STGW

SEC Filing Summary: MDC Partners Inc. (Form 10-Q)

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for MDC Partners Inc. for the period ended June 30, 2009. MDC Partners is a holding company that provides marketing communications and strategic consulting services through three reportable segments: Strategic Marketing Services (SMS), Customer Relationship Management (CRM), and Specialized Communication Services (SCS). The company operates primarily in the United States and Canada.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 14.1% ($22.0 million) for the quarter and 12.2% ($36.3 million) for the six months compared to 2008. This was driven primarily by a decrease in organic revenue ($18.9 million for the quarter) and a strengthening U.S. dollar against the Canadian dollar ($3.2 million impact for the quarter).
• Segment Performance:
  • SMS: Revenue declined 6.4% due to reduced client spending, but operating profit increased 23.6% to $10.8 million due to lower amortization costs.
  • CRM: Revenue fell 17.8% and operating profit dropped to $1.1 million due to clients reducing outsourcing needs.
  • SCS: Revenue dropped significantly by 30.9% to $22.1 million, with operating profit falling to $1.2 million.
• Profitability: Despite revenue declines, the company reported a net income of $0.1 million for the quarter, a significant improvement from a net loss of $4.5 million in the same period in 2008. This improvement was largely due to a reduction in net income attributable to noncontrolling interests and lower income tax expenses.
• Discontinued Operations: The company recorded a loss of $0.1 million from discontinued operations in Q2 2009, primarily related to the sale of remaining assets of Clifford/Bratskeir Public Relations LLC.

Guidance, Outlook, Risks, and Unusual Items

• Foreign Exchange: The company faces significant exposure to currency fluctuations, particularly between the U.S. and Canadian dollars. A 1-cent change in the exchange rate impacts financial statements by approximately $0.4 million. Q2 2009 included a $2.5 million unrealized foreign exchange loss.
• Debt and Covenants: Total debt stands at $184.8 million. The company is currently in compliance with its $185 million Financing Agreement covenants, including a Senior Leverage Ratio of 1.57 (limit 3.25) and a Fixed Charges Ratio of 3.40 (minimum 1.30).
• Put Options: Due to the adoption of new accounting standards (SFAS 160), the company recorded $34.2 million in "Redeemable Noncontrolling Interests" related to put options held by subsidiary owners. Management estimates that if all put options were exercised, the company could be required to pay approximately $30.4 million.
• Acquisitions: In July 2009 (subsequent event), the company acquired a majority stake in Crispin Porter & Bogusky Europe AB for $3.1 million, with additional contingent payments estimated at $6.1 million.
• Risks: Key risks include the economic downturn affecting client spending, the ability to finance contingent payment obligations (put options and earn-outs), and foreign currency volatility.

Investor Verification Checklist

• Put Option Liability: Verify the potential cash outflow of ~$30.4 million if subsidiary owners exercise put options and the company's liquidity plan to fund this.
• Organic Revenue Trends: Confirm the sustainability of the 12-14% organic revenue decline across all segments, particularly the sharp drop in the SCS segment.
• Debt Covenants: Monitor the Fixed Charges Ratio and Senior Leverage Ratio to ensure continued compliance with the Financing Agreement, especially given the working capital deficit.
• Noncontrolling Interests: Understand the impact of the reclassification of noncontrolling interests on reported equity and net income.
• Foreign Exchange Exposure: Assess the impact of continued U.S. dollar strength on future earnings, given the significant Canadian operations.