MDC Partners Inc. Form 10-Q Summary
Filing identity: The supplied filing is for MDC Partners Inc., not Stagwell Inc. It covers the three and nine months ended September 30, 2012, with comparative periods ended September 30, 2011. The financial statements are unaudited and presented in thousands of U.S. dollars unless otherwise stated.
Business context and reporting period
MDC Partners operated marketing communications businesses through Strategic Marketing Services and Performance Marketing Services, supported by a Corporate Group. Revenue was generated from retainers, commissions, project fees, per diem fees and performance incentives. Management emphasized organic growth, acquisitions, client retention, employee retention, EBITDA and capital expenditures.
The company completed or consolidated investments in Doner, TargetCast and Dotbox during 2012. Hudson and Sunset Media, The Bull-Whitehouse, and Redscout Ventures were classified as discontinued operations, and prior periods were restated accordingly.
Financial performance and key metrics
| Metric | Three months ended September 30, 2012 | Three months ended September 30, 2011 | Nine months ended September 30, 2012 | Nine months ended September 30, 2011 |
|---|---|---|---|---|
| Revenue | $267.8 million | $235.7 million | $777.3 million | $686.3 million |
| Operating profit (loss) | $1.3 million | $(3.0) million | $(12.2) million | $15.4 million |
| Operating margin | 0.5% | (1.3)% | (1.6)% | 2.2% |
| Loss from continuing operations attributable to MDC | $(13.9) million | $(19.0) million | $(57.7) million | $(25.1) million |
| Net loss attributable to MDC | $(14.5) million | $(19.6) million | $(60.9) million | $(26.9) million |
| Loss per diluted share | $(0.47) | $(0.67) | $(1.99) | $(0.93) |
| Net cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $15.8 million | $(6.2) million |
Third-quarter revenue increased 13.6%, comprising $15.7 million of organic growth, $17.2 million of acquisition growth and a $0.8 million unfavorable foreign-exchange effect. Nine-month revenue increased 13.2%, comprising $49.7 million of organic growth, $45.0 million of acquisition growth and a $3.8 million unfavorable foreign-exchange effect.
Third-quarter operating profit improved primarily because Strategic Marketing Services returned to profitability and Corporate operating costs declined. The Performance Marketing Services segment weakened materially. Nine-month operating performance deteriorated because of lower profitability in both operating segments and higher Corporate costs.
Non-cash stock-based compensation was $5.1 million in the third quarter and $26.4 million for the nine-month period, compared with $7.8 million and $17.8 million, respectively, in the prior-year periods. Deferred acquisition consideration remeasurement expense was $13.6 million in the third quarter and $20.1 million for the nine months, versus $1.8 million and $0.9 million of expense, respectively, in the comparable periods.
Segments, cash flow, debt and liquidity
- Strategic Marketing Services: Third-quarter revenue increased 20.9% to $176.7 million and operating profit increased to $8.2 million from a $0.2 million loss. Nine-month revenue increased 17.6% to $520.5 million, but operating profit declined to $22.0 million from $30.8 million.
- Performance Marketing Services: Third-quarter revenue increased 1.7% to $91.1 million, while operating profit declined to a $0.2 million loss from $6.7 million. Nine-month revenue increased 5.3% to $256.8 million, while operating profit declined to a $2.1 million loss from $11.6 million.
- Cash flow: Nine-month cash from continuing operations was $18.1 million; discontinued operations used $2.3 million. Investing activities provided $13.8 million, including $29.1 million of net cash received in connection with acquisitions and $14.3 million of capital expenditures. Financing activities provided $35.1 million, principally from $86.5 million of revolving-credit borrowings and $29.2 million of bank overdrafts.
- Cash and working capital: Cash and cash equivalents were $72.8 million at September 30, 2012, versus $8.1 million at December 31, 2011. Working capital remained negative at $(154.5) million, compared with $(127.9) million at year-end 2011.
- Debt: Total debt was $471.7 million, including $345.0 million of 11% Senior Notes due 2016 and $124.5 million drawn under the revolving credit facility. Debt increased $86.5 million from December 31, 2011. Approximately $20.5 million remained available under the revolver, subject to indenture limitations.
- Debt compliance: The company reported compliance with its credit agreement. The total leverage ratio was 3.59x against a 4.0x maximum; fixed-charge coverage was 1.80x against a 1.25x minimum; and covenant EBITDA was $113.7 million against a $94.6 million minimum.
Material changes, outlook and risks
Management stated that it expected to maintain sufficient cash and available borrowings to fund operations for the next twelve months and expected to remain in compliance with debt covenants based on current projections. No specific revenue, earnings or margin guidance was provided in the filing.
Key unusual or potentially nonrecurring items included significant deferred acquisition consideration remeasurement expense, elevated stock-based compensation, acquisitions, discontinued operations and higher interest expense resulting from increased borrowings. Goodwill and intangible assets totaled $794.2 million at September 30, 2012, representing a substantial portion of total assets.
Material risks included economic weakness and client spending reductions, client concentration or loss, difficulty attracting and retaining key employees, acquisition integration, foreign-currency movements, variable-rate debt, covenant compliance and the ability to fund deferred acquisition consideration and subsidiary-owner put rights. Deferred acquisition consideration totaled $168.6 million. Estimated potential payments under put rights were approximately $18.0 million based on stated assumptions, plus $82.5 million payable upon specified employment termination or death events.
The filing states that litigation was not expected to have a material adverse effect, although operating entities were involved in various proceedings. The company also had $3.8 million of investment commitments and $5.0 million of undrawn letters of credit.
Investor verification points
- Verify the issuer identity: the supplied filing is MDC Partners Inc. rather than Stagwell Inc.
- Reconcile the strong revenue growth with the deterioration in nine-month operating profit and net loss.
- Assess the sustainability of cash liquidity given the $(154.5) million working-capital deficit, $471.7 million of debt and only approximately $20.5 million of revolver availability.
- Review deferred acquisition consideration, put-right obligations and the assumptions underlying their estimated values.
- Evaluate the performance and client-spending sensitivity of Performance Marketing Services.
- Review acquisition accounting, goodwill and intangible-asset impairment risk, including the company’s fourth-quarter annual impairment testing.
- Confirm the effect of discontinued operations and acquisition-related items when comparing results with prior periods.