MDC Partners Inc. Form 10-K Summary
Filing and period: The provided filing is MDC Partners Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed March 15, 2012. The request metadata identifies Stagwell Inc. and “2011 Q4,” but the filing itself identifies the registrant as MDC Partners Inc. and covers the full fiscal year, with separate fourth-quarter information.
Business Context
MDC Partners provided marketing communications and strategic consulting services through operating companies in the United States, Canada, Europe and the Caribbean. Its two reportable segments were Strategic Marketing Services and Performance Marketing Services. Services included advertising, media, public relations, interactive and mobile marketing, direct marketing, customer relationship management, market research, branding, social media and related consulting.
The company employed approximately 6,810 people at December 31, 2011. The largest client, Sprint, represented approximately 6% of 2011 revenue, while the ten largest clients represented 29%.
Financial Performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $943.3 million | $689.1 million | Up 36.9% |
| Operating profit | $9.3 million | $30.3 million | Down $21.0 million |
| Loss from continuing operations | $(75.6) million | $(1.4) million | Material deterioration |
| Net loss attributable to MDC | $(84.7) million | $(15.4) million | Material deterioration |
| Net loss per diluted share | $(2.91) | $(0.55) | Worsened |
| Cash flow from operations | $4.5 million | $37.3 million | Down $32.7 million |
| Cash and cash equivalents | $8.1 million | $10.9 million | Down $2.9 million |
| Total debt | $385.2 million | $286.2 million | Up $99.0 million |
| Working capital | $(127.9) million | $(102.5) million | Deficit increased |
Revenue and Margins
- Revenue growth comprised approximately $132.1 million from acquisitions, $117.3 million of organic growth and $4.8 million from foreign exchange.
- Strategic Marketing Services revenue increased 38.5% to $608.1 million, but operating margin declined to 3.5% from 9.3%.
- Performance Marketing Services revenue increased 34.0% to $335.2 million, and operating margin improved to 7.2% from 4.8%.
- Marketing Communications Group operating margin declined to 4.8% from 7.7%, primarily because reimbursed client-related direct costs increased as a percentage of revenue and acquisition-related costs increased.
- Stock-based compensation was $23.7 million, compared with $16.5 million in 2010.
Fourth-Quarter Results
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Revenue | $254.3 million | $211.0 million |
| Operating result | $(4.6) million | $22.2 million |
| Loss from continuing operations | $(55.5) million | $17.9 million |
| Net loss attributable to MDC | $(57.7) million | $11.5 million |
The fourth-quarter deterioration reflected acquisition-related costs and deferred acquisition consideration adjustments, strategic investments in talent and offices, higher interest expense, and a significant increase in tax valuation allowances. Q4 2011 included $11.8 million of deferred acquisition adjustments and an additional $47.4 million deferred tax valuation allowance.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $4.5 million, including $5.5 million from continuing operations and a $0.9 million use by discontinued operations.
- Investing activities used $30.4 million, including $23.4 million of capital expenditures and $6.8 million for acquisitions, net of cash acquired.
- Financing activities provided $23.3 million, including proceeds from the issuance of additional 11% notes and $38.0 million of borrowings under the revolving credit facility.
- The company had $345.0 million principal amount of 11% notes due 2016 and $38.0 million outstanding under the revolving facility at year-end. The notes bear interest at 11%.
- The revolving credit facility was increased to $150 million and extended to October 23, 2015. Reported availability was $106.1 million, but availability after limitations under the notes indenture was approximately $41.2 million.
- Management stated that the company was in compliance with its credit agreement and expected to remain compliant over the following twelve months. The reported total leverage ratio was 3.85 versus a maximum of 4.15, leaving limited headroom.
- Management expected approximately $20 million of 2012 capital expenditures and stated that operating cash flow, available credit and other initiatives were expected to fund working capital, capital expenditures and other obligations. Additional financing could be required for further acquisitions.
Material Changes and Unusual Items
- The company completed multiple acquisitions, including Anomaly, Concentric Partners, Laird + Partners, RJ Palmer and Trade X. Aggregate 2011 acquisition purchase prices were estimated at $76.8 million, including $40.0 million of closing cash payments and approximately $36.8 million of future contingent payments.
- Goodwill increased to $605.2 million from $514.5 million, and goodwill plus intangible assets reached $663.2 million. Management reported no goodwill impairment for 2011.
- Deferred acquisition consideration increased to $137.2 million from $108.0 million. Changes in estimated contingent consideration, acquisition-related costs and integration investments reduced operating profit.
- The company issued an additional $55 million of 11% notes in April 2011 and increased borrowings under its revolving facility, contributing to higher interest expense of $41.8 million versus $33.2 million in 2010.
- Income tax expense was $41.7 million despite a pretax loss, principally because of a $44.2 million increase in the valuation allowance and $7.1 million of nondeductible stock-based compensation.
- A Performance Marketing Group division was classified as a discontinued operation in December 2011. The discontinued operation produced a $1.4 million loss in 2011.
- Shareholders’ equity attributable to MDC declined to $(52.5) million from $59.1 million, and total equity became negative at $(12.9) million.
Outlook, Risks and Contingencies
Management’s strategy remained focused on organic growth, acquisitions and the “Perpetual Partnership” model, which generally involves acquiring majority ownership while retaining operating management participation. The filing does not provide formal revenue or earnings guidance.
- Key risks include economic weakness, reductions in client marketing budgets, client concentration and defaults, loss of major clients, competition, employee and executive retention, foreign currency movements and difficulty integrating acquisitions.
- Debt agreements restrict dividends, additional indebtedness, investments, asset sales, share repurchases and other corporate actions. The company’s ability to fund operations and acquisitions depends heavily on subsidiary cash flows and available credit.
- Contractual obligations totaled approximately $844.5 million, including $346.3 million of indebtedness, $189.9 million of interest on debt, $164.2 million of operating leases and $137.2 million of deferred acquisition consideration.
- Subsidiary owners held put rights that could require approximately $29.0 million of payments based on assumed operating performance, of which approximately $3.6 million could be funded with shares. Additional put obligations of approximately $88.1 million could arise upon specified employment termination or death events.
- Legal proceedings were described as routine, and management stated that no current matter was expected to have a material adverse effect. The company also had indemnification obligations from prior dispositions, although no material provision was recorded.
- The company’s substantial goodwill, intangible assets and deferred tax assets depend on estimates of future earnings, cash flows and recoverability. A substantial portion of deferred tax assets was subject to valuation allowances.
Investor Verification Checklist
- Reconcile the requested Stagwell Inc. reference with the filing’s actual registrant, MDC Partners Inc., and confirm the intended period.
- Review the sustainability of revenue growth after separating organic growth from acquisitions and foreign exchange.
- Assess operating margin recovery, particularly in Strategic Marketing Services, and quantify recurring versus acquisition-related costs.
- Verify cash availability after covenant restrictions, expected 2012 capital expenditures, debt service, earnouts and put-right obligations.
- Review the $345.0 million 11% notes due 2016 and the company’s refinancing or repayment capacity.
- Evaluate the effect of the $44.2 million tax valuation allowance increase and the recoverability of remaining deferred tax assets.
- Monitor goodwill, intangible assets and contingent acquisition consideration for impairment or further remeasurement charges.
- Confirm the timing and potential dilution or cash cost of subsidiary put options and deferred acquisition payments.
- Consider the negative shareholders’ equity position and the company’s dependence on subsidiary distributions and revolving credit availability.