Business Context and Reporting Period
The supplied filing is a Form 10-Q for MDC Partners Inc., not Stagwell Inc. It covers the three and nine months ended September 30, 2011, under U.S. GAAP. MDC operated marketing communications businesses through Strategic Marketing Services, Performance Marketing Services, and a Corporate group, with operations primarily in the United States, Canada, Europe, and the Caribbean.
The interim financial statements are unaudited. Prior periods were restated for discontinued operations, including Zig (USA), the “007” division of Redscout, and Fearless Progression.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $238.2 million | $696.2 million |
| Operating profit (loss) | $(3.6) million | $13.2 million |
| Loss from continuing operations | $(17.6) million | $(20.8) million |
| Loss attributable to MDC Partners | $(19.6) million | $(26.9) million |
| Loss per diluted share | $(0.67) | $(0.93) |
| Operating margin | (1.5%) | 1.9% |
| Cash flow from operating activities | Not separately provided | $(6.2) million |
| Capital expenditures | Not separately provided | $(17.9) million |
Revenue increased 33.4% year over year in the third quarter and 43.7% in the first nine months. Management attributed nine-month growth to $104.1 million of organic growth, $102.6 million from acquisitions, and $5.1 million of favorable foreign exchange.
Third-quarter segment operating profit was $6.3 million for Performance Marketing Services and a $0.4 million loss for Strategic Marketing Services. Corporate operating costs were $9.5 million. For the first nine months, Strategic Marketing Services generated $30.2 million of operating profit, Performance Marketing Services generated $10.0 million, and Corporate incurred $27.0 million of operating costs.
At September 30, 2011, cash and cash equivalents were $7.3 million, working capital was negative $77.8 million, total assets were $1.005 billion, total liabilities were $854.2 million, and total equity was $56.5 million. Goodwill and intangible assets totaled approximately $636.1 million.
Debt, Liquidity, and Cash Flow
- Total debt was $395.0 million at September 30, 2011, compared with $286.2 million at December 31, 2010.
- Debt included $345.0 million of 11% Senior Notes due 2016, $47.6 million drawn under the revolving credit facility, and other debt and capital lease obligations.
- The revolving credit facility had $150 million of availability and approximately $32 million of availability after limitations under the senior notes indenture.
- The company was in compliance with its credit agreement covenants. Reported covenant measures included a total leverage ratio of 3.79 versus a maximum of 4.15, a fixed charges ratio of 1.85 versus a minimum of 1.25, and EBITDA of $103.7 million versus a $94.6 million minimum.
- Operating cash flow declined to a use of $6.2 million from $25.3 million of operating cash flow provided in the comparable 2010 period, primarily because of lower advance billings and working-capital requirements.
- Investing cash outflows were $69.3 million, including $52.9 million for acquisitions and deferred acquisition payments and $17.9 million for capital expenditures.
- Financing activities provided $72.5 million, principally from the issuance of additional 11% Senior Notes and revolver borrowings. Cash declined by $3.6 million during the nine months to $7.3 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased $59.6 million, or 33.4%, driven by $32.0 million of organic growth, $25.9 million of acquisition growth, and $1.7 million of foreign exchange benefit.
- Third-quarter operating results deteriorated from $1.4 million of operating profit to a $3.6 million operating loss. Strategic Marketing Services declined from $7.9 million of operating profit to a $0.4 million loss, partially offset by improved Performance Marketing Services results.
- Third-quarter loss attributable to MDC Partners increased to $19.6 million from $10.9 million, and diluted loss per share increased to $0.67 from $0.38.
- For the first nine months, operating profit increased to $13.2 million from $7.1 million, but higher interest expense, foreign exchange expense, and noncontrolling-interest allocations kept the company in a net loss position.
- Nine-month loss attributable to MDC Partners was approximately flat at $26.9 million versus $26.9 million in 2010, while diluted loss per share improved to $0.93 from $0.96 because of a larger share base.
- Marketing Communications Group operating margin improved to 5.8% for the first nine months from 5.2%, but third-quarter margin declined to 2.5% from 5.1%. Direct costs increased significantly as a percentage of revenue, partly because certain client-contract costs were reported gross when the company acted as principal.
- The company completed or increased ownership in several businesses, including Concentric Partners, Laird + Partners, Redscout, VitroRobertson, and The Northstar Group. Third-quarter acquisitions had estimated consideration of $39.3 million, including $16.0 million of closing cash payments and $23.3 million of contingent deferred consideration.
- Redeemable noncontrolling interests increased to $94.7 million from $77.6 million at year-end 2010, reflecting new grants, changes in estimated redemption values, and currency effects.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that it intended to maintain sufficient cash and revolver availability to fund operations and working-capital deficits for the next twelve months and expected to remain compliant with debt covenants based on current projections.
- No formal earnings or revenue guidance was provided in the filing.
- Potential put rights held by minority owners of subsidiaries could require approximately $40.2 million of future payments to acquire ownership interests, including approximately $36.4 million in cash and $3.8 million potentially payable in shares. Additional put obligations of approximately $64.6 million may arise upon certain owner terminations or deaths.
- Deferred acquisition consideration totaled $111.7 million at September 30, 2011. Actual payments may differ materially from estimates because they depend on future operating results and contractual valuation formulas.
- The company identified client retention, client spending, economic conditions, acquisition integration, key-person retention, foreign currency movements, debt covenant compliance, and the ability to finance contingent obligations as principal risks.
- Third-quarter results included a $3.1 million foreign exchange expense, $10.8 million of net interest expense, $7.8 million of non-cash stock-based compensation, and $1.8 million of expense from changes in estimated acquisition consideration.
- Management stated that legal proceedings were not expected to have a material adverse effect, and no material changes to previously disclosed risk factors were reported.
- Disclosure controls and procedures were assessed as effective as of September 30, 2011.
Important Facts for Investors to Verify
- Verify the entity and period: the supplied filing identifies the registrant as MDC Partners Inc., while the request identifies Stagwell Inc.
- Reconcile the sharp increase in revenue with the deterioration in third-quarter operating margin and the increase in direct costs.
- Assess liquidity given only $7.3 million of cash, negative working capital, $395.0 million of debt, and negative operating cash flow.
- Review the 11% Senior Notes, revolving-credit covenants, available borrowing capacity, and refinancing requirements.
- Evaluate the timing and potential cash impact of $111.7 million of deferred acquisition consideration and subsidiary put obligations.
- Review acquisition accounting, goodwill and intangible balances, noncontrolling interests, and the sensitivity of these estimates to future performance.
- Confirm the effect of discontinued operations and foreign exchange losses when comparing 2011 with 2010.