MDC Partners Inc. Form 10-K Summary
Filing identity: The supplied filing is for MDC Partners Inc., not Stagwell Inc. It reports the fiscal year ended December 31, 2012, under U.S. GAAP. Although the request references 2012 Q4, this is an annual Form 10-K; fourth-quarter results are presented separately where disclosed. Dollars are U.S. dollars unless otherwise stated.
Business Context and Reporting Period
MDC Partners was a Canadian-incorporated marketing communications holding company operating through Strategic Marketing Services and Performance Marketing Services segments, plus a Corporate Group. Services included advertising, media, public relations, digital and interactive marketing, analytics, research, branding, direct marketing, customer relationship management and consulting. The Company had 7,984 employees at December 31, 2012.
Revenue was geographically concentrated in the United States, which represented 81% of 2012 revenue, followed by Canada at 14% and Europe and other markets at 5%. Sprint was the largest client at approximately 5% of 2012 revenue; the ten largest clients represented 26%.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $1,070.7 million | $940.4 million | +13.9% |
| Operating profit (loss) | $(17.9) million | $11.7 million | Declined $29.6 million |
| Operating margin | (1.7%) | 1.2% | Declined |
| Loss from continuing operations | $(74.0) million | $(73.1) million | Loss increased $0.9 million |
| Net loss attributable to MDC | $(85.4) million | $(84.7) million | Loss increased $0.8 million |
| Net loss per diluted share | $(2.78) | $(2.91) | Improved $0.13 |
| Cash flow from operating activities | $76.3 million | $4.5 million | Improved $71.8 million |
| Capital expenditures | $20.3 million | $23.4 million | Declined $3.0 million |
| Cash and cash equivalents | $60.3 million | $8.1 million | Increased $52.2 million |
| Total debt | $431.7 million | $385.2 million | Increased $46.5 million |
| Deferred acquisition consideration | $196.4 million | $137.2 million | Increased $59.2 million |
| Redeemable noncontrolling interests | $118.0 million | $107.4 million | Increased $10.5 million |
Continuing-operations operating cash flow was $78.2 million before $1.9 million used by discontinued operations. Cash flow benefited materially from non-cash stock-based compensation of $32.2 million, depreciation and amortization of $48.7 million, deferred acquisition consideration adjustments of $53.3 million, and increases in accounts payable and other current liabilities.
Working capital was negative $226.7 million at year-end, compared with negative $127.9 million in 2011. Accounts receivable were $326.1 million, accounts payable were $356.8 million, and advance billings were $131.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth included $78.6 million of organic growth, $54.2 million from acquisitions and a $2.5 million unfavorable foreign-exchange effect.
- Strategic Marketing Services revenue increased 18.6% to $721.2 million, with operating profit broadly stable at $22.7 million. Its operating margin declined to 3.1% from 3.7%.
- Performance Marketing Services revenue increased 5.1% to $349.5 million, but operating profit fell to a loss of $0.4 million from profit of $25.4 million. The decline was driven mainly by higher deferred acquisition consideration adjustments and stock-based compensation.
- Marketing Communications Group operating margin declined to 2.1% from 5.1%, primarily because office and general expenses increased to 24.7% of revenue from 19.5%, while staff costs increased to 59.4% from 55.2%.
- Deferred acquisition consideration adjustments charged to operations increased to approximately $53.0 million from $12.6 million, materially reducing operating profit.
- Net interest expense increased to approximately $46.3 million from $41.7 million due to higher borrowings and the additional 11% notes issued in December 2012.
- Income tax expense declined to $9.6 million from $41.7 million. The 2012 effective tax rate was 14.7%, affected by valuation allowance increases and nondeductible stock-based compensation.
- The Company completed acquisitions including Doner, TargetCast and Dotbox. The aggregate estimated present value of 2012 acquisition consideration was $99.3 million, including $67.8 million of contingent deferred consideration.
- Fourth-quarter revenue increased to $294.6 million from $254.1 million. Fourth-quarter continuing-operations loss improved to $22.1 million from $54.7 million, although the quarter included $32.9 million of deferred acquisition adjustments.
Debt, Liquidity and Commitments
- The Company issued an additional $80.0 million of 11% senior notes due 2016 in December 2012, receiving $83.2 million of net proceeds before expenses. The notes carried an 11% fixed interest rate and increased total principal notes outstanding to $425.0 million.
- There were no borrowings under the $150 million Wells Fargo revolving credit facility at December 31, 2012. Availability was reported as $145.2 million before indenture limitations and approximately $80.2 million after those limitations.
- The Company reported compliance with its credit agreement covenants. The reported total leverage ratio was 3.03x versus a maximum of 4.0x; fixed charge coverage was 1.91x versus a minimum of 1.25x; and EBITDA for covenant purposes was $124.5 million versus a $95.4 million minimum.
- The 11% notes mature in 2016. Contractual obligations totaled approximately $1.09 billion, including debt, interest, operating leases and deferred acquisition consideration.
- Deferred acquisition consideration payable within 2013 was estimated at $104.3 million, with an additional $40.4 million payable in 2014, $29.9 million in 2015 and $21.8 million thereafter.
- Potential subsidiary minority-interest put rights were estimated at $15.9 million for exercisable rights and an additional $102.1 million payable upon specified employment termination or death events. Actual amounts depend on future subsidiary performance, exercise timing and exchange rates.
Guidance, Outlook, Risks and Unusual Items
Management expected operating cash flow, available revolver capacity and other initiatives to fund working capital, capital expenditures and other needs over the following twelve months. The Company expected approximately $20 million of capital expenditures in 2013. Future acquisitions could require additional debt or equity financing.
- Management identified economic conditions, client spending, client retention, competitive reviews and the ability to attract and retain key employees as significant operating risks.
- High leverage, 11% debt, restrictive covenants and substantial deferred acquisition obligations could constrain acquisitions, dividends and other corporate actions.
- Revenue and profitability were exposed to client defaults, concentration among major clients, pricing pressure from procurement departments, foreign-currency movements and changing media consumption.
- Goodwill and intangible assets totaled approximately $783.3 million, including $720.1 million of goodwill. No goodwill impairment was recorded for 2012, but future underperformance could result in material impairment charges.
- Discontinued operations generated a $5.4 million net loss in 2012, and prior periods were restated for discontinued operations.
- The filing reports legal proceedings in the ordinary course but states that management did not expect them to have a material adverse effect. It also describes indemnification and guarantee obligations for which no material provision was accrued.
- Internal control over financial reporting was reported effective and received an unqualified audit opinion; however, the 2012 acquisitions, representing 13% of total assets and 9% of revenue, were excluded from management’s internal-control assessment because of acquisition timing.
Investor Verification Items
- Verify the filing identity and ticker: the document is for MDC Partners Inc., not Stagwell Inc.
- Reconcile reported operating loss and segment operating results with the Company’s non-GAAP measures, particularly the treatment of deferred acquisition consideration and stock-based compensation.
- Review the maturity and refinancing plan for the $425.0 million of 11% notes due 2016, including covenant headroom and revolver availability after indenture restrictions.
- Assess whether operating cash flow can support the $104.3 million of deferred acquisition consideration due in 2013, expected capital expenditures and potential put-right payments.
- Evaluate acquisition performance and the assumptions underlying the $196.4 million deferred acquisition liability, $118.0 million of redeemable noncontrolling interests and $720.1 million of goodwill.
- Confirm the sustainability of the dividend practice, as 2012 dividends totaled $0.56 per share despite continuing net losses and negative working capital.
- Review client concentration, employee retention, pricing pressure, foreign exchange exposure and the impact of discontinued operations on period-over-period comparisons.