Business Context and Reporting Period
This Form 10-Q covers MDC Partners Inc. (Note: The input metadata referenced "Stagwell Inc," but the filing text explicitly identifies the registrant as MDC Partners Inc.) for the quarterly period ended September 30, 2009. The Company operates in the marketing communications industry through three reportable segments: Strategic Marketing Services (SMS), Customer Relationship Management (CRM), and Specialized Communication Services (SCS). The financial statements reflect the adoption of new accounting standards regarding noncontrolling interests and put options, which significantly impacted equity presentation.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Revenue | $134.6 million | $396.2 million |
| Operating Profit | $10.2 million | $21.2 million |
| Operating Margin | 7.6% | 5.3% |
| Net Income (Consolidated) | $2.2 million | $3.7 million |
| Net Income Attributable to MDC Partners | $0.04 million | $0.14 million |
| Diluted EPS (Attributable to MDC) | $0.00 | $0.01 |
| Cash and Cash Equivalents | $70.9 million | $70.9 million (Balance Sheet) |
| Operating Cash Flow (9 Months) | N/A | $43.9 million |
| Total Debt | $184.4 million | $184.4 million (Balance Sheet) |
| Working Capital | Deficit of $27.6 million | Deficit of $27.6 million (Balance Sheet) |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 5.3% year-over-year for the quarter and 9.9% for the nine-month period. This was driven primarily by a decrease in organic revenue ($6.3M for the quarter; $34.7M for nine months) and a strengthening US dollar impacting foreign operations ($1.2M for the quarter; $9.0M for nine months).
- Segment Performance:
- SMS: Revenue increased 6.2% (quarter) and 0.5% (nine months) due to organic growth. Operating profit increased significantly (50.5% for the quarter) due to cost management.
- CRM: Revenue decreased 19.6% (quarter) and 17.7% (nine months) as clients reduced outsourcing needs.
- SCS: Revenue decreased 21.6% (quarter) and 29.7% (nine months) due to reduced client project spending.
- Net Income Volatility: While consolidated net income was positive, net income attributable to MDC Partners was minimal ($0.04M for the quarter) compared to $3.25M in the prior year quarter. This was largely due to a $2.2M increase in net income attributable to noncontrolling interests and a $3.1M foreign exchange loss in the quarter.
- Discontinued Operations: The Company recorded no discontinued operations charges in Q3 2009, compared to a $0.8M loss in Q3 2008. The nine-month 2009 loss was $0.4M, significantly lower than the $6.7M loss in the prior year period.
Outlook, Risks, and Subsequent Events
- Debt Refinancing (Subsequent Event): On October 23, 2009, the Company issued $225 million of 11% Senior Notes due 2016. Proceeds were used to repay the existing Fortress Financing Agreement and redeem outstanding 8% convertible debentures.
- New Credit Facility: Concurrent with the note issuance, the Company entered into a new $75 million five-year senior secured revolving credit facility with Wells Fargo Foothill, LLC.
- Acquisitions: On October 5, 2009, the Company acquired the remaining 6% equity interest in CPB, achieving 100% ownership.
- Liquidity Risks: The Company reported a working capital deficit of $27.6 million. Management intends to fund this through cash flow and the new credit facility. There are significant contingent obligations related to "put options" held by noncontrolling shareholders, estimated at $39.7 million if fully exercised.
- Foreign Exchange: The Company remains exposed to currency fluctuations, particularly between the US and Canadian dollars, which impacted results in the current period.
Investor Verification Checklist
- Debt Structure: Verify the terms and covenants of the new $225M Senior Notes and $75M credit facility issued in October 2009.
- Put Option Obligations: Assess the likelihood and timing of the $39.7 million in potential put option exercises by noncontrolling shareholders.
- Organic Growth: Analyze the sustainability of the SMS segment's organic growth amidst declines in CRM and SCS segments.
- Noncontrolling Interests: Review the impact of noncontrolling interests on net income attributable to common shareholders, which significantly reduced reported earnings.
- Working Capital: Monitor the $27.6 million working capital deficit and the Company's ability to manage cash flow without further dilution or debt.