Filing Context
The provided filing is MDC Partners Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The request metadata identifies Stagwell Inc.; however, the filing itself identifies the registrant as MDC Partners Inc. and does not mention Stagwell.
MDC Partners operated marketing communications businesses through Strategic Marketing Services, Performance Marketing Services, and Corporate activities. Results are reported in U.S. dollars under U.S. GAAP.
Financial Summary
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $336.6 million | $299.4 million | $638.8 million | $574.2 million |
| Operating profit | $44.5 million | $29.1 million | $49.7 million | $40.7 million |
| Operating margin | 13.2% | 9.7% | 7.8% | 7.1% |
| Income from continuing operations | $31.1 million | $19.6 million | $7.7 million | $12.3 million |
| Net income attributable to MDC | $29.6 million | $16.5 million | $(2.5) million | $7.6 million |
| Diluted earnings per share | $0.59 | $0.32 | $(0.05) | $0.15 |
| Cash flow from operations | Not separately provided | Not separately provided | $68.5 million | $26.1 million |
The filing’s MD&A reports Marketing Communications Group operating margins of 14.7% for the second quarter of 2015 versus 13.9% in the prior-year quarter, and approximately 11% for both six-month periods. The difference from consolidated margins reflects the treatment of Corporate costs.
Revenue and Operating Performance
- Second-quarter revenue increased 12.4%, consisting of 8.3% organic growth, 6.6% acquisition growth, and a 2.4% foreign-exchange reduction.
- Six-month revenue increased 11.3%, consisting of 7.8% organic growth, 5.7% acquisition growth, and a 2.2% foreign-exchange reduction.
- Strategic Marketing Services revenue increased 17.4% in the quarter and 14.7% for the six months, but operating profit declined to $33.4 million in the quarter and $52.3 million year to date.
- Performance Marketing Services revenue declined 3.9% in the quarter and 0.8% year to date, while operating profit increased substantially to $16.3 million in the quarter and $17.1 million year to date.
- Quarterly operating profit benefited from lower Corporate expenses, including an $8.6 million reimbursement from former CEO Miles Nadal, partly offset by $3.9 million of additional legal expenses related to the SEC investigation.
Liquidity, Cash Flow, Debt and Balance Sheet
- Cash and cash equivalents were $34.9 million at June 30, 2015, compared with $113.3 million at December 31, 2014. The company also held $206.1 million in restricted cash in client trusts, matched by a trust liability.
- Working capital deficit increased to $394.7 million from $269.3 million at December 31, 2014, primarily due to seasonal timing of client collections and payments to media suppliers.
- Operating cash flow was $68.5 million, investing cash flow was $(18.0) million, and financing cash flow was $(129.1) million for the six months.
- Financing cash outflows included $107.0 million of acquisition-related payments, $21.2 million of dividends, and $7.0 million of distributions to noncontrolling interests.
- Total debt was $742.3 million, principally consisting of $735.0 million of 6.75% Senior Notes due 2020. No borrowings were outstanding under the revolving credit facility.
- The revolving credit facility had commitments of $325 million, approximately $250.7 million of availability, and $5.1 million of undrawn letters of credit at June 30, 2015.
- Management stated that the company was in compliance with its debt covenants and expected to remain compliant over the next twelve months. The filing reports a total leverage ratio of 3.9 versus a maximum of 5.5 and a fixed charges ratio of 2.2 versus a minimum of 1.0.
- Shareholders’ deficit was $422.2 million at June 30, 2015, compared with $348.6 million at year-end 2014.
Material Changes and Unusual Items
- The company acquired a 60% effective interest in Y Media Labs for an estimated acquisition-date purchase price of $45.1 million, including $20.0 million of closing cash payments and $25.1 million of deferred consideration.
- The company acquired additional interests in several majority-owned subsidiaries. Aggregate consideration for these step-up transactions was estimated at $104.5 million, including $27.4 million of closing cash payments and $77.1 million of deferred payments.
- Accent Marketing Services was sold effective May 31, 2015, for $18.1 million net of transaction expenses. The sale produced a $3.9 million loss on disposal and contributed to a $5.0 million six-month loss from discontinued operations.
- Foreign-exchange losses materially reduced first-half results: other expense was $13.7 million in 2015 versus other income of $1.0 million in 2014. The filing states that a one-cent change in exchange rates could affect the financial statements by approximately $2.5 million.
- Deferred acquisition consideration totaled $220.9 million at June 30, 2015. The ultimate payments may differ materially from recorded estimates because they depend on future subsidiary performance and other contractual formulas.
Outlook, Risks and Contingencies
- The filing provides no formal revenue or earnings guidance. Management expects to maintain sufficient cash and available credit to fund operations for the next twelve months.
- Business performance is exposed to economic conditions, client spending, client wins and losses, employee retention, acquisition integration, seasonality, and foreign-currency movements. Historically, the fourth quarter generates the highest revenue.
- Noncontrolling-interest holders have put rights that could require approximately $15.7 million of payments based on current assumptions, plus approximately $132.7 million payable only upon certain employment terminations or deaths. The timing and ultimate amounts are uncertain.
- An SEC investigation remained ongoing regarding executive expenses, goodwill and other accounting practices, and securities trading. The company incurred $9.6 million of related expenses during the first six months of 2015.
- Former CEO Miles Nadal agreed to repay $1.9 million related to additional expenses and $10.6 million related to prior cash bonus awards. The company expected to record approximately $6.0 million of additional expense in the third quarter for unrecovered bonus amounts.
- A putative securities class action was filed on July 31, 2015, alleging violations related to executive compensation, goodwill accounting, and internal controls. The company stated that it intends to defend the action.
- Management implemented new private-aircraft and travel-and-entertainment policies, hired senior compliance personnel, increased Audit Committee oversight, and reduced the number of non-independent directors.
Investor Verification Items
- Confirm the issuer identity, because the supplied metadata says Stagwell Inc. while the filing is for MDC Partners Inc.
- Reconcile the reported quarterly and year-to-date operating margins with consolidated Corporate expenses and the company’s non-GAAP segment presentation.
- Assess liquidity against the $742.3 million debt balance, restricted cash structure, working capital deficit, dividends, acquisition payments, deferred consideration, and potential put-right obligations.
- Monitor the SEC investigation, related litigation, repayment obligations, legal expenses, possible sanctions, and any additional accounting or control remediation.
- Evaluate whether foreign-exchange losses, acquisition-related accounting adjustments, discontinued operations, and the $8.6 million reimbursement materially affect the sustainability of reported earnings.
- Review subsequent filings for the August 2015 acquisition of the remaining interest in 72andSunny and the resulting deferred consideration, redeemable noncontrolling-interest, and stock-based compensation effects.