Filing Overview
Registrant: MDC Partners Inc. The request identifies Stagwell Inc., but the supplied filing is MDC Partners Inc.’s Form 10-Q for the quarter ended September 30, 2013. Financial amounts are in thousands of U.S. dollars unless otherwise stated. The interim statements are unaudited and periods were restated for discontinued operations.
Business Context and Reporting Period
MDC Partners operated marketing communications and strategic consulting businesses through two reportable segments: Strategic Marketing Services and Performance Marketing Services, supported by a Corporate Group. Revenue was generated primarily from retainers, commissions, fixed-fee projects, per diem services and performance incentives. The company noted that revenue is typically highest in the fourth quarter because of media placements and retail-related consumer marketing.
Key Financial Metrics
| Metric | Three months ended September 30, 2013 | Three months ended September 30, 2012 | Nine months ended September 30, 2013 | Nine months ended September 30, 2012 |
|---|---|---|---|---|
| Revenue | $288.9 million | $265.9 million | $842.5 million | $771.9 million |
| Operating profit (loss) | $1.2 million | $2.2 million | $39.8 million | $(8.8) million |
| Operating margin | 0.4% | 0.8% | 4.7% | (1.1)% |
| Loss from continuing operations attributable to MDC | $(13.8) million | $(13.1) million | $(43.5) million | $(54.9) million |
| Net loss attributable to MDC | $(21.2) million | $(14.5) million | $(54.5) million | $(60.9) million |
| Loss per diluted share | $(0.68) | $(0.47) | $(1.74) | $(1.99) |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $105.4 million | $15.8 million |
- Revenue growth: Third-quarter revenue increased 8.7%, consisting primarily of $24.8 million of organic growth, partly offset by a $1.7 million foreign-exchange impact. Nine-month revenue increased 9.1%, including $72.8 million of organic growth, $0.3 million from acquisitions and a $2.5 million foreign-exchange headwind.
- Segment performance: Third-quarter Strategic Marketing Services revenue rose 15.5% to $203.4 million and operating profit rose to $28.3 million. Performance Marketing Services revenue declined 4.7% to $85.5 million, while operating profit increased to $6.3 million.
- Margins: Marketing Communications Group operating margin improved to 12.0% in the third quarter from 3.3%, and to 10.5% for the nine-month period from 3.0%. Consolidated margin remained low because Corporate operating costs were $33.4 million in the quarter and $48.9 million for nine months.
- Stock compensation: Non-cash stock-based compensation was $27.4 million in the third quarter and $36.7 million for nine months, compared with $5.1 million and $26.4 million, respectively, in the prior-year periods. The third-quarter amount included a $22.2 million charge related to potential cash settlement of stock appreciation rights.
- Liquidity: Cash and cash equivalents were $63.3 million at September 30, 2013, compared with $60.3 million at December 31, 2012. Working capital was negative $211.1 million. The company generated $105.4 million of operating cash flow, used $13.2 million in investing activities and used $88.9 million in financing activities.
- Debt: Total debt, including capital lease obligations, was $551.3 million at September 30, 2013, compared with $431.7 million at year-end 2012. The balance consisted primarily of $550.0 million of 6.75% Senior Notes due 2020. No borrowings were outstanding under the $225 million revolving credit facility, with approximately $220.0 million available and $5.0 million of undrawn letters of credit.
- Balance sheet: Total assets were $1.366 billion and total liabilities were $1.406 billion. Total deficit was $178.7 million, compared with a deficit of $84.8 million at December 31, 2012. Redeemable noncontrolling interests were $138.6 million.
Material Changes Versus Prior Comparable Period
- Revenue increased in both the quarter and year-to-date period, driven mainly by organic growth and net new business wins.
- Operating performance improved substantially for the operating segments, particularly Strategic Marketing Services, as staff costs, direct costs, office and general expenses and depreciation and amortization declined as percentages of revenue.
- Corporate costs increased sharply, primarily because of higher compensation and non-cash stock-based compensation, offsetting much of the segment-level improvement.
- Interest expense for the quarter declined to $10.6 million from $11.5 million because the company refinanced 11% notes with 6.75% notes. For the nine-month period, interest expense and finance charges increased to $33.4 million from $34.4 million excluding the separately reported $55.6 million loss on redemption of notes.
- The company redeemed all 11% Senior Notes due 2016 and issued $550 million of 6.75% Senior Notes due 2020. The refinancing produced approximately $537.6 million of net proceeds and resulted in a $55.6 million redemption loss.
- Discontinued operations produced a $7.4 million loss in the third quarter and an $11.0 million loss for nine months, compared with $1.4 million and $5.9 million, respectively, in the prior-year periods. The company discontinued a subsidiary and an operating division during the third quarter.
- Deferred acquisition consideration declined to $102.8 million from $196.4 million at December 31, 2012, after $101.96 million of payments, although the recorded amount remains subject to remeasurement.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that it expected to maintain sufficient cash and available borrowing capacity to fund operations and working-capital requirements for the next twelve months. It also stated that the company was in compliance with its revolving credit agreement and expected to remain compliant over the next twelve months based on current projections.
- Reported covenant measures were within stated limits: total leverage ratio of 3.11 versus a maximum of 5.50, fixed charges ratio of 2.94 versus a minimum of 1.00, and covenant EBITDA of $163.8 million versus a minimum of $105.0 million.
- Management identified risks from economic conditions, client spending and retention, new-business wins and losses, key employee retention, acquisitions and integration, foreign currency movements, debt covenant compliance and the ability to fund deferred acquisition consideration and put obligations.
- Put rights held by minority owners could require approximately $15.3 million of future consideration under management’s stated assumptions, including approximately $14.1 million in cash and $1.2 million in shares. Separate employment-termination or death-related obligations were estimated at approximately $123.3 million. The ultimate amounts and timing are uncertain.
- Deferred acquisition consideration of $102.8 million was recorded on the balance sheet, but actual future payments may differ materially from estimates based on subsidiary earnings and other contractual formulas.
- On October 28, 2013, after the reporting date, the company announced an intention to settle all outstanding stock appreciation rights in cash. It disclosed that an additional $42.2 million of stock-based compensation would have been recorded at September 30, 2013, for a total estimated charge of $64.3 million; the actual fourth-quarter charge was to be determined.
- During October 2013, the company recorded a one-time C$10.0 million, or approximately $9.6 million, incentive charge related to achievement of a Class A share-price target.
- The company had no material change to the risk factors disclosed in its 2012 Form 10-K. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm that the intended issuer is MDC Partners Inc., not Stagwell Inc., and verify the appropriate historical filing and ticker context.
- Assess the sustainability of operating improvement given the significant increase in Corporate expenses and stock-based compensation.
- Reconcile operating cash flow with the large non-cash adjustments, including the note-redemption loss, stock compensation and working-capital changes.
- Review the 6.75% Senior Notes and revolving credit agreement for covenants, refinancing risk, collateral, guarantees and restrictions on dividends or additional debt.
- Monitor the cash impact and valuation sensitivity of deferred acquisition consideration and subsidiary put rights.
- Incorporate the subsequent cash-settlement decision for stock appreciation rights and the related fourth-quarter compensation charge into period-to-period comparisons.
- Evaluate discontinued operations separately from continuing operations and confirm the final disposal-related obligations.