MDC Partners Inc. Form 10-Q Summary
Filing identity: The supplied filing is for MDC Partners Inc., not Stagwell Inc. It covers the quarterly period ended June 30, 2011, with financial information for the three and six months ended June 30, 2011 and comparable 2010 periods. Amounts are in thousands of U.S. dollars unless otherwise stated.
Business Context and Reporting Period
MDC Partners operated a marketing communications and strategic consulting business through two reportable segments: Strategic Marketing Services and Performance Marketing Services, plus a corporate group. Revenue was generated from retainers, commissions, fixed-fee and per diem projects, and performance incentives. The company continued an acquisition-led strategy and had operations in the United States, Canada, Europe, and the Caribbean.
Key Financial Metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $240.5 million | $169.9 million | $458.0 million | $305.8 million |
| Operating profit | $14.6 million | $6.4 million | $16.8 million | $5.6 million |
| Operating margin | 6.1% | 3.8% | 3.7% | 1.8% |
| Income from continuing operations attributable to MDC | $1.3 million | $(4.9) million | $(7.4) million | $(14.6) million |
| Net income (loss) attributable to MDC | $1.3 million | $(5.8) million | $(7.4) million | $(16.0) million |
| Diluted earnings (loss) per share | $0.04 | $(0.21) | $(0.25) | $(0.58) |
| Net interest expense | $10.6 million | $8.4 million | $20.2 million | $15.4 million |
Marketing Communications Group operating margin was 10.5% in the second quarter, compared with 7.1% in the prior-year quarter, and 7.5% for the first six months, compared with 5.3%. Non-cash stock-based compensation was $5.8 million in the second quarter and $10.0 million for the six-month period.
Segment Performance
- Strategic Marketing Services: Second-quarter revenue increased 45.0% to $155.0 million; operating profit increased to $22.9 million from $10.7 million, with margin rising to 14.8% from 10.0%.
- Performance Marketing Services: Second-quarter revenue increased 35.7% to $85.5 million; operating profit improved to $2.4 million from $1.3 million, with margin rising to 2.8% from 2.1%.
- For the six months, Strategic Marketing Services revenue increased 49.6% to $296.5 million and Performance Marketing Services revenue increased 50.0% to $161.5 million.
Cash Flow, Liquidity, and Balance Sheet
- Cash used in operating activities was $25.7 million in the first six months of 2011, compared with $1.8 million of cash provided in the prior-year period.
- Cash used in investing activities was $46.1 million, including $40.0 million for acquisitions and deferred acquisition payments and $8.5 million of capital expenditures.
- Cash provided by financing activities was $66.7 million, principally from the issuance of $55 million of additional 11% Senior Notes and borrowings under the revolving credit facility.
- Cash and cash equivalents declined to $5.7 million at June 30, 2011 from $10.9 million at December 31, 2010.
- Working capital deficit improved to $48.7 million from $102.5 million at December 31, 2010, primarily due to seasonal collections and improved billing and collection practices.
- Total debt was $382.1 million at June 30, 2011, compared with $286.2 million at December 31, 2010. The debt included $345.0 million of 11% Senior Notes due 2016 and $34.5 million outstanding under the revolving credit facility.
- The revolving credit facility was expanded to $150 million and extended to October 2015. $109.3 million was available at June 30, 2011. The weighted-average interest rate on borrowings was 5.5%.
- Management stated that the company was in compliance with its credit agreement and expected to remain compliant over the following twelve months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue grew 41.6%, consisting of $36.1 million of organic growth, $32.5 million from acquisitions, and $2.0 million from foreign exchange. Six-month revenue grew 49.8%, consisting of $72.1 million of organic growth, $76.6 million from acquisitions, and $3.4 million from foreign exchange.
- Operating profit more than doubled in the second quarter and nearly tripled for the six-month period, although corporate operating expenses increased by $5.1 million in the quarter and $7.0 million year to date, primarily due to compensation and stock-based compensation.
- The company reported attributable net income in the second quarter, reversing the prior-year loss. It remained loss-making for the first six months, but the attributable loss narrowed substantially.
- Interest expense increased because of higher average debt, including additional 11% Senior Notes issued in April 2011.
- The company acquired 60% of Anomaly Partners in January 2011 and increased ownership in Communifx and Varick during the second quarter. Anomaly contributed $12.3 million of second-quarter revenue and $23.7 million of six-month revenue.
- Previously discontinued operations generated losses of $0.9 million in the second quarter and $1.4 million in the first six months of 2010; no comparable discontinued-operation loss was reported in 2011.
Outlook, Risks, Contingencies, and Unusual Items
- No formal revenue or earnings guidance was provided. Management stated that it intended to maintain sufficient cash and credit availability to fund operations for the next twelve months.
- Key operating risks included economic conditions, client spending and retention, new business wins and losses, dependence on key employees, foreign exchange, and successful integration of acquisitions.
- Deferred acquisition consideration totaled $90.8 million at June 30, 2011. Actual payments may differ materially from recorded estimates because they depend on future earnings and other contractual formulas.
- Put rights held by minority owners could require approximately $32.6 million to acquire additional ownership interests, including approximately $28.8 million in cash and $3.8 million potentially payable in shares. Separate put obligations of approximately $61.9 million could arise upon specified owner termination events or death.
- The company had $6.2 million of undrawn letters of credit and commitments to fund $3.8 million of investments.
- The 11% Senior Notes and revolving credit agreement contain restrictive and financial covenants. A loss of credit availability could impair the company’s ability to fund working capital and contingent obligations.
- Unusual items included acquisition-related valuation adjustments, stock-based compensation, foreign-exchange gains, and the effect of discontinued operations in the prior-year comparison.
- Management reported no material changes to the risk factors in the 2010 Form 10-K, no material adverse legal proceedings, and effective disclosure controls as of June 30, 2011.
- A former executive’s separation agreement provided for CAD$1.4 million of payments over a 24-month consulting period. The company also disclosed aggregate mid-year executive incentive and retention payments of $3.35 million approved after quarter end.
Important Facts for Investors to Verify
- Confirm the issuer identity: the filing is for MDC Partners Inc., while the request identifies Stagwell Inc.
- Assess whether strong revenue growth and improved operating margins can offset rising interest expense, corporate costs, and acquisition-related obligations.
- Review liquidity in light of only $5.7 million of cash, negative operating cash flow, a $48.7 million working capital deficit, and $382.1 million of debt.
- Evaluate compliance headroom under the revolving credit agreement, particularly the total leverage ratio of 3.70 versus a 4.00 maximum and fixed charges ratio of 2.05 versus a 1.25 minimum.
- Validate the assumptions underlying $90.8 million of deferred acquisition consideration and the estimated $94.5 million of potential put-related obligations.
- Separate organic growth from acquisition and foreign-exchange effects when evaluating underlying performance.
- Review the impact of stock-based compensation, noncontrolling interests, goodwill, and other acquisition-related estimates on reported earnings and equity.