MDC Partners Inc. Form 10-Q Summary
Important identification note: The supplied filing is for MDC Partners Inc., not Stagwell Inc. It covers the quarter ended March 31, 2012, and was filed May 10, 2012. The unaudited statements are prepared under U.S. GAAP.
Business context and reporting period
MDC Partners operated marketing communications businesses through two reportable segments: Strategic Marketing Services and Performance Marketing Services, plus a Corporate group. Revenue was generated primarily from retainer fees, commissions, project fees, per diem services and performance incentives.
- Strategic Marketing Services revenue: $160.4 million, up from $141.5 million.
- Performance Marketing Services revenue: $75.6 million, up from $73.6 million.
- The company completed acquisitions of interests in Doner, TargetCast and Dotbox during the quarter.
- A division of Accent Marketing Services was classified as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $236.0 million | $215.1 million |
| Operating profit (loss) | $(11.7) million | $2.6 million |
| Loss from continuing operations | $(24.6) million | $(6.8) million |
| Net loss | $(24.9) million | $(7.1) million |
| Loss attributable to MDC Partners | $(26.3) million | $(8.7) million |
| Loss per diluted share | $(0.88) | $(0.31) |
| Net cash from operating activities | $12.5 million | $(37.1) million |
- Revenue increased 9.7%, consisting of $11.6 million of organic growth, $10.1 million from acquisitions and a $0.8 million foreign-exchange reduction.
- Marketing Communications Group operating margin declined to negative 1.4% from positive 4.4%. Strategic Marketing Services margin declined to 0.3% from 5.5%; Performance Marketing Services margin declined to negative 5.1% from 2.2%.
- Cost pressures included higher staff and direct costs, severance, investment spending, stock-based compensation, acquisition-related costs and deferred acquisition consideration adjustments.
- Cash and cash equivalents were $36.0 million at March 31, 2012, compared with $8.1 million at December 31, 2011.
- Working capital deficit was $201.4 million, compared with $127.9 million at December 31, 2011.
- Total debt, including capital leases, was $371.2 million, down from $385.2 million at December 31, 2011. This included $345.0 million of 11% Senior Notes due 2016 and $23.9 million outstanding under the revolving credit facility.
- The revolving credit facility had approximately $120.4 million of availability after limitations under the senior notes indenture. Management stated that the company was in compliance with its covenants and expected to remain compliant over the next twelve months.
- Capital expenditures were $5.1 million. Investing cash flow was positive $33.1 million, primarily because acquisitions were acquired with more cash than paid at closing due to assumed cash balances.
- Goodwill and other intangible assets totaled $812.3 million at March 31, 2012, representing a significant portion of total assets.
Material changes versus the prior comparable period
- Revenue grew by $20.9 million, or 9.7%, but operating results deteriorated from a $2.6 million profit to an $11.7 million loss.
- Loss attributable to MDC Partners increased by $17.6 million, primarily because of lower operating profit, higher interest expense, higher other expense and higher income tax expense.
- Interest expense increased to $11.0 million from $9.6 million, primarily reflecting higher average debt following the 2011 senior notes issuance.
- Other expense was $1.0 million versus $0.3 million of other income, largely due to foreign-exchange losses on intercompany balances.
- Corporate operating expenses increased to $8.3 million from $6.8 million.
- Non-cash stock-based compensation increased to $5.9 million from $4.3 million.
- Deferred acquisition consideration increased substantially, with total deferred acquisition consideration of $204.2 million at March 31, 2012 versus $103.4 million at March 31, 2011.
- Cash flow from operations improved materially from an outflow of $37.1 million to an inflow of $12.5 million, supported by advance billings and changes in accounts payable and other liabilities.
Outlook, commentary, risks and unusual items
- Management emphasized organic growth, acquisitions, client retention, new business wins and development of database marketing and data analytics capabilities.
- The business is seasonal, with historically higher revenue in the fourth quarter because of media placements and retail-related consumer marketing.
- Key risks include economic downturns, reductions in client spending, client losses, difficulty retaining key employees, foreign-currency fluctuations, acquisition integration and compliance with debt covenants.
- Deferred acquisition consideration was $204.2 million and is based partly on future operating performance; actual payments may differ materially from recorded estimates.
- Put rights held by subsidiary minority owners could require approximately $29.4 million if all exercised under management’s assumptions, including approximately $26.7 million in cash and $2.7 million in shares. Additional put obligations of approximately $79.4 million are triggered only upon specified employment termination events or death.
- The 11% Senior Notes mature in 2016 and carry substantial fixed interest costs. The secured revolving facility is subject to leverage, fixed-charge, earnings and receivables covenants.
- Legal proceedings were described as routine, with management stating that no material adverse outcome was expected. No material change to the prior annual report’s risk factors was disclosed.
- The Chief Administrative Officer’s employment was not renewed effective May 9, 2012; the separation agreement provided six months of base salary and health benefits.
Most important facts for an investor to verify
- Confirm the registrant identity: the filing identifies MDC Partners Inc., while the request identifies Stagwell Inc.
- Assess whether revenue growth can translate into profitability given the sharp decline in segment margins and increased corporate costs.
- Review debt maturities, the 11% Senior Notes, revolving-facility availability and covenant headroom.
- Reconcile cash generation with the substantial working capital deficit and seasonal funding needs.
- Evaluate the magnitude and timing of deferred acquisition consideration and minority-owner put obligations.
- Review acquisition accounting, goodwill and intangible-asset valuations for impairment risk.
- Separate organic performance from acquisition-related growth and foreign-exchange effects.