SEC Filing Summary
Filing: Form 10-Q for MDC Partners Inc., not Stagwell Inc. The filing covers the three and six months ended June 30, 2013, with comparable periods in 2012. The financial statements are unaudited and presented in thousands of U.S. dollars, except per-share amounts.
Business Context and Reporting Period
MDC Partners operated marketing communications businesses through Strategic Marketing Services and Performance Marketing Services segments, plus a Corporate Group. Revenue was generated from advertising, consulting, customer relationship management, media, analytics, and related services. The company reported discontinued operations separately and historically experiences its highest revenue in the fourth quarter.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Revenue | $288.1 million | $273.5 million | $555.2 million | $508.7 million |
| Operating profit (loss) | $26.5 million | $(1.7) million | $36.9 million | $(12.5) million |
| Operating margin | 9.2% | (0.6)% | 6.6% | (2.5)% |
| Income (loss) from continuing operations attributable to MDC | $10.1 million | $(17.6) million | $(31.5) million | $(42.8) million |
| Net income (loss) attributable to MDC | $9.8 million | $(20.1) million | $(33.3) million | $(46.4) million |
| Diluted earnings (loss) per share | $0.29 | $(0.65) | $(1.06) | $(1.52) |
| Cash flow from operating activities | Not separately provided | Not separately provided | $54.1 million | $(6.6) million |
Q2 revenue increased 5.3%, including $15.5 million of organic growth, no acquisition contribution, and a $0.8 million foreign-exchange headwind. Six-month revenue increased 9.1%, including $47.5 million of organic growth, $0.3 million from acquisitions, and a $1.4 million foreign-exchange headwind.
At June 30, 2013, cash and cash equivalents were $77.3 million, compared with $60.3 million at December 31, 2012. Working capital remained negative at $(204.5) million. Total debt, including capital leases, was $551.9 million, compared with $431.7 million at year-end 2012. There were no borrowings under the revolving credit facility, approximately $220 million of availability, and $5.1 million of undrawn letters of credit.
Total assets were $1.389 billion and total shareholders’ deficit was $(145.1) million at June 30, 2013. Goodwill and other intangibles totaled $771.2 million. Deferred acquisition consideration was $133.9 million, and redeemable noncontrolling interests were $128.5 million.
Material Changes Versus the Prior Comparable Period
- Strategic Marketing Services revenue increased 9.3% in Q2 and 11.9% for the six-month period, primarily from net new business wins. Its operating margin improved to 13.5% in Q2 from 7.1% and to 12.8% for six months from 4.0%.
- Performance Marketing Services revenue declined 2.8% in Q2 because of project and event timing, but increased 3.4% for six months. Its Q2 operating margin improved to 5.1% from 2.8%, while the six-month margin improved to 1.8% from a 0.5% loss.
- Corporate operating costs declined to $5.0 million in Q2 from $17.3 million and to $15.5 million for six months from $25.6 million. The reduction primarily reflected lower non-cash stock-based compensation and compensation-related expenses. The CEO also repaid a previously reserved $5.3 million loan.
- Operating performance benefited from lower direct pass-through costs, office and general expenses, and depreciation and amortization as percentages of revenue. Q2 Marketing Communications Group operating margin increased to 10.9% from 5.7%.
- The company issued $550.0 million of 6.75% Senior Notes due 2020 and redeemed its $425.0 million of 11% Senior Notes due 2016. The refinancing generated a $55.6 million loss, including redemption premiums and write-offs of financing costs and original issue premium.
- Six-month operating cash flow improved to $54.1 million from an outflow of $6.6 million, although the 2013 amount included significant non-cash add-backs, including the $50.4 million note-redemption loss.
- Discontinued-operations losses declined to $0.3 million in Q2 and $1.8 million for six months, compared with $2.5 million and $3.6 million, respectively, in 2012.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that the company was in compliance with its revolving-credit covenants and expected to remain compliant over the following twelve months. Reported covenant metrics included a 3.16x total leverage ratio versus a 5.50x maximum, a 2.87x fixed-charge ratio versus a 1.0x minimum, and EBITDA of $156.5 million versus a $105.0 million minimum.
- The company intended to maintain sufficient cash and borrowing availability to fund operations and working-capital deficits for the next twelve months.
- Future obligations include $133.9 million of deferred acquisition consideration and potential subsidiary put obligations estimated at approximately $16.0 million, plus approximately $112.5 million payable only upon certain employment terminations or deaths. Actual amounts may differ materially because they depend on future earnings, valuation formulas, timing, and foreign exchange.
- Principal risks include economic conditions, client retention and spending, new-business performance, employee retention, acquisition integration, debt-covenant compliance, funding of contingent obligations, and foreign-currency fluctuations.
- The company reported a $2.9 million Q2 unrealized foreign-exchange loss and estimated that each one-cent change in the U.S. dollar/Canadian dollar exchange rate could affect its financial statements by approximately $0.9 million.
- The company had no material legal proceedings identified in the filing, no material changes to the risk factors in its 2012 Form 10-K, and effective disclosure controls as of June 30, 2013.
Investor Verification Checklist
- Verify the requested issuer: the supplied filing is for MDC Partners Inc., not Stagwell Inc.
- Assess whether the Q2 margin improvement is sustainable, particularly given lower pass-through costs, reduced corporate stock compensation, and other unusual items.
- Reconcile operating cash flow with earnings and quantify the effect of the $50.4 million non-cash debt-redemption loss and working-capital movements.
- Review refinancing terms, covenant definitions, debt maturities, collateral, and restrictions on dividends, acquisitions, and additional debt.
- Monitor deferred acquisition consideration and subsidiary put rights, including potential cash funding requirements and dilution.
- Evaluate goodwill and intangible-asset exposure, which totaled $771.2 million, relative to the company’s deficit position.
- Review foreign-exchange exposure, client concentration and retention trends, seasonality, and Performance Marketing Services project timing.