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MDCA > SEC Filings for MDCA > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for MDC PARTNERS INC


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 2013 means the period beginning January 1, 2013, and ending December 31, 2013).

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, 2013 and 2012, and the financial condition of the Company as of March 31, 2013. 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 for the year ended December 31, 2012 as reported on Form 10-K. All amounts are in U.S. dollars unless otherwise stated.

Executive Summary

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.

MDC manages 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, which results in earnings before interest, income taxes and depreciation and amortization ("EBITDA") 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.

MDC conducts its businesses through the Marketing Communications Group. Within the Marketing Communications Group, there are two reportable operating segments:
Strategic Marketing Services and Performance Marking Services. In addition, MDC has a "Corporate Group" which provides certain administrative, accounting, financial, human resources and legal functions. Through our operating "partners", MDC provides advertising, consulting, customer relationship management, and specialized communication services to clients throughout the world.

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 Unaudited Condensed Consolidated Financial Statements.

MDC measures 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. 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 also monitor the resulting EBITDA generated to assist in determining where investment needs to be made.

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

Overall Factors Affecting our Business and Results of Operations. The most significant factors include national, regional and local economic conditions, our clients' profitability, mergers and acquisitions of our clients, changes in top management of our clients and our ability to retain and attract key employees. New business wins and client losses occur for of a variety of factors. The two most significant factors are; clients' desire to change marketing communication firms, and the creative product our firms are offering. A client may choose to change marketing communication firms for any number of reasons, such as a change in top management and the new management wants to go retain an agency that it may have previously worked with. In addition, if the client is merged or acquired by another company, the marketing communication firm is often changed. Further, global clients are trending to consolidate the use of numerous marketing communication firms to just one or two. Another factor in a client changing firms is the agency's campaign or work product is not providing results and they feel a change is in order to generate additional revenues.

Clients will generally reduce or increase their spending or outsourcing needs based on their current business trends and profitability. These types of changes impact the Performance Marketing Services Group more than the Strategic Marketing Services Group due to the Performance Marketing Services Group having clients who require project-based work as opposed to the Strategic Marketing Services Group who primarily have retainer-based relationships.

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 2009 to 2013 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 Unaudited 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:

Three Months Ended March 31, 2013

(thousands of United States dollars)



                                         Strategic       Performance
                                         Marketing        Marketing
                                         Services         Services         Corporate        Total

Revenue                                 $   183,844     $      83,170     $         -     $  267,014

Cost of services sold                       119,046            59,961               -        179,007

Office and general expenses                  36,689            21,171          10,145         68,005

Depreciation and amortization                 5,834             3,423             365          9,622

Operating Profit/(Loss)                      22,275            (1,385 )       (10,510 )       10,380

Other Income (Expense):
Other income, net                                                                              2,692
Interest expense, net                                                                        (67,980 )

Loss from continuing operations
before income taxes, equity in
affiliates                                                                                   (54,908 )
Income tax benefit                                                                           (14,250 )

Loss from continuing operations
before equity in affiliates                                                                  (40,658 )
Equity in earnings of
non-consolidated affiliates                                                                       41

Loss from continuing operations                                                              (40,617 )
Loss from discontinued operations
attributable to MDC Partners Inc.,
net of taxes                                                                                  (1,557 )
Net loss                                                                                     (42,174 )

Net income attributable to the
noncontrolling interests                       (762 )            (222 )             -           (984 )
Net loss attributable to MDC Partners
Inc.                                                                                      $  (43,158 )

Non cash stock based compensation       $     1,141     $         829     $     2,531     $    4,501

Three Months Ended March 31, 2012

(thousands of United States dollars)



                                         Strategic       Performance
                                         Marketing        Marketing
                                         Services         Services         Corporate        Total

Revenue                                 $   160,096     $      75,056     $         -     $  235,152

Cost of services sold                       119,553            56,493               -        176,046

Office and general expenses                  34,640            17,295           7,933         59,868

Depreciation and amortization                 5,097             4,543             348          9,988

Operating Profit (Loss)                         806            (3,275 )        (8,281 )      (10,750 )

Other Income (Expense):
Other expense, net                                                                            (1,023 )
Interest expense, net                                                                        (10,928 )

Loss from continuing operations
before income taxes, equity in
affiliates                                                                                   (22,701 )
Income tax expense                                                                             1,263

Loss from continuing operations
before equity in affiliates                                                                  (23,964 )
Equity in earnings of
non-consolidated affiliates                                                                      272

Loss from continuing operations                                                              (23,692 )

Loss from discontinued operations
attributable to MDC Partners Inc. net
of taxes                                                                                      (1,092 )

Net loss                                                                                     (24,784 )

Net income attributable to the
noncontrolling interests                     (1,100 )            (397 )             -         (1,497 )
Net loss attributable to MDC Partners
Inc.                                                                                      $  (26,281 )

Non cash stock based compensation       $     1,866     $       1,691     $     2,327     $    5,884

Three Months Ended March 31, 2013, Compared to Three Months Ended March 31, 2012

Revenue was $267.0 million for the quarter ended March 31, 2013, representing an increase of $31.9 million, or 13.6%, compared to revenue of $235.2 million for the quarter ended March 31, 2012. This revenue increase related primarily to acquisition growth of $8.8 million and organic growth of $23.7 million. In addition, a strengthening of the US Dollar, primarily versus the Canadian dollar during the quarter ended March 31, 2013, resulted in decreased revenues of $0.6 million.

The operating profit for the quarter ended March 31, 2013 was $10.4 million compared to an operating loss of $10.8 million for the quarter ended March 31, 2012. The increase in operating profit was primarily the result of an increase in operating profit of $21.5 million in the Strategic Marketing Services segment, a decrease in the loss of $1.9 million within the Performance Marketing Services segment, offset by an increase in corporate operating expenses of $2.2 million.

The loss from continuing operations attributable to MDC Partners Inc. for the first quarter of 2012 was $25.2 million, compared to a loss of $41.6 million for the first quarter ended March 31, 2013. This increase in loss of $16.4 million was primarily the result of an increase in operating profits of $21.1 million, an increase in other income (expense) net of $3.7 million, a decrease in net income attributable to noncontrolling interests of $0.5 million, a decrease in income tax expense of $15.5 million, offset by an increase in interest expense, net of $57.0 million.

Marketing Communications Group

Revenues in the first quarter of 2013 attributable to the Marketing Communications Group, which consists of two reportable segments - Strategic Marketing Services and Performance Marketing Services, were $267.0 million compared to $235.2 million in the first quarter of 2012, representing a year-over-year increase of 13.6%.

The components of the increase in revenue in 2013 are shown in the following table:

                                      Revenue
                               $   000's        %
Quarter ended March 31, 2012   $  235,152          -
Organic                            23,654       10.1 %
Acquisitions                        8,764        3.7 %
Foreign exchange impact              (556 )     (0.2 )%
Quarter ended March 31, 2013   $  267,014       13.6 %

The geographic mix in revenues was consistent between the first quarter of 2013 and 2012 and is demonstrated in the following table:

         2013      2012
US          83 %      80 %
Canada      12 %      15 %
Other        5 %       5 %

The operating profit of the Marketing Communications Group increased by $23.4 million to $20.9 million from a loss of $2.5 million. Operating margins increased by 8.9% and were 7.8% for 2013, compared to a loss of 1.1% for 2012. The increase in operating profit and operating margin was primarily due to increases in revenue and a decrease in direct costs, and depreciation and amortization, offset by increases in total staff costs and office and general expenses. Direct costs (excluding staff costs) decreased as a percentage of revenues from 21.9% in 2012, to 13.4% in 2013. Total staff costs were consistent as a percentage of revenue at 61.1% in 2012 and 2013. Direct costs decreased as there were fewer pass-through costs incurred on the clients' behalf during the first quarter of 2013 where the company was acting as principal versus agent for certain client contracts. Office and general expenses decreased as a percentage of revenue from 22.1% in 2012, to 21.7% in 2013. This decrease was primarily due to the increase in revenue. Depreciation and amortization as a percentage of revenue decreased from 4.1% in 2012 to 3.5% in 2013.

Strategic Marketing Services

Revenues attributable to Strategic Marketing Services in the first quarter of 2013 were $183.8 million, compared to $160.1 million in the first quarter of 2012. The year-over-year increase of $23.7 million or 14.8% was attributable primarily to organic growth of $18.7 million as a result of net new business wins, and acquisition growth of $5.2 million. A strengthening of the US dollar versus the Canadian dollar in 2013 compared to 2012 resulted in a $0.2 million decrease in revenues from the division's Canadian-based operations.

The operating profit of Strategic Marketing Services increased by $21.5 million from $0.8 million in the first quarter of 2012 to $22.3 million in the first quarter of 2013. Operating margins increased from 0.5% in the first quarter of 2012 to 12.1% in the first quarter of 2013. The increase in operating profits and operating margins were primarily due to increases in revenues and decreases in direct costs and office and general costs offset by an increase in total staff costs. Direct costs (excluding staff labor) decreased as a percentage of revenue from 22.1% in the first quarter of 2012 to 9.1% in the first quarter of 2013. Direct costs decreased as there were fewer pass-through costs incurred on the clients' behalf during the first quarter of 2013 where the company was acting as principal versus agent for certain client contracts. Total staff costs increased as a percentage of revenue from 59.7% in the first quarter of 2012 to 61.4% in the first quarter of 2013. Total staff costs as a percentage of revenue are consistent in 2013 with the 2012 full year run rate. Office and general expenses decreased as a percentage of revenue from 21.6% in the first quarter of 2012 to 20.0% in the first quarter of 2013. The decrease is due to the increased revenue on relatively fixed costs. Depreciation and amortization as a percentage of revenue was consistent at 3.2%.

Performance Marketing Services

The Performance Marketing Services segment generated revenues of $83.2 million for the first quarter of 2013, an increase of $8.1 million, or 10.8% higher than revenues of $75.1 million in the first quarter of 2012. The year over year increase was attributed primarily to growth from acquisitions of $3.6 million, and organic revenue growth of $4.9 million, due to net new business wins. In addition, a strengthening of the US dollar verses the Canadian dollar in 2013 compared to 2012 resulted in a $0.4 million decrease in revenues from the division's Canadian-based operations.

The operating profit of Performance Marketing Services increased by $1.9 million, from a loss of $3.3 million in the first quarter of 2012 to a loss of $1.4 million in the first quarter of 2013. Operating margins increased from a loss of 4.4% in 2012, to a loss of 1.7% in 2013. The increase in operating profits and operating margins were primarily due to decreases in total staff costs and depreciation and amortization offset by increases in direct costs (excluding staff labor) and office and general costs. Total staff costs decreased from 64.3% in 2012 to 60.5% in 2013 primarily from the run rate reductions of staff reduced during 2012. Direct costs increased from 21.6% in 2012 to 22.8% in 2013 due to increased pass-thru costs incurred on the clients' behalf during the first quarter of 2013 where the agency was acting as principal versus agent for certain client contracts. Office and general costs increased from 23.0% in 2012 to 25.5% in 2013 primarily due to deferred acquisition consideration adjustments which increase as a percentage of revenue from 0.1% in 2012 to 2.2% in 2013. Depreciation and amortization decreased from 6.1% in 2012 to 4.1% in 2013 due to increased revenue on relatively fixed costs.

Corporate

Operating costs related to the Company's Corporate operations totaled $10.5 million in the first quarter of 2013 compared to $8.3 million in the first quarter of 2012. The increase was primarily related to increased compensation and related expenses of $1.0 million. In addition, advertising and promotion costs and professional fees resulted in the remaining increase.

Other Income, Net

Other income (expense) increased to an income of $2.7 million in the first quarter of 2013 compared to an expense of $1.0 million in the first quarter of 2012. The increase was primarily related to a distribution received in excess of the assets carrying value of $3.1 million and a decrease in the unrealized foreign exchange loss of $1.0 million. Specifically, this unrealized loss was due primarily to the fluctuation in the US dollar during 2013 and 2012 compared to the Canadian dollar primarily on the Company's US dollar denominated intercompany balances with its Canadian subsidiaries.

Net Interest Expense

Net interest expense for the first quarter of 2013 was $68.0 million, an increase of $57.1 million over the $10.9 million of net interest expense incurred during the first quarter of 2012. The increase in interest expense in 2013 was due to the loss paid on the redemption of the Company's 11% Notes of $55.6 million and higher average outstanding debt in 2013.

Income Taxes

Income tax expense was a benefit of $14.3 million in the first quarter of 2013 compared to an expense of $1.3 million for the first quarter of 2012. The Company's effective tax rate in 2013 was consistent with the Canadian effective rate. The Company's effective tax rate in 2012 was substantially higher due to noncontrolling interest charges, offset by non-deductible stock based compensation. In addition, the effective tax rate was higher due to losses in certain tax jurisdictions where the benefits are not expected to be realized.

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 the first quarter of 2013, equity in affiliates was nominal income compared to income of $0.3 million in 2012.

Noncontrolling Interests

Net income attributable to the noncontrolling interests was $1.0 million for the first quarter of 2013, a decrease of $0.5 million from the $1.5 million of noncontrolling interest expense incurred during the first quarter of 2012, primarily due to the Company's increase in ownership during 2012 of entities not previously wholly owned.

Discontinued Operations Attributable to MDC Partners Inc.

The loss from discontinued operations was $1.6 million for the first quarter of 2013 and $1.1 million for the first quarter of 2012.

Net Loss attributable to MDC Partners Inc.

As a result of the foregoing, the net loss attributable to MDC Partners Inc. recorded for the first quarter of 2013 was $43.2 million or a loss of $1.38 per diluted share, compared to a net loss attributable to MDC Partners Inc. of $26.3 million or a loss of $0.88 per diluted share reported for the first quarter of 2012.

Liquidity and Capital Resources:



Liquidity



The following table provides summary information about the Company's liquidity
position:



                                                   As of and for the       As of and for the       As of and for the
                                                  three months ended      three months ended          year ended
                                                    March 31, 2013          March 31, 2012         December 31, 2012
                                                        (000's)                 (000's)                 (000's)
Cash and cash equivalents                         $            71,360     $            35,957     $            60,330
Working capital (deficit)                         $          (165,908 )   $          (201,391 )   $          (226,682 )
Cash from (used in) operations                    $           (32,958 )   $            12,519     $            76,304
Cash from (used in) investing                     $            (1,021 )   $            33,133     $             7,811
Cash from financing                               $            45,068     $           (17,718 )   $           (31,858 )
Long-term debt to total equity ratio                            (4.19 )                (57.05 )                 (5.09 )
Fixed charge coverage ratio                                       N/A                     N/A                     N/A
Fixed charge deficiency                           $            51,812     $            22,701     $            63,791

As of March 31, 2013 and December 31, 2012, $0.6 million and $2.5 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 any outstanding borrowings under the Credit Agreement by using available cash.

The Company intends to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months.

Working Capital

At March 31, 2013, the Company had a working capital deficit of $165.9 million compared to a deficit of $226.7 million at December 31, 2012. The increase in working capital was 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, 2013, $3.4 million remained outstanding to be distributed to noncontrolling interest holders over the next twelve months.

The Company intends to maintain sufficient cash or availability of funds under the Credit Agreement at any particular time to adequately fund such working capital deficits should there be a need to do so from time to time.

Cash Flows

Operating Activities

Cash flow used in continuing operations, including changes in non-cash working capital, for the three months ended March 31, 2013 was $32.0 million. This was attributable primarily to a net loss from continuing operations of $40.6 million, an increase in accounts receivable of $41.4 million, a decrease in deferred income tax of $14.6 million, a decrease in accounts payables, accruals, and other liabilities of $13.4 million, an increase in prepaid expenses and other current assets of $5.9 million, distributions in excess of carrying value of $3.1 million, and an increase in expenditures billable to clients of $0.3 million. This use of cash was offset by the loss on the redemption of notes of $50.4 million, depreciation and amortization of intangibles and non-cash stock compensation of $14.1 million, an increase in advanced billings of $13.1 million, amortization of deferred financing costs and debt discount of $5.7 million, adjustments to deferred acquisition consideration for $2.3 million, a decrease in other non-current assets and liabilities of $1.2 million and foreign exchange of $0.4 million. Discontinued operations attributable to MDC Partners used cash of $1.0 million in the three months ended March 31, 2013.

Cash flow provided by continuing operations, including changes in non-cash working capital, for the three months ended March 31, 2012 was $13.3 million. . . .

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