MDC Partners Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015. The provided filing is for MDC Partners Inc., not Stagwell Inc.; the filing text does not explain the company-name discrepancy. The statements are unaudited and prepared under U.S. GAAP.
Business Context and Key Metrics
MDC operated marketing communications businesses through Strategic Marketing Services, Performance Marketing Services, and Corporate. Management emphasized organic growth, acquisitions, client retention, operating expenses, EBITDA, and capital expenditures. Historically, the fourth quarter has generated the highest revenue due to media placements and retail-related marketing activity.
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $328.4 million | $309.4 million | $967.2 million | $883.6 million |
| Operating profit | $23.6 million | $21.3 million | $73.3 million | $62.0 million |
| Operating margin | 7.2% | 6.9% | 7.6% | 7.0% |
| Income from continuing operations | $(5.2) million | $(1.9) million | $2.5 million | $10.5 million |
| Net loss attributable to MDC | $(8.6) million | $(4.9) million | $(11.1) million | $2.7 million |
| Diluted loss per share | $(0.17) | $(0.10) | $(0.22) | $0.05 |
Q3 revenue growth was 6.1%, consisting of 5.7% organic growth and 3.4% acquisition growth, partly offset by a 2.9% foreign-exchange impact. Nine-month revenue growth was 9.5%, consisting of 7.1% organic growth and 4.9% acquisition growth, partly offset by a 2.5% foreign-exchange impact.
- Strategic Marketing Services: Q3 revenue increased 11.0% to $264.6 million and operating margin rose to 13.9% from 11.0%. Nine-month revenue increased 13.4% to $775.1 million, while operating margin declined to 11.5% from 12.6%.
- Performance Marketing Services: Q3 revenue declined 10.0% to $63.9 million and operating margin declined to 4.6% from 9.0%. Nine-month revenue declined 4.0% to $192.2 million, but operating margin improved to 10.4% from 5.0%.
- Corporate: Q3 operating costs increased to $16.1 million, primarily due to executive-related charges, asset write-offs, and SEC investigation costs.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $15.8 million at September 30, 2015, compared with $113.3 million at December 31, 2014.
- Net cash used in operating activities was $10.5 million for the first nine months, compared with $35.4 million of cash provided in the prior-year period. Continuing operations used $9.1 million.
- Net cash used in investing activities was $25.6 million, including $21.1 million for acquisitions and $17.7 million of capital expenditures. The sale of Accent generated approximately $18.3 million of proceeds.
- Net cash used in financing activities was $63.7 million, including $133.0 million of acquisition-related payments, $31.7 million of dividends, and $85.3 million of revolving-credit borrowings.
- Total debt was $827.2 million, including $735.0 million of 6.75% Senior Notes due 2020 and $85.3 million drawn under the revolving credit agreement, compared with $743.1 million at December 31, 2014.
- The revolving facility had approximately $165.9 million of availability and $5.0 million of undrawn letters of credit at September 30, 2015.
- Working-capital deficit was $326.5 million, compared with $269.3 million at year-end 2014. The increase primarily reflected short-term deferred acquisition consideration and working-capital demands from the media business.
- Management stated that the company was in compliance with its credit agreement and expected to remain compliant over the next twelve months. The reported total leverage ratio was 4.3 versus a 5.5 maximum, and fixed-charges ratio was 2.5 versus a 1.0 minimum.
Material Changes and Unusual Items
- Other expense increased to $15.6 million in Q3 and $29.3 million for nine months, primarily from unrealized foreign-exchange losses of $29.8 million for nine months.
- Interest expense increased to $42.7 million for nine months from $40.4 million, mainly due to the additional 6.75% notes issued in April 2014.
- The company acquired a 60% interest in Y Media Labs effective May 1, 2015, with estimated acquisition consideration of $45.1 million, including $20.0 million of closing cash payments.
- The company acquired additional interests in several majority-owned businesses. The estimated present value of consideration for these incremental interests was $195.7 million, including $158.2 million of deferred payments.
- Deferred acquisition consideration increased to $291.7 million from $205.4 million at December 31, 2014. Redeemable noncontrolling interests were $71.3 million.
- Accent Marketing Services was sold effective May 31, 2015. Discontinued operations produced a loss attributable to MDC of $6.3 million for the first nine months, including a $5.2 million loss on disposal.
- Q3 included a $5.3 million charge for unrecovered prior cash bonus awards and a $1.1 million write-off of assets related to former executives. The company also incurred $2.7 million of SEC-investigation professional fees in Q3 and $12.4 million for nine months.
Outlook, Risks, and Contingencies
The filing does not provide specific revenue or earnings guidance. Management expected to maintain sufficient cash and revolver availability to fund operations for the next twelve months, but noted that loss of credit availability or use of the facility’s maximum capacity could require additional financing.
- The SEC investigation remained ongoing and concerned executive expenses, goodwill and other accounting practices, and securities trading. The company was cooperating with the investigation.
- Former CEO Miles Nadal resigned effective July 20, 2015. Through September 30, he had repaid approximately $9.5 million for expenses and $1.0 million toward prior cash bonus repayment obligations; an additional $0.8 million was repaid in October 2015.
- Putative securities class actions were filed in the United States and Canada concerning alleged misleading disclosures involving executive compensation, goodwill accounting, internal controls, and the SEC investigation.
- Potential payments for outstanding put rights to acquire remaining subsidiary interests were estimated at approximately $18.6 million, excluding certain termination- or death-related obligations of approximately $49.2 million.
- Key risks include client losses and spending changes, retention of key personnel, foreign-exchange volatility, acquisition integration, leverage and covenant compliance, contingent acquisition payments, regulatory sanctions, litigation, reputational damage, and potentially insufficient insurance coverage.
- A 1% change in the weighted-average interest rate on revolving borrowings would have had an estimated $0.9 million annualized impact. A one-cent currency-rate change was estimated to affect the financial statements by approximately $2.4 million.
Most Important Facts to Verify
- Confirm the issuer identity: the source filing identifies MDC Partners Inc., while the request identifies Stagwell Inc.
- Reconcile the sharp decline in cash, negative operating cash flow, working-capital deficit, and increased revolving borrowings.
- Assess the sustainability of acquisition-driven growth and the sizable deferred acquisition consideration and redeemable noncontrolling-interest obligations.
- Review the SEC investigation, executive repayments, related charges, internal-control remediation, and U.S. and Canadian class-action litigation.
- Evaluate debt covenant headroom, revolving-facility availability, 2020 senior-note maturity, and the company’s ability to fund dividends and contingent obligations.
- Separate operational performance from foreign-exchange losses, discontinued operations, executive-related charges, and other unusual items.