UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20212022
or
| | | | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission File Number: 001-13718
MDC Partners![stgw-20220331_g1.jpg](https://files.docoh.com/10-Q/0000876883-22-000017/stgw-20220331_g1.jpg)
Stagwell Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
CanadaDelaware | | 98-036444186-1390679 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
| | | |
One World Trade Center, Floor 65
| | |
New York, | New York | | 10007 |
(Address of principal executive offices) | | (Zip Code) |
(646) 429-1800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Subordinate Voting Shares, noCommon Stock, par value $0.001 per share | MDCASTGW | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated Filer | ☐ | Accelerated Filer | ☒ |
Non-accelerated Filer | ☐ | Smaller reporting company | ☒☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of common shares outstanding as of April 30, 2021May 5, 2022 was 77,181,293133,151,845 shares of Class A subordinate votingCommon Stock, 3,946 shares and 3,743of Class B multiple voting shares.Common Stock, and 164,814,910 shares of Class C Common Stock.
MDC PARTNERSSTAGWELL INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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| PART I. FINANCIAL INFORMATION | |
Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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| PART II. OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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EXPLANATORY NOTE
On December 21, 2020, MDC Partners Inc. (“MDC”) and Stagwell Media LP (“Stagwell Media”) announced that they had entered into an agreement, providing for the combination of MDC with the operating businesses and subsidiaries of Stagwell Media (the “Stagwell Subject Entities”) (the “Transaction Agreement”). The Stagwell Subject Entities comprised Stagwell Marketing Group LLC (“Stagwell Marketing” or “SMG”) and its direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”), we completed the combination of MDC and the Stagwell Subject Entities and a series of steps and related transactions (such combination and transactions, the “Transactions”). In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged as a wholly owned subsidiary of Stagwell Inc. (“the Company” or “Stagwell”), converted into a Delaware limited liability company and changed its name to Midas OpCo Holdings LLC (“OpCo”); (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.
The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. As a result of the Transactions and the change in our business and operations, under applicable accounting principles, the historical financial results of Stagwell Marketing prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Form 10-Q for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions or the financial
results of MDC and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021.
References in this Quarterly Report on Form 10-Q to “MDC Partners,” “MDC,” the “Company,“Stagwell,” “we,” “us”“us,” “our” and “our”the “Company” refer (i) with respect to MDC Partnersevents occurring or periods ending before August 2, 2021, to Stagwell Marketing and its direct and indirect subsidiaries and (ii) with respect to events occurring or periods ending on or after August 2, 2021, to Stagwell Inc. and unless the context otherwise requires or otherwise is expressly stated, its direct and indirect subsidiaries. References in this Quarterly Report on Form 10-Q to “Partner Firms” generally refer to the Company’s subsidiary agencies.
All dollar amounts are stated in U.S. dollars unless otherwise stated.
Note About Forward-Looking Statements
This document contains forward-looking statements. within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as amended. The Company’s representatives may also make forward-looking statements orally or in writing from time to time. Statements in this document that are not historical facts, including, statements about the Company’s beliefs and expectations, recentfuture financial performance and future prospects, business and economic trends, potential acquisitions, and estimates of amounts for redeemable noncontrolling interests and deferred acquisition consideration, constitute forward-looking statements. Forward-looking statements, which are generally denoted by words such as “anticipate,” “assume,” “believe,” “continue,” “could,” “create,” “estimate,” “expect,” “focus,” “forecast,” “foresee,” “future,” “guidance,” “intend,” “look,” “may,” “opportunity,” “outlook,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” or the negative of such terms or other variations thereof and terms of similar substance used in connection with any discussion of current plans, estimates and projections are subject to change based on a number of factors, including those outlined in this section.
Forward-looking statements in this document are based on certain key expectations and assumptions made by the Company. Although the management of the Company believes that the expectations and assumptions on which such forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. The material assumptions upon which such forward-looking statements are based include, among others, assumptions with respect to general business, economic and market conditions, the competitive environment, anticipated and unanticipated tax consequences and anticipated and unanticipated costs. These forward-looking statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined in this section. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the Company’s control. Therefore, you should not place undue reliance on such statements. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events, if any.
Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such risk factors include, but are not limited to, the following:
•risks associated with international, national and regional unfavorable economic conditions that could affect the Company or its clients, including as a result of the novel coronavirus pandemic (“COVID-19”);clients;
•the effects of the outbreak of COVID-19, including the measures to reduce its spread,coronavirus pandemic (“COVID-19”), and the impact on the economy and demand for ourthe Company’s services, which may precipitate or exacerbate other risks and uncertainties;
•an inability to realize expected benefits of the proposed redomiciliation of the Company from the federal jurisdiction of Canada to the State of Delaware (the “Redomiciliation”) and the subsequent combination of the Company’s business with the business of the subsidiaries of Stagwell Media LP (“Stagwell”) that own and operate a portfolio of marketing services companies (the “Business Combination” and, together with the Redomiciliation, the “Proposed Transaction”) or the occurrence of difficulties in connection with the Proposed Transaction;MDC;
•adverse tax consequences in connection with the Proposed TransactionTransactions for the Company, its operations and its shareholders, that may differ from the expectations of the Company, including that future changes in tax law, potential increases to corporate tax rates in the United States and disagreements with the tax authorities on the Company’s determination of value and computations of its attributes may result in increased tax costs;
•the occurrence of material Canadian federal income tax (including material “emigration tax”) as a result of the Proposed Transaction;
•the impact of uncertainty associated with the Proposed Transaction on the Company’s businesses;
•direct or indirect costs associated with the Proposed Transaction, which could be greater than expected;
•the risk that a condition to completion of the Proposed Transaction may not be satisfied and the Proposed Transaction may not be completed;
•the risk of parties challenging the Proposed Transaction or the impact of the Proposed Transaction on the Company’s debt arrangements;Transactions;
•the Company’s ability to attract new clients and retain existing clients;
•the impact of a reduction in client spending and changes in client advertising, marketing and corporate communications requirements;
•financial failure of the Company’s clients;
•the Company’s ability to retain and attract key employees;
•the Company’s ability to compete in the markets in which it operates;
•the Company’s ability to achieve the full amount of its stated cost saving initiatives;
•the Company’s implementation of strategic initiatives;
•the Company’s ability to remain in compliance with its debt agreements and the Company’s ability to finance its contingent payment obligations when due and payable, including but not limited to those relating to redeemable noncontrolling interests and deferred acquisition consideration;
•the Company’s ability to manage its growth effectively, including the successful completion and integration of acquisitions which complement and expand the Company’s business capabilities;
•the Company’s material weaknesses in internal control over financial reporting and its ability to establish and maintain an effective system of internal control over financial reporting;
•the Company’s ability to protect client data from security incidents or cyberattacks;
•economic disruptions resulting from war and other geopolitical tensions (such as the ongoing military conflict between Russia and Ukraine), terrorist activities and natural disasters;
•stock price volatility; and
•foreign currency fluctuations.
Investors should carefully consider these risk factors, other risk factors described herein, and the additional risk factors outlined in more detail in the Company’s 2020our 2021 Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 16, 202117, 2022, and accessible on the SEC’s website at www.sec.gov.,www.sec.gov, under the caption “Risk Factors,” and in the Company’s other SEC filings.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MDC PARTNERSSTAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of United States dollars, except per share amounts)amounts in thousands)
| | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | 2021 | | 2020 | | | | 2022 | | 2021 |
Revenue: | | | | | |
Services | $ | 307,585 | | | $ | 327,742 | | | |
Revenue | | Revenue | | $ | 642,903 | | | $ | 181,242 | |
Operating Expenses | Operating Expenses | | | Operating Expenses | | |
Cost of services sold | 186,921 | | | 222,694 | | | |
Cost of services | | Cost of services | | 411,970 | | | 111,999 | |
Office and general expenses | Office and general expenses | 83,946 | | | 66,354 | | | Office and general expenses | | 144,512 | | | 52,278 | |
Depreciation and amortization | Depreciation and amortization | 8,176 | | | 9,206 | | | Depreciation and amortization | | 31,204 | | | 10,950 | |
Impairment and other losses | Impairment and other losses | 875 | | | 161 | | | Impairment and other losses | | 557 | | | — | |
| | 279,918 | | | 298,415 | | | | | 588,243 | | | 175,227 | |
Operating income | Operating income | 27,667 | | | 29,327 | | | Operating income | | 54,660 | | | 6,015 | |
Other Income (expenses): | Other Income (expenses): | | | | | Other Income (expenses): | | | | |
Interest expense and finance charges, net | (19,065) | | | (15,611) | | | |
Foreign exchange gain (loss) | 2,080 | | | (14,757) | | | |
Interest expense, net | | Interest expense, net | | (18,729) | | | (1,351) | |
Foreign exchange, net | | Foreign exchange, net | | (306) | | | (677) | |
Other, net | Other, net | 614 | | | 16,334 | | | Other, net | | 156 | | | 1,285 | |
| | (16,371) | | | (14,034) | | | | | (18,879) | | | (743) | |
Income before income taxes and equity in earnings of non-consolidated affiliates | Income before income taxes and equity in earnings of non-consolidated affiliates | 11,296 | | | 15,293 | | | Income before income taxes and equity in earnings of non-consolidated affiliates | | 35,781 | | | 5,272 | |
Income tax expense | Income tax expense | 1,302 | | | 13,500 | | | Income tax expense | | 3,189 | | | 673 | |
Income before equity in earnings of non-consolidated affiliates | Income before equity in earnings of non-consolidated affiliates | 9,994 | | | 1,793 | | | Income before equity in earnings of non-consolidated affiliates | | 32,592 | | | 4,599 | |
Equity in losses of non-consolidated affiliates | (493) | | | 0 | | | |
Equity in income of non-consolidated affiliates | | Equity in income of non-consolidated affiliates | | 1,030 | | | 4 | |
Net income | Net income | 9,501 | | | 1,793 | | | Net income | | 33,622 | | | 4,603 | |
Net income attributable to the noncontrolling interest | (4,491) | | | (791) | | | |
Net income attributable to MDC Partners Inc. | 5,010 | | | 1,002 | | | |
Accretion on and net income allocated to convertible preference shares | (4,089) | | | (3,440) | | | |
Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | 921 | | | $ | (2,438) | | | |
Income (loss) Per Common Share: | | | |
Net income attributable to noncontrolling and redeemable noncontrolling interests | | Net income attributable to noncontrolling and redeemable noncontrolling interests | | (20,947) | | | (238) | |
Net income attributable to Stagwell Inc. common shareholders | | Net income attributable to Stagwell Inc. common shareholders | | $ | 12,675 | | | $ | 4,365 | |
| Income Per Common Share: | | Income Per Common Share: | | | | |
Basic | Basic | | | | | Basic | | |
Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | 0.01 | | | $ | (0.03) | | | |
Net income attributable to Stagwell Inc. common shareholders | | Net income attributable to Stagwell Inc. common shareholders | | $ | 0.10 | | | N/A |
Diluted | Diluted | | | | | Diluted | | | | |
Net income (loss) attributable to MDC Partners Inc common shareholders | $ | 0.01 | | | $ | (0.03) | | | |
Net income attributable to Stagwell Inc. common shareholders | | Net income attributable to Stagwell Inc. common shareholders | | $ | 0.10 | | | N/A |
Weighted Average Number of Common Shares Outstanding: | Weighted Average Number of Common Shares Outstanding: | | | | | Weighted Average Number of Common Shares Outstanding: | | | | |
Basic | Basic | 73,392,824 | | | 72,397,661 | | | Basic | | 122,285 | | | N/A |
Diluted | Diluted | 75,439,066 | | | 72,397,661 | | | Diluted | | 297,484 | | | N/A |
|
See notes to the Unaudited Condensed Consolidated Financial Statements.
MDC PARTNERS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(thousands of United States dollars)
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Comprehensive Income | | | | | | | |
Net income | $ | 9,501 | | | $ | 1,793 | | | | | |
Other comprehensive income (loss), net of applicable tax: | | | | | | | |
Foreign currency translation adjustment | (3,507) | | | 7,429 | | | | | |
Other comprehensive income (loss) | (3,507) | | | 7,429 | | | | | |
Comprehensive income for the period | 5,994 | | | 9,222 | | | | | |
Comprehensive income attributable to the noncontrolling interests | (3,539) | | | (282) | | | | | |
Comprehensive income attributable to MDC Partners Inc. | $ | 2,455 | | | $ | 8,940 | | | | | |
See notes to the Unaudited Condensed Consolidated Financial Statements.
MDC PARTNERSSTAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME
(thousands of United States dollars)amounts in thousands)
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| | | |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 113,340 | | | $ | 60,757 | |
Accounts receivable, less allowance for doubtful accounts of $4,498 and $5,473 | 377,670 | | | 374,892 | |
Expenditures billable to clients | 22,824 | | | 10,552 | |
Other current assets | 31,687 | | | 40,938 | |
Total Current Assets | 545,521 | | | 487,139 | |
Fixed assets, at cost, less accumulated depreciation of $137,729 and $136,166 | 85,085 | | | 90,413 | |
Right-of-use assets - operating leases | 207,418 | | | 214,188 | |
Goodwill | 669,060 | | | 668,211 | |
Other intangible assets, net | 30,784 | | | 33,844 | |
| | | |
Other assets | 22,845 | | | 17,517 | |
Total Assets | $ | 1,560,713 | | | $ | 1,511,312 | |
LIABILITIES, RNCI, AND SHAREHOLDERS’ DEFICIT | | | |
Current Liabilities | | | |
Accounts payable | $ | 209,679 | | | $ | 168,396 | |
Accruals and other liabilities | 242,667 | | | 274,968 | |
Advance billings | 170,159 | | | 152,956 | |
Current portion of lease liabilities - operating leases | 41,229 | | | 41,208 | |
Current portion of deferred acquisition consideration | 52,156 | | | 53,730 | |
Total Current Liabilities | 715,890 | | | 691,258 | |
Long-term debt | 864,850 | | | 843,184 | |
Long-term portion of deferred acquisition consideration | 41,244 | | | 29,335 | |
Long-term lease liabilities - operating leases | 241,375 | | | 247,243 | |
Other liabilities | 77,585 | | | 82,065 | |
Total Liabilities | 1,940,944 | | | 1,893,085 | |
Redeemable Noncontrolling Interests | 25,352 | | | 27,137 | |
Commitments, Contingencies and Guarantees (Note 9) | 0 | | 0 |
Shareholders' Deficit: | | | |
Convertible preference shares, 145,000 authorized, issued and outstanding at March 31, 2021 and December 31, 2020 | 152,746 | | | 152,746 | |
Common stock and other paid-in capital | 106,193 | | | 104,367 | |
Accumulated deficit | (704,741) | | | (709,751) | |
Accumulated other comprehensive income | 183 | | | 2,739 | |
MDC Partners Inc. Shareholders' Deficit | (445,619) | | | (449,899) | |
Noncontrolling interests | 40,036 | | | 40,989 | |
Total Shareholders' Deficit | (405,583) | | | (408,910) | |
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Deficit | $ | 1,560,713 | | | $ | 1,511,312 | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
COMPREHENSIVE INCOME | | | | | | | |
Net income | | | | | $ | 33,622 | | | $ | 4,603 | |
Other comprehensive income | | | | | | | |
Foreign currency translation adjustment | | | | | (5,347) | | | 137 | |
Other comprehensive income (loss) | | | | | (5,347) | | | 137 | |
Comprehensive income for the period | | | | | 28,275 | | | 4,740 | |
Comprehensive income attributable to the noncontrolling and redeemable noncontrolling interests | | | | | (20,947) | | | (238) | |
Comprehensive income attributable to Stagwell Inc. common shareholders | | | | | $ | 7,328 | | | $ | 4,502 | |
| | | | | | | |
See notes to the Unaudited Condensed Consolidated Financial Statements.Statements.
MDC PARTNERSSTAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS
(thousands of United States dollars)amounts in thousands)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (Unaudited) | | |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 135,153 | | | $ | 184,009 | |
Accounts receivable, net | 767,147 | | | 696,937 | |
Expenditures billable to clients | 51,069 | | | 63,065 | |
Other current assets | 69,009 | | | 61,830 | |
Total Current Assets | 1,022,378 | | | 1,005,841 | |
Fixed assets, net | 118,542 | | | 118,603 | |
Right-of-use lease assets - operating leases | 311,028 | | | 311,654 | |
Goodwill | 1,651,475 | | | 1,652,723 | |
Other intangible assets, net | 914,829 | | | 937,695 | |
| | | |
Other assets | 33,581 | | | 29,064 | |
Total Assets | $ | 4,051,833 | | | $ | 4,055,580 | |
LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY | | | |
Current Liabilities | | | |
Accounts payable | $ | 248,619 | | | $ | 271,769 | |
Accrued media | 284,735 | | | 237,794 | |
Accruals and other liabilities | 224,945 | | | 272,533 | |
Advance billings | 344,125 | | | 361,885 | |
Current portion of lease liabilities - operating leases | 70,356 | | | 72,255 | |
Current portion of deferred acquisition consideration | 75,619 | | | 77,946 | |
Total Current Liabilities | 1,248,399 | | | 1,294,182 | |
Long-term debt | 1,222,041 | | | 1,191,601 | |
Long-term portion of deferred acquisition consideration | 148,649 | | | 144,423 | |
Long-term lease liabilities - operating leases | 339,168 | | | 342,730 | |
Deferred tax liabilities, net | 78,401 | | | 103,093 | |
Other liabilities | 73,097 | | | 57,147 | |
Total Liabilities | 3,109,755 | | | 3,133,176 | |
Redeemable Noncontrolling Interests | 44,233 | | | 43,364 | |
Commitments, Contingencies and Guarantees (Note 10) | 0 | | 0 |
Shareholders' Equity: | | | |
| | | |
Common shares - Class A & B | 135 | | | 118 | |
Common shares - Class C | 2 | | | 2 | |
Paid-in capital | 373,300 | | | 382,893 | |
Retained earnings | 6,668 | | | (6,982) | |
Accumulated other comprehensive loss | (10,625) | | | (5,278) | |
Stagwell Inc. Shareholders' Equity | 369,480 | | | 370,753 | |
Noncontrolling interests | 528,365 | | | 508,287 | |
Total Shareholders' Equity | 897,845 | | | 879,040 | |
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Equity | $ | 4,051,833 | | | $ | 4,055,580 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net income | $ | 9,501 | | | $ | 1,793 | |
Adjustments to reconcile net income to cash provided by (used in) operating activities: | | | |
Stock-based compensation | (1,963) | | | 3,070 | |
Depreciation and amortization | 8,176 | | | 9,206 | |
Impairment and other losses | 875 | | | 161 | |
Adjustment to deferred acquisition consideration | 11,685 | | | (4,600) | |
Deferred income taxes | 63 | | | 8,511 | |
Foreign exchange and other | 682 | | | 4,489 | |
Changes in working capital: | | | |
Accounts receivable | (2,779) | | | 41,148 | |
Expenditures billable to clients | (12,272) | | | 7,370 | |
Prepaid expenses and other current assets | (7,615) | | | (3,385) | |
Accounts payable, accruals and other liabilities | 23,977 | | | (62,120) | |
Acquisition related payments | (473) | | | (782) | |
Advance billings | 17,203 | | | (24,816) | |
Net cash provided by (used in) operating activities | 47,060 | | | (19,955) | |
Cash flows from investing activities: | | | |
Capital expenditures | (13,423) | | | (1,546) | |
Proceeds from sale of assets | 7,080 | | | 18,920 | |
Acquisitions, net of cash acquired | 0 | | | (729) | |
Other | (689) | | | 0 | |
Net cash provided by (used in) investing activities | (7,032) | | | 16,645 | |
Cash flows from financing activities: | | | |
Repayment of borrowing under revolving credit facility | (140,950) | | | (125,333) | |
Proceeds from revolving credit facility | 160,950 | | | 250,333 | |
Acquisition related payments | (1,087) | | | (750) | |
Distributions to noncontrolling interests and other | (5,486) | | | (4,608) | |
| | | |
| | | |
Net cash provided by financing activities | 13,427 | | | 119,642 | |
Effect of exchange rate changes on cash and cash equivalents | (872) | | | (2,164) | |
Net increase in cash and cash equivalents | 52,583 | | | 114,168 | |
Cash and cash equivalents at beginning of period | 60,757 | | | 106,933 | |
Cash and cash equivalents at end of period | $ | 113,340 | | | $ | 221,101 | |
Supplemental disclosures: | | | |
Cash income taxes paid | $ | 251 | | | $ | 849 | |
Cash interest paid | $ | 317 | | | $ | 145 | |
See notes to the Unaudited Condensed Consolidated Financial Statements.Statements.
MDC PARTNERSSTAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income | $ | 33,622 | | | $ | 4,603 | |
Adjustments to reconcile net income to cash (used in) provided by operating activities: | | | |
Stock-based compensation | 8,021 | | | — | |
Depreciation and amortization | 31,204 | | | 10,950 | |
Impairment and other losses | 557 | | | — | |
Provision for bad debt expense | 879 | | | 255 | |
Deferred income taxes | (1,350) | | | (181) | |
Adjustment to deferred acquisition consideration | 1,897 | | | 3,918 | |
| | | |
| | | |
Transaction costs contributed by Stagwell Media LP | — | | | 3,188 | |
| | | |
Other | (3,526) | | | (436) | |
| | | |
Changes in working capital: | | | |
Accounts receivable | (70,039) | | | 59,536 | |
Expenditures billable to clients | 11,996 | | | (5,387) | |
Other assets | (6,100) | | | (1,134) | |
Accounts payable | (32,386) | | | (69,133) | |
Accruals and other liabilities | (5,592) | | | (1,411) | |
Advance billings | (17,760) | | | 1,003 | |
| | | |
Net cash (used in) provided by operating activities | (48,577) | | | 5,771 | |
Cash flows from investing activities: | | | |
Capital expenditures | (6,538) | | | (3,311) | |
| | | |
Acquisitions, net of cash acquired | (935) | | | — | |
Other | (816) | | | — | |
Net cash used in investing activities | (8,289) | | | (3,311) | |
Cash flows from financing activities: | | | |
Repayment of borrowings under revolving credit facility | (209,500) | | | (25,248) | |
Proceeds from borrowings under revolving credit facility | 239,000 | | | 10,000 | |
Shares acquired and cancelled | (14,926) | | | — | |
Distributions to noncontrolling interests and other | (6,464) | | | — | |
Payment of deferred consideration | (1,581) | | | — | |
| | | |
| | | |
| | | |
| | | |
Distributions | — | | | (25,894) | |
| | | |
| | | |
Net cash provided by (used in) financing activities | 6,529 | | | (41,142) | |
Effect of exchange rate changes on cash and cash equivalents | 1,481 | | | 9 | |
Net decrease in cash and cash equivalents | (48,856) | | | (38,673) | |
Cash and cash equivalents at beginning of period | 184,009 | | | 92,457 | |
Cash and cash equivalents at end of period | $ | 135,153 | | | $ | 53,784 | |
| | | |
Supplemental disclosures: | | | |
Cash income taxes paid | $ | 6,623 | | | $ | 2,361 | |
Cash interest paid | 30,798 | | | 928 | |
| | | |
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(amounts in thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Non-cash investing and financing activities: | | | |
| | | |
| | | |
Establishment of tax receivable agreement – | | | |
Tax receivables agreement liability | 20,846 | | | — | |
Tax receivables deferred tax liability | 24,500 | | | — | |
Non-cash contributions | — | | | 10,268 | |
Non-cash distributions to Stagwell Media LP | — | | | (13,000) | |
Non-cash payment of deferred acquisition consideration | — | | | (7,080) | |
| | | |
See notes to the Unaudited Condensed Consolidated Financial Statements.
STAGWELL INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICITEQUITY
(thousands of United States dollars, except share amounts)amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2021 |
| Convertible Preference Shares | | Common Shares | | Common Stock and Other Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | MDC Partners Inc. Shareholders' Deficit | | Noncontrolling Interests | | Total Shareholders' Deficit |
| | | | | | | |
| | | | | | | |
| Shares | | Amount | | Shares | | | | | | | | | | | | |
Balance at December 31, 2020 | 145,000 | | | $ | 152,746 | | | 73,532,848 | | | $ | 104,367 | | | $ | (709,751) | | | $ | 2,739 | | | $ | (449,899) | | | $ | 40,989 | | | $ | (408,910) | |
Net income attributable to MDC Partners Inc. | — | | | — | | | — | | | — | | | 5,010 | | | — | | | 5,010 | | | — | | | 5,010 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (2,555) | | | (2,555) | | | (952) | | | (3,507) | |
Vesting of restricted awards | — | | | — | | | 1,322,732 | | | — | | | — | | | — | | | — | | | — | | | 0 | |
Shares acquired and cancelled | — | | | — | | | (64,520) | | | (202) | | | — | | | — | | | (202) | | | — | | | (202) | |
Stock-based compensation | — | | | — | | | — | | | 1,035 | | | — | | | — | | | 1,035 | | | — | | | 1,035 | |
Changes in redemption value of redeemable noncontrolling interests | — | | | — | | | — | | | 1,681 | | | — | | | — | | | 1,681 | | | — | | | 1,681 | |
Business acquisitions and step-up transactions, net of tax | — | | | — | | | — | | | (330) | | | — | | | — | | | (330) | | | — | | | (330) | |
Other | — | | | — | | | — | | | (358) | | | 0 | | | (1) | | | (359) | | | (1) | | | (360) | |
Balance at March 31, 2021 | 145,000 | | | $ | 152,746 | | | 74,791,060 | | | $ | 106,193 | | | $ | (704,741) | | | $ | 183 | | | $ | (445,619) | | | $ | 40,036 | | | $ | (405,583) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Three Months Ended |
| | | | | | | | March 31, 2022 |
| | | | | | Common Shares - Class A & B | | Common Shares - Class C | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Stagwell Inc. Shareholders' Equity | | Noncontrolling Interests | | Shareholders' Equity |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | |
| Balance at December 31, 2021 | | | | | | | 118,252 | | | $ | 118 | | | 179,970 | | | $ | 2 | | | $ | 382,893 | | | $ | (6,982) | | | $ | (5,278) | | | $ | 370,753 | | | $ | 508,287 | | | $ | 879,040 | |
| Net income attributable to Stagwell Inc. | | | | | | | — | | | — | | | — | | | — | | | — | | | 12,675 | | | — | | | 12,675 | | | 18,537 | | | 31,212 | |
| Other comprehensive loss | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,347) | | | (5,347) | | | — | | | (5,347) | |
| Distributions to noncontrolling interests | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (705) | | | (705) | |
| Changes in redemption value of RNCI | | | | | | | — | | | — | | | — | | | — | | | — | | | 975 | | | — | | | 975 | | | — | | | 975 | |
| Granting of restricted awards | | | | | | | 1,787 | | | 2 | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | — | |
| Shares acquired and cancelled | | | | | | | (1,998) | | | | | — | | | — | | | (14,926) | | | — | | | — | | | (14,926) | | | — | | | (14,926) | |
| Stock-based compensation | | | | | | | — | | | — | | | — | | | — | | | 6,714 | | | — | | | — | | | 6,714 | | | — | | | 6,714 | |
| Conversion of shares | | | | | | | 15,155 | | | 15 | | | (15,155) | | | — | | | (15) | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | | | | | | | — | | | — | | | — | | | — | | | (1,364) | | | | | | | (1,364) | | | 2,246 | | | 882 | |
| Balance at March 31, 2022 | | | | | | | 133,196 | | | $ | 135 | | | 164,815 | | | $ | 2 | | | $ | 373,300 | | | $ | 6,668 | | | $ | (10,625) | | | $ | 369,480 | | | $ | 528,365 | | | $ | 897,845 | |
See notes to the Unaudited Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2020 |
| Convertible Preference Shares | | Common Shares | | Common Stock and Other Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | MDC Partners Inc. Shareholders' Deficit | | Noncontrolling Interests | | Total Shareholders' Deficit |
| | | | | | | |
| | | | | | | |
| Shares | | Amount | | Shares | | | | | | | | | | | | |
Balance at December 31, 2019 | 145,000 | | | $ | 152,746 | | | 72,154,603 | | | $ | 101,469 | | | $ | (480,779) | | | $ | (4,269) | | | $ | (230,833) | | | $ | 40,258 | | | $ | (190,575) | |
Net income attributable to MDC Partners Inc. | — | | | — | | | — | | | — | | | 1,002 | | | — | | | 1,002 | | | — | | | 1,002 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 7,938 | | | 7,938 | | | (509) | | | 7,429 | |
Vesting of restricted awards | — | | | — | | | 587,227 | | | — | | | — | | | — | | | — | | | — | | | 0 | |
Shares acquired and cancelled | — | | | — | | | (258,664) | | | (637) | | | — | | | — | | | (637) | | | — | | | (637) | |
Stock-based compensation | — | | | — | | | — | | | 476 | | | — | | | — | | | 476 | | | — | | | 476 | |
Changes in redemption value of redeemable noncontrolling interests | — | | | — | | | — | | | (1,218) | | | — | | | — | | | (1,218) | | | — | | | (1,218) | |
Business acquisitions and step-up transactions, net of tax | — | | | — | | | — | | | (503) | | | — | | | — | | | (503) | | | — | | | (503) | |
Other | — | | | — | | | — | | | 0 | | | 82 | | | — | | | 82 | | | 0 | | | 82 | |
Balance at March 31, 2020 | 145,000 | | | $ | 152,746 | | | 72,483,166 | | | $ | 99,587 | | | $ | (479,695) | | | $ | 3,669 | | | $ | (223,693) | | | $ | 39,749 | | | $ | (183,944) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Three Months Ended |
| | | | | | | | March 31, 2021 |
| | Members' capital | | | | Common Shares - Class A & B | | Common Shares - Class C | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Stagwell Inc. Shareholders' Equity | | Noncontrolling Interests | | Shareholders' Equity |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | Shares | | Amount | | Shares | | Amount | | | | | | | | | | | | |
| Balance at December 31, 2020 | $ | 358,756 | | | | | | | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 358,756 | | | $ | 39,787 | | | $ | 398,543 | |
| Net income attributable to Stagwell Inc. | 4,365 | | | | | | | — | | | — | | | — | | | — | | | — | | | 0 | | — | | | 4,365 | | | 1,153 | | | 5,518 | |
| Other comprehensive income | 137 | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 137 | | | — | | | 137 | |
| Contributions | 10,268 | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,268 | | | — | | | 10,268 | |
| Distributions | (28,004) | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (28,004) | | | — | | | (28,004) | |
| Distributions to noncontrolling interests | — | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10,890) | | | (10,890) | |
| Changes in redemption value of RNCI | (400) | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (400) | | | — | | | (400) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2021 | $ | 345,122 | | | | | | | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 345,122 | | | $ | 30,050 | | | $ | 375,172 | |
See notes to the Unaudited Condensed Consolidated Financial StatementsStatements.
MDC PARTNERSSTAGWELL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, of United States dollars, except per share amounts, unless otherwise stated)
1. Business and Basis of Presentation and Recent Developments
MDC PartnersStagwell Inc. (the “Company” or “MDC”“Stagwell”), incorporated under the laws of Canada, is a leading provider of global marketing, advertising, activation, communicationsDelaware, conducts its business through its networks and strategic consulting solutions. Through its Networks (and underlying agencies generally referred to as “Partner Firms”their Brands (“Brands”), MDC delivers a wide range of customized services in order to drive growthwhich provide marketing and business performance for its clients.solutions that realize the potential of combining data and creativity.Stagwell’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment.
The accompanying condensed consolidated financial statements include the accounts of MDC,Stagwell and its subsidiaries and variable interest entities for which the Company is the primary beneficiary. MDCsubsidiaries. Stagwell has prepared the unaudited condensed consolidated interim financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting interim financial information on Form 10-Q. Accordingly, the financial statements have been condensed and do not include certain information and disclosures pursuant to these rules. The preparation of financial statements in conformity with GAAP requires us to make judgments, assumptions and estimates about current and future results of operations and cash flows that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions. The consolidated results for interim periods are not necessarily indicative of results for the full year and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 (“20202021 Form 10-K”).
On December 21, 2020, MDC Partners Inc. (“MDC”) and Stagwell Media LP (“Stagwell Media”) announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the operating businesses and subsidiaries of Stagwell Media (the “Stagwell Subject Entities”). The COVID-19 pandemic continues to negatively affectStagwell Subject Entities comprised Stagwell Marketing Group LLC (“Stagwell Marketing” or “SMG”) and its direct and indirect subsidiaries.
On August 2, 2021, we completed the global economypreviously announced combination of MDC and the Company’s operations.operating businesses and subsidiaries of Stagwell Media and a series related transactions (such combination and transactions, the “Transactions”). The pandemic did not begin to impactTransactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the Company’s operations in a significant manner untillegal acquirer and Stagwell Marketing treated as the second quarteraccounting acquirer. The results of 2020. Therefore, our first quarterMDC are included within the Unaudited Condensed Consolidated Statements of 2021 comparisons toOperations for the first quarter of 2020 are affected byperiod beginning on the impactdate of the pandemic on our operationsacquisition through the end of the respective period presented and the results of SMG are included for the entire period presented. See Note 3 of the Notes included herein for information in connection with the first quarteracquisition of 2021. Early in 2020, theMDC.
The Company took actions to combat the impact of COVID-19 on our operations. We will continuecontinues to monitor the worldwide public health threat and government actions to combat COVID-19 and the impact such developments may have on the overall economy, our clients and operations. If the impact of the pandemic is beyond our expectation, the Company believes it is well positioned through the actions implemented at the beginning of the pandemic to successfully work through the effects of COVID-19 in 2021. The impact of the pandemic and the corresponding actions are reflected in our judgments, assumptions and estimates in the preparation of the financial statements. The judgments, assumptions and estimates will be updated and could result in different results in the future depending on the continued impact of the COVID-19 pandemic.
In addition, while not material, the Company continues to monitor the war and other geopolitical tensions between Russia and Ukraine and will continue to assess any potential impacts that this conflict may have on the economy, our clients, and our operations.
The accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in the opinion of management are necessary for a fair presentation, in all material respects, of the information contained therein. Intercompany balances and transactions have been eliminated in consolidation.Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
We have revised the presentation of Current Liabilities to separately present Accrued media of $237,794 as of December 31, 2021. As a result, the accompanying Condensed Consolidated Balance Sheet has been revised to correct this immaterial classification error by decreasing the previously reported amount for Accruals and other liabilities as of December 31, 2021 by the $237,794 of Accrued media. This revision had no effect on our previously reported Total Current Liabilities, or on any other previously reported amounts in our consolidated financial statements for the year ended December 31, 2021.
Recent Developments
On April 19, 2022, the Company acquired Brand New Galaxy (“BNG”), a leading provider of scaled commerce and marketplace solutions, for approximately $20,000, subject to post-closing adjustments, as well as contingent consideration up to a maximum value of $50,000. The contingent consideration is due upon meeting certain future earnings targets through 2024, with approximately 67% payable in cash and 33% payable in Class A Common Stock. BNG will be included within the Media Network segment. The purchase price allocation has not yet been completed. The Company will provide the purchase price allocation and pro forma operating results of the combined company in its Form 10-Q for the period of June 30, 2022.
2. New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board, (“FASB”) issued ASU 2020-04, and in January 2021 subsequently issued ASU 2021-01, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective upon issuance, through December 31, 2022. The Company is evaluating the impact of the adoption of this guidance on the Company’s financial statements and disclosures.
3. Acquisitions
2021 Acquisitions
Acquisition of MDC
On December 21, 2020, MDC and Stagwell Media LP (“Stagwell”) announced that they had entered into a definitive transaction agreement (the “Transaction Agreement”)the Transaction Agreement, providing for the combination of MDC with the operating businesses and subsidiaries of the Stagwell that ownSubject Entities. The Stagwell Subject Entities comprised Stagwell Marketing and operateits direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”), we completed the combination of MDC and the Stagwell Subject Entities and a portfolioseries of marketing services companies (the “Stagwell Entities”). The combinationsteps and related transactions including(such combination and transactions, the domestication“Transactions”). In connection with the Transactions, among other things, (i) MDC completed a series of MDCtransactions pursuant to which it emerged as a wholly owned subsidiary of the Company, converted into a Delaware limited liability company and changed its name to Midas OpCo Holdings LLC, which subsequently changed its name to Stagwell Global LLC (“OpCo”); (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, are referred tosucceeded MDC as the “Transactions.” See “Item 1.publicly-traded company and changed its name to Stagwell Inc.
In respect of the Transactions, the acquired assets and assumed liabilities, together with acquired processes and employees, represent a business as defined in the FASB’s Accounting Standards Codification (“ASC”) 805, Business – Recent Developments”Combinations (“ASC 805”). The Transactions were accounted for as a reverse acquisition using the acquisition method of accounting, pursuant to ASC Topic 805-10, Business Combinations, with MDC treated as the legal acquirer and SMG treated as the accounting acquirer. In identifying SMG as the acquiring entity for accounting purposes, MDC and SMG took into account a number of factors, including the relative voting rights and the corporate governance structure of the Company. SMG is considered the accounting acquirer since Stagwell Media controls the board of directors of the Company following the Transactions and received an indirect ownership interest in the Company’s Annual Report on Form 10-Konly operating subsidiary, OpCo, of 69.55% ownership of OpCo’s common units. However, no single factor was the sole determinant in the overall conclusion that Stagwell is the acquirer for accounting purposes; rather all factors were considered in arriving at such conclusion. Under the acquisition method of accounting, the assets and liabilities of MDC, as the accounting acquiree, were recorded at their respective fair value as of the date the Transactions were completed.
On August 2, 2021, an aggregate of 179,970 shares of the Company’s Class C Common Stock were issued to Stagwell Media in exchange for $1.80 (the “Stagwell New MDC Contribution”). The Class C Common Stock does not participate in the earnings of the Company. Additionally, an aggregate of 179,970 OpCo common units were issued to Stagwell Media in exchange for the equity interests of the Stagwell Subject Entities (the “Stagwell OpCo Contribution”).
The fair value of the purchase consideration is $429,062, consisting of approximately 80,000 shares of the Company’s Class A and B Common Stock and Common Stock equivalents based on a per share price of approximately $5.42, the closing stock price on the date of the combination.
ASC 805 requires the allocation of the purchase price consideration to the fair value of the identified assets acquired and liabilities assumed upon consummation of a business combination. For this purpose, fair value shall be determined in accordance with the fair value concepts defined in ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”). Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value measurements can be highly subjective and can involve a high degree of estimation.
The total purchase price to acquire MDC has been allocated to the assets acquired and assumed liabilities based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The fair value of the acquired assets and assumed liabilities as of the date of acquisition are based on preliminary estimates assisted, in part, by a third-party valuation expert. The estimates are subject to change upon the finalization of appraisals and other valuation analyses, which are expected to be completed no later than one year endedfrom the date of acquisition. Although the completion of the valuation activities may result in asset and liability fair values that are different from the preliminary estimates included herein, it is not expected that those differences would alter the understanding of the impact of this transaction on the consolidated financial position and results of operations of the Company.
The preliminary purchase price allocation is as follows:
| | | | | | | | |
| | Amount |
Cash and cash equivalents | | $ | 130,153 | |
Accounts receivable | | 413,839 | |
Other current assets | | 41,736 | |
Fixed assets | | 80,047 | |
Right-of-use lease assets - operating leases | | 253,629 | |
Intangible assets | | 810,900 | |
Other assets | | 18,418 | |
Accounts payable | | (171,019) | |
Accruals and other liabilities | | (307,699) | |
Advance billings | | (211,403) | |
Current portion of lease liabilities | | (48,517) | |
Current portion of deferred acquisition consideration | | (53,054) | |
Long-term debt | | (901,736) | |
Revolving credit facility | | (109,954) | |
Long-term portion of deferred acquisition consideration | | (8,056) | |
Long-term portion of lease liabilities | | (289,128) | |
Other liabilities | | (132,394) | |
Redeemable noncontrolling interests | | (25,990) | |
Preferred shares | | (209,980) | |
Noncontrolling interests | | (151,090) | |
Net liabilities assumed | | (871,298) | |
Goodwill | | 1,300,360 | |
Purchase price consideration | | $ | 429,062 | |
The excess of purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which is primarily attributed to the assembled workforce of MDC. Goodwill of $1,059,388, $174,710 and $66,262 was assigned to the Integrated Agencies Network, the Media Network and the Communications Network reportable segments, respectively. The majority of the goodwill is non-deductible for income tax purposes. Goodwill has been updated from the previously reported amount of $1,299,374 to reflect a change in certain assets and liabilities. There has been no change that impacts the Consolidated Statement of Operations.
Intangible assets consist of trade names and customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is thirteen years. The following table presents the details of identifiable intangible assets acquired.
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
Trade Names | | $ | 98,000 | | | 10 |
Customer Relationships | | 712,900 | | | 6-15 |
Total Acquired Intangible Assets | | $ | 810,900 | | | |
Pro Forma Financial Information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | | | |
| | | | Three Months Ended March 31, 2021 |
Revenue | | | | $ | 488,827 | |
Net Income | | | | 14,104 | |
Acquisition of Goodstuff Holdings Limited
On December 31, 2020, filed on March 16, 2021, the Company acquired GoodStuff Holdings Limited (“Goodstuff”) for approximately £21,000 (approximately $28,053) of cash consideration as well as contingent consideration up to a descriptionmaximum of £22,000. The cash consideration included an initial payment of £8,000, an excess working capital payment of approximately £9,000 and approximately £4,000 of deferred payments. The contingent consideration is tied to employees’ service and will be recognized as deferred acquisition consideration expense through 2026. Therefore, only the cash consideration has been allocated to the assets acquired and assumed liabilities of Goodstuff based upon preliminary estimated fair values, with any excess purchase price allocated to goodwill. The preliminary purchase price allocation is as follows:
| | | | | | | | |
| | Amount |
Cash and cash equivalents | | $ | 30,985 | |
Accounts receivable | | 28,685 | |
Other current assets | | 3,207 | |
Fixed assets | | 237 | |
Right-of-use lease assets - operating leases | | 2,060 | |
Intangible assets | | 14,974 | |
Other assets | | 55 | |
Accounts payable | | (6,344) | |
Accruals and other liabilities | | (27,353) | |
Advance billings | | (15,956) | |
Current portion of lease liabilities | | (857) | |
Income taxes payable | | (967) | |
Long-term portion of lease liabilities | | (3,744) | |
Other liabilities | | (1,204) | |
Net assets assumed | | 23,778 | |
Goodwill | | 4,275 | |
Purchase price consideration | | $ | 28,053 | |
The excess of purchase consideration over the fair value of the Transactions.net assets acquired was recorded as goodwill, which is primarily attributed to the assembled workforce of Goodstuff. Goodwill of $4,275 was assigned to the Media Network. The majority of the goodwill is non-deductible for income tax purposes.
Intangible assets consist of trade names and customer relationships. We amortize purchased intangible assets on a straight-line basis over their respective useful lives. The weighted average life of the total acquired identifiable intangible assets is ten years. The following table presents the details of identifiable intangible assets acquired.
| | | | | | | | | | | | | | |
| | Estimated Fair Value | | Estimated Useful Life in Years |
Trade Names | | $ | 1,349 | | | 15 |
Customer Relationships | | 13,625 | | | 10 |
Total Acquired Intangible Assets | | $ | 14,974 | | | |
Pro Forma Financial Information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition as if it occurred as of January 1, 2021. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time.
| | | | | | | | |
| | Three Months Ended March 31, 2021 |
Revenue | | $ | 185,428 | |
Net Income | | 5,111 | |
2021 Purchases of Noncontrolling Interests
On May 7,October 1, 2021, MDC’s proxy statement/prospectusthe Company entered into an agreement to purchase the approximate 27% remaining interest of Targeted Victory it did not already own, stipulating the purchase of 13.3% on Form S-4, as filedOctober 1, 2021 and the remaining 13.3% on April 30, 2021, which describesJuly 31, 2023, with the Transaction Agreement, the Transactions, and related ancillary agreements in more detail, was declared effective by the SEC. MDC’s Board of Directors has scheduled a special meeting of shareholders on June 22, 2021option for the Company’s shareholdersseller to votedelay the second purchase until July 31, 2025. The purchase price of $73,898, was comprised of a contingent deferred acquisition payment and redeemable noncontrolling interest with estimated present values at the acquisition date of $46,618 and $27,280, respectively. The contingent deferred payment and redeemable noncontrolling interest were based on proposalsthe financial results of the underlying business through 2025. In addition, at the option of the Company, up to approve50% of the Transactionstotal purchase price can be paid in shares of Class A Common Stock and related matters.in no event may the purchase price exceed $135,000.
On April 26,December 1, 2021, the Company acquired the approximate 27% remaining 40% ownership interest of Gale PartnersConcentric it did not already own for an aggregate purchase price of approximately $20,000. The purchase price will be made in a combination of cash and MDC Class A Common Shares, of which approximately $12,000 is deferred with payments due in April 2022 and 2023. As part of the closing date purchase price, the Company issued 2,131,574 Class A Common Shares to the seller in a private placement in reliance on exemptions from registration under the Securities Act of 1933, as amended.
2. Acquisitions and Dispositions
2020 Acquisition
On July 1, 2020, the Company acquired the remaining 10% ownership interest of Veritas it did not already own for an aggregate purchase price of $2,187, of which $1,087 was a deferred cash payment. As a result of the transaction, the Company reduced noncontrolling and redeemable noncontrolling interests by $2,651. The difference between the purchase price and the noncontrolling interest of $464 was recorded in Common stock and other paid-in capital in the Unaudited Condensed Consolidated Balance Sheets.
On March 19, 2020, the Company acquired the remaining 22.5% ownership interest of KWT Global it did not already own for an aggregate purchase price of $2,118,$8,058, comprised of a closing cash payment of $729$1,581 and contingent deferred acquisition payments with an estimated present value at the acquisition date of $1,389.$6,477. The contingent deferred payments were based on the financial results of the underlying business from 2019 to 2020through 2022 with final payment due in 2021. As a result of the transaction,2023.
On December 31, 2021, the Company reduced redeemable noncontrolling interests by $1,615. The difference betweenacquired the purchase price and the redeemable noncontrollingapproximate 49% remaining interest of $503 was recorded in Common stock and other paid-in capital in the Unaudited Condensed Consolidated Balance Sheets.
2020 Disposition
On February 14, 2020, the Company sold substantially all the assets and certain liabilities of Sloane and Company LLC (“Sloane”), an indirectly wholly owned subsidiary of the Company, to an affiliate of The Stagwell Group LLC (“Stagwell”),Instrument it did not already own for an aggregate salepurchase price of $26,696, consisting$157,072, comprised of a closing payment of $37,500 in cash receivedand $37,500 in shares of Class A Common Stock and deferred acquisition payments with an estimated present value at closing plus contingentthe acquisition date of $82,072. The deferred payments expected toare not contingent and will be paid over the next two years. The sale resulted in a gain of $16,827, which is included in Other, net within the Unaudited Condensed Consolidated Statements of Operations. Sloane was included within Allison & Partners which is included within the All Other category.
2023 and 2024.
3.4. Revenue
The Company’s revenue recognition policies are established in accordance with ASC 606, and accordingly, revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The MDCStagwell network provides an extensive range of services to our clients, offering a variety of marketing and communication capabilities including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast), public relations services including strategy, editorial, crisis support or issues management, media training, influencer engagement and events management. We also provide media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast), experiential marketing and application/website design and development.
The primary source of the Company’s revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses, depending on the terms of the client contract. In all circumstances, revenue is only recognized when collection is reasonably assured. Certain of the Company’s contractual arrangements have more than one performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its relative stand-alone selling price. Stand-alone selling prices are determined based on the prices charged to clients or using expected cost plus margin.
The determination of our performance obligations is specific to the services included within each contract. Based on a client’s requirements within the contract, and how these services are provided, multiple services could represent separate performance obligations or be combined and considered one performance obligation. Contracts that contain services that are not significantly integrated or interdependent, and that do not significantly modify or customize each other, are considered separate performance obligations. Typically, we consider media planning, media buying, creative (or strategy), production and experiential marketing services to be separate performance obligations if included in the same contract as each of these services can be provided on a stand-alone basis, and do not significantly modify or customize each other. Public relations services and application/website design and development are typically each considered one performance obligation as there is a significant integration of these services into a combined output.
Certain of the Company’s contracts consist of a single performance obligation. In these instances, the Company does not consider the underlying activities as separate or distinct performance obligations because its services are highly interrelated, and
the integration of the various components is essential to the overall promise to the Company’s customer. In certain of the Company’s client contracts, the performance obligation is a stand-ready obligation because the Company provides a constant level of similar services over the term of the contract.
We typically satisfy our performance obligations over time, as services are performed. Fees for services are typically recognized using input methods (direct labor hours, materials and third-party costs) that correspond with efforts incurred to date in relation to total estimated efforts to complete the contract. To a lesser extent, revenue is recognized using output measures, such as impressions or ongoing reporting. For client contracts when the Company has a stand-ready obligation to perform services on an ongoing basis over the life of the contract, where the scope of these arrangements includes an undefined number of broad activities and there are no significant gaps in performing the services, the Company recognizes revenue ratably using a time-based measure. In addition, for client contracts where the Company is providing online subscription-based hosted services, it recognizes revenue ratably over the contract term. Point in time recognition primarily relates to certain commission-based contracts, which are recognized upon the placement of advertisements in various media when the Company has no further performance obligation.
Revenue is recognized net of sales and other taxes due to be collected and remitted to governmental authorities. The Company’s contracts typically provide for termination by either party within 30 to 90 days. Although payment terms vary by client, they are typically within 30 to 60 days. In addition, the Company generally has the right to payment for all services provided through the end of the contract or termination date.
Within each contract, we identify whether the Company is principal or agent at the performance obligation level. In arrangements where the Company has substantive control over the service before transferring it to the client, and is primarily responsible for integrating the services into the final deliverables, we act as principal. In these arrangements, revenue is recorded at the gross amount billed. Accordingly, for these contracts the Company has included reimbursed expenses in revenue. In other arrangements where a third-party supplier, rather than the Company, is primarily responsible for the integration of services into the final deliverables, and thus the Company is solely arranging for the third-party supplier to provide these services to our client, we generally act as agent and record revenue equal to the net amount retained, when the fee or commission is earned. The role of MDC’sStagwell’s agencies under a production services agreement is to facilitate a client’s purchasing of production capabilities from a third-party production company in accordance with the client’s strategy and guidelines. The obligation of MDC’sStagwell’s agencies under media buying services is to negotiate and purchase advertising media from a third-party media vendor on behalf of a client to execute its media plan. We do not obtain control prior to transferring these services to our clients; therefore, we primarily act as agent for production and media buying services.
A small portion of the Company’s contractual arrangements with clients include performance incentive provisions, which allow the Company to earn additional revenues as a result of its performance relative to both quantitative and qualitative goals. Incentive compensation is primarily estimated using the most likely amount method and is included in revenue up to the amount that is not expected to result in a reversal of a significant amount of cumulative revenue recognized. We recognize revenue related to performance incentives as we satisfy the performance obligation to which the performance incentives are related.
Disaggregated Revenue Data
The Company provides a broad range of services to a large base of clients across the full spectrum of industry verticals globally. The primary source of revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses. Certain clients may engage with the Company in various geographic locations, across multiple disciplines, and through multiple Partner Firms.Brands. Representation of a client rarely means that MDCStagwell handles marketing communications for all brandsBrands or product lines of the client in every geographical location. The Company’s Partner FirmsBrands often cooperate with one another through referrals and the sharing of both services and expertise, which enables MDCStagwell to service clients’ varied marketing needs by crafting custom integrated solutions. Additionally, the Company maintains separate, independent operating companies to enable it to effectively manage potential conflicts of interest by representing competing clients across the MDCStagwell network.
The following table presents revenue disaggregated by client industry verticalour principal capabilities for the three months ended March 31, 20212022 and 2020:2021:
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
Industry | Reportable Segment | | 2021 | | 2020 | | | | |
Food & Beverage | All | | $ | 55,178 | | | $ | 58,091 | | | | | |
Retail | All | | 30,777 | | | 36,303 | | | | | |
Consumer Products | All | | 45,405 | | | 39,769 | | | | | |
Communications | All | | 16,990 | | | 41,045 | | | | | |
Automotive | All | | 15,629 | | | 25,192 | | | | | |
Technology | All | | 46,390 | | | 25,535 | | | | | |
Healthcare | All | | 31,494 | | | 24,066 | | | | | |
Financials | All | | 24,442 | | | 24,005 | | | | | |
Transportation and Travel/Lodging | All | | 9,948 | | | 20,486 | | | | | |
Other | All | | 31,332 | | | 33,250 | | | | | |
| | | $ | 307,585 | | | $ | 327,742 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, |
Principal Capabilities | Reportable Segment | | | | | | 2022 | | 2021 |
Digital Transformation | All Segments | | | | | | $ | 210,809 | | | $ | 63,354 | |
Creativity and Communications | Integrated Agencies Network, Communications Network, Other | | | | | | 279,242 | | | 23,265 | |
Performance Media and Data | Media Network, Other | | | | | | 99,776 | | | 62,716 | |
Consumer Insights and Strategy | Integrated Agencies Network, Other | | | | | | 53,076 | | | 31,907 | |
| | | | | | | $ | 642,903 | | | $ | 181,242 | |
MDCStagwell has historically largely focused where the Company was founded in North America, the largest market for its services in the world. The Company has expanded its global footprint to support clients looking for help to grow their businesses in new markets. MDC’s Partner FirmsStagwell’s Brands are located in the United States Canada, and an additional 11United Kingdom, and more than 30 other countries around the world. In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which included discretionary components that are easier to reduce in the short term than other operating expenses.
The following table presents revenue disaggregated by geography for the three months ended March 31, 20212022 and 2020:2021:
| | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
Geographical Location | Geographical Location | Reportable Segment | | 2021 | | 2020 | | Geographical Location | Reportable Segment | | | 2022 | | 2021 |
United States | United States | All | | $242,580 | | $264,561 | | United States | All | | | $ | 537,231 | | | $ | 166,747 | |
Canada | All | | 22,650 | | 18,256 | | |
United Kingdom | | United Kingdom | All | | | 39,813 | | | 4,705 | |
Other | Other | All | | 42,355 | | 44,925 | | Other | All | | | 65,859 | | | 9,790 | |
| | $307,585 | | $327,742 | | | | $ | 642,903 | | | $ | 181,242 | |
Contract Assets and Liabilities
Contract assets consist of fees and reimbursable outside vendor costs incurred on behalf of clients when providing advertising, marketing and corporate communications services that have not yet been invoiced to clients. Unbilled service fees were $59,143$161,912 and $49,110$116,558 at March 31, 20212022 and December 31, 2020,2021, respectively, and are included as a component of Accounts receivable on the Unaudited Condensed Consolidated Balance Sheets. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were $22,824$51,069 and $10,552$63,065 at March 31, 20212022 and December 31, 2020,2021, respectively, and are included on the Unaudited Condensed Consolidated Balance Sheets as Expenditures billable to clients. Such amounts are invoiced to clients at various times over the course of providing services.
Contract liabilities consist of fees received from or billed to clients in excess of fees recognized as revenue andrecognized. Such fees are classified as Advance billings and included within Accruals and other liabilitiespresented on the Company’s Unaudited Condensed Consolidated Balance Sheets. In arrangements in which we are acting as an agent, the revenue recognition related to the contract liability is presented on a net basis within the Unaudited Condensed Consolidated Statements of Operations. Advance billings at March 31, 20212022 and December 31, 20202021 were $170,159$344,125 and $152,956,$361,885, respectively. The increasedecrease in the Advance billings balance of $17,203$17,760 for the three months ended March 31, 20212022 was primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $99,188$221,094 of revenues recognized that were included in the Advance billings balances as of December 31, 2020 and reductions due to the incurrence of third-party costs. Contract liabilities classified within Accruals and other liabilities at March 31, 2021 and December 31, 2020 were $97,075 and $112,755, respectively. The decrease in the balance of $15,680 for the three months ended March 31, 2021 was primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $69,699 of revenues recognized that were included in the balance as of December 31, 2020 and reductions due to the incurrence of third-party costs.
Changes in the contract asset and liability balances during the three months ended March 31, 20212022 were not materially impacted by write offs, impairment losses or any other factors.
Unsatisfied Performance Obligations
The majority of our contracts are for periods of one year or less. For those contracts with a term of more than one year, we had approximately $5,799$28,241 of unsatisfied performance obligations as of March 31, 2021,2022 of which we expect to recognize approximately 83%67% in 2021the remaining quarters of 2022, 30% in 2023 and 17%3% in 2022.2024.
4. Income (Loss)5. Earnings Per Common Share
The following table sets forth the computationcomputations of basic and diluted income (loss) per common share:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Numerator: | | | | | | | |
Net income attributable to MDC Partners Inc. | $ | 5,010 | | | $ | 1,002 | | | | | |
Accretion on convertible preference shares | (3,724) | | | (3,440) | | | | | |
Net income allocated to convertible preference shares | (365) | | | 0 | | | | | |
Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | 921 | | | $ | (2,438) | | | | | |
| | | | | | | |
Adjustment to net income allocated to convertible preference shares | 7 | | — | | | | | |
Net income (loss) attributable to MDC Partners Inc. common shareholders - Diluted | $ | 928 | | | $ | (2,438) | | | | | |
Denominator: | | | | | | | |
Basic weighted average number of common shares outstanding | 73,392,824 | | | 72,397,661 | | | | | |
Diluted weighted average number of common shares outstanding | 75,439,066 | | | 72,397,661 | | | | | |
Basic | $ | 0.01 | | | $ | (0.03) | | | | | |
Diluted | $ | 0.01 | | | $ | (0.03) | | | | | |
| | | | | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | |
| | | | | | | |
| | | | | | | |
Earnings Per Share - Basic | | | | | | | |
Numerator: | | | | | | | |
Net income | $ | 33,622 | | | | | | | |
Net income attributable to Class C shareholders | (17,721) | | | | | | | |
Net income attributable to other equity interest holders | (3,226) | | | | | | | |
Net income attributable to noncontrolling interests | (20,947) | | | | | | | |
Net income attributable to Stagwell Inc. common shareholders | $ | 12,675 | | | | | | | |
| | | | | | | |
Denominator: | | | | | | | |
Basic - Weighted Average number of common shares outstanding | 122,285 | | | | | | | |
| | | | | | | |
Earnings Per Share - Basic | $ | 0.10 | | | | | | | |
| | | | | | | |
Earnings Per Share - Diluted | | | | | | | |
Numerator: | | | | | | | |
Net income attributable to Stagwell Inc. common shareholders | $ | 12,675 | | | | | | | |
Net income attributable to Class C shareholders | 17,721 | | | | | | | |
| $ | 30,396 | | | | | | | |
| | | | | | | |
Denominator: | | | | | | | |
Basic - Weighted Average number of common shares outstanding | 122,285 | | | | | | | |
Dilutive shares: | | | | | | | |
| | | | | | | |
Stock appreciation rights | 2,041 | | | | | | | |
Restricted share and restricted unit awards | 2,786 | | | | | | | |
Class C shares | 170,372 | | | | | | | |
Diluted - Weighted average number of common shares outstanding | 297,484 | | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings Per Share - Diluted | $ | 0.10 | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Anti-dilutive stock awards 1,920,634 2,835,770The combination of MDC and SMG was completed on August 2, 2021, which was treated as a reverse acquisition for financial reporting purposes. SMG was treated as the accounting acquirer and MDC was the accounting acquiree. Therefore, under applicable accounting principles, the historical financial results of SMG prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Form 10-Q for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions or the financial results of MDC and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021.
SMG’s equity structure, prior to the combination with MDC, was a non-unitized single member limited liability company, resulting in all components of equity attributable to the member being reported within Members' Capital. Given that SMG was a non-unitized single member limited liability company, net income (loss) prior to the combination is not applicable for purposes of calculating earnings per share. Therefore, the earnings per share calculation in the table above includes only the three months ended March 31, 2022 and does not include the corresponding prior year period.
Restricted stock and restricted stock unit awards of 0 and 2,203,7171,005 as of March 31, 2021 and 2020, respectively,2022 are excluded from the computation of diluted income (loss) per common share because the performance contingency necessary for vesting hashad not been met as of the reporting date. In addition, there were 145,000 Preference Shares outstanding which were convertible into 29,430,693 and 27,189,411 Class A common shares at March 31, 2021 and 2020, respectively. These Preference Shares were anti-dilutive for each period presented in the table above and are therefore excluded from the diluted income (loss) per common share calculation.
5.6. Deferred Acquisition Consideration
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel.
Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period through operating income, for contingent purchase price payments, or net interest expense, for fixed purchase price payments. The Company accounts for certain retention payments through operating income as stock-based compensation over the required retention period.income.
The following table presents changes in contingent deferred acquisition consideration, which is measured at fair value on a recurring basis using significant unobservable inputs, and a reconciliation to the amounts reported on the balance sheets as of March 31, 20212022 and December 31, 2020.2021:
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2021 | | 2020 |
Beginning Balance of Contingent Payments | $ | 82,802 | | | $ | 74,671 | |
Payments | (1,153) | | | (46,792) | |
Redemption value adjustments (1) | 12,392 | | | 44,993 | |
Additions - Acquisitions and step-up transactions | 0 | | | 7,703 | |
Other | (641) | | | 2,227 | |
Ending balance of contingent payments | $ | 93,400 | | | $ | 82,802 | |
Fixed Payments | 0 | | | 263 | |
| $ | 93,400 | | | $ | 83,065 | |
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2022 | | 2021 |
Beginning balance of contingent payments | $ | 222,369 | | | $ | 17,847 | |
Payments | (1,581) | | | (12,431) | |
Adjustment to deferred acquisition consideration (1) | 2,522 | | | 18,721 | |
Additions (2) | 1,097 | | | 198,937 | |
Other | (139) | | | (705) | |
Ending balance of contingent payments | $ | 224,268 | | | $ | 222,369 | |
| | | |
| | | |
(1) Redemption value adjustments areAdjustment to deferred acquisition consideration contains fair value changes from the Company’s initial estimates of deferred acquisition payments and stock-based compensation charges relatingpayments. Adjustment to deferred acquisition payments that are tied to continued employment. Redemption value adjustments areconsideration is recorded within Office and general expenses on the Unaudited Condensed Consolidated Statements of Operations.
The following table presents(2) In 2021, approximately $61,000 of additions represent deferred acquisition consideration acquired in connection with the impactacquisition of MDC. Approximately $136,000 of additions represent deferred acquisition consideration acquired in connection with the purchases of noncontrolling interests. See Note 3 of the Notes included herein for additional information related to the Company’s Statementspurchases of operations due to the redemption value adjustments for the contingent deferred acquisition consideration:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Loss (income) attributable to fair value adjustments | $ | 11,685 | | | $ | (4,600) | | | | | |
Stock-based compensation | 707 | | | 2,025 | | | | | |
Redemption value adjustments | $ | 12,392 | | | $ | (2,575) | | | | | |
Concentric, Targeted Victory, and Instrument.6.7. Leases
The Company leases office space in North America, Europe, Asia, South America, and Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. These leases are classified as operating leases and expire between years 20212022 through 2033.2034. The Company’s finance leases are immaterial.
The Company’s leasing policies are established in accordance with ASC 842, and accordingly, the Company recognizes on the balance sheet at the time of lease commencement a right-of-use lease asset and a lease liability, initially measured at the present value of the lease payments. Right-of-use lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. All right-of-use lease assets are reviewed for impairment. As the Company’s implicit rate in its leases is not readily determinable, in determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the commencement date. Lease payments included in the measurement of the lease liability are comprised of noncancelablenon-cancellable lease payments, payments based upon an index or rate, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease costs are recognized in the Unaudited Condensed Consolidated Statements of Operations over the lease term on a straight-line basis. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset.
Some of the Company’s leases contain variable lease payments, including payments based upon an index or rate. Variable lease payments based upon an index or rate are initially measured using the index or rate in effect at the lease commencement date and are included within the lease liabilities. Lease liabilities are not remeasured as a result of changes in the index or rate, rather changes in these types of payments are recognized in the period in which the obligation for those payments is incurred. In addition, some of our leases contain variable payments for utilities, insurance, real estate tax, repairs and maintenance, and other variable operating expenses. Such amounts are not included in the measurement of the lease liability and are recognized in the period when the facts and circumstances which the variable lease payments are based upon occur.
Some of the Company’s leases include options to extend or renew the leases through 2040.2044. The renewal and extension options are not included in the lease term as the Company is not reasonably certain that it will exercise its option.
From time to time, the Company enters into sublease arrangements both with unrelated third-parties and with our partner agencies.third parties. These leases are classified as operating leases and expire between years 20212022 through 2027.2032. Sublease income is
recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America, Asia, Europe and Australia.
As of March 31, 2021,2022, the Company has entered into 54 operating leases for which the commencement date has not yet occurred asprimarily because the premises are in the process of being prepared for occupancy by the landlord. Accordingly, these 54 leases represent an obligation of the Company that is not reflected within the Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021.2022. The aggregate future liability related to these leases is approximately $34,020.$3,478.
The discount rate used for leases accounted for under ASC 842 is the Company’s collateralized credit adjusted borrowing rate.
The following table presents lease costs and other quantitative information for the three months ended March 31, 20212022 and 2020:2021:
| | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | |
| 2021 | | 2020 | | | | | |
Lease Cost: | | | | | | | | |
Operating lease cost | $ | 17,127 | | | $ | 16,391 | | | | | | |
Variable lease cost | 2,593 | | | 4,655 | | | | | | |
Sublease rental income | (2,564) | | | (2,805) | | | | | | |
Total lease cost | $ | 17,156 | | | $ | 18,241 | | | | | | |
Additional information: | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities for operating leases | | | | | | | | |
Operating cash flows | $ | 16,796 | | | $ | 17,635 | | | | | | |
| | | | | | | | |
Right-of-use lease assets obtained in exchange for operating lease liabilities and other non-cash adjustments | $ | 3,816 | | | $ | 7,119 | | | | | | |
Weighted average remaining lease term (in years) - Operating leases | 7.2 | | 7.0 | | | | | |
Weighted average discount rate - Operating leases | 10.6 | | | 8.7 | | | | | |
| | | | | | | | |
| | | | | | | | |
In the three months ended March 31, 2021, the Company recorded a charge of $875 to reduce the carrying value of two of its right-of-use lease assets and accelerate the operating expenses of one of its right-of-use lease assets. These right-of-use lease assets related to three agencies within its Integrated Networks - Group B reportable segment. The Company evaluated the facts and circumstances related to the use of the assets which indicated that they may not be recoverable. Using adjusted quoted market prices to develop expected future cash flows, it was determined that the fair value of the assets were less than their carrying value. This impairment charge is included in Impairment and other losses within the Unaudited Condensed Consolidated Statements of Operations.
In the three months ended March 31, 2020, the Company recorded an impairment charge of $161 to reduce the carrying value of one of its right-of-use lease assets. | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Lease Cost: | | | | | | | |
Operating lease cost | | | | | $ | 14,016 | | $ | 5,505 |
Variable lease cost | | | | | 5,160 | | 1,053 |
Sublease rental income | | | | | (3,276) | | (959) |
Total lease cost | | | | | $ | 15,900 | | $ | 5,599 |
Additional information: | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities for operating leases | | | | | | | |
Operating cash flows | | | | | $ | 22,781 | | $ | 5,601 |
| | | | | | | |
Right-of-use lease assets obtained in exchange for operating lease liabilities and other non-cash adjustments | | | | | $ | 14,162 | | $ | — |
Weighted average remaining lease term (in years) - Operating leases | | | | | 6.9 | | 4.3 |
Weighted average discount rate - Operating leases | | | | | 4.2 | % | | 4.0 | % |
| | | | | | | |
| | | | | | | |
Operating lease expense is included in office and general expenses in the Unaudited Condensed Consolidated Statements of Operations. The Company’s lease expense for leases with a term of 12 months or less is immaterial.
The following table presents minimum future rental payments under the Company’s leases at March 31, 20212022 and their reconciliation to the corresponding lease liabilities:
| | | | | |
| Maturity Analysis |
Remaining 2022 | $ | 63,181 | |
2023 | 86,071 | |
2024 | 73,027 | |
2025 | 57,131 | |
2026 | 43,289 | |
2027 and thereafter | 157,507 | |
Total | 480,206 | |
Less: Present value discount | (70,682) | |
Lease liability | $ | 409,524 | |
| | | | | |
| Maturity Analysis |
Remaining 2021 | $52,871 |
2022 | 61,447 | |
2023 | 56,839 | |
2024 | 50,615 | |
2025 | 39,582 | |
2026 and thereafter | 152,702 | |
Total | 414,056 | |
Less: Present value discount | (131,452) | |
Lease liability | $ | 282,604 | |
7.8. Debt
As of March 31, 20212022 and December 31, 2020,2021, the Company’s indebtedness was comprised as follows:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Revolving Credit Agreements | $ | 20,000 | | | $ | 0 | |
Senior Notes | 870,256 | | | 870,256 | |
Debt Issuance Cost | (25,406) | | | (27,072) | |
| $ | 864,850 | | | $ | 843,184 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2022 | | 2021 |
Revolving credit facility | $ | 140,000 | | | $ | 110,165 | |
5.625% Notes | 1,100,000 | | | 1,100,000 | |
Debt issuance costs | (17,959) | | | (18,564) | |
Total long-term debt | $ | 1,222,041 | | | $ | 1,191,601 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Interest expense related to long-term debt included in Interest expense, net on the Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 was $18,261 and $1,624, respectively.
The amortization of debt issuance costs included in Interest expense, net on the Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 was $605 and $139, respectively.
Revolving Credit Agreement
On November 18, 2019, the Company entered into a debt agreement (“JPM Syndicated Facility”) with a syndicate of banks led by JPMorgan Chase Bank, N.A (“JPM”). The JPM Syndicated Facility consisted of a five-year revolving credit facility of $265,000 (“JPM Revolver”) with the right to be increased by an additional $150,000. On March 18, 2020, the Company increased the commitments on the JPM Revolver by $60,000 to $325,000.
On August 2, 2021, in connection with the closing of the acquisition of MDC, the Company entered into an amended and restated credit agreement (the “Combined Credit Agreement”) with a syndicate of banks led by JPM to increase commitments on the existing JPM Revolver. The Combined Credit Agreement consists of a $500,000 senior secured revolving credit facility with a five-year maturity.
The Combined Credit Agreement contains sub-limits for revolving loans and letters of credit of $50,000 for loans denominated in pounds sterling or euros. It also includes an accordion feature under which the Company may request, subject to lender approval and certain conditions, to increase the amount of the commitments to an aggregate amount not to exceed $650,000.
Borrowings under the Combined Credit Agreement bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest announced from time to time by JPM, (b) the federal funds effective rate from time to time plus 0.50% and (c) the LIBOR rate plus 1%, in each case, plus the applicable margin (calculated based on the Company’s total leverage ratio) at that time or (ii) the LIBOR rate plus the applicable margin (calculated based on the Company’s total leverage ratio) at that time. The Company is also required to pay an unused revolver fee to the lenders under the Combined Credit Agreement in respect of the unused commitments thereunder ranging from 0.15% to 0.30% of unused commitments depending on the total leverage ratio, as well as customary letter of credit fees.
As of April 27, 2022, the Company amended its Combined Credit Agreement. Among other things, this amendment replaces any previous reference to LIBOR with SOFR. The borrowings bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest in effect on such day, (b) the federal funds effective rate plus 0.50% and (c) the SOFR rate plus 1% in each case, plus the applicable margin (calculated base on the Company’s total leverage ratio) at that time. Additionally, the Combined Credit Agreement was amended to remove certain pre-commencement notice provisions for certain acquisitions under $50,000 in the aggregate, increased the amount permitted for certain investments allowed under the Combined Credit Agreement, and subject to certain conditions, explicitly allows for the repurchase of Stagwell Inc. stock in an amount not to exceed $100,000 in any fiscal year. All other substantive terms of the Combined Credit Agreement remain unchanged.
Advances under the Combined Credit Agreement may be prepaid in whole or in part from time to time without penalty or premium. The Combined Credit Agreement commitment may be reduced by the Company from time to time. Principal amounts outstanding under the Combined Credit Agreement are due and payable in full at maturity within five years of the date of the Combined Credit Agreement.
If an event of default occurs under the Combined Credit Agreement or any future secured indebtedness, the holders of such secured indebtedness will have a prior right to our assets securing such indebtedness, to the exclusion of the holders of the 5.625% Notes (as defined below), even if we are in default with respect to the 5.625% Notes. In that event, our assets securing such indebtedness would first be used to repay in full all indebtedness and other obligations secured by them (including all amounts outstanding under the Combined Credit Agreement), resulting in all or a portion of our assets being unavailable to satisfy the claims of the holders of the 5.625% Notes and other unsecured indebtedness.
The Combined Credit Agreement contains a number of financial and nonfinancial covenants and is guaranteed by substantially all of our present and future subsidiaries, subject to customary exceptions.
The Company was in compliance with all covenants at March 31, 2022.
A portion of the Combined Credit Agreement in an amount not to exceed $50,000 is available for the issuance of standby letters of credit. At March 31, 2022 and December 31, 2021, the Company had issued undrawn outstanding letters of credit of $24,943 and $24,332, respectively.
Senior Notes
On March 23, 2016, MDC entered into an indenture (the “Indenture”) among MDC, its existing and future restricted subsidiaries that guarantee, are co-borrowers under, or grant liens to secure,In August 2021, the Credit Agreement (as defined below), as guarantors (the “Guarantors”) and The BankCompany issued $1,100,000 aggregate principal amount of New York Mellon, as trustee, relating to5.625% senior notes (“5.625% Notes”). A portion of the proceeds from the issuance by MDC of $900,000the 5.625% Notes was used to redeem $870,300 aggregate principal amount of the senior notesoutstanding 7.50% Senior Notes due 2024 (the “Senior“Existing Notes”). for a price of $904,200. This price is equal to 101.625% of the outstanding principal amount of the Existing Notes being redeemed, plus, accrued, and unpaid interest on the principal amount of such Existing Notes. The SeniorCompany did not recognize a gain or loss on redemption.
The 5.625% Notes were sold in a private placement in reliance on exemptions from registration under the Securities Act of 1933. The Senior Notesare due August 15, 2029 and bear interest payable semiannually in arrearsof 5.625% to be paid on May 1February 15 and November 1, at a rateAugust 15 of 7.50% per annum. The Senior Notes matureeach year, commencing on May 1, 2024, unless earlier redeemed or repurchased.February 15, 2022.
The Senior5.625% Notes are guaranteed on a senior unsecured basis by substantially all of MDC’s existing and future restricted subsidiaries that guarantee, are co-borrowers under, or grant liens to secure, the Credit Agreement.Company’s subsidiaries. The Senior5.625% Notes are unsecured and unsubordinated obligations of MDC and rank (i) equally in right of payment with all of MDC’sthe Company’s or any Guarantor’sguarantor’s existing and future seniorunsubordinated indebtedness, (ii) senior in right of payment to MDC’sthe Company’s or any Guarantor’sguarantor’s existing and future subordinated indebtedness, (iii) effectively subordinated to allany of MDC’sthe Company’s or any Guarantor’sguarantor’s existing and future secured indebtedness to the extent of the collateral securing such indebtedness, including the Combined Credit Agreement, and (iv) structurally subordinated to all existing and future liabilities of MDC’sthe Company’s subsidiaries that are not Guarantors.guarantors.
MDCOur obligations under the 5.625% Notes are unsecured and are effectively junior to our secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. Borrowings under the Combined Credit Agreement are secured by substantially all of the assets of the Company, and any existing and future subsidiary guarantors, including all of the capital stock of each restricted subsidiary.
The Company may, at its option, redeem the Senior5.625% Notes in whole at any time or in part from time to time, on and after August 15, 2024 at varying prices based on the timinga redemption price of 102.813% of the redemption.principal amount thereof if redeemed during the twelve-month period beginning on August 15, 2024, at a redemption price of 101.406% of the principal amount thereof if redeemed during the twelve-month period beginning on August 15, 2025 and at a redemption price of 100% of the principal amount thereof if redeemed on August 15, 2026 and thereafter. Prior to August 15, 2024, the Company may, at its option, redeem some or all of the 5.625% Notes at a price equal to 100% of the principal amount of the 5.625% Notes plus a “make whole” premium and accrued and unpaid interest. The Company may also redeem, at its option, prior to August 15, 2024, up to 40% of the 5.625% Notes with the net proceeds from one or more equity offerings at a redemption price of 105.625% of the principal amount thereof.
If MDCthe Company experiences certain kinds of changes of control (as defined in the Indenture)indenture), holders of the Senior5.625% Notes may require MDCthe Company to repurchase any Senior5.625% Notes held by them at a price equal to 101% of the principal amount of the Senior5.625% Notes plus accrued and unpaid interest. In addition, if MDCthe Company sells assets under certain circumstances, it must apply the proceeds from such sale and offer to repurchase the Senior5.625% Notes at a price equal to 100% of the principal amount of the 5.625% Notes plus accrued and unpaid interest.
The Indentureindenture includes covenants that, among other things, restrict MDC’sthe Company’s ability and the ability of its restricted subsidiaries (as defined in the Indenture)indenture) to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC;the Company; make certain types of investments; create restrictions on the payment of dividends or other amounts from MDC’sthe Company’s restricted subsidiaries; sell assets; enter into transactions with affiliates; create liens; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’sthe Company’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The Senior5.625% Notes are also subject to customary events of default, including a cross-payment default and cross-acceleration provision.provisions. The Company was in compliance with all covenants at March 31, 2021.2022.
Revolving Credit AgreementInterest Rate Swap
The Company had an interest rate swap that matured in April 2022 to convert $9,375 of variable rate debt to a fixed rate of 2.7%. The fair value of the swap was $10 and $77 as of March 31, 2022 and December 31, 2021, respectively, and is included in Accruals and other liabilities on the Unaudited Condensed Consolidated Balance Sheets. The swap closed at the fair value recorded as of March 31, 2022.
The Company is party to a $211,500 secured revolving credit facility due February 3, 2022. The Company had $20,000 outstanding under the revolving credit facility as of March 31, 2021.
Advances under the Credit Agreement bear interest as follows: (i) Non-Prime Rate Loans bear interest at the Non-Prime Rate plus the Non-Prime Rate Margin and (ii) all other Obligations bear interest at the Prime Rate, plus the Prime Rate Margin. The Non-Prime Rate Margin and Prime Rate Margin will range from 2.50% to 3.00% for Non-Prime Rate Loans and from 1.75% to 2.25% for Prime Rate Loans. In addition to paying interest on outstanding principal under the Credit Agreement, MDC is required to pay an unused revolver fee to lenders under the Credit Agreement in respect of unused commitments thereunder.
The Credit Agreement, which includes financial and non-financial covenants, is guaranteed by substantially all of MDC’s present and future subsidiaries, other than immaterial subsidiaries and subject to customary exceptions, and collateralized by a portion of MDC’s outstanding receivable balance. The Company was in compliance with all of the terms and conditions of its Credit Agreement as of March 31, 2021.
At March 31, 2021 and December 31, 2020, the Company had issued undrawn outstanding letters of credit of $19,151 and $18,651, respectively.
8.9. Noncontrolling and Redeemable Noncontrolling Interests
Noncontrolling Interests
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the Company’s Unaudited Condensed Consolidated Balance Sheets. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity at their estimated acquisition date redemption value and adjusted at each reporting period for changes to their estimated redemption value through additional paid-in capitalRetained earnings (but not less than their initial redemption value), except for foreign currency translation adjustments. On occasion,
There were no changes to the Company may initiate a renegotiation to acquire an incremental ownership interest and the amount of consideration paid may differ materially from the amounts recorded in the Company’s Unaudited Condensed Consolidated Balance Sheets.
Noncontrolling Interests
Changes in amounts due to noncontrolling interest holders included in Accruals and other liabilities on the Unaudited Condensed Consolidated Balance Sheets for the year ended December 31, 2020 and three months ended March 31, 2021 were as follows:
| | | | | |
| Noncontrolling Interests |
Balance at December 31, 2019 | $ | 14,028 | |
Income attributable to noncontrolling interests | 21,774 | |
Distributions made | (15,192) | |
Other | 94 | |
Balance at December 31, 2020 | $ | 20,704 | |
Income attributable to noncontrolling interests | 4,491 | |
Distributions made | (5,285) | |
Other | 36 | |
Balance at March 31, 2021 | $ | 19,946 | |
Changes in the Company’sCompany's ownership interests in our less than 100% owned subsidiaries during the three months ended March 31, 20212022 and 2020 were as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Net income attributable to MDC Partners Inc. | $ | 5,010 | | | $ | 1,002 | | | | | |
Transfers from the noncontrolling interest: | | | | | | | |
Decrease in MDC Partners Inc. paid-in capital for purchase of redeemable noncontrolling interests and noncontrolling interests | (330) | | | (503) | | | | | |
Net transfers from noncontrolling interests | $ | (330) | | | $ | (503) | | | | | |
Change from Net income attributable to MDC Partners Inc. and transfers to noncontrolling interests | $ | 4,680 | | | $ | 499 | | | | | |
2021.
The following table presents net income attributable to noncontrolling interests between holders of Class C shares and other equity interest holders for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Net income attributable of Class C shareholders | $ | 17,721 | | | $ | — | |
Net income attributable of other equity interest holders | 816 | | | 1,153 | |
Net income attributable to noncontrolling interests | $ | 18,537 | | | $ | 1,153 | |
The following table presents noncontrolling interests between holders of Class C shares and other equity interest holders as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | |
| March 31, | | December 31, |
| 2022 | | 2021 |
Noncontrolling interest of Class C shareholders | $ | 495,395 | | | $ | 475,373 | |
Noncontrolling interest of other equity interest holders | 32,970 | | | 32,914 | |
NCI attributable to noncontrolling interests | $ | 528,365 | | | $ | 508,287 | |
Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests:
| | | | | | | | | | | | | March 31, | | December 31, |
| | Three Months Ended March 31, 2021 | | Year Ended December 31, 2020 | | 2022 | | 2021 |
Beginning Balance | Beginning Balance | $ | 27,137 | | | $ | 36,973 | | Beginning Balance | $ | 43,364 | | | $ | 604 | |
Redemptions | Redemptions | 0 | | | (12,289) | | Redemptions | — | | | (15,231) | |
Granted | 0 | | | 0 | | |
Acquisitions (1) | | Acquisitions (1) | — | | | 53,270 | |
Changes in redemption value | Changes in redemption value | (1,681) | | | 2,800 | | Changes in redemption value | (975) | | | 3,834 | |
Currency translation adjustments | (104) | | | (347) | | |
| Net income (loss) attributable to redeemable noncontrolling interests | | Net income (loss) attributable to redeemable noncontrolling interests | 1,649 | | | (412) | |
Other | | Other | 195 | | | 1,299 | |
Ending Balance | Ending Balance | $ | 25,352 | | | $ | 27,137 | | Ending Balance | $ | 44,233 | | | $ | 43,364 | |
(1) As of December 31, 2021, approximately $26,000 represents redeemable noncontrolling interests acquired in connection with the acquisition of MDC. Approximately $27,000 represents redeemable noncontrolling interests acquired in connection with the purchase of the noncontrolling interest of Targeted Victory. See Note 3 of the Notes included herein for additional information related to the purchase of Targeted Victory.
The noncontrolling shareholders’ ability to exercise any such option right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise and specific employment termination conditions. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual
date would result in obligations of the Company to fund the related amounts during 20212022 to 2025. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights.
The redeemable noncontrolling interest of $25,352$44,233 as of March 31, 2021,2022, consists of $16,469$42,011, assuming that the subsidiaries perform over the relevant future periods at their discounted cash flows earnings levelcurrent profit levels, and such rights are exercised, $8,883$2,222 upon termination of such owner’s employment with the applicable subsidiary or death and $0 representing the initial redemption value (required floor) recorded for certain acquisitions in excess of the amount the Company would have to pay should the Company acquire the remaining ownership interests for such subsidiaries.death.
These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. There is no related impact on the Company’s income per share calculations.
9.10. Commitments, Contingencies, and Guarantees
Legal Proceedings. The Company’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.
Deferred Acquisition Consideration and Options to Purchase. See Notes 56 and 89 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for information regarding potential payments associated with deferred acquisition consideration and the acquisition of noncontrolling shareholders’ ownership interest in subsidiaries.
Natural Disasters. Certain of the Company’s operations are located in regions of the United States which typically are subject to hurricanes. During the three months ended March 31, 2021 and 2020, these operations did not incur any material costs related to damages resulting from hurricanes.
Guarantees. Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Commitments. At March 31, 2021,2022, the Company had $19,151$24,943 of undrawn letters of credit.
The Company entered into 4 operating leases for which the commencement date has not yet occurred as of March 31, 2021.2022. See Note 67 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information.
In the ordinary course of business, the Company may enter into long-term, non-cancellable contracts with partner associations that include revenue or profit-sharing commitments related to the provision of its services. These contracts may also include provisions that require the partner associations to meet certain performance targets prior to any obligation to the Company. As of March 31, 2022, the Company estimates its future minimum commitments under these non-cancellable agreements to be: $9,397, $7,403, $2,139, $1,407, $1,207, and $92 for the remainder of 2022, 2023, 2024, 2025, 2026, and 2027, respectively.
10.
11. Share Capital
On March 23, 2022, the board of directors authorized a stock repurchase program (the “Repurchase Program”) under which we may repurchase up to $125,000 of shares of our outstanding Class A common stock. The Repurchase Program will expire on March 23, 2025.
Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices (including through trading plans that may be adopted in accordance with Rule 10b5-1 of the Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically and may authorize adjustments of its terms.
The authorized and outstanding share capital of the Company is as follows:below.
Series 6 Convertible Preference Shares
On March 14, 2019 (the “Series 6 Issue Date”), the Company entered into a securities purchase agreement with Stagwell Agency Holdings LLC (“Stagwell Holdings”), an affiliate of Stagwell, pursuant to which Stagwell Holdings agreed to purchase (i) 14,285,714 newly authorized Class A shares (the “Stagwell Common Stock (“Class A Shares”) for an aggregate contractual purchase price
There are 1,000,000 shares of $50,000 and (ii) 50,000 newly authorized Series 6 convertible preference shares (“Series 6 Preference Shares”) for an aggregate contractual purchase price of $50,000. The Company received proceeds of approximately $98,620 net of fees and estimated expenses, whichClass A Common Stock authorized. There were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. The proceeds allocated to the Stagwell133,192 Class A Shares were $35,997issued and to Series 6 Preference Shares were $62,623 based on their relative fair value calculated by utilizing a Monte Carlo Simulation model. In connection with the closing of the transaction, the Company increased the size of its Board and appointed two nominees designated by Stagwell Holdings. Except as required by law, the Series 6 Preference Shares do not have voting rights and are not redeemable at the option of Stagwell Holdings.
The holders of the Series 6 Preference Shares have the right to convert their Series 6 Preference Shares in whole at any time and from time to time, and in part at any time and from time to time, into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation preference per share of each Series 6 Preference Share is $1,000. The initial Conversion Price is $5.00 per Series 6 Preference Share, subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities.
The Series 6 Preference Shares’ liquidation preference accretes at 8.0% per annum, compounded quarterly until the five-year anniversary of the Series 6 Issue Date. During the three months ended March 31, 2021, the Series 6 Preference Shares accreted at a monthly rate of 7.69, for total accretion of $1,153, bringing the aggregate liquidation preference to $58,804outstanding as of March 31, 2021.2022. The accretion is considered in the calculation of net income (loss) attributable to MDC Partners Inc. common shareholders. See Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information regarding the Series 6 Preference Shares.
Holders of the Series 6 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 6 Preference Shares. The Series 6 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Series 6 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least 125% of the Conversion
Price or (ii) after the fifth anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 6 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at 7%), and (ii) the Company will have a right to redeem the Series 6 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
Series 4 Convertible Preference Shares
On March 7, 2017 (the “Series 4 Issue Date”), the Company issued 95,000 newly created Preference Shares (“Series 4 Preference Shares”) to affiliates of The Goldman Sachs Group, Inc. (collectively, the “Purchaser”) pursuant to a $95,000 private placement. The Company received proceeds of approximately $90,123, net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. In connection with the closing of the transaction, the Company increased the size of its Board and appointed one nominee designated by the Purchaser. Except as required by law, the Series 4 Preference Shares do not have voting rights and are not redeemable at the option of the Purchaser.
Subsequent to the ninetieth day following the Series 4 Issue Date, the holders of the Series 4 Preference Shares have the right to convert their Series 4 Preference Shares in whole at any time and from time to time and in part at any time and from time to time into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation preference per share of each Series 4 Preference Share is $1,000. The Conversion Price of a Series 4 Preference Share is subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities. In connection with the anti-dilution protection provision triggered by the issuance of equity securities to Stagwell Holdings, the Conversion Price per Series 4 Preference Share was reduced to $7.42 from the initial Conversion Price of $10.00.
The Series 4 Preference Shares’ liquidation preference accretes at 8.0% per annum, compounded quarterly until the five-year anniversary of the Series 4 Issue Date. During the three months ended March 31, 2021, the Series 4 Preference Shares accreted at a monthly rate of approximately $9.02 per Series 4 Preference Share, for total accretion of $2,571, bringing the aggregate liquidation preference to $131,110 as of March 31, 2021. The accretion is considered in the calculation of net income (loss) attributable to MDC Partners Inc. common shareholders. See Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information regarding the Series 4 Preference Shares.
Holders of the Series 4 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 4 Preference Shares. The Series 4 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least 125% of the Conversion Price or (ii) after the fifth anniversary of the Series 4 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 4 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at 7%), and (ii) the Company will have a right to redeem the Series 4 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
Class A Common Shares (“Class A Shares”)
These are an unlimited number of subordinate voting shares, carrying 1 vote each, with a par value of $0,$0.001 entitled to dividends equal to or greater than Class B Shares, and convertible at the option of the holder into one Class B Share for each Class A Share after the occurrence of certain events related to an offer to purchase all Class B shares.
Class B Common Stock (“Class B Shares”)
There are 5 shares of Class B Common Stock authorized. There were 74,787,317 and 73,529,1054 of Class AB Shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively.
2022. The Class B Common Shares (“Class B Shares”)
These are an unlimited number of voting shares, carrying 20 votes each, with a par value of $0,$0.001, convertible at any time at the option of the holder into one Class A share for each Class B share.
Class C Common Stock (“Class C Shares”)
There are 250,000 shares of Class C Common Stock authorized. There were 3,743 and 3,743164,815 Class BC Shares issued and outstanding as of March 31, 2022. The Class C shares do not participate in the earnings of the Company and have a par value of $.00001. In 2021, an aggregate of 179,970 OpCo common units were issued to Stagwell Media in exchange for the equity interests of the Stagwell Subject Entities. Each Class C Share, together with the related OpCo common unit, is convertible at any time, at the option of the holder, into one Class A Share. In February 2022, holders of Class C Common Stock and December 31, 2020, respectively.OpCo Units (the “Paired Units”) exchanged 15,155 Paired Units for the same number of shares of Class A Common Stock. Approximately 5,000 Paired Units exchanged into an equal number of Class A Shares triggered an employee tax withholding obligation of $14,900. The Company repurchased approximately 2,000 of the 5,000 Class A Shares issued to the employees to satisfy their employee tax withholding obligation.
11.12. Fair Value Measurements
A fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The hierarchy for observable and unobservable inputs used to measure fair value into three broad levels are described below:
•Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
•Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
•Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Financial LiabilitiesInstruments that are not Measured at Fair Value on a Recurring Basis
The following table presents certain information for our financial liability that is not measured at fair value on a recurring basis at March 31, 20212022 and December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | March 31, 2021 | | December 31, 2020 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Liabilities: | | | | | | | | |
Senior Notes | | $ | 870,256 | | | $ | 882,379 | | | $ | 870,256 | | | $ | 883,580 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| March 31, 2022 | | December 31, 2021 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | | | | | |
5.625% Notes | 1,100,000 | | | 1,042,250 | | | 1,100,000 | | | 1,120,900 | |
| | | | | | | |
Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices in markets that are not active. Therefore, this debt is classified as Level 2 within the fair value hierarchy.
Financial LiabilitiesInstruments Measured at Fair Value on a Recurring Basis
The following table presents certain information for our financial instruments that are measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Interest Rate Swap | $ | 10 | | | $ | 10 | | | $ | 77 | | | $ | 77 | |
The interest rate swap is classified as Level 3 within the fair value hierarchy.
Contingent deferred acquisition consideration (Level 3 fair value measurement) is recorded at the acquisition date fair value and adjusted at each reporting period. The estimated liability is determined in accordance with various contractual valuation formulasmodels of each business' future performance, including revenue growth and isfree cash flows. These models are dependent upon significant assumptions, such as the growth rate of the earnings of the relevant subsidiary during the contractual period and the discount rate. These growth rates are consistent with the Company’s long-term forecasts. As of March 31, 2021,2022, the discount rate used to measure these liabilities was 5.1%ranged from 3.5% to 7.2%.
As these estimates require the use of assumptions about future performance, which are uncertain at the time of estimation, the fair value measurements presented on the Unaudited Condensed Consolidated Balance Sheets are subject to material uncertainty.
See Note 56 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding contingent deferred acquisition consideration.
At March 31, 20212022 and December 31, 2020,2021, the carrying amount of the Company’s financial instruments, including cash, and cash equivalents, accounts receivable and accounts payable, approximated fair value because of their short-term maturity.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets are measured at fair value on a nonrecurring basis, primarily goodwill, intangible assets (Level 3 fair value measurement) and right-of-use lease assets (Level 2 fair value measurement). Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. The Company did not recognize an impairment of goodwill or intangible assets in the three months ended March 31, 2022 and 2021. The company did not recognize an impairment of goodwill orCompany recognized impairments for right-of-use lease assets and intangible assets (Level 3 fair value measurement) in the three months ended March 31, 2020.
2022. The Company recognized a charge of $598 to reduce the carrying value of itsdid not recognize an impairment for right-of-use lease assets and intangible assets in the three months ended March 31, 2021. The company recognized
13. Supplemental Information
Subsidiary Awards
Certain of the Company’s subsidiaries grant awards to their employees providing them with an impairment charge of $161 to reduce the carrying value of one of its right-of-use lease assetsequity interest in the three months endedrespective subsidiary (the “profits interests awards”). The awards generally provide the employee the right, but not the obligation, to sell its profits interest in the subsidiary to the Company based on a performance-based formula and, in certain cases, pay a profit share distribution. The profits interests awards are settled in cash and the corresponding liability at fair value was $37,358 at March 31, 2020. See Note 62022 (Level 3 fair value model), and included as a component of the Notes toAccruals and other liabilities and Other liabilities on the Unaudited Condensed Consolidated Financial Statements included herein for further information.Balance Sheets.
Stock-based Compensation
12. Supplemental Information
Impairment and Other Losses
The CompanyTotal stock-based compensation recognized a charge of $875 for the three months ended March 31, 2021 to reduce2022 was $8,021. In the carrying value of two of its right-of-use lease assets and acceleratethree months ended March 31, 2022, the operating expenses of one of its right-of-use lease assets. These right-of-use lease assets related toCompany granted approximately 3,800 share based awards. Stock-based compensation expense recognized for these grants for the three agencies within its Integrated Networks - Group B reportable segment.months ended March 31, 2022 was approximately $1,594.
See Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding the impairment of right-of-use lease assets and losses.
14. Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in interim periods.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act includes provisions relating to delaying certain payroll tax payments, refundable payroll tax credits, net operating loss carryback periods, modifications to the net interest deduction limitations and technical corrections to the tax depreciation methods for qualified improvement property. The tax law changes in the CARES Act did not have a material impact on the Company’s income tax provision.
The Company had an income tax expense for the three months ended March 31, 20212022 of $1,302$3,189 (on a pre-tax income of $11,296$35,781 resulting in an effective tax rate of 11.5%8.9%) compared to income tax expense of $13,500$673 (on pre-tax income of $15,293$5,272 resulting in an effective tax rate of 88.3%12.8%) for the three months ended March 31, 2020.2021.
The difference in the effective tax rate of 11.5% for8.9% in the three months ended March 31, 2022 as compared to 12.8% in the three months ended March 31, 2021 was primarily duerelated to minimaladditional deductions for share based compensation vesting in 2022.
Tax Receivables Agreement
In connection with the closing of the Transactions, we entered into the Tax Receivables Agreement (“TRA”) with OpCo and Stagwell Media, pursuant to which we are required to make cash payments to Stagwell Media equal to 85% of certain U.S. federal, state and local income tax expense recognized on U.S. earningsor franchise tax savings, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of being subject(i) increases in the tax basis of OpCo’s assets resulting from exchanges of Paired Units (defined in Note 11) for shares of our Class A Common Stock or cash, as applicable, and (ii) certain other tax benefits related to us making payments under the TRA.
The Company accounts for amounts payable under the TRA in accordance with ASC 450—Contingencies. We will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance.allowance and a corresponding reduction to the TRA liability. The amounts to be recorded for both the deferred tax assets and the liability under the TRA will be estimated at the time of any purchase or exchange as a reduction to shareholders’ equity, and the effects of changes in any of our estimates after this date will be included in net income or loss. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income or loss.
In March 31, 2020 was primarily driven by capital gains, non-deductible stock compensation for which2022, the Company recorded a TRA liability of $20,846 and a reduction in the net deferred tax benefit was not recognized, andliability of $24,525 on its consolidated balance sheet in connection with the jurisdictional mix of earnings.
projected obligations under the TRA.
13.15. Related Party Transactions
In the ordinary course of business, the Company enters into transactions with related parties, including Stagwell and its affiliates. The transactions may range in the nature and value of services underlying the arrangements. Below are the related party transactions that are significant in nature:
In October2018, the Company entered into a continuous arrangement to provide technological services to a client founded by the Company’s Chief Executive Officer. During the three months ended March 31, 2022 and 2021, the Company recognized $9 and $15, respectively, in revenue related to this transaction. As of March 31, 2022 and December 31, 2021, $175 and $137, respectively, was due from the client.
In 2018, a Brand entered into a continuous arrangement with a third party in which the third party is providing data management services to the Brand. A family member of one of the Brand’s partners holds an executive leadership position in this entity. Under the arrangement, the Brand is expected to pay the affiliate based upon the success of their services with no minimum or maximum spend. During the three months ended March 31, 2022 and 2021, the Company incurred $305 and $304, respectively, in expenses related to this transaction. As of March 31, 2022 and December 31, 2021, $617 and $569, respectively, was due to the vendor.
In 2018, a Brand entered into a continuous arrangement to provide marketing services to a client in which a family member of one of the Brand’s partners holds an executive leadership position. During the three months ended March 31, 2022 and 2021, the Company recognized $186 and $24, respectively, in revenue related to this transaction. As of March 31, 2022 and December 31, 2021, $273 and $88, respectively, was due from the client.
In 2019, a Partner FirmBrand of the Company, entered into a loan agreement with a third party who holds a minority interest in the Brand. The loan receivable of $1,797 and $3,784 due from the third party is included within Other current assets in the Company’s Unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. The Company recognized $43 and $50 of interest income within interest expense, net on its Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021, respectively.
In 2021, the Company entered into an arrangement with a Stagwell affiliate, in which the Stagwell affiliate and the Partner Firm collaborated to provide variouspolling services to a client in which a family member of the Partner Firm. The Partner Firm and the Stagwell affiliate pitched and won this business together, with the client ultimately determining the general scope of work for each agency.Company’s Chief Executive Officer holds a key leadership position. Under the arrangement, which was structured as a sub-contract due tothe Company will receive from the client preference, the Partner Firmapproximately $350 which is expected to pay the Stagwell affiliate, for services provided by the Stagwell affiliate in connection with serving the client, approximately $2,000 which has beenbe fully recognized throughin 2022. During the three months ended March 31, 2021.2022 and 2021, the Company recognized revenue of $70 and $15, respectively, related to this arrangement. As of March 31, 2022 and December 31, 2021, $101$70 and $70 was owed todue from the affiliate.client, respectively.
In January 2021 a Partner Firmand 2022, certain of the Companyour Brands entered into an arrangement witharrangements to provide marketing and website development services to a certain Stagwell affiliate to perform media planning, buying and reporting services.client that has a significant interest in the Company. Under the arrangement, the Partner Firm isBrands are expected to receive from the Stagwell affiliate approximately $529,$6,152 which have beenwill be fully recognized throughin 2022. During the three months ended March 2021.31, 2022 and 2021, the Company recognized $1,393, and $0, respectively, in revenue related to this transaction. As of March 31, 2022 and December 31, 2021, $0$1,563 and $502, respectively, was due from the affiliate.
client.
In May 2020,2021, a Partner FirmBrand entered into an arrangement to obtain sales and management services from an affiliate for which the CEO of the Brand is a shareholder of the affiliate. Under the arrangement, the Brand has incurred $89 and $49 of related party expense for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and December 31, 2021, $446 and $442, respectively, was due to the related party.
On a continuous basis, certain of our Brands enter into arrangements to provide typical marketing and advertising services for clients that certain of the Brands’ partners and executives either hold key leadership positions in or are on the Board of Directors of. During the three months ended March 31, 2022 and 2021, the Company recognized revenue of $2,328 and $2124, respectively, related to this transaction. As of March 31, 2022 and December 31, 2021, $4,907 and $4,577, respectively, was due from the client.
In 2022, the Company entered into an arrangement withto provide polling services to a certain Stagwell affiliate to perform programmatic media planning, buying and reporting services.client for which the founder of the client has a significant interest in the Company. Under the arrangement, the Partner Firm is expected toCompany will receive from the Stagwell affiliateclient approximately $2,397,$3,200 which is expected to be fully recognized in May 2021.as of September 2022. During the three months ended March 31, 2022 and 2021, the Company recognized revenue of $242 and $0 related to this arrangement, respectively. As of March 31, 2021,2022, $0 was due from the affiliate. client.
In November 2020, a Partner Firm ofDuring the Company entered into an arrangement with a certain Stagwell affiliate to perform Event Management Services. Under the arrangement, the Partner Firm is expected to receive from the Stagwell affiliate approximately $456, which has been fully recognized as of March of 2021. As ofthree months ended March 31, 2021, $316 was due fromStagwell Media made additional noncash investments in the affiliate.
Company of $10,300. In March 2021, the Company made a noncash distribution to Stagwell Media of $13,000 for the transfer of the ownership of the Finn Partners Preferred shares. Additionally, the Company made cash distributions to Stagwell Media of $15,000 for the three months ended March 31, 2021.
In February 2021, a Partner Firm of the Company entered into an arrangement with a certain Stagwell affiliate to perform requirements gathering and concept features for a future-leaning ad platform for the augmented reality space. Under the arrangement, the Stagwell affiliate is expected to receive from the Partner Firm approximately $140, which will be recognized through April 2021. As of March 31, 2021, $140 was due to the affiliate.
In March 2021, a Partner Firm of the Company entered into an arrangement with a certain Stagwell affiliate to perform media relations support and outreach services. Under the arrangement, the Partner Firm is expected to receive from the Stagwell affiliate approximately $190, which will be recognized through September 2022. As of March 31, 2021, $10 was due from the affiliate.
The Company entered into an agreement commencing on January 1, 2020 to sublease office space through July 2021 to a company whose chairman is a member of the Company’s Board of Directors. As of March 31, 2021, the total future rental income related to the sublease is approximately $65.
14.16. Segment Information
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Mark Penn, Chief Executive Officer and Chairman, to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
The CODM uses Adjusted EBITDA (defined below) as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions. Adjusted EBITDA is defined as Net income (loss) attributableexcluding non-operating income or expense to MDC Partners Inc. common shareholders’ plus or minus non-operating items toachieve operating income, (loss), plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, distributions from non-consolidated affiliates and other items, net. Distributions from non-consolidated affiliates includes (i) cash received for profit distributions from non-consolidated affiliates, and (ii) consideration from the sale of ownership interests in non-consolidated affiliates, less contributions to date, plus undistributed earnings (losses).items. Other items net includes items such as merger relatedinclude restructuring costs, severanceacquisition-related expenses, and other restructuring expenses, including costs for leases that will either be terminated or sublet in connection with the centralization of our New York real estate portfolio.non-recurring items.
The Company has 3 reportable segments that result from applying the aggregation criteria are as follows: “Integrated Networks - Group A,Agencies Network,” “Integrated Networks - Group B”“Media Network” and the “Media & Data“Communications Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the Unaudited Condensed Consolidated Financial Statements included herein and Note 2 of the Company’s 2020 Form 10-K.herein.
•The Integrated Networks - Group AAgencies Network includes four integrated operating segments: the Anomaly Alliance, Constellation, the Code and Theory Network, and the Doner Partner Network. These operating networks are organized for go-to-market and collaboration incentive purposes and to facilitate integrated and flexible offerings for our clients. Each integrated network consists of agencies that offer an array of complementary services spanning our core capabilities of Digital Transformation, Performance Media & Data, Consumer Insights & Strategy, and Creativity & Communications. The Agencies included in the operating segments that comprise the Integrated Agencies Network reportable segment is comprised of theare as follows: Anomaly Alliance (Anomaly, Concentric, Partners, Hunter, Mono, Y Media Labs)YML and Scout agencies), the Code & Theory Network (Code and Theory, Forsman & Bodenfors, National Research Group, Observatory, Hello Design and Colle McVoy operating segments.
•The Integrated Networks - Group B reportable segment is comprised of theagencies), Constellation (72andSunny, CPB,Crispin Porter Bogusky, Instrument, Team Enterprises, Harris and Redscout)Redscout agencies) and the Doner Partner Network (6degrees, Doner,(Doner, KWT Union,Global, Bruce Mau Design, Vitro, Harris X, Northstar, Veritas and Yamamoto) operating segments.Yamamoto agencies).
The operating segments aggregated within the Integrated Networks - Group A and B reportable segments provide a range of services for their clients, primarily including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast) as well as public relations and communications services, experiential, social media and influencer marketing. These integrated network operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments may occasionally compete with each other for new business and from time to timeor have business move between them. While the operating segments are similar in nature, the distinction between the Integrated Networks - Group A and B is the aggregation of operating segments that have the most similar historical and expected average long-term profitability.
•The Media & Data Network reportable segment is comprised of a single operating segment, that combinesour specialist network branded the Stagwell Media Network (“SMN”). SMN serves as a unified media and data management structure with omni-channel media placement, creative media consulting, influencer and business-to-business marketing capabilities. Our Agencies in this segment aim to provide scaled creative performance through developing and executing sophisticated omnichannel campaign strategies leveraging significant amounts of consumer data. SMN’s Agencies combine media buying and planning across a range of digital and traditional platforms (out-of-home, paid search, social media, lead generation,
programmatic, television, broadcast) with technologybroadcast, among others) and data capabilities. includes multichannel agencies Assembly, Goodstuff, MMI Agency, digital creative & transformation consultancy GALE, B2B specialist Multiview, CX specialists Kenna, and travel media experts Ink.
•The MediaCommunications Network reportable segment is comprised of a single operating segment, our specialist network that provides advocacy, strategic corporate communications, investor relations, public relations, online fundraising and other services to both corporations and political and advocacy organizations and consists of our Allison & Data Network includes Gale Partners Kenna, MDC MediaSKDK (including Sloane & Company), and Northstar.Targeted Victory Agencies.
•All Other consists of the Company’s remaining operating segments that provide a range of services including advertising, public relationsdigital innovation group, Reputation Defender (which was sold in September 2021) and marketing communication services, but generally do not have similar services offerings or financial characteristicsStagwell Marketing Cloud products such as those aggregated in the reportable segments. The All Other category includes Allison & Partners, Bruce Mau, Forsman & Bodenfors, Hello, Team and Vitro.PRophet.
•Corporate consists of corporate office expenses incurred in connection with the strategic resources provided to the operating segments, as well as certain other centrally managed expenses that are not fully allocated to the operating segments. These office and general expenses include (i) salaries and related expenses for corporate office employees, including employees dedicated to supporting the operating segments, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the
corporate office. Additional expenses managed by the corporate office that are directly related to the operating segments are allocated to the appropriate reportable segment and the All Other category.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Revenue: | | | | | (Dollars in Thousands) |
| | | | | | | |
| | | | | | | |
Integrated Agencies Network | | | | | $ | 378,372 | | | $ | 69,898 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Media Network | | | | | 169,886 | | | 62,773 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Communications Network | | | | | 91,535 | | | 42,708 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
All Other | | | | | 3,110 | | | 5,863 | |
Total Revenue | | | | | $ | 642,903 | | | $ | 181,242 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Adjusted EBITDA: | | | | | | | |
Integrated Agencies Network | | | | | $ | 71,473 | | | $ | 13,500 | |
Media Network | | | | | 29,164 | | | 4,688 | |
Communications Network | | | | | 15,937 | | | 7,974 | |
All Other | | | | | (124) | | | (1,611) | |
Corporate | | | | | (15,038) | | | (709) | |
Total Adjusted EBITDA | | | | | $ | 101,412 | | | $ | 23,842 | |
| | | | | | | |
Depreciation and amortization | | | | | $ | (31,204) | | | $ | (10,950) | |
Impairment and other losses | | | | | (557) | | | — | |
Stock-based compensation | | | | | (8,021) | | | — | |
Deferred acquisition consideration | | | | | (1,897) | | | (3,936) | |
Other items, net | | | | | (5,073) | | | (2,941) | |
Total Operating Income | | | | | $ | 54,660 | | | $ | 6,015 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Revenue: | (Dollars in Thousands) |
Integrated Networks - Group A | $ | 102,386 | | | $ | 90,621 | | | | | |
Integrated Networks - Group B | 111,151 | | | 117,707 | | | | | |
Media & Data Network | 36,783 | | | 41,058 | | | | | |
All Other | 57,265 | | | 78,356 | | | | | |
Total | $ | 307,585 | | | $ | 327,742 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Adjusted EBITDA: | | | | | | | |
Integrated Networks - Group A | $ | 22,462 | | | $ | 16,301 | | | | | |
Integrated Networks - Group B | 25,869 | | | 17,136 | | | | | |
Media & Data Network | 5,081 | | | 1,787 | | | | | |
All Other | 6,042 | | | 9,904 | | | | | |
Corporate | (7,520) | | | (5,562) | | | | | |
Total Adjusted EBITDA | $ | 51,934 | | | $ | 39,566 | | | | | |
| | | | | | | |
Depreciation and amortization | $ | (8,176) | | | $ | (9,206) | | | | | |
Impairment and other losses | (875) | | | (161) | | | | | |
Stock-based compensation | 1,963 | | | (3,070) | | | | | |
Deferred acquisition consideration | (11,685) | | | 4,600 | | | | | |
Distributions from non-consolidated affiliates | (9) | | | 14 | | | | | |
Other items, net | (5,485) | | | (2,416) | | | | | |
Total Operating Income | $ | 27,667 | | | $ | 29,327 | | | | | |
| | | | | | | |
Other Income (expenses): | | | | | | | |
Interest expense and finance charges, net | $ | (19,065) | | | $ | (15,611) | | | | | |
Foreign exchange gain (loss) | 2,080 | | | (14,757) | | | | | |
Other, net | 614 | | | 16,334 | | | | | |
Income before income taxes and equity in earnings of non-consolidated affiliates | 11,296 | | | 15,293 | | | | | |
Income tax expense | 1,302 | | | 13,500 | | | | | |
Income before equity in earnings of non-consolidated affiliates | 9,994 | | | 1,793 | | | | | |
Equity in losses of non-consolidated affiliates | (493) | | | 0 | | | | | |
Net income | 9,501 | | | 1,793 | | | | | |
Net income attributable to the noncontrolling interest | (4,491) | | | (791) | | | | | |
Net income attributable to MDC Partners Inc. | 5,010 | | | 1,002 | | | | | |
Accretion on and net income allocated to convertible preference shares | (4,089) | | | (3,440) | | | | | |
Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | 921 | | | $ | (2,438) | | | | | |
| | | | | Three Months Ended March 31, |
| | | | 2022 | | 2021 |
| | | | (Dollars in Thousands) |
Other Income (expenses): | | Other Income (expenses): | | |
Interest expense, net | | Interest expense, net | | $ | (18,729) | | | $ | (1,351) | |
Foreign exchange, net | | Foreign exchange, net | | (306) | | | (677) | |
Other, net | | Other, net | | 156 | | | 1,285 | |
Income before income taxes and equity in earnings of non-consolidated affiliates | | Income before income taxes and equity in earnings of non-consolidated affiliates | | 35,781 | | | 5,272 | |
Income tax expense | | Income tax expense | | 3,189 | | | 673 | |
Income before equity in earnings of non-consolidated affiliates | | Income before equity in earnings of non-consolidated affiliates | | 32,592 | | | 4,599 | |
Equity in income of non-consolidated affiliates | | Equity in income of non-consolidated affiliates | | 1,030 | | | 4 | |
Net income | | Net income | | 33,622 | | | 4,603 | |
Net income attributable to noncontrolling and redeemable noncontrolling interests | | Net income attributable to noncontrolling and redeemable noncontrolling interests | | (20,947) | | | (238) | |
Net income attributable to Stagwell Inc. common shareholders | | Net income attributable to Stagwell Inc. common shareholders | | $ | 12,675 | | | $ | 4,365 | |
| | | Three Months Ended March 31, | | |
| | 2021 | | 2020 | | | | | | |
Depreciation and amortization: | Depreciation and amortization: | (Dollars in Thousands) | Depreciation and amortization: | | |
Integrated Networks - Group A | $ | 1,294 | | | $ | 1,741 | | | |
Integrated Networks - Group B | 3,657 | | | 4,526 | | | |
Media & Data Network | 472 | | | 808 | | | |
Integrated Agencies Network | | Integrated Agencies Network | | $ | 20,211 | | | $ | 2,666 | |
Media Network | | Media Network | | 6,865 | | | 5,195 | |
Communications Network | | Communications Network | | 2,540 | | | 1,582 | |
All Other | All Other | 1,537 | | | 1,899 | | | All Other | | 501 | | | 1,022 | |
Corporate | Corporate | 1,216 | | | 232 | | | Corporate | | 1,087 | | | 485 | |
Total | Total | $ | 8,176 | | | $ | 9,206 | | | Total | | $ | 31,204 | | | $ | 10,950 | |
| Stock-based compensation: | Stock-based compensation: | | | Stock-based compensation: | | |
Integrated Networks - Group A | $ | (3,628) | | | $ | 1,961 | | | |
Integrated Networks - Group B | 953 | | | 900 | | | |
Media & Data Network | 21 | | | (13) | | | |
Integrated Agencies Network | | Integrated Agencies Network | | $ | 5,547 | | | $ | — | |
Media Network | | Media Network | | 786 | | | — | |
Communications Network | | Communications Network | | (243) | | | — | |
All Other | All Other | 61 | | | 80 | | | All Other | | 8 | | | — | |
Corporate | Corporate | 630 | | | 142 | | | Corporate | | 1,923 | | | — | |
Total | Total | $ | (1,963) | | | $ | 3,070 | | | Total | | $ | 8,021 | | | $ | — | |
| Capital expenditures: | | | |
Integrated Networks - Group A | $ | 275 | | | $ | 358 | | | |
Integrated Networks - Group B | 213 | | | 477 | | | |
Media & Data Network | 64 | | | 85 | | | |
All Other | 134 | | | 324 | | | |
Corporate | (170) | | | 302 | | | |
Total | $ | 516 | | | $ | 1,546 | | | |
|
The Company’s CODM does not use segment assets to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
See Note 34 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for a summary of the Company’s revenue by geographic region for the three months ended March 31, 20212022 and 2020.2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, referencesThe following discussion and analysis are based on and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes related thereto included elsewhere in this Form 10-Q. The following discussion and analysis contains forward-looking statements and should be read in conjunction with the disclosures and information contained and referenced under the captions “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in this Form 10-Q. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. A description of the non-GAAP measures discussed in this section and reconciliations to the comparable GAAP measures are below.
In this section, the terms “Stagwell,” “we,” “us,” “our” and the “Company” refer (i) with respect to events occurring or “MDC” mean MDC Partnersperiods ending before August 2, 2021, to Stagwell Marketing Group LLC and its direct and indirect subsidiaries and (ii) with respect to events occurring or periods ending on or after August 2, 2021, to Stagwell Inc. and its subsidiaries,direct and referencesindirect subsidiaries.
References to a “fiscal year” mean the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 20212022 means the period beginning January 1, 2021,2022, and ending December 31, 2021)2022).
Executive Summary
Business Combination
On December 21, 2020, MDC and Stagwell Media LP announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the “Stagwell Subject Entities”. The Stagwell Subject Entities comprised Stagwell Marketing and its direct and indirect subsidiaries.
On August 2, 2021 (the “Closing Date”), we completed the Transactions. In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged as a wholly owned subsidiary of the Company, converted into a OpCo; (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.
The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. As a result of the Transactions and the change in our business and operations, under applicable accounting principles, the historical financial results of Stagwell Marketing prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Form 10-Q for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021, which do not include the financial results of MDC. See Note 3 of the Unaudited Condensed Consolidated Financial Statements included herein for additional information regarding the Transactions.
Overview
Stagwell conducts its business through its networks, which provide marketing and business solutions that realize the potential of combining data and creativity. Stagwell’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. Stagwell’s differentiation lies in its creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. Stagwell leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
Stagwell manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenue, operating expenses, capital expenditures and the non-GAAP measures described below. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth from existing clients and the addition of new clients, (iii) growth by principal capability, (iv) growth from currency changes, and (v) growth from acquisitions. In addition to monitoring the foregoing financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our networks. These indicators may include a network’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the network’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.
While a recovery from the COVID-19 pandemic appears to be underway, we expect economic conditions will continue to be volatile as long as COVID-19 remains a public health threat. We will continue to monitor the worldwide public health threat, government actions to combat COVID-19 and the impact or potential impact that such developments may have on the overall economy, our clients and our operations. If the impact of the pandemic continues to go beyond expectations, we believe we are well positioned through the actions implemented at the onset of the pandemic to successfully work through the effects of COVID-19 on our business. The impact of the pandemic and the corresponding actions are reflected in our judgments, assumptions and estimates in the preparation of our financial statements. The judgments, assumptions and estimates will be updated and could result in different results in the future depending on the severity, duration, and continued impact of the COVID-19 pandemic.
In addition, while not material, the Company continues to monitor the war and other geopolitical tensions between Russia and Ukraine and will continue to assess any potential impacts that this conflict may have on the economy, our clients, and our operations.
Recent Developments
On April 19, 2022, the Company acquired Brand New Galaxy (“BNG”), a leading provider of scaled commerce and marketplace solutions, for approximately $20 million, subject to post-closing adjustments, as well as contingent consideration up to a maximum value of $50 million. The contingent consideration is due upon meeting certain future earnings targets through 2024, with approximately 67% payable in cash and 33% payable in Class A Common Stock. BNG will be included within the Media Network segment. The purchase price allocation has not yet been completed. The Company will provide the purchase price allocation and pro forma operating results of the combined company in its Form 10-Q for the period of June 30, 2022.
Significant Factors Affecting our Business and Results of Operations
The most significant factors affecting our business and results of operations include national, regional, and local economic conditions, our clients’ profitability, mergers and acquisitions of our clients, changes in top management of our clients and our ability to retain and attract key employees. New business wins and client losses occur due to a variety of factors. The two most significant factors are (i) our clients’ desire to change marketing communication firms, and (ii) the digital and data-driven products that our brands offer. A client may choose to change marketing communication firms for several reasons, such as a change in leadership where new management wants to retain an agency that it may have previously worked with. In addition, if the client is merged or acquired by another company, the marketing communication firm is often changed. Clients also change firms as a result of the firm’s failure to meet marketing performance targets or other expectations in client service delivery.
Seasonality
Historically, we typically generate the highest quarterly revenue during the fourth quarter in each year. In addition, client concentration increases during election years due to the cyclical nature of our advocacy Brands. The highest volumes of retail related consumer marketing increase with the back-to-school season through the end of the holiday season.
Non-GAAP Measures
The Company reports its financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In addition, the Company has included non-GAAP financial measures and ratios, which management uses to operate the business, which it believes provide useful supplemental information to both management and readers of this report in making period-to-period comparisons in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by GAAP and should not be construed as an alternative to other titled measures determined in accordance with GAAP. The non-GAAP measures included are “organic revenue growth”growth or “organic revenue decline” and “Adjusted EBITDA.”
“Organic revenue growth or organicgrowth” and “organic revenue declinedecline” refer to the positive or negative results, respectively, of subtracting both the foreign exchange and acquisition (disposition) components from total revenue growth. The acquisition (disposition) component is calculated by aggregating the prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were disposed of induring the current period. The organic revenue growth (decline) component reflects the constant currency impact of (a) of the change in revenue of the Partner Firms whichbrands that the Company has held throughout each of the comparable periods presented, and (b) “non-GAAP“Net acquisitions (dispositions), net.(divestitures).” Non-GAAPNet acquisitions (dispositions), net(divestitures) consists of (i) for acquisitions during the current year, the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and (ii) for acquisitions during the previous year, the revenue effect from such acquisitions as if they had been owned during that entire year or(or the same prior year period as the current reportable period,period), taking into
account their respective pre-acquisition revenues for the applicable periods, and (iii) for dispositions, the revenue effect from such dispositionsdisposition as if they had been disposed of during the equivalent period in the prior year. The Company believes that isolating the impact of acquisition activity and foreign currency impacts is an important and informative component to understand the overall change in the Company’s consolidated revenue. The change in the consolidated revenue that remains after these adjustments illustrates the underlying financial performance of the Company’s businesses. Specifically, it represents the impact of the Company’s management oversight, investments and resources dedicated to supporting the businesses’ growth strategy and operations. In addition, it reflects the network benefit of inclusion in the broader portfolio of firms that includes, but is not limited to, cross-selling and sharing of best practices. This approach isolates changes in performance of the business that take place under the Company’s stewardship, whether favorable or unfavorable, and thereby reflects the potential benefits and risks associated with owning and managing a talent-driven services business.
Accordingly, during the first twelve months of ownership by the Company, the organic growth measure may credit the Company with growth from an acquired business that is dependent on work performed prior to the acquisition date, and may include the impact of prior work in progress, existing contracts and backlog of the acquired businesses. It is the presumption of the Company that positive developments that may have taken place at an acquired business during the period preceding the acquisition will continue to result in value creation in the post-acquisition period.
While the Company believes that the methodology used in the calculation of organic revenue change is entirely consistent with our closest U.S. competitors, the calculations may not be comparable to similarly titled measures presented by other publicly traded companies in other industries. Additional information regarding the Company’s acquisition activity as it relates to potential revenue growth is provided in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Certain Factors Affecting our Business.”
Adjusted EBITDA is defined as Net income (loss) attributable to MDC PartnersStagwell Inc. common shareholders plusexcluding non-operating income or minus non-operating itemsexpense to achieve operating income (loss), plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, distributions from non-consolidated affiliates, and other items, net. Distributions from non-consolidated affiliates includes (i) cash received for profit distributions from non-consolidated affiliates, and (ii) consideration from the sale of ownership interests in non-consolidated affiliates less contributions to date plus undistributed earnings (losses).items. Other items includes items such as merger relatedinclude restructuring costs, severanceacquisition-related expenses, and restructuring expenses, including costs for leases that will either be terminated or sublet in connection with the centralization of our New York real estate portfolio.non-recurring items.
The following discussion focuses on the operating performance of the Company for the three months ended March 31, 20212022 and 20202021 and the financial condition of the Company as of March 31, 2021.2022. This analysis should be read in conjunction with the interim Unaudited Condensed Consolidated Financial Statements presented in this interim report and the annual Audited Consolidated Financial Statements and Management’s Discussion and Analysis presented in the 2020Company’s Annual Report on Form 10-K.
Direct costs represent billable or non-billable internal and third-party expenses that are directly tied to providing services to our clients where we are principal in10-K for the arrangement. Direct costs exclude staff costs, which are presented separately.year ended December 31, 2021 (the “2021 Form 10-K”).
All amounts are in dollars unless otherwise stated. Amounts reported in millions herein are computed based on the amounts in thousands. As a result, the sum of the components, and related calculations, reported in millions may not equal the total amounts due to rounding.
The percentage changes included in the tables herein Item 2 that are not considered meaningful are presented as “NM.”
Recent Developments
On December 21, 2020, MDC and Stagwell Media LP (“Stagwell”) announced that they had entered into a definitive transaction agreement (the “Transaction Agreement”) providing for the combination of MDC with the subsidiaries of Stagwell that own and operate a portfolio of marketing services companies (the “Stagwell Entities”). The combination and related transactions, including the domestication of MDC to a Delaware corporation, are referred to as the “Transactions.” See “Item 1. Business – Recent Developments” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed on March 16, 2021, for a description of the Transactions.
On May 7, 2021, MDC’s proxy statement/prospectus on Form S-4, as filed on April 30, 2021, which describes the Transaction Agreement, the Transactions, and related ancillary agreements in more detail, was declared effective by the SEC. MDC’s Board of Directors has scheduled a special meeting of shareholders on June 22, 2021 for the Company’s shareholders to vote on proposals to approve the Transactions and related matters.
On April 26, 2021, the Company acquired the remaining 40% ownership interest of Gale Partners it did not already own for an aggregate purchase price of approximately $20,000. The purchase price will be made in a combination of cash and MDC Class A Common Shares, of which approximately $12,000 is deferred with payments due in April 2022 and 2023. As part of the closing date purchase price, the Company issued 2,131,574 Class A Common Shares to the seller in a private placement in reliance on exemptions from registration under the Securities Act of 1933, as amended.
Executive Summary
The COVID-19 pandemic continues to negatively affect the global economy and the Company’s operations. The pandemic did not begin to impact the Company’s operations in a significant manner until the second quarter of 2020. Therefore, our first quarter of 2021 comparisons to the first quarter of 2020 are affected by the impact of the pandemic on our operations in the first quarter of 2021. Early in 2020, the Company took actions to combat the impact of COVID-19 on our operations. We will continue to monitor the worldwide public health threat, government actions to combat COVID-19 and the impact such developments may have on the overall economy, our clients and operations. If the impact of the pandemic is beyond our expectation, the Company believes it is well positioned through the actions implemented at the beginning of the pandemic to successfully work through the effects of COVID-19 in 2021.
MDC conducts its business through its network of Partner Firms, which provide marketing and business solutions that realize the potential of combining data and creativity. MDC’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. MDC’s differentiation lies in its best-in-class creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. MDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
MDC manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenues, operating expenses, capital expenditures and non-GAAP measures described above. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth by client industry vertical, (iii) growth from existing clients and the addition of new clients, (iv) growth by primary discipline, (v) growth from currency changes, and (vi) growth from acquisitions. In addition to monitoring the foregoing financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our Partner Firms. These indicators may include a Partner Firm’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the Partner Firm’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.Segments
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Mark Penn, Chief Executive Officer and Chairman, to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
The CODM uses Adjusted EBITDA (defined below) as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions. Adjusted EBITDA is defined as Net income (loss) attributable to MDC Partners Inc. common shareholders’ plus or minus non-operating items to operating income (loss), plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, distributions from non-consolidated affiliates and other items, net. Distributions from non-consolidated affiliates includes (i) cash received for profit distributions from non-consolidated affiliates, and (ii) consideration from the sale of ownership interests in non-consolidated affiliates, less contributions to date, plus undistributed earnings (losses). Other items, net includes items such as merger related costs, severance and other restructuring expenses, including costs for leases that will either be terminated or sublet in connection with the centralization of our New York real estate portfolio.
The Company has three reportable segments that result from applying the aggregation criteria are as follows: “Integrated Networks - Group A,Agencies Network,” “Integrated Networks - Group B”“Media Network” and the “Media & Data“Communications Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the Unaudited Condensed Consolidated Financial Statements included herein and Note 2 of the Company’s 2020audited consolidated financial statements included in the 2021 Form 10-K.
In addition, MDCStagwell reports its corporate office expenses incurred in connection with the strategic resources provided to the Partner Firms,networks, as well as certain other centrally managed expenses that are not fully allocated to the operating segments as Corporate, including interest expense and public company overhead costs.Corporate. Corporate provides client and business development
support to the Partner Firmsnetworks as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions.
The following discussion focuses on the operating performance of the Company for the three months ended March 31, 2022 and 2021 and the financial condition of the Company as of March 31, 2022.
Results of Operations:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Revenue: | (Dollars in Thousands) |
Integrated Networks - Group A | $ | 102,386 | | | $ | 90,621 | | | | | |
Integrated Networks - Group B | 111,151 | | | 117,707 | | | | | |
Media & Data Network | 36,783 | | | 41,058 | | | | | |
All Other | 57,265 | | | 78,356 | | | | | |
Total Revenue | $ | 307,585 | | | $ | 327,742 | | | | | |
| | | | | | | |
Operating Income (Loss): | | | | | | | |
Integrated Networks - Group A | $ | 11,450 | | | $ | 12,030 | | | | | |
Integrated Networks - Group B | 19,910 | | | 17,161 | | | | | |
Media & Data Network | 3,392 | | | 617 | | | | | |
All Other | 4,657 | | | 7,857 | | | | | |
Corporate | (11,742) | | | (8,338) | | | | | |
Total Operating Income | $ | 27,667 | | | $ | 29,327 | | | | | |
| | | | | | | |
Other Income (Expenses): | | | | | | | |
Interest expense and finance charges, net | $ | (19,065) | | | $ | (15,611) | | | | | |
Foreign exchange gain (loss) | 2,080 | | | (14,757) | | | | | |
Other, net | 614 | | | 16,334 | | | | | |
Income before income taxes and equity in earnings of non-consolidated affiliates | 11,296 | | | 15,293 | | | | | |
Income tax expense | 1,302 | | | 13,500 | | | | | |
Income before equity in earnings of non-consolidated affiliates | 9,994 | | | 1,793 | | | | | |
Equity in losses of non-consolidated affiliates | (493) | | | — | | | | | |
Net income | 9,501 | | | 1,793 | | | | | |
Net income attributable to the noncontrolling interest | (4,491) | | | (791) | | | | | |
Net income attributable to MDC Partners Inc. | 5,010 | | | 1,002 | | | | | |
Accretion on and net income allocated to convertible preference shares | (4,089) | | | (3,440) | | | | | |
Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | 921 | | | $ | (2,438) | | | | | |
| | | | | | | |
Adjusted EBITDA: | | | | | | | |
Integrated Networks - Group A | $ | 22,462 | | | $ | 16,301 | | | | | |
Integrated Networks - Group B | 25,869 | | | 17,136 | | | | | |
Media & Data Network | 5,081 | | | 1,787 | | | | | |
All Other | 6,042 | | | 9,904 | | | | | |
Corporate | (7,520) | | | (5,562) | | | | | |
Total Adjusted EBITDA | $ | 51,934 | | | $ | 39,566 | | | | | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
| | | | | (Dollars in Thousands) |
Revenue | | | | | | | |
Integrated Agencies Network | | | | | $ | 378,372 | | | $ | 69,898 | |
Media Network | | | | | 169,886 | | | 62,773 | |
Communications Network | | | | | 91,535 | | | 42,708 | |
All Other | | | | | 3,110 | | | 5,863 | |
Total Revenue | | | | | $ | 642,903 | | | $ | 181,242 | |
| | | | | | | |
Operating Income | | | | | $ | 54,660 | | | $ | 6,015 | |
| | | | | | | |
Other Income (Expenses) | | | | | | | |
Interest expense, net | | | | | $ | (18,729) | | | $ | (1,351) | |
Foreign exchange, net | | | | | (306) | | | (677) | |
Other, net | | | | | 156 | | | 1,285 | |
Income before income taxes and equity in earnings of non-consolidated affiliates | | | | | 35,781 | | | 5,272 | |
Income tax expense | | | | | 3,189 | | | 673 | |
Income before equity in earnings of non-consolidated affiliates | | | | | 32,592 | | | 4,599 | |
Equity in income of non-consolidated affiliates | | | | | 1,030 | | | 4 | |
Net income | | | | | 33,622 | | | 4,603 | |
Net income attributable to noncontrolling and redeemable noncontrolling interests | | | | | (20,947) | | | (238) | |
Net income attributable to Stagwell Inc. common shareholders | | | | | $ | 12,675 | | | $ | 4,365 | |
| | | | | | | |
Reconciliation to Adjusted EBITDA | | | | | | | |
Net income attributable to Stagwell Inc. common shareholders | | | | | $ | 12,675 | | | $ | 4,365 | |
Non-operating items | | | | | 41,985 | | | 1,650 | |
Operating income | | | | | 54,660 | | | 6,015 | |
Depreciation and amortization | | | | | 31,204 | | | 10,950 | |
Impairment and other losses | | | | | 557 | | | — | |
Stock-based compensation | | | | | 8,021 | | | — | |
Deferred acquisition consideration | | | | | 1,897 | | | 3,936 | |
Total other items, net | | | | | 5,073 | | | 2,941 | |
Adjusted EBITDA | | | | | $ | 101,412 | | | $ | 23,842 | |
| | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | |
| 2021 | | 2020 | | | | | |
| | |
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| | | | | | | | |
Capital expenditures: | (Dollars in Thousands) | |
Integrated Networks - Group A | $ | 275 | | | $ | 358 | | | | | | |
Integrated Networks - Group B | 213 | | | 477 | | | | | | |
Media & Data Network | 64 | | | 85 | | | | | | |
All Other | 134 | | | 324 | | | | | | |
Corporate | (170) | | | 302 | | | | | | |
Total | $ | 516 | | | $ | 1,546 | | | | | | |
The following tables reconcile Net income (loss) attributable to MDC Partners Inc. common shareholders (GAAP) to Adjusted EBITDA (non-GAAP) for the three months ended March 31, 2021 and 2020. The adjustments from Net income (loss) attributable to MDC Partners Inc. common shareholders to Operating income (loss) are detailed in the table above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Integrated Networks - Group A | | Integrated Networks - Group B | | Media & Data Network | | All Other | | Corporate | | Total |
| | | | | | | | | | | |
| | | | | | | | | | | |
| |
Net income attributable to MDC Partners Inc. common shareholders | | | | | | | | | | | 921 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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| | | | | | | | | | | |
Non-operating items | | | | | | | | | | | 26,746 | |
Operating income (loss) | $ | 11,450 | | | $ | 19,910 | | | $ | 3,392 | | | $ | 4,657 | | | $ | (11,742) | | | $ | 27,667 | |
| | | | | | | | | | | |
Adjustments: | | | | | | | | | | | |
Depreciation and amortization | 1,294 | | | 3,657 | | | 472 | | | 1,537 | | | 1,216 | | | 8,176 | |
Impairment and other losses | — | | | 875 | | | — | | | — | | | — | | | 875 | |
Stock-based compensation | (3,628) | | | 953 | | | 21 | | | 61 | | | 630 | | | (1,963) | |
Deferred acquisition consideration | 11,824 | | | 128 | | | — | | | (267) | | | — | | | 11,685 | |
Distributions from non-consolidated affiliates | — | | | — | | | — | | | — | | | 9 | | | 9 | |
Other items, net | 1,522 | | | 346 | | | 1,196 | | | 54 | | | 2,367 | | | 5,485 | |
Adjusted EBITDA | $ | 22,462 | | | $ | 25,869 | | | $ | 5,081 | | | $ | 6,042 | | | $ | (7,520) | | | $ | 51,934 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Integrated Networks - Group A | | Integrated Networks - Group B | | Media & Data Network | | All Other | | Corporate | | Total |
| | | | | | | | | | | |
| | | | | | | | | | | |
| |
Net loss attributable to MDC Partners Inc. common shareholders | | | | | | | | | | | $ | (2,438) | |
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| | | | | | | | | | | |
Non-operating items | | | | | | | | | | | 31,765 | |
Operating income (loss) | $ | 12,030 | | | $ | 17,161 | | | $ | 617 | | | $ | 7,857 | | | $ | (8,338) | | | $ | 29,327 | |
| | | | | | | | | | | |
Adjustments: | | | | | | | | | | | |
Depreciation and amortization | 1,741 | | | 4,526 | | | 808 | | | 1,899 | | | 232 | | | 9,206 | |
Impairment and other losses | — | | | 161 | | | — | | | — | | | — | | | 161 | |
Stock-based compensation | 1,961 | | | 900 | | | (13) | | | 80 | | | 142 | | | 3,070 | |
Deferred acquisition consideration | 569 | | | (5,612) | | | 375 | | | 68 | | | — | | | (4,600) | |
Distributions from non-consolidated affiliates | — | | | — | | | — | | | — | | | (14) | | | (14) | |
Other items, net | — | | | — | | | — | | | — | | | 2,416 | | | 2,416 | |
Adjusted EBITDA | $ | 16,301 | | | $ | 17,136 | | | $ | 1,787 | | | $ | 9,904 | | | $ | (5,562) | | | $ | 39,566 | |
Certain Factors Affecting Our Business
See the Executive Summary section of Item 7 of the Company’s 2020 Form 10-K for information regarding certain factors affecting our business.
THREE MONTHS ENDED MARCH 31, 20212022 COMPARED TO THREE MONTHS ENDED MARCH 31, 20202021
Consolidated Results of Operations
RevenuesThe components of operating results for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change |
| | (Dollars in Thousands) |
| | | | | | | | | | $ | | % |
Revenue: | | $ | 642,903 | | | | | $ | 181,242 | | | | | $ | 461,661 | | | NM |
Operating Expenses: | | | | | | | | | | | | |
Cost of services sold | | 411,970 | | | | | 111,999 | | | | | 299,971 | | | NM |
Office and general expenses | | 144,512 | | | | | 52,278 | | | | | 92,234 | | | NM |
Depreciation and amortization | | 31,204 | | | | | 10,950 | | | | | 20,254 | | | NM |
Impairment and other losses | | $ | 557 | | | | | $ | — | | | | | $ | 557 | | | 100.0 | % |
| | $ | 588,243 | | | | | $ | 175,227 | | | | | $ | 413,016 | | | NM |
Operating income | | $ | 54,660 | | | | | $ | 6,015 | | | | | $ | 48,645 | | | NM |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
Net Revenue | $ | 526,637 | | | $ | 158,074 | | | $ | 368,563 | | | NM |
Billable costs | 116,266 | | | 23,168 | | | 93,098 | | | NM |
Revenue | 642,903 | | 181,242 | | $ | 461,661 | | | NM |
| | | | | | | |
Billable costs | 116,266 | | | 23,168 | | | 93,098 | | | NM |
Staff costs | 340,638 | | | 97,910 | | | 242,728 | | | NM |
Administrative costs | 56,294 | | | 20,054 | | | 36,240 | | | NM |
Unbillable and other costs, net | 28,293 | | | 16,268 | | | 12,025 | | | 73.9 | % |
Adjusted EBITDA | 101,412 | | | 23,842 | | | 77,570 | | | NM |
Stock-based compensation | 8,021 | | | — | | | 8,021 | | | 100.0 | % |
Depreciation and amortization | 31,204 | | | 10,950 | | | 20,254 | | | NM |
Deferred acquisition consideration | 1,897 | | | 3,936 | | | (2,039) | | | (51.8) | % |
Impairment and other losses | 557 | | | — | | | 557 | | | 100.0 | % |
Other items, net | 5,073 | | | 2,941 | | | 2,132 | | | 72.5 | % |
Operating Income (1) | $ | 54,660 | | | $ | 6,015 | | | $ | 48,645 | | | NM |
| | | | | | | |
(1) See the Results of Operations section above for a reconciliation of Operating Income to Net Income attributable to Stagwell Inc. common shareholders. |
Revenue
Revenue for the three months ended March 31, 2022 was $307.6$642.9 million compared to $181.2 million for the three months ended March 31, 2021, compared toan increase of $461.7 million.
Net Revenue
The components of the fluctuations in net revenue of $327.7 million for the three months ended March 31, 2020.2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change | | |
| Three Months Ended March 31, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2022 | | Organic | | Total | | | | |
| (Dollars in Thousands) | | | | | | | | |
Integrated Agencies Network | $ | 68,063 | | | $ | 3,240 | | | $ | 218,363 | | | $ | 42,994 | | | $ | 264,597 | | | $ | 332,660 | | | 63.2 | % | | NM | | | | |
Media Network | 55,661 | | | (156) | | | 37,509 | | | 35,401 | | | 72,754 | | | 128,415 | | | 63.6 | % | | NM | | | | |
Communications Network | 28,487 | | | 201 | | | 19,044 | | | 14,720 | | | 33,965 | | | 62,452 | | | 51.7 | % | | NM | | | | |
All Other | 5,863 | | | (11) | | | (5,256) | | | 2,514 | | | (2,753) | | | 3,110 | | | 42.9 | % | | (47.0) | % | | | | |
| $ | 158,074 | | | $ | 3,274 | | | $ | 269,660 | | | $ | 95,629 | | | $ | 368,563 | | | $ | 526,637 | | | 60.5 | % | | NM | | | | |
Component % change | | | 2.1% | | NM | | 60.5% | | NM | | | | | | | | | | |
For the three months ended March 31, 2022, organic net revenue increased $95.6 million, or 60.5%. The organic revenue growth was across all segments, primarily attributable to increased spending by existing clients and business with new clients. The increase in net acquisition (divestitures) was primarily driven by the inclusion of MDC in results subsequent to the acquisition.
The components of the fluctuationsgeographic mix in net revenues for the three months ended March 31, 2022 and 2021 compared to the three months ended March 31, 2020 wereis as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | United States | | Canada | | Other |
| $ | | % | | $ | | % | | $ | | % | | $ | | % |
| (Dollars in Thousands) |
March 31, 2020 | $ | 327,742 | | | | | $ | 264,561 | | | | | $ | 18,256 | | | | | $ | 44,925 | | | |
Components of revenue change: | | | | | | | | | | | | | | | |
Foreign exchange impact | 4,559 | | | 1.4 | % | | — | | | — | % | | 1,192 | | | 6.5 | % | | 3,367 | | | 7.5 | % |
Non-GAAP acquisitions (dispositions), net | (2,101) | | | (0.6) | % | | (2,101) | | | (0.8) | % | | — | | | — | % | | — | | | — | % |
Organic revenue | (22,615) | | | (6.9) | % | | (19,880) | | | (7.5) | % | | 3,202 | | | 17.5 | % | | (5,937) | | | (13.2) | % |
Total change | $ | (20,157) | | | (6.2) | % | | $ | (21,981) | | | (8.3) | % | | $ | 4,394 | | | 24.1 | % | | $ | (2,570) | | | (5.7) | % |
March 31, 2021 | $ | 307,585 | | | | | $ | 242,580 | | | | | $ | 22,650 | | | | | $ | 42,355 | | | |
The positive foreign exchange impact of $4.6 million, or 1.4%, was attributable to the fluctuation of the U.S. dollar against the Canadian dollar, Swedish Króna, Euro and British Pound.
For the three months ended March 31, 2021, organic revenue declined $22.6 million, or 6.9%, primarily attributable to reduced spending by clients in connection with the COVID-19 pandemic.
The table below provides a reconciliation between revenue from acquired/disposed businesses in the statement of operations to non-GAAP dispositions, net for the three months ended March 31, 2021:
| | | | | | | | | |
| | | | All Other | |
| | | | |
GAAP Revenue from 2020 and 2021 Dispositions | | | | $ | — | | |
Foreign exchange impact | | | | — | | |
Contributions to non-GAAP organic revenue (growth) decline | | | | — | | |
Prior year revenue from dispositions | | | | (2,101) | | |
Non-GAAP dispositions, net | | | | $ | (2,101) | | |
The geographic mix in revenues for the three months ended March 31, 2021 and 2020 was as follows:
| | | | Three Months Ended March 31, |
| | | | | | | | | | | | 2022 | | 2021 |
| | 2021 | | 2020 | | (Dollars in Thousands) |
United States | United States | 78.9 | % | | 80.7 | % | United States | $ | 429,532 | | | $ | 137,510 | |
Canada | 7.4 | % | | 5.6 | % | |
United Kingdom | | United Kingdom | 38,285 | | | 12,547 | |
Other | Other | 13.7 | % | | 13.7 | % | Other | 58,820 | | | 8,017 | |
Total | | Total | $ | 526,637 | | | $ | 158,074 | |
Operating Income
Operating income for the three months ended March 31, 20212022 was $27.7$54.7 million compared to operating income of $29.3$6.0 million for the three months ended March 31, 2020,2021, representing a changean increase of $1.7 million, primarily driven by the decline in revenue, mostly offset by a reduction in operating expenses to align our costs with revenues impacted by the COVID-19 pandemic.$48.6 million.
Adjusted EBITDA
Adjusted EBITDA for theThe three months ended March 31, 20212022 was $51.9 million, compared to $39.6 million for the three months ended March 31, 2020, representingimpacted primarily by an increase in revenue and expenses due to the inclusion of $12.4 million, principally resulting from a reductionMDC in operating expenses, partially offsetresults subsequent to the acquisition and costs associated with an increase in services provided. Stock-based compensation expense increased, driven by awards issued to employees in the declinefirst quarter of 2022. Depreciation and amortization was higher due to the recognition of amortizable intangible assets in revenues.connection with the inclusion of MDC in results subsequent to the acquisition.
Other, Netnet
Other, net, for the three months ended March 31, 20212022 was income of $0.6$0.2 million, compared to income of $16.3$1.3 million for the three months ended March 31, 2020, primarily due to a gain on the sale of a Partner Firm in March 2020.2021.
Foreign Exchange Transaction Gain (Loss)
The foreign exchange gainloss for the three months ended March 31, 2022 was $0.3 million compared to a loss of $0.7 million for the three months ended March 31, 2021.
Interest Expense, Net
Interest expense, net, for the three months ended March 31, 2022 was $18.7 million compared to $1.4 million for the three months ended March 31, 2021, was $2.1 million compared to a loss of $14.8 million for the three months ended March 31, 2020. The change in foreign exchange was primarily attributable to the strengthening of the Canadian dollar against the U.S. dollar in 2021 compared to the prior year period, in connection with a U.S. dollar denominated indebtedness that is an obligation of our Canadian parent company.
Interest Expense And Finance Charges, Net
Interest expense and finance charges, net, for the three months ended March 31, 2021 was $19.1 million compared to $15.6 million for the three months ended March 31, 2020, representing an increase of $3.5$17.4 million, primarily driven by the impacta higher level of a 1% increase in the interest rate of the Company’s Senior Notes and the amortization of consent fees paid to holders of the Senior Notes, bothdebt in connection with obtaining consentthe inclusion of MDC in December 2020results subsequent to the consummationacquisition.
Income Tax Expense (Benefit)
IncomeThe Company had an income tax expense for the three months ended March 31, 2021 was $1.32022 of $3.2 million (on a pre-tax income of $11.3$35.8 million resulting in an effective tax rate of 11.5%8.9%) compared to an income tax expense of $13.5$0.7 million (on pre-tax income of $15.3$5.3 million resulting in an effective tax rate of 88.3%12.8%) for the three months ended March 31, 2020.2021.
The difference in the effective tax rate of 11.5% for8.9% in the three months ended March 31, 2022 as compared to 12.8% in the three months ended March 31, 2021 was primarily duerelated to minimal tax expense recognized on U.S. earnings as a result of being subject to a valuation allowance.additional deductions for share based compensation vesting in 2022.
The effective tax rate of 88.3% for the three months ended March 31, 2020 was primarily driven by capital gains, non-deductible stock compensation for which a tax benefit was not recognized,Noncontrolling and the jurisdictional mix of earnings.
Redeemable Noncontrolling Interests
The effect of noncontrolling and redeemable noncontrolling interests for the three months ended March 31, 20212022 was $4.5$20.9 million compared to $0.8$0.2 million for the three months ended March 31, 2020.2021.
Net Income (Loss) Attributable to MDC PartnersStagwell Inc. Common Shareholders
As a result of the foregoing, net income attributable to MDC PartnersStagwell Inc. common shareholders for the three months ended March 31, 20212022 was $0.9$12.7 million with $0.01 diluted income per share, compared to net lossincome attributable to MDC PartnersStagwell Inc. common shareholders of $2.4$4.4 million or $0.03 diluted loss per share, for the three months ended March 31, 2020.2021.
Integrated Networks - Group A
The change in expenses, operating income and Adjusted EBITDA as a percentage of revenue infor the Integrated Networks - Group A reportable segmentthree months ended March 31, 2022 was $101.4 million, compared to $23.8 million for the three months ended March 31, 2021, representing an increase of $77.6 million, driven by the increase in revenue, partially offset by higher operating expenses and 2020 wasthe impact of the inclusion of MDC in results subsequent to the acquisition.
Integrated Agencies Network
The components of operating results for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | 2021 | | 2020 | | Change | | Three Months Ended March 31, |
Integrated Networks - Group A | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % | |
| | | (Dollars in Thousands) | | 2022 | | | 2021 | | | Change |
Revenue: | | $ | 102,386 | | | $ | 90,621 | | | $ | 11,765 | | | 13.0 | % | |
Operating Expenses: | | |
| | | (Dollars in Thousands) |
| | | | | | | $ | | % |
Revenue | | Revenue | | $ | 378,372 | | | | $ | 69,898 | | | | $ | 308,474 | | | NM |
Operating expenses | | Operating expenses | | | | | |
Cost of services sold | Cost of services sold | | 62,246 | | | 60.8 | % | | 62,524 | | | 69.0 | % | | (278) | | | (0.4) | % | Cost of services sold | | 244,904 | | | | 41,883 | | | | 203,021 | | | NM |
Office and general expenses | Office and general expenses | | 27,396 | | | 26.8 | % | | 14,326 | | | 15.8 | % | | 13,070 | | | 91.2 | % | Office and general expenses | | 67,155 | | | | 18,717 | | | | 48,438 | | | NM |
Depreciation and amortization | Depreciation and amortization | | 1,294 | | | 1.3 | % | | 1,741 | | | 1.9 | % | | (447) | | | (25.7) | % | Depreciation and amortization | | 20,211 | | | | 2,666 | | | | 17,545 | | | NM |
Impairment and other losses | | Impairment and other losses | | 279 | | | | — | | | | 279 | | | 100.0 | % |
| | $ | 90,936 | | | 88.8 | % | | $ | 78,591 | | | 86.7 | % | | $ | 12,345 | | | 15.7 | % | | $ | 332,549 | | | | $ | 63,266 | | | | $ | 269,283 | | | NM |
Operating income | Operating income | | $ | 11,450 | | | 11.2 | % | | $ | 12,030 | | | 13.3 | % | | $ | (580) | | | (4.8) | % | Operating income | | $ | 45,823 | | | | $ | 6,632 | | | | $ | 39,191 | | | NM |
| Adjusted EBITDA | | $ | 22,462 | | | 21.9 | % | | $ | 16,301 | | | 18.0 | % | | $ | 6,161 | | | 37.8 | % | |
|
The increase in revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
Net Revenue | $ | 332,660 | | | $ | 68,063 | | | $ | 264,597 | | | NM |
Billable costs | 45,712 | | | 1,835 | | | 43,877 | | | NM |
Revenue | 378,372 | | | 69,898 | | | 308,474 | | | NM |
| | | | | | | |
Billable costs | 45,712 | | | 1,835 | | | 43,877 | | | NM |
Staff costs | 213,467 | | | 35,851 | | | 177,616 | | | NM |
Administrative costs | 30,293 | | | 6,230 | | | 24,063 | | | NM |
Unbillable and other costs, net | 17,427 | | | 12,482 | | | 4,945 | | | 39.6 | % |
Adjusted EBITDA | 71,473 | | | 13,500 | | | 57,973 | | | NM |
Stock-based compensation | 5,547 | | | — | | | 5,547 | | | 100.0 | % |
Depreciation and amortization | 20,211 | | | 2,666 | | | 17,545 | | | NM |
Deferred acquisition consideration | (1,325) | | | 3,936 | | | (5,261) | | | NM |
Impairment | 279 | | | — | | | 279 | | | 100.0 | % |
Other items, net | 938 | | | 266 | | | 672 | | | NM |
Operating Income | $ | 45,823 | | | $ | 6,632 | | | $ | 39,191 | | | NM |
Revenue
Revenue for the three months ended March 31, 2022 was primarily attributable$378.4 million compared to increased spending by clients for public relations and digital services.
The decrease in operating income was attributable to higher operating expenses, as outlined below, more than offsetting the increase in revenue.
The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group A reportable segment$69.9 million for the three months ended March 31, 2021, and 2020 was as follows:an increase of $308.5 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
Integrated Networks - Group A | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
| | (Dollars in Thousands) |
Direct costs | | $ | 13,976 | | | 13.7 | % | | $ | 10,774 | | | 11.9 | % | | $ | 3,202 | | | 29.7 | % |
Staff costs | | 57,210 | | | 55.9 | % | | 53,510 | | | 59.0 | % | | 3,700 | | | 6.9 | % |
Administrative costs | | 10,260 | | | 10.0 | % | | 10,036 | | | 11.1 | % | | 224 | | | 2.2 | % |
Deferred acquisitions consideration | | 11,824 | | | 11.5 | % | | 569 | | | 0.6 | % | | 11,255 | | | NM |
Stock-based compensation | | (3,628) | | | (3.5) | % | | 1,961 | | | 2.2 | % | | (5,589) | | | NM |
Depreciation and amortization | | 1,294 | | | 1.3 | % | | 1,741 | | | 1.9 | % | | (447) | | | (25.7) | % |
Total operating expenses | | $ | 90,936 | | | 88.8 | % | | $ | 78,591 | | | 86.7 | % | | $ | 12,345 | | | 15.7 | % |
Net RevenueThe increasecomponents of the fluctuations in direct costs was in connection with higher revenues in connection with public relations services in the first quarter of 2021.
The increase in staff costs was primarily attributable to costs to support the growth in digital marketing services in the first quarter of 2021.
The increase in deferred acquisition consideration was primarily attributable to the favorable performance of a Partner Firm achieving incremental contractual targets.
Stock-based compensation expense was a credit in the first quarter of 2021, driven by a reduction in previously projected results in connection with awards tied to performance.
The increase in Adjusted EBITDA was driven by highernet revenue partially offset by higher expenses.
Integrated Networks - Group B
The change in expenses, operating income and Adjusted EBITDA as a percentage of revenue in the Integrated Networks - Group B reportable segment for the three months ended March 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
Integrated Networks - Group B | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
| | (Dollars in Thousands) |
Revenue: | | $ | 111,151 | | | | | $ | 117,707 | | | | | $ | (6,556) | | | (5.6) | % |
Operating Expenses: | | | | | | | | | | | | |
Cost of services sold | | 61,581 | | | 55.4 | % | | 74,021 | | | 62.9 | % | | (12,440) | | | (16.8) | % |
Office and general expenses | | 25,128 | | | 22.6 | % | | 21,838 | | | 18.6 | % | | 3,290 | | | 15.1 | % |
Depreciation and amortization | | 3,657 | | | 3.3 | % | | 4,526 | | | 3.8 | % | | (869) | | | (19.2) | % |
Impairment and other losses | | 875 | | | 0.8 | % | | 161 | | | 0.1 | % | | 714 | | | NM |
| | $ | 91,241 | | | 82.1 | % | | $ | 100,546 | | | 85.4 | % | | $ | (9,305) | | | (9.3) | % |
Operating income | | $ | 19,910 | | | 17.9 | % | | $ | 17,161 | | | 14.6 | % | | $ | 2,749 | | | 16.0 | % |
| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 25,869 | | | 23.3 | % | | $ | 17,136 | | | 14.6 | % | | $ | 8,733 | | | 51.0 | % |
The decrease in revenue was primarily attributable2022 compared to lower spending by clients in connection with the COVID-19 pandemic, partially offset by higher digital marketing services in the first quarter of 2021.
The increase in operating income was attributable to lower operating expenses, as outlined below, partially offset by the decline in revenue.
The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group B reportable segment for the three months ended March 31, 2021 and 2020 waswere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
Integrated Networks - Group B | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
| | (Dollars in Thousands) |
Direct costs | | $ | 7,761 | | | 7.0 | % | | $ | 14,439 | | | 12.3 | % | | $ | (6,678) | | | (46.2) | % |
Staff costs | | 66,397 | | | 59.7 | % | | 70,576 | | | 60.0 | % | | (4,179) | | | (5.9) | % |
Administrative costs | | 11,470 | | | 10.3 | % | | 15,556 | | | 13.2 | % | | (4,086) | | | (26.3) | % |
Deferred acquisitions consideration | | 128 | | | 0.1 | % | | (5,612) | | | (4.8) | % | | 5,740 | | | NM |
Stock-based compensation | | 953 | | | 0.9 | % | | 900 | | | 0.8 | % | | 53 | | | 5.9 | % |
Depreciation and amortization | | 3,657 | | | 3.3 | % | | 4,526 | | | 3.8 | % | | (869) | | | (19.2) | % |
Impairment and other losses | | 875 | | | 0.8 | % | | 161 | | | 0.1 | % | | 714 | | | NM |
Total operating expenses | | $ | 91,241 | | | 82.1 | % | | $ | 100,546 | | | 85.4 | % | | $ | (9,305) | | | (9.3) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change |
| Three Months Ended March 31, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2022 | | Organic | | Total |
| (Dollars in Thousands) | | | | |
Integrated Agencies Network | $ | 68,063 | | | $ | 3,240 | | | $ | 218,363 | | | $ | 42,994 | | | $ | 264,597 | | | $ | 332,660 | | | 63.2 | % | | NM |
Component % change | | | 4.8% | | NM | | 63.2% | | NM | | | | | | |
DirectThe increase in organic net revenue was attributable to increased spending by existing and new clients, primarily driven by creative, digital transformation and consumer insights services. The increase in net acquisition (divestitures) was driven by the inclusion of MDC in results subsequent to the acquisition.
The increase in expenses was driven by the impact of the inclusion of MDC in results subsequent to the acquisition and costs declinedassociated with an increase in services provided. Stock-based compensation expense increased, driven by awards issued to employees in connection with the reduction in revenuemerger, as discussed above.
The decline in staff costs was attributablewell as retention awards issued to a reduction in staff to combat the impact of the COVID-19 pandemic on the business.
Administrative costs were loweremployees. Depreciation and amortization grew due to a declinethe recognition of amortizable intangible assets in spending resulting fromconnection with the ordersinclusion of MDC in results subsequent to work-from-home given the COVID-19 pandemic and related cost containment initiatives.acquisition.
The increase in Adjusted EBITDA was for the same reasons as the change in operating income.
Media & Data Network
The change in expenses, operatingOperating income and Adjusted EBITDA as a percentage of revenue in the Media & Data Network reportable segment for the three months ended March 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
Media & Data Network | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
| | (Dollars in Thousands) |
Revenue: | | $ | 36,783 | | | | | $ | 41,058 | | | | | $ | (4,275) | | | (10.4) | % |
Operating Expenses: | | | | | | | | | | | | |
Cost of services sold | | 25,574 | | | 69.5 | % | | 29,906 | | | 72.8 | % | | (4,332) | | | (14.5) | % |
Office and general expenses | | 7,345 | | | 20.0 | % | | 9,727 | | | 23.7 | % | | (2,382) | | | (24.5) | % |
Depreciation and amortization | | 472 | | | 1.3 | % | | 808 | | | 2.0 | % | | (336) | | | (41.6) | % |
| | | | | | | | | | | | |
| | $ | 33,391 | | | 90.8 | % | | $ | 40,441 | | | 98.5 | % | | $ | (7,050) | | | (17.4) | % |
Operating income | | 3,392 | | | 9.2 | % | | 617 | | | 1.5 | % | | 2,775 | | | NM |
| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 5,081 | | | 13.8 | % | | $ | 1,787 | | | 4.4 | % | | $ | 3,294 | | | NM |
The decrease in revenue was primarily attributable to lower spending by media clients in connection with the COVID-19 pandemic, partially offsetwere higher driven by an increase in digital services.
The increase in operating income was attributable to lower operating expenses, as outlined below,revenues, partially offset by the decline in revenue.
The change in the categories ofhigher expenses as a percentage of revenue in the Media & Data Network reportable segment for the three months ended March 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
Media & Data Network | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
| | (Dollars in Thousands) |
Direct costs | | $ | 8,031 | | | 21.8 | % | | $ | 12,128 | | | 29.5 | % | | $ | (4,097) | | | (33.8) | % |
Staff costs | | 19,790 | | | 53.8 | % | | 20,600 | | | 50.2 | % | | (810) | | | (3.9) | % |
Administrative costs | | 5,077 | | | 13.8 | % | | 6,543 | | | 15.9 | % | | (1,466) | | | (22.4) | % |
Deferred acquisition consideration | | — | | | — | % | | 375 | | | 0.9 | % | | (375) | | | (100.0) | % |
Stock-based compensation | | 21 | | | 0.1 | % | | (13) | | | — | % | | 34 | | | NM |
Depreciation and amortization | | 472 | | | 1.3 | % | | 808 | | | 2.0 | % | | (336) | | | (41.6) | % |
| | | | | | | | | | | | |
Total operating expenses | | $ | 33,391 | | | 90.8 | % | | $ | 40,441 | | | 98.5 | % | | $ | (7,050) | | | (17.4) | % |
Direct costs declined in connection with the reduction in revenue as discusseddetailed above.
Administrative costs were lower due to a decline in spending resulting from the orders to work-from-home given the COVID-19 pandemic and other cost containment initiatives.
The increase in Adjusted EBITDA was principally for the same reasons as the change in operating income.
All Other
The change in expenses, operating income and Adjusted EBITDA as a percentage of revenue in the All Other category for the three months ended March 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
All Other | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
| | (Dollars in Thousands) |
Revenue: | | $ | 57,265 | | | | | $ | 78,356 | | | | | $ | (21,091) | | | (26.9) | % |
Operating Expenses: | | | | | | | | | | | | |
Cost of services sold | | 37,520 | | | 65.5 | % | | 56,243 | | | 71.8 | % | | (18,723) | | | (33.3) | % |
Office and general expenses | | 13,551 | | | 23.7 | % | | 12,357 | | | 15.8 | % | | 1,194 | | | 9.7 | % |
Depreciation and amortization | | 1,537 | | | 2.7 | % | | 1,899 | | | 2.4 | % | | (362) | | | (19.1) | % |
| | | | | | | | | | | | |
| | $ | 52,608 | | | 91.9 | % | | $ | 70,499 | | | 90.0 | % | | $ | (17,891) | | | (25.4) | % |
Operating income | | $ | 4,657 | | | 8.1 | % | | $ | 7,857 | | | 10.0 | % | | $ | (3,200) | | | (40.7) | % |
| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 6,042 | | | 10.6 | % | | $ | 9,904 | | | 12.6 | % | | $ | (3,862) | | | (39.0) | % |
The decrease in revenue was primarily attributable to the impact of the COVID-19 pandemic primarily on the experiential marketing business.
The decrease in operating income was attributable to the decline in revenue, partially offset by lower operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the All Other category for the three months ended March 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
All Other | | $ | | % of Revenue | | $ | | % of Revenue | | $ | | % |
| | (Dollars in Thousands) |
Direct costs | | $ | 7,837 | | | 13.7 | % | | $ | 19,224 | | | 24.5 | % | | $ | (11,387) | | | (59.2) | % |
Staff costs | | 35,713 | | | 62.4 | % | | 42,083 | | | 53.7 | % | | (6,370) | | | (15.1) | % |
Administrative costs | | 7,727 | | | 13.5 | % | | 7,145 | | | 9.1 | % | | 582 | | | 8.1 | % |
Deferred acquisition consideration | | (267) | | | (0.5) | % | | 68 | | | 0.1 | % | | (335) | | | NM |
Stock-based compensation | | 61 | | | 0.1 | % | | 80 | | | 0.1 | % | | (19) | | | (23.8) | % |
Depreciation and amortization | | 1,537 | | | 2.7 | % | | 1,899 | | | 2.4 | % | | (362) | | | (19.1) | % |
| | | | | | | | | | | | |
Total operating expenses | | $ | 52,608 | | | 91.9 | % | | $ | 70,499 | | | 90.0 | % | | $ | (17,891) | | | (25.4) | % |
Direct costs declined in line with the reduction in revenues as discussed above.
The decline in staff costs was primarily attributable to a reduction in staff to combat the impact on the business from the COVID-19 pandemic.
The decline in Adjusted EBITDA is principally for the same reasons as the change in operating income.
CorporateMedia Network
The change incomponents of operating expenses and Adjusted EBITDAresults for Corporatethe three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | | | 2021 | | | | Change |
| | (Dollars in Thousands) |
| | | | | | | | | | $ | | % |
Revenue | | $ | 169,886 | | | | | $ | 62,773 | | | | | $ | 107,113 | | | NM |
Operating expenses | | | | | | | | | | | | |
Cost of services sold | | 105,412 | | | | | 39,242 | | | | | 66,170 | | | NM |
Office and general expenses | | 39,115 | | | | | 19,080 | | | | | 20,035 | | | NM |
Depreciation and amortization | | 6,865 | | | | | 5,195 | | | | | 1,670 | | | 32.1 | % |
Impairment and other losses | | 278 | | | | | — | | | | | 278 | | | 100.0 | % |
| | $ | 151,670 | | | | | $ | 63,517 | | | | | $ | 88,153 | | | NM |
Operating income (loss) | | $ | 18,216 | | | | | $ | (744) | | | | | $ | 18,960 | | | NM |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
Net Revenue | $ | 128,415 | | | $ | 55,661 | | | $ | 72,754 | | | NM |
Billable costs | 41,471 | | | 7,112 | | | 34,359 | | | NM |
Revenue | 169,886 | | | 62,773 | | | 107,113 | | | NM |
| | | | | | | |
Billable costs | 41,471 | | | 7,112 | | | 34,359 | | | NM |
Staff costs | 75,856 | | | 37,423 | | | 38,433 | | | NM |
Administrative costs | 12,580 | | | 8,496 | | | 4,084 | | | 48.1 | % |
Unbillable and other costs, net | 10,815 | | | 5,054 | | | 5,761 | | | NM |
Adjusted EBITDA | 29,164 | | | 4,688 | | | 24,476 | | | NM |
Stock-based compensation | 786 | | | — | | | 786 | | | 100.0 | % |
Depreciation and amortization | 6,865 | | | 5,195 | | | 1,670 | | | 32.1 | % |
Deferred acquisition consideration | 2,132 | | | — | | | 2,132 | | | 100.0 | % |
Impairment | 278 | | | — | | | 278 | | | 100.0 | % |
Other items, net | 887 | | | 237 | | | 650 | | | NM |
Operating Income (Loss) | $ | 18,216 | | | $ | (744) | | | $ | 18,960 | | | NM |
Revenue
Revenue for the three months ended March 31, 2022 was $169.9 million compared to $62.8 million for the three months ended March 31, 2021, and 2020 wasan increase of $107.1 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Change |
Corporate | | $ | | $ | | $ | | % |
| | (Dollars in Thousands) |
Staff costs | | $ | 7,126 | | | $ | 4,917 | | | $ | 2,209 | | | 44.9 | % |
Administrative costs | | 2,770 | | | 3,047 | | | (277) | | | (9.1) | % |
Stock-based compensation | | 630 | | | 142 | | | 488 | | | NM |
Depreciation and amortization | | $ | 1,216 | | | $ | 232 | | | $ | 984 | | | NM |
Total operating expenses | | $ | 11,742 | | | $ | 8,338 | | | $ | 3,404 | | | 40.8 | % |
| | | | | | | | |
Adjusted EBITDA | | $ | (7,520) | | | $ | (5,562) | | | $ | (1,958) | | | 35.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change |
| Three Months Ended March 31, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2022 | | Organic | | Total |
| (Dollars in Thousands) | | | | |
Media Network | $ | 55,661 | | | $ | (156) | | | $ | 37,509 | | | $ | 35,401 | | | $ | 72,754 | | | $ | 128,415 | | | 63.6 | % | | NM |
Component % change | | | (0.3)% | | 67.4% | | 63.6% | | NM | | | | | | |
The increase in organic net revenue was primarily attributable to new clients and increased spending by existing clients, primarily driven by the seasonal business of a new client and the recovery of the travel industry. The increase in net acquisition (divestitures) was driven by the inclusion of MDC in results subsequent to the acquisition and Goodstuff Holdings Limited.
The increase in expenses was driven by the impact of the inclusion of MDC in results subsequent to the acquisition and costs associated with an increase in services provided. Stock-based compensation expense increased, driven by awards issued to employees in connection with the merger, as well as retention awards issued to employees. Deferred acquisition consideration expense increased due to the assumption of additional liabilities in connection with the inclusion of MDC in results subsequent to the acquisition. Depreciation and amortization expense increased due to the recognition of amortizable intangible assets in connection with the inclusion of MDC in results subsequent to the acquisition.
Operating income and Adjusted EBITDA were driven by an increase in revenues, partially offset by higher expenses as detailed above.
Communications Network
The components of operating results for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| | 2022 | | | | 2021 | | | | Change | |
| | (Dollars in Thousands) | |
| | | | | | | | | | $ | | % | |
Revenue | | $ | 91,535 | | | | | $ | 42,708 | | | | | $ | 48,827 | | | NM | |
Operating expenses | | | | | | | | | | | | | |
Cost of services sold | | 60,031 | | | | | 28,444 | | | | | 31,587 | | | NM | |
Office and general expenses | | 16,486 | | | | | 6,290 | | | | | 10,196 | | | NM | |
Depreciation and amortization | | 2,540 | | | | | 1,582 | | | | | 958 | | | 60.6 | % | |
| | | | | | | | | | | | | |
| | $ | 79,057 | | | | | $ | 36,316 | | | | | $ | 42,741 | | | NM | |
Operating income | | $ | 12,478 | | | | | $ | 6,392 | | | | | $ | 6,086 | | | 95.2 | % | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
Net Revenue | $ | 62,452 | | | $ | 28,487 | | | $ | 33,965 | | | NM |
Billable costs | 29,083 | | | 14,221 | | | 14,862 | | | NM |
Revenue | 91,535 | | | 42,708 | | | 48,827 | | | NM |
| | | | | | | |
Billable costs | 29,083 | | | 14,221 | | | 14,862 | | | NM |
Staff costs | 39,623 | | | 18,442 | | | 21,181 | | | NM |
Administrative costs | 6,844 | | | 2,161 | | | 4,683 | | | NM |
Unbillable and other costs, net | 48 | | | (90) | | | 138 | | | NM |
Adjusted EBITDA | 15,937 | | | 7,974 | | | 7,963 | | | 99.9 | % |
Stock-based compensation | (243) | | | — | | | (243) | | | (100.0) | % |
Depreciation and amortization | 2,540 | | | 1,582 | | | 958 | | | 60.6 | % |
Deferred acquisition consideration | 1,090 | | | — | | | 1,090 | | | 100.0 | % |
| | | | | | | |
Other items, net | 72 | | | — | | | 72 | | | 100.0 | % |
Operating Income | $ | 12,478 | | | $ | 6,392 | | | $ | 6,086 | | | 95.2 | % |
Revenue
Revenue for the three months ended March 31, 2022 was $91.5 million compared to $42.7 million for the three months ended March 31, 2021, an increase of $48.8 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change |
| Three Months Ended March 31, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2022 | | Organic | | Total |
| (Dollars in Thousands) | | | | |
Communications Network | $ | 28,487 | | | $ | 201 | | | $ | 19,044 | | | $ | 14,720 | | | $ | 33,965 | | | $ | 62,452 | | | 51.7 | % | | NM |
Component % change | | | 0.7% | | 66.9% | | 51.7% | | NM | | | | | | |
The increase in organic net revenue was attributable to increased spending by existing and new clients, primarily driven by higher public relations and advocacy services. The increase in net acquisition (divestitures) was driven by the inclusion of MDC in results subsequent to the acquisition.
The increase in expenses was driven by the impact from the inclusion of MDC in results subsequent to the acquisition and costs associated with an increase in services provided. Deferred acquisition consideration expense increased due to the assumption of additional liabilities in connection with the inclusion of MDC in results subsequent to the acquisition. Depreciation and amortization grew due to the recognition of amortizable intangible assets in connection with the inclusion of MDC in results subsequent to the acquisition.
Operating income and Adjusted EBITDA were driven by an increase in revenues, partially offset by higher expenses as detailed above.
All Other
The components of operating results for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | | | 2021 | | | | Change |
| | (Dollars in Thousands) |
| | | | | | | | | | $ | | % |
Revenue | | $ | 3,110 | | | | | $ | 5,863 | | | | | $ | (2,753) | | | (47.0) | % |
Operating expenses | | | | | | | | | | | | |
Cost of services sold | | 1,623 | | | | | 2,430 | | | | | (807) | | | (33.2) | % |
Office and general expenses | | 1,619 | | | | | 5,044 | | | | | (3,425) | | | (67.9) | % |
Depreciation and amortization | | 501 | | | | | 1,022 | | | | | (521) | | | (51.0) | % |
| | | | | | | | | | | | |
| | $ | 3,743 | | | | | $ | 8,496 | | | | | $ | (4,753) | | | (55.9) | % |
Operating loss | | $ | (633) | | | | | $ | (2,633) | | | | | $ | 2,000 | | | (76.0) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
Net Revenue | $ | 3,110 | | | $ | 5,863 | | | $ | (2,753) | | | (47.0) | % |
Billable costs | — | | | — | | | — | | | — | % |
Revenue | 3,110 | | | 5,863 | | | (2,753) | | | (47.0) | % |
| | | | | | | |
Billable costs | — | | | — | | | — | | | — | % |
Staff costs | 2,536 | | | 5,023 | | | (2,487) | | | (49.5) | % |
Administrative costs | 695 | | | 3,773 | | | (3,078) | | | (81.6) | % |
Unbillable and other costs, net | 3 | | | (1,322) | | | 1,325 | | | NM |
Adjusted EBITDA | (124) | | | (1,611) | | | 1,487 | | | (92.3) | % |
Stock-based compensation | 8 | | | — | | | 8 | | | 100.0 | % |
Depreciation and amortization | 501 | | | 1,022 | | | (521) | | | (51.0) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Operating Loss | $ | (633) | | | $ | (2,633) | | | $ | 2,000 | | | (76.0) | % |
Revenue
Revenue for the three months ended March 31, 2022 was $3.1 million compared to $5.9 million for the three months ended March 31, 2021, a decrease of $2.8 million.
Net Revenue
The components of the fluctuations in net revenue for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Net Revenue - Components of Change | | | | | | Change |
| Three Months Ended March 31, 2021 | | Foreign Currency | | Net Acquisitions (Divestitures) | | Organic | | Total Change | | Three Months Ended March 31, 2022 | | Organic | | Total |
| (Dollars in Thousands) | | | | |
All Other | $ | 5,863 | | | $ | (11) | | | $ | (5,256) | | | $ | 2,514 | | | $ | (2,753) | | | $ | 3,110 | | | 42.9 | % | | (47.0) | % |
Component % change | | | (0.2)% | | (89.6)% | | 42.9% | | (47.0)% | | | | | | |
The increase in organic net revenue was attributable to services at the central innovations group.
The decrease related to net acquisitions (divestitures) was attributable to the sale of Reputation Defender in the third quarter of 2021.
Increase in operating income and Adjusted EBITDA were driven by decrease in revenues, more than offset by lower expenses driven by the sale of Reputation Defender.
Corporate
The components of operating results for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change |
| (Dollars in Thousands) |
| | | | | $ | | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Staff costs | $ | 9,156 | | | $ | 1,171 | | | $ | 7,985 | | | NM |
Administrative costs | 5,882 | | | (606) | | | 6,488 | | | NM |
Unbillable and other costs, net | — | | | 144 | | | (144) | | | (100.0) | % |
Adjusted EBITDA | (15,038) | | | (709) | | | (14,329) | | | NM |
Stock-based compensation | 1,923 | | | — | | | 1,923 | | | 100.0 | % |
Depreciation and amortization | 1,087 | | | 485 | | | 602 | | | NM |
| | | | | | | |
Other items, net | 3,176 | | | 2,438 | | | 738 | | | 30.3 | % |
Operating Income | $ | (21,224) | | | $ | (3,632) | | | $ | (17,592) | | | NM |
Operating expenses increased primarily due to higher incentive compensation, driving the change in Adjusted EBITDA, and depreciation expense in connection with the Company’s new headquarters.inclusion of MDC in results subsequent to the acquisition, including professional fees associated with the transaction.
Liquidity and Capital Resources:
Liquidity
The following table provides summary information about the Company’s liquidity position:
| | | | | | | | | | | | | | | | |
| March 31, 2021 | | March 31, 2020 | | | | | |
| (Dollars in Thousands) | | | | | |
Net cash provided by (used in) operating activities | $ | 47,060 | | | $ | (19,955) | | | | | | |
Net cash provided by (used in) investing activities | $ | (7,032) | | | $ | 16,645 | | | | | | |
Net cash provided by financing activities | $ | 13,427 | | | $ | 119,642 | | | | | | |
| | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
| (Dollars in Thousands) |
Net cash (used in) provided by operating activities | $ | (48,577) | | | $ | 5,771 | |
Net cash used in investing activities | $ | (8,289) | | | $ | (3,311) | |
Net cash provided by (used in) financing activities | $ | 6,529 | | | $ | (41,142) | |
Early in 2020, the Company took actions to combat the impact of COVID-19 on our operations, including liquidity. We will continue to monitor the worldwide public health threat, government actions to combat COVID-19 and the impact such developments may have on our liquidity. If the impact of the pandemic is beyond our expectation, the Company believes it iswe believe we are well positioned through the actions implemented at the beginning of the pandemic to successfully work through the effects of COVID-19 for the foreseeable future. We will also continue to monitor any potential impact that the military conflict between Russia and Ukraine has on our liquidity but do not expect material adverse impacts.
The Company had cash and cash equivalents of $113.3$135.2 million and $60.8$184.0 million as of March 31, 20212022 and December 31, 2020,2021, respectively. The Company intendsexpects to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months. The Company has historically been able to maintain and expand its business using cash generated from operating activities, funds available under its Credit Agreement,revolving credit agreement, and other initiatives, such as obtaining additional debt and equity financing. At March 31, 2021,2022, the Company had $20.0$140.0 million of borrowings outstanding, $24.9 million of outstanding and $172.3undrawn letters of credit resulting in $335.1 million available under the Credit Agreement.its $500.0 million revolving credit agreement.
The Company’s obligations extending beyond twelve months primarily consist of deferred acquisition payments, purchases of noncontrolling interests, capital expenditures, scheduled lease obligation payments, and interest payments on borrowings under the Company’s Senior5.625% Notes. The Company may also make cash payments in the future to satisfy obligations under the Tax Receivables Agreement (see Note 14 of the Notes to the Financial Statements for additional details). The amount and timing of payments are contingent on the Company achieving certain tax savings, if any, that we actually realize, or in certain circumstances are deemed to realize as a result of (i) increases in the tax basis of OpCo’s assets resulting from exchanges of Paired Units (defined in Note 11) for shares of our Class A Common Stock or cash, as applicable, and (ii) certain other tax benefits related to us making payments under the TRA. Based on the current outlook, the Company believes future cash flows from operations, together with the Company’s existing cash balance and availability of funds under the Company’s Credit Agreement,revolving credit agreement, will be sufficient to meet the Company’s anticipated cash needs for the next twelve months. The Company’s ability to make scheduled deferred acquisition payments, principal and interest payments, to refinance indebtedness or to fund planned capital expenditures or other obligations will depend on future performance, which is subject to general economic conditions, the competitive environment and other factors, including those described in the Company’s 2020this Form 10-K10-Q and in the Company’s other SEC filings.
On March 23, 2022, the board of directors authorized a stock repurchase program (the “Repurchase Program”) under which we may repurchase up to $125,000 of shares of our outstanding Class A common stock. The Repurchase Program will expire on March 23, 2025.
Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices (including through trading plans that may be adopted in accordance with Rule 10b5-1 of the Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically and may authorize adjustments of its terms.
Cash Flows
Operating Activities
Cash flows used in operating activities for the three months ended March 31, 2022 were $48.6 million, primarily driven by earnings, more than offset by unfavorable working capital requirements, including the timing of media supplier payments.
Cash flows provided by operating activities for the three months ended March 31, 2021 were $47.1$5.8 million, primarily reflectingdriven by earnings, and favorablepartially offset by unfavorable working capital requirements.
Cash flows used in operatinginvesting activities were $8.3 million and $3.3 million for the three months ended March 31, 20202022 and 2021, respectively, primarily driven by capital expenditures.
Financing Activities
During the three months ended March 31, 2022, cash flows provided by financing activities were $20.0$6.5 million, primarily reflecting unfavorable working capital requirements, driven by media and other supplier payments.
Investing Activities$29.5 million in net borrowings under the revolving credit agreement, partially offset by $14.9 million in connection with shares withheld to satisfy employee tax withholding obligations associated with employee stock awards vesting.
During the three months ended March 31, 2021, cash flows used in investing activities were $7.0 million, which was primarily due to capital expenditures of $13.4 million, primarily related to the Company’s new headquarters at One World Trade Center, partially offset by receipt of $7.1 million of deferred proceeds from the sale of the Company’s equity interest in a Partner Firm in the first quarter of 2020.
During the three months ended March 31, 2020, cash flows provided by investing activities were $16.6 million, which primarily consisted of proceeds of $18.9 million from the sale of the Company’s equity interest in a Partner Firm, partially offset by $1.5 million of capital expenditures and $0.7 million paid for acquisitions.
Financing Activities
During the three months ended March 31, 2021, cash flows provided by financing activities were $13.4was $41.1 million, which primarily consisted of $20.0driven by $15.2 million in net borrowingspayments under the Credit Agreement, partially offset by $5.5revolving credit agreement and distributions of $25.9 million in distributions to minority interest holders and $1.1 million in deferred acquisition consideration payments.
During the three months ended March 31, 2020, cash flows provided by financing activities were $119.6 million, primarily driven by $125.0 million in new borrowings under the Credit Agreement, offset by $4.6 million in distributions to minority interest holders and $0.8 million in deferred acquisition consideration payments.Stagwell Media.
Total Debt
Debt, net of debt issuance costs, as of March 31, 20212022 was $864.9$1,222.0 million as compared to $843.2$1,191.6 million outstanding at December 31, 2020. The increase of $21.7 million in debt was primarily a result of the Company’s borrowings under the Credit Agreement.2021. See Note 7 of the Notes8 to the Unaudited Condensed Consolidated Financial Statements included herein for information regarding the Company’s Senior5.625% Notes and $211.5$500.0 million senior secured revolving credit agreement due February 3, 2022 (the “Credit Agreement”).
The Company is currently in compliance with all of the terms and conditions of the Credit Agreement, and management believes, based on its current financial projections, that the Company will be in compliance with its covenants over the next twelve months.
If the Company loses all or a substantial portion of its lines of credit under the Credit Agreement, or if the Company uses the maximum available amount under the Credit Agreement,agreement, it will be required to seek other sources of liquidity. If the Company were unable to find these sources of liquidity, for example through an equity offering or access to the capital markets, the Company’s ability to fund its working capital needs and any contingent obligations with respect to acquisitions and redeemable noncontrolling interests would be adversely affected.
As of April 27, 2022, the Company amended the Credit Agreement. Among other things, this amendment replaces any previous reference to LIBOR with SOFR. The borrowings bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest in effect on such day, (b) the federal funds effective rate plus 0.50% and (c) the SOFR rate plus 1% in each case, plus the applicable margin (calculated based on the Company’s total leverage ratio) at that time. Additionally, the Credit Agreement was amended to remove certain pre-commencement notice provisions for certain acquisitions under $50,000 in the aggregate, increased the amount permitted for certain investments allowed under the Credit Agreement, and subject to certain conditions, and explicitly allows for the repurchase of Stagwell Inc. stock in an amount not to exceed $100,000 in any fiscal year. All other substantive terms of the Credit Agreement remain unchanged.
Pursuant to the Credit Agreement, the Company must comply with certain financial covenants including, among other things, covenants for (i) total senior leverage ratio, (ii)its total leverage ratio (iii) fixed charges ratio, and (iv) minimum earnings before interest, taxes and depreciation and amortization, in each casecovenant, as such term is specifically defined in the Credit Agreement.agreement. For the period ended March 31, 2021,2022, the Company’s calculation of each of these covenants, and the specific requirements under the Credit Agreement,revolving credit agreement, respectively, were calculated based on the trailing twelve months as follows:
| | | | | |
| March 31, 20212022 |
Total Senior Leverage Ratio | (0.24)3.10 | |
Maximum per covenant | 2.00 | |
| |
Total Leverage Ratio | 4.10 | |
Maximum per covenant | 5.50 | |
| |
Fixed Charges Ratio | 2.81 | |
Minimum per covenant | 1.00 | |
| |
Earnings before interest, taxes, depreciation and amortization (in millions) | $ | 200.7 | |
Minimum per covenant (in millions) | $ | 120.04.50 | |
These ratios and measures are not based on GAAP and are not presented as alternative measures of operating performance or liquidity. Some of these ratios and measures include, among other things, pro forma adjustments for acquisitions, one-time charges, and other items, as defined in the Credit Agreement. They are presented here to demonstrate compliance with the covenants in the Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.
Contractual Obligations and Other Commercial CommitmentsMaterial Cash Requirements
The Company’s agenciesAgencies enter into contractual commitments with media providers and agreements with production companies on behalf of its clients at levels that exceed the revenue from services. Some of our agencies purchase media for clients and act as an agent for a disclosed principal. These commitments are included in Accounts payable and Accruals and other liabilities when the media services are delivered by the media providers. MDCStagwell takes precautions against default on payment for these services and has historically had a very low incidence of default. MDCStagwell is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn.
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel.payments. See Note 56 of the Notes to the Unaudited Condensed Consolidated Financial Statementsincluded herein for additional information regarding contingent deferred acquisition consideration.
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity. See Note 89 of the Notes to the Unaudited Condensed Consolidated Financial Statementsincluded herein for additional information regarding noncontrolling interests and redeemable noncontrolling interests.
The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the revolving Credit Agreement (and(or any refinancings thereof), and, if necessary, through the incurrence of additional debt and/or issuance of additional equity. The ultimate amount payable in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.
Critical Accounting Policies
See the Company’s 20202021 Form 10-K for information regarding the Company’s critical accounting policies.
New Accounting Pronouncements
Website Access to Company Reports and Information
Stagwell Inc. is the successor SEC registrant to MDC Partners Inc. Stagwell Inc.’s Internet website address is www.mdc-partners.com.www.stagwellglobal.com. The Company’s Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act, of 1934, as amended (the “Exchange Act” ), will be made available free of charge through the Company’s website as soon as reasonably practical after those reports are electronically filed with, or furnished to, the SEC. From time to time, the Company uses its website as a channel of distribution of material company information, including webcasts of earnings calls and other investor events and notifications of news or announcements regarding its financial performance, including SEC filings, investor events, press releases and earnings releases. The information found on, or otherwise accessible through, the Company’s website is not incorporated into, and does not form a part of, this quarterly report on Form 10-Q. From time to time, the Company may use its website as a channel of distribution of material company information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
TheIn the normal course of business, the Company is exposed to market risk related to interest rates, foreign currencies and impairment risk.
Debt Instruments: At March 31, 2021,2022, the Company’s debt obligations consisted of amounts outstanding under its Credit Agreement and the Senior5.625% Notes. The Senior5.625% Notes bear a fixed 7.50%5.625% interest rate. The Credit Agreementrevolving credit agreement bears interest at variable rates based upon the Euro rate, U.S. bank prime rate, and U.S. base rate, atLIBOR or its replacement SOFR, EURIBOR, and SONIA depending on the Company’s option.duration of the borrowing product. The Company’s ability to obtain the required bank syndication commitments depends in part on conditions in the bank market at the time of syndication. Given that there were $20.0 million in borrowings under
As of April 27, 2022, the Company amended its Credit Agreement, as of March 31, 2021,Agreement. This amendment replaces any previous reference to LIBOR with SOFR. With regard to our variable rate debt, a 1.0%10% increase or decrease in the weighted average interest rate, which was 4.46% at March 31, 2021,rates would have annot be material to our interest impact of approximately $0.2 million.expense or cash flows.
Foreign Exchange: While the Company primarily conducts business in markets that use the U.S. dollar, the Canadian dollar, the Euro and the British Pound, its non-U.S. operations transact business in numerous different currencies. The Company’s results of operations are subject to risk from the translation to the U.S. dollar of the revenue and expenses of its non-U.S. operations. The effects of currency exchange rate fluctuations on the translation of the Company’s results of operations are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 2 of the Company’s 20202021 Form 10-K. For the most part, revenues and expenses incurred related to the non-U.S. operations are denominated in their functional currency. This minimizesreduces the impact that fluctuations in exchange rates will have on profit margins. Translation of intercompany debt, which is not intended to be repaid, is included in cumulative translation adjustments. Translation of current intercompany balances are included in net earningsincome (loss). The Company generally does not enter into foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
The Company is exposed to foreign currency fluctuations relating to its intercompany balances between the U.S. and Canada. For every one cent change in the foreign exchange rate between the U.S. and Canada, the impact to the Company’s financial statements would be approximately $2.2 million.
Impairment Risk: At March 31, 2021,2022, the Company had goodwilldid not have any impairment of $669.1 million.goodwill. The Company reviews goodwill for impairment annually as of October 1st of each year or more frequently if indicators of potential impairment exist. See the Critical Accounting Policies and Estimates section in the Company’s 20202021 Form 10-K for information related to impairment testing and the risk of potential impairment charges in future periods.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be included in our SEC reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”), who is our principal executive officer, and Chief Financial Officer (“CFO”), who is our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives. However, our disclosure controls and procedures are designed to provide reasonable assurances of achieving our control objectives.
We conducted an evaluation, under the supervision and with the participation of our management, including our CEO, CFO and management Disclosure Committee, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to RuleRules 13a-15(e) and 15(d)-15(e)15d-15(e) of the Exchange Act. Based on that evaluation, and in light of the material weaknesses identified in our internal control over financial reporting as disclosed in our Form 10-K for the fiscal year ended December 31, 2021, our CEO and CFO concluded that, as of March 31, 2022, our disclosure controls and procedures arewere not effective as of March 31, 2021.at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
The Company identified material weaknesses in its internal controls over financial reporting as of December 31, 2021 as described in its 2021 Form 10-K. We have given considerationare continuing to the impact of the COVID-19formulate our remediation plan to enhance and have concluded that there have been no changes inimprove our internal controls over financial reporting, that have materially affected, or are reasonably likelywhich includes the hiring of third-party consultants to materially affect,assist in the design and implementation of new control activities, enhancing existing control activities and assessing the size and structure of our staff. The remediation plan is expected to continue through the end of 2022 with the goal of having the system of internal control over financial reporting.controls designed and in operation as of December 31, 2022. However, the material weaknesses will not be considered remediated as of December 31, 2022 as the system of internal controls will need to operate for a sufficient period of time and be subject to testing by management in 2023 in order to conclude the system of internal controls is operating effectively. The Company will provide an update on the progress of its remediation plan throughout the fiscal year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various legal proceedings. We do not currently expect that these proceedings will have a material adverse effect on our results of operations, cash flows or financial position.
Item 1A. Risk Factors
There have been no material changes to the risk factors in Part I, Item 1A “Risk Factors” of our Annual Report on2021 Form 10-K for the year ended December 31, 2020.10-K. These risks could materially and adversely affect our business, results of operations, financial condition, cash flows, projected results and future prospects. These risks are not exclusive and additional risks to which we are subject include the factors listed under “Note About Forward-Looking Statements” and the risks described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the three months ended MarMarch 31, 2021,2022, the Company issued 50,00032,407 shares of Class A sharesCommon Stock in a transactiontransactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. These shares were issuedgranted to employees as payment to a member of management of a subsidiaryinducement for an acquisition by the Company of additional interests in the majority-owned subsidiary. The Company received no cash proceeds and no commissions were paid to any person in connection with the issuance of the shares.
employment.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
For the three months ended March 31, 2021,2022, the Company made no open market purchases of its Class A, sharesB, or its Class BC shares. Pursuant to its Combined Credit Agreement and the indenture governing the Senior5.625% Notes, the Company is currently limited as to the dollar amountvalue of shares it may repurchase in the open market.
For the three months ended March 31, 2021,2022, the Company’s employees surrendered shares of Class A sharesCommon Stock in connection with the required tax withholding resulting from the vestingconversion of restricted stock.Class C Common Stock to Class A Common Stock. The Company paid these withholding taxes on behalf of the related employees. These shares of Class A sharesCommon Stock were subsequently retired and no longer remain outstanding as of March 31, 2021. 2022.
On March 23, 2022, the board of directors authorized a stock repurchase program (the “Repurchase Program”) under which we may repurchase up to $125,000,000 of shares of our outstanding Class A common stock. The Repurchase Program will expire on March 23, 2025. Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices (including through trading plans that may be adopted in accordance with Rule 10b5-1 of the Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we
deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically and may authorize adjustments of its terms.
The following table details those shares withheld during the first quarter of 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares That May Yet Be Purchased Under the Program |
1/1/2021 - 1/31/2021 | | 10,117 | | | $ | 3.29 | | | — | | | — | |
2/1/2021 - 2/28/2021 | | 54,403 | | | 2.51 | | | — | | | — | |
3/1/2021 - 3/31/2021 | | | | | | — | | | — | |
Total | | 64,520 | | | $ | 2.90 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Appropriate Dollar Value of Shares That May Yet Be Purchased Under the Program |
1/1/2022 - 1/31/2022 | | — | | | $ | — | | | — | | | — | |
2/1/2022 - 2/28/2022 | | 1,998,143 | | | 5.42 | | | — | | | — | |
3/1/2022 - 3/31/2022 | | — | | | — | | | — | | | — | |
Total | | 1,998,143 | | | $ | 5.42 | | | — | | | — | |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
The exhibits required by this item are listed on the Exhibit Index.
EXHIBIT INDEX
| | | | | | | | |
Exhibit No. | | Description |
| | ArticlesSecond Amended and Restated Certificate of Amalgamation, dated January 1, 2004 (incorporatedIncorporation of Stagwell Inc., as amended(incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed on May 10, 2004).
|
| | Articles of Continuance, dated June 28, 2004 (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q filed on August 4, 2004). |
| | Articles of Amalgamation, dated July 1, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed on July 30, 2010). |
| | Articles of Amalgamation, dated May 1, 2011 (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed on May 2, 2011). |
| | Articles of Amalgamation, dated January 1, 2013 (incorporated by reference to Exhibit 3.1.4 to the Company’s Form 10-K filed on March 10, 2014)17, 2022). |
| | Articles of Amalgamation, dated April 1, 2013 (incorporated by reference to Exhibit 3.1.5 to the Company’s Form 10-K filed on March 10, 2014). |
| | Articles of Amalgamation, dated July 1, 2013 (incorporated by reference to Exhibit 3.1.6 to the Company’s Form 10-K filed on March 10, 2014). |
| | Articles of Amendment, dated March 7, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on March 7, 2017). |
| | Articles of Amendment, dated March 14, 2019 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed on March 15, 2019). |
| | General By-law No. 1, as amended on April 29, 2005Amended and Restated Bylaws of Stagwell Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K filed on March 16, 2007). |
| | Second Supplemental Indenture, dated as of January 13, 2021, among the Company, the Note Guarantors party thereto and the Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on January 13, 2021. |
| | Third Supplemental Indenture, dated as of February 8, 2021, among the Company, the Note Guarantors party thereto and the Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on February 9,August 2, 2021). |
| | Goldman LetterSecond Amended and Restated Limited Liability Company Agreement of Stagwell Global LLC dated as of April 21, 2021, by and among MDC Partners Inc., Broad Street Principal Investments, L.L.C., Stonebridge 2017, L.P. and Stonebridge 2017 Offshore, L.P.March 23, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Amendment No. 2 to Registration Statement on Form S-48-K filed on April 21, 2021)March 28, 2022). |
| | Second Amended and Restated Employment Agreement Amendment, dated as of March 11, 2022, by and between the Company and Mark Penn (incorporated by reference to Exhibit 10.10 to the Company’s Form 10-K filed on March 17, 2022). |
| | Amended and Restated Stock Appreciation Rights Agreement by and between the Company and Mark Penn, dated as of March 11, 2022 (incorporated by reference to Exhibit 10.10.2 to the Company’s Form 10-K filed on March 17, 2022). |
| | Certification by Chief Executive Officer pursuant to Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | Certification by Chief Financial Officer pursuant to Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | Certification by Chief Executive Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| | Certification by Chief Financial Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
101 | | Interactive Data File, for the period ended March 31, 2021.2022. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.* |
104 | | Cover Page Interactive Data File. The cover page XBRL tags are embedded within the inline XBRL document and are included in Exhibit 101.* |
* Filed electronically herewith.
** Furnished herewith
† Indicates management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
MDC PARTNERSSTAGWELL INC. |
|
/s/ Mark Penn |
Mark Penn |
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
May 10, 20212022 |
| |
/s/ Frank Lanuto |
Frank Lanuto |
Chief Financial Officer (Principal Financial Officer) |
May 10, 20212022 |
| |