Add
MDCA to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| MDCA > SEC Filings for MDCA > Form 10-Q on 1-May-2009 | All Recent SEC Filings |
1-May-2009
Quarterly Report
Unless otherwise indicated, references to the "Company" mean MDC Partners Inc. and its subsidiaries, and references to a fiscal year means the Company's year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2009 means the period beginning January 1, 2009, and ending December 31, 2009).
The Company reports its financial results in accordance with generally accepted accounting principles ("GAAP") of the United States of America ("US GAAP"). However, the Company has included certain non-US GAAP financial measures and ratios, which it believes, provide useful information to both management and readers of this report in measuring the financial performance and financial condition of the Company. One such term is "organic revenue" which means growth in revenues from sources other than acquisitions or foreign exchange impacts. These measures do not have a standardized meaning prescribed by US GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other titled measures determined in accordance with US GAAP.
The following discussion focuses on the operating performance of the Company for the three months ended March 31, 2009 and 2008, and the financial condition of the Company as of March 31, 2009. This analysis should be read in conjunction with the interim condensed consolidated financial statements presented in this interim report and the annual audited consolidated financial statements and Management's Discussion and Analysis presented in the Annual Report to Shareholders for the year ended December 31, 2008 as reported on Form 10-K. All amounts are in U.S. dollars unless otherwise stated.
The Company's objective is to create shareholder value by building market-leading subsidiaries and affiliates that deliver innovative, value-added marketing communications and strategic consulting services to their clients. Management believes that shareholder value is maximized with an operating philosophy of "Perpetual Partnership" with proven committed industry leaders in marketing communications.
We manage the business by monitoring several financial and non-financial performance indicators. The key indicators that we review focus on the areas of revenues and operating expenses and capital expenditures. Revenue growth is analyzed by reviewing the components and mix of the growth, including: growth by major geographic location; existing growth by major reportable segment (organic); growth from currency changes; and growth from acquisitions.
We conduct our businesses through the Marketing Communications Group. Within the
Marketing Communications Group, there are three reportable operating segments:
Strategic Marketing Services ("SMS"), Customer Relationship Management ("CRM")
and Specialized Communication Services ("SCS"). In addition, MDC has a
"Corporate Group" which provides certain administrative, accounting, financial
and legal functions. Through our operating "partners", MDC provides advertising,
consulting, customer relationship management, and specialized communication
services to clients throughout the United States, Canada, Europe, Jamaica and
the Philippines.
The operating companies earn revenue from agency arrangements in the form of retainer fees or commissions; from short-term project arrangements in the form of fixed fees or per diem fees for services; and from incentives or bonuses. Additional information about revenue recognition appears in Note 2 of the Notes to the Condensed Consolidated Financial Statements.
We measure operating expenses in two distinct cost categories: cost of services sold, and office and general expenses. Cost of services sold is primarily comprised of employee compensation related costs and direct costs related primarily to providing services. Office and general expenses are primarily comprised of rent and occupancy costs and administrative service costs including related employee compensation costs. Also included in operating expenses is depreciation and amortization.
Because we are a service business, we monitor these costs on a percentage of revenue basis. The cost of services sold tends to fluctuate in conjunction with changes in revenues, whereas office and general expenses and depreciation and amortization, which are not directly related to servicing clients, tend to decrease as a percentage of revenue as revenues increase because a significant portion of these expenses are relatively fixed in nature.
We measure capital expenses as either maintenance or investment related. Maintenance capital expenses are primarily composed of general upkeep of our office facilities and equipment that are required to continue to operate our businesses. Investment capital expenses include expansion costs, the build out of new capabilities, technology or call centers, or other growth initiatives not related to the day to day upkeep of the existing operations. Growth capital expenses are measured and approved based on the expected return of the invested capital.
Certain Factors Affecting Our Business
Acquisitions and Dispositions. Our strategy includes acquiring ownership stakes in well-managed businesses with strong reputations in the industry. We engaged in a number of acquisition and disposal transactions during the 2008 to 2009 period, which affected revenues, expenses, operating income and net income. Additional information regarding material acquisitions is provided in Note 4 "Acquisitions" and information on dispositions is provided in Note 6 "Discontinued Operations" in the notes to the Condensed Consolidated Financial Statements.
Foreign Exchange Fluctuations. Our financial results and competitive position are affected by fluctuations in the exchange rate between the US dollar and non-US dollars, primarily the Canadian dollar. See also "Quantitative and Qualitative Disclosures About Market Risk - Foreign Exchange."
Seasonality. Historically, with some exceptions, we generate the highest quarterly revenues during the fourth quarter in each year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail related consumer marketing occur.
Results of Operations:
For the Three Months Ended March 31, 2009
(thousands of United States dollars)
Strategic Customer Specialized
Marketing Relationship Communication
Services Management Services Corporate Total
Revenue $ 78,870 $ 29,132 $ 18,736 $ - $ 126,738
Cost of services sold 49,019 21,970 14,890 - 85,879
Office and general expenses 18,280 5,485 3,475 3,912 31,152
Depreciation and amortization 5,240 1,839 420 94 7,593
Operating Profit/(Loss) 6,331 (162)_ (49 ) (4,006 ) 2,114
Other Income (Expense):
Other income, net 2,629
Interest expense, net (3,558 )
Income from continuing
operations before income taxes,
equity in affiliates 1,185
Income tax expense 615
Income from continuing
operations before equity in
affiliates 570
Equity in earnings of
non-consolidated affiliates 93
Income from continuing
operations 663
Loss from discontinued
operations attributable to MDC
Partners Inc., net of taxes (252 )
Net income 411
Net income attributable to the
noncontrolling interests (365 ) - (17 ) - (382 )
Net income attributable to MDC
Partners Inc. $ 29
Non cash stock based
compensation. $ 433 $ 29 $ 161 $ 1,274 $ 1,897
|
Results of Operations:
For the Three Months Ended March 31, 2008
(thousands of United States dollars)
Restated for Discontinued Operations
Strategic Customer Specialized
Marketing Relationship Communication
Services Management Services Corporate Total
Revenue $ 76,978 $ 34,663 $ 29,261 $ - $ 140,902
Cost of services sold 49,521 25,690 20,308 - 95,519
Office and general expenses 18,924 5,921 5,227 4,383 34,455
Depreciation and amortization 7,281 1,825 602 68 9,776
Operating Profit/(Loss) 1,252 1,227 3,124 (4,451 ) 1,152
Other Income (Expense):
Other income, net 3,627
Interest expense, net (3,444 )
Income from continuing
operations before income taxes,
equity in affiliates 1,335
Income tax recovery 292
Income from continuing
operations before equity in
affiliates 1,627
Equity loss of non-consolidated
affiliates 140
Income from continuing
operations 1,767
Loss from discontinued
operations attributable to MDC
Partners Inc., net of taxes (3,036 )
Net loss (1,269 )
Net income attributable to the
noncontrolling
interests (687 ) (57 ) (1,381 ) - (2,125 )
Net loss attributable to MDC
Partners Inc. $ (3,394 )
Non cash stock based
compensation $ 446 $ 32 $ 252 $ 1,268 $ 1,998
|
Three Months Ended March 31, 2009, Compared to Three Months Ended March 31, 2008
Revenue was $126.7 million for the quarter ended March 31, 2009, representing a decrease of $14.2 million, or 10%, compared to revenue of $140.9 million for the quarter ended March 31, 2008. This revenue decrease relates primarily to a decrease in organic revenues of $9.5 million. In addition, a strengthening of the US Dollar, primarily versus the Canadian dollar during the quarter ended March 31, 2009, resulted in decreased revenues of $4.7 million.
Operating profit for 2009 was $2.1 million, compared to $1.2 million for 2008. The increase in operating profit was primarily the result of an increase in operating profit of $5.1 million in the Strategic Marketing Services ("SMS") segment, partially offset by decreases in operating profits of $1.4 million and $3.2 million within the Customer Relationship Management ("CRM") and Specialized Communication Services ("SCS") segments, respectively. In addition, Corporate operating expenses decreased by $0.4 million.
The income from continuing operations attributable to MDC Partners Inc. for the first quarter of 2009 was $0.3 million, compared to a loss of $0.4 million in 2008. This increase in income of $0.7 million was primarily the result of an increase in operating profits of $1.0 million and a decrease in net income attributable to noncontrolling interests of $1.7 million. These amounts were offset by an increase in income tax expense of $0.9 million and a decrease in unrealized gains on foreign currency transactions of $1.0 million.
Marketing Communications Group
Revenues in 2009 attributable to the Marketing Communications Group, which
consists of three reportable segments - Strategic Marketing Services ("SMS"),
Customer Relationship Management ("CRM"), and Specialized Communication Services
("SCS"), were $126.7 million compared to $140.9 million in 2008, representing a
year-over-year decrease of 10%.
The components of decrease revenue in 2009 are shown in the following table:
Revenue
$000's %
Quarter ended March 31, 2008 $ 140,902 -
Organic (9,455 ) 6.7 %
Foreign exchange impact (4,709 ) 3.3 %
Quarter ended March 31, 2009 $ 126,738 10.0 %
|
The geographic mix in revenues was consistent between 2009 and 2008 and is demonstrated in the following table:
2009 2008
US 85 % 82 %
Canada 14 % 16 %
UK and other 1 % 2 %
|
The operating profit of the Marketing Communications Group increased by approximately 9.2% to $6.1 million from $5.6 million. Operating margins increased by 0.8% and were 4.8% for 2009 compared to 4.0% for 2008. The increase in operating profit and operating margin is primarily attributable to a decrease in depreciation and amortization of $2.2 million primarily related to the SMS segment. In addition, direct costs (excluding staff costs) decreased as a percentage of revenues from 27.6% of revenue in 2008 to 25.6% of revenue in 2009 due to a decrease in reimbursed client related direct costs. However, total staff costs as a percentage of revenues increased from 48.2% in 2008 to 51.1% in 2009. General and administrative costs increased as a percentage of revenue from 21.3% in 2008 to 21.5% in 2009.
Strategic Marketing Services ("SMS")
Revenues attributable to SMS in the first quarter of 2009 were $78.9 million, compared to $77.0 million in 2008. The year-over-year increase of $1.9 million or 2.5% was attributable primarily to organic growth of $3.5 million as a result of net new business wins. A strengthening of the US dollar versus the Canadian dollar in 2009 compared to 2008 resulted in a $1.6 million decrease in revenues from the division's Canadian-based operations.
The operating profit of SMS increased by approximately 406% to $6.3 million in 2009 from $1.3 million in 2008, while operating margins increased to 8.0% in 2009 from 1.6% in 2008. Operating profit increased due primarily to decreased depreciation and amortization of $2.0 million, which relates to the amortization of certain intangibles resulting from the CPB and KBP step-up acquisitions during the fourth quarter of 2007. In addition, direct costs (excluding staff costs) as a percentage of revenues decreased from 12.1% of revenue in 2008, to 11.0% of revenue in 2009. Total staff costs as a percentage of revenue decreased from 61.0% in 2008 to 60.4% in 2009, due in part to the managing of staff costs more closely due to the current economic conditions. General and administrative costs decreased as a percentage of revenue from 24.6% in 2008 to 23.2% in 2009, as a result of relatively fixed costs while revenue increased.
Customer Relationship Management ("CRM")
Revenues reported by the CRM segment in 2009 were $29.1 million, a decrease of $5.5 million or 16% compared to the $34.7 million reported for 2008. This decrease was a result of reduced revenues from existing clients in part as a result of clients reducing their outsourcing needs and the conversion of a customer care center to a new program which began in the fourth quarter of 2008.
Operating profit earned by CRM decreased to a loss of $0.2 million in 2009 from income of $1.2 million for 2008. Operating margins were (0.6)% for 2009 as compared to 3.5% in 2008. The decrease in margins is primarily due to an increase in cost of services sold from 74.1% in 2008 to 75.4% in 2009, and an increase in general and administrative costs as a percentage of revenue from 17.1% in 2008 to 18.8% in 2009. These increases relate primarily to relatively fixed costs against a decrease in revenue.
Specialized Communication Services ("SCS")
SCS generated revenues of $18.7 million for 2009, a decrease of $10.5 million, or 36% lower than revenues of $29.3 million in 2008. The year-over-year decrease was attributable primarily to reduced revenue of $7.4 million as a result of the reduction and delays of client project spending. A strengthening of the US dollar versus the Canadian dollar and British pound in 2009 compared to 2008 resulted in a $3.1 million decrease in revenues from the division's Canadian and UK-based operations.
The operating profit of SCS decreased by $3.2 million to a loss of $0.1 million in 2009, from an operating profit of $3.1 million in 2008, with operating margins of (0.3)% in 2009 compared to 10.7% in 2008. The decrease in operating margin in 2009 was due primarily to an increase in total staff costs as a percentage of revenue from 47.4% in 2008, to 52.5% in 2009, and an increase in general and administrative costs as a percentage of revenue from 17.9% in 2008 to 18.5% in 2009. Total staff costs decreased from $13.9 million in 2008 to $9.8 million in 2009. However, revenue decreases outpaced the reduction of staff costs and general and administrative costs are relatively fixed costs.
Corporate
Operating costs related to the Company's Corporate operations totaled $4.0 million in 2009 compared to $4.5 million in 2008. This decrease of $0.5 million is primarily due to a reduction in compensation and related costs.
Other Income, Net
Other income decreased to $2.6 million in 2009 compared to $3.6 million in 2008. The 2009 income is primarily comprised of a foreign exchange gain of $2.6 million for 2009, compared to a gain of $3.6 million recorded in 2008. Specifically, this unrealized gain was due primarily to the strengthening in the US dollar during 2009 and 2008 compared to the Canadian dollar primarily on its US dollar denominated intercompany balances with its Canadian subsidiaries compared to December 31, 2008. At March 31, 2009, the exchange rate was 1.26 Canadian dollars to one US dollar, compared to 1.22 at the end of 2008.
Net Interest Expense
Net interest expense for 2009 was $3.5 million, an increase of $0.1 million over the $3.4 million net interest expense incurred during 2008. Interest expense decreased $0.1 million in 2009 due to higher average outstanding debt in 2009, offset by lower interest rates. Interest income was $0.4 million for 2008 and $0.2 million in 2009.
Income Taxes
Income tax expense was $0.6 million in 2009 compared to an income tax recovery of $0.3 million for 2008. The Company's effective tax rate was substantially higher than the statutory rate in 2009 due to noncontrolling interest charges, offset by non-deductible stock based compensation. The Company's effective tax rate was substantially lower than the statutory rate in 2008 due to noncontrolling interest charges and losses in certain tax jurisdictions where the benefits are expected to be realized, offset by non-deductible stock based compensation.
The Company's US operating units are generally structured as limited liability companies, which are treated as partnerships for tax purposes. The Company is only taxed on its share of profits, while noncontrolling holders are responsible for taxes on their share of the profits.
Equity in Affiliates
Equity in affiliates represents the income attributable to equity-accounted affiliate operations. For 2009 and 2008, income of $0.1 million was recorded.
Noncontrolling Interests
Net income attributable to the noncontrolling interests was $0.4 million for 2009, down $1.7 million from the $2.1 million of noncontrolling interest expense incurred during 2008. Such decrease was primarily due to the Company's step-up in ownership of Accent and decreased profitability in the subsidiaries within the SMS and SCS operating segments who are not 100% owned.
Discontinued Operations Attributable to MDC Partners Inc.
The loss, net of an income tax benefit of $0.3 million from discontinued operations in 2009, resulted from the operating results of Clifford/Bratskeir Public Relations LLC ("Bratskeir"), which was discontinued in 2008 with the completion of the sale of Bratskeir's remaining assets in April 2009.
The loss net of taxes from discontinued operations for 2008 was $3.0 million and is comprised of the operating results of Mobium, a division of Colle & McVoy, LLC ("Colle"), Bratskeir, The Ito Partnership ("Ito") and Margeotes Fertitta Powell, LLC ("MFP"). MFP was previously discontinued in 2007; the other entities were discontinued in 2008.
Effective December 3, 2008, Colle completed the sale of certain assets of its Mobium division. The operating loss was $0.3 million, net of income tax benefits.
The operating loss of Bratskeir for 2008 was $0.7 million net of income tax benefits.
Effective June 30, 2008, the Company completed the sale of its equity interests in Ito. The operating loss of Ito for 2008 was nominal.
In 2007, the Company ceased operation of MFP. In 2008, the Company recorded a loss of $2.0 million, net of income tax benefits resulting primarily from the accrual of lease abandonment costs and severance at MFP.
As a result, the Company has classified these operations as discontinued.
Net Income (loss) attributable to MDC Partners Inc.
As a result of the foregoing, net income attributable to MDC Partners Inc. recorded for 2009 was nominal or income of $0.00 per diluted share, compared to a net loss attributable to MDC Partners Inc. of $3.4 million or $0.13 per diluted share reported for 2008.
Liquidity and Capital Resources:
Liquidity
The following table provides summary information about the Company's liquidity
position:
As of and for the
three months As of and for the As of and for the
ended three months ended year ended
March 31, 2009 March 31, 2008 December 31, 2008
(000's) (000's) (000's)
Cash and cash equivalents $ 46,247 $ 5,749 $ 41,331
Working capital (deficit) $ 4,703 $ (12,175 ) $ (12,091 )
Cash from operations $ 560 $ (10,450 ) $ 57,446
Cash from investing $ (4,121 ) $ (9,933 ) $ (50,186 )
Cash from financing $ 8,924 $ 15,586 $ (23,510 )
Long-term debt to total equity ratio 2.10 1.44 1.42
Fixed charge coverage ratio 1.22 1.25 2.01
|
As of March 31, 2009, and December 31, 2008, $6.3 million and $8.4 million, respectively, of the consolidated cash position was held by subsidiaries, which, although available for the subsidiaries' use, does not represent cash that is distributable as earnings to MDC Partners for use to reduce its indebtedness. It is the Company's intent through its cash management system to reduce outstanding borrowings under the Financing Agreement.
Due to the adoption of a new accounting pronouncement, in January 2009, the Company was required to record its outstanding Put Options on the Company's balance sheet. The result of recording these Put Options reduced total equity by $37.8 million.
Working Capital
At March 31, 2009, the Company had working capital of $4.7 million compared to a deficit of $12.1 million at December 31, 2008. The increase in working capital is primarily due to seasonal shifts in the amounts collected from clients, and paid to suppliers, primarily media outlets and improvements made in the Company's billing and collecting practices. The Company includes amounts due to noncontrolling interest holders, for their share of profits, in accrued and other liabilities. At March 31, 2009, $2.3 million remains outstanding to be distributed to noncontrolling interest holders over the next twelve months.
The Company intends to maintain sufficient availability of funds under its Financing Agreement at any particular time to adequately fund such working capital deficits should there be a need to do so from time to time.
Operating Activities
Cash flow provided by continuing operations, including changes in non-cash working capital, for the three months ended March 31, 2009 was $0.9 million. This was attributable primarily to income from continuing operations attributable to MDC Partners of $0.3 million, depreciation and amortization and non-cash stock compensation of $9.6 million, and an increase of advance billings to clients of $6.6 million. This cash provided by continuing operations was . . .
|
|