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MDCA > SEC Filings for MDCA > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for MDC PARTNERS INC

Form 10-Q for MDC PARTNERS INC


11-Aug-2014

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 2014 means the period beginning January 1, 2014, and ending December 31, 2014).

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


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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 June 30, 2014 and 2013 and the financial condition of the Company as of June 30, 2014. 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, 2013 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


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reasons, such as a change in top management and the new management wants to 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 2014 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.


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Results of Operations:
Three Months Ended June 30, 2014
(thousands of United States dollars)

                                      Strategic       Performance
                                      Marketing        Marketing
                                       Services        Services         Corporate        Total
Revenue                              $  221,017     $      96,702     $         -     $  317,719

Cost of services sold                   138,082            62,100               -        200,182

Office and general expenses              42,400            24,045          12,113         78,558

Depreciation and amortization             5,038             5,259             433         10,730

Operating Profit (Loss)                  35,497             5,298         (12,546 )       28,249

Other Income (Expense):
Other income,net                                                                           7,302
Interest expense and finance
charges, net                                                                             (13,881 )

Income from continuing operations
before income taxes and equity in
non-consolidated affiliates                                                               21,670
Income tax expense                                                                         3,378

Income from continuing operations
before equity in non-consolidated
affiliates                                                                                18,292
Equity in earnings of
non-consolidated affiliates                                                                   79

Income from continuing operations                                                         18,371

Loss from discontinued operations
attributable to MDC Partners Inc.,
net of taxes                                                                                (152 )

Net income                                                                                18,219

Net income attributable to the
noncontrolling interests                 (1,843 )              94               -         (1,749 )
Net income attributable to MDC
Partners Inc.                                                                         $   16,470

Stock based compensation             $    2,112     $         930     $     1,386     $    4,428


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Three Months Ended June 30, 2013
(thousands of United States dollars)

                                   Strategic      Performance
                                   Marketing       Marketing
                                   Services         Services       Corporate           Total
Revenue                           $ 200,670      $     86,829     $        -     $       287,499

Cost of services sold               128,810            60,867              -             189,677

Office and general expenses          38,336            17,812          4,697              60,845

Depreciation and amortization         5,753             3,408            327               9,488

Operating Profit (loss)              27,771             4,742         (5,024 )            27,489

Other Income (Expense):
Other expense, net                                                                        (2,880 )
Interest expense and finance
charges, net                                                                             (10,313 )

Income from continuing operations
before income taxes and equity in
non-consolidated affiliates                                                               14,296
Income tax expense                                                                         1,727

Income from continuing operations
before equity in non-consolidated
affiliates                                                                                12,569
Equity in earnings of
non-consolidated affiliates                                                                   82

Income from continuing operations                                                         12,651

Loss from discontinued operations
attributable to MDC Partners
Inc., net of taxes                                                                        (1,321 )

Net income                                                                                11,330

Net income attributable to the
noncontrolling interests             (1,345 )            (169 )            -              (1,514 )
Net income attributable to MDC
Partners Inc.                                                                    $         9,816

Stock based compensation          $   1,839      $      1,030     $    1,885     $         4,754


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Six Months Ended June 30, 2014
(thousands of United States dollars)
                                  Strategic        Performance
                                  Marketing         Marketing
                                  Services          Services        Corporate            Total
Revenue                          $ 426,965       $     183,323     $        -      $       610,288

Cost of services sold              271,214             120,661              -              391,875

Office and general expenses         86,567              48,077         22,088              156,732

Depreciation and amortization       10,084              11,006            935               22,025

Operating Profit (Loss)             59,100               3,579        (23,023 )             39,656

Other Income (Expense):
Other income,net                                                                               765
Interest expense and finance
charges, net                                                                               (26,526 )

Income from continuing
operations before income taxes
and equity in non-consolidated
affiliates                                                                                  13,895
Income tax expense                                                                           3,044

Loss from discontinued
operations attributable to MDC
Partners Inc., net of taxes                                                                 10,851
Equity in earnings of
non-consolidated affiliates                                                                    142

Income from continuing
operations                                                                                  10,993

Loss from discontinued
operations attributable to MDC
Partners Inc., net of taxes                                                                   (258 )

Net income                                                                                  10,735

Net income attributable to the
noncontrolling interests            (3,185 )                74              -               (3,111 )
Net income attributable to MDC
Partners Inc.                                                                      $         7,624

Stock based compensation         $   4,251       $       2,207     $    2,338      $         8,796


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Six Months Ended June 30, 2013
(thousands of United States dollars)

                                   Strategic      Performance
                                   Marketing       Marketing
                                   Services         Services        Corporate           Total
Revenue                           $ 384,100      $    169,035      $        -      $      553,135

Cost of services sold               247,381           120,154               -             367,535

Office and general expenses          74,764            38,599          14,842             128,205

Depreciation and amortization        11,527             6,748             692              18,967

Operating Profit (Loss)              50,428             3,534         (15,534 )            38,428

Other Income (Expense):
Other expense, net                                                                           (191 )
Interest expense, finance
charges, and loss on redemption
of notes, net                                                                             (78,226 )

Loss from continuing operations
before income taxes, equity in
affiliates                                                                                (39,989 )
Income tax benefit                                                                        (12,523 )

Loss from continuing operations
before equity in affiliates                                                               (27,466 )
Equity in earnings of
non-consolidated affiliates                                                                   123

Loss from continuing operations                                                           (27,343 )

Loss from discontinuing
operations attributable to MDC
Partners Inc., net of taxes                                                                (3,503 )

Net loss                                                                                  (30,846 )

Net income attributable to the
noncontrolling interests             (2,107 )            (389 )             -              (2,496 )
Net loss attributable to MDC
Partners Inc.                                                                      $      (33,342 )

Stock based compensation          $   2,980      $      1,859      $    4,416      $        9,255


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Three Months Ended June 30, 2014, Compared to Three Months Ended June 30, 2013

Revenue was $317.7 million for the quarter ended June 30, 2014, representing an increase of $30.2 million, or 10.5%, compared to revenue of $287.5 million for the quarter ended June 30, 2013. This revenue increase related primarily to organic growth of $20.0 million and acquisition growth of $11.9 million. A strengthening of the US Dollar, primarily versus the Canadian dollar during the quarter ended June 30, 2014, resulted in decreased revenues of $1.6 million.

The operating profit for the quarter ended June 30, 2014 was $28.2 million, compared to operating profit of $27.5 million for the quarter ended June 30, 2013. The increase in operating profit was primarily the result of an increase in operating profit of $7.7 million in the Strategic Marketing Services segment, and $0.6 million within the Performance Marketing Services segment, offset by an increase in corporate expenses of $7.5 million.

Income from continuing operations for the second quarter of 2014 was $18.4 million, compared to $12.7 million for the second quarter ended June 30, 2013. This increase of $5.7 million was primarily the result of an increase in other income of $10.2 million, offset by increases in interest expense, net of $3.6 million, and income tax expense of $1.7 million.

Marketing Communications Group

Revenues in the second quarter of 2014 attributable to the Marketing Communications Group, which consists of two reportable segments - Strategic Marketing Services and Performance Marketing Services, were $317.7 million compared to $287.5 million in the second quarter of 2013, representing a year-over-year increase of 10.5%.

The components of the increase in revenue in 2014 are shown in the following table:

                                  Revenue
                             $  000's       %
Quarter ended June 30, 2013 $ 287,499
Organic                        19,987     7.0  %
Acquisitions                   11,851     4.1  %
Foreign exchange impact        (1,618 )  (0.6 )%
Quarter ended June 30, 2014 $ 317,719    10.5  %

The geographic mix in revenues was consistent between the second quarter of 2014 and 2013 and is demonstrated in the following table:

       2014    2013
US      82 %    83 %
Canada  12 %    12 %
Other    6 %     5 %

The operating profit of the Marketing Communications Group increased by $8.3 million to $40.8 million from $32.5 million. Operating margins increased by 1.5% and were 12.8% for 2014, compared to 11.3% for 2013. The increase in operating profit and in operating margin was primarily due to increases in revenue and decreases in total staff costs, offset by increases in direct costs (excluding staff costs), and office and general expenses. Total staff costs decreased as a percentage of revenue from 60.1% in 2013 to 56.9% in 2014. Total staff costs decreased as the Company continues to benefit from prior investments in staff which have resulted in increased revenues. Direct costs increased as a percentage of revenues from 12.6% in 2013, to 13.2% in 2014. Direct costs increased as there were increased pass-through costs incurred on the clients' behalf during the second quarter of 2014 where the Company was acting as principal versus agent for certain client contracts. Office and general expenses increased as a percentage of revenue from 19.5% in 2013, to 20.9% in 2014. This increase was primarily due to an increase of $1.7 million in expense relating to estimated deferred acquisition consideration. Depreciation and amortization as a percentage of revenue remained consistent at 3.2%.


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Strategic Marketing Services

Revenues attributable to Strategic Marketing Services in the second quarter of 2014 were $221.0 million, compared to $200.7 million in the second quarter of 2013. The year-over-year increase of $20.3 million or 10.1% was attributable primarily to organic growth as a result of net new business wins. A strengthening of the US dollar versus the Canadian dollar in 2014 compared to 2013 resulted in a slight decrease in revenues from the segment's Canadian-based operations.

The operating profit of Strategic Marketing Services increased by $7.7 million from $27.8 million in the second quarter of 2013 to $35.5 million in the second quarter of 2014. Operating margins increased from 13.8% in the second quarter of 2013 to 16.1% in the second quarter of 2014. The increase in operating profits and operating margins was primarily due to increases in revenues and decreases in total staff costs, offset by an increase in direct costs (excluding staff labor). Total staff costs decreased as a percentage of revenue from 61.0% in the second quarter of 2013 to 59.2% in the second quarter of 2014. Total staff costs decreased due to the benefit from prior investments in staff which have resulted in increased revenue. Direct costs increased from 8.3% in 2013 to 8.8% in 2014. Office and general expense was consistent at approximately 19.2%. Depreciation and amortization decreased from 2.9% in 2013 to 2.3% in 2014.

Performance Marketing Services

The Performance Marketing Services segment generated revenues of $96.7 million for the second quarter of 2014, an increase of $9.9 million, or 11.4% compared to $86.8 million in the second quarter of 2013. The year over year increase was attributed primarily to acquisition growth of 13.6%, offset by an organic revenue decline of 0.9% due to timing of when client projects and events will be executed and a shift in the mix of revenue from certain agencies acting as agents as opposed to principals. In addition, a strengthening of the US dollar versus the Canadian dollar in 2014 compared to 2013 resulted in a decrease in revenues from the segment's Canadian-based operations.

The operating profit of Performance Marketing Services increased by $0.6 million, from $4.7 million in the second quarter of 2013 to $5.3 million in the second quarter of 2014. Operating margins were consistent at 5.5%. The increase in operating profits were primarily due to a decrease in total staff costs, offset by increases in direct costs (excluding staff labor), office and general costs and depreciation and amortization. Total staff costs decreased from 58.0% in 2013 to 51.6% in 2014 continuing the trend started in 2013 to reduce overall staff costs. Direct costs increased from 22.4% in 2013 to 23.2% in 2014. Office and general costs increased from 20.5% in 2013 to 24.9% in 2014. The increase was due to an increase of $4.1 million in expense relating to estimated deferred acquisition consideration. Depreciation and amortization increased from 3.9% in 2013 to 5.4% in 2014 due to the recent acquisitions in the fourth quarter of 2013 and first quarter of 2014.

Corporate

Operating costs related to the Company's Corporate operations increased $7.5 million to $12.5 million in the second quarter of 2014, up from $5.0 million in the second quarter of 2013. This increase in 2014 was primarily related to the May 2013 repayment in full of a previously fully reserved loan by the Company's CEO of $5.3 million. In addition, the Company had increases in compensation and related costs of $0.9 million relating to incentive compensation. In addition, increases in travel and entertainment, advertising and promotional costs, and professional fees accounted for the additional increase.

Other Income, Net

Other income (expense) increased to income of $7.3 million in the second quarter of 2014 compared to expenses of $2.9 million in the second quarter of 2013. The increase was primarily related to an unrealized foreign exchange gain of $6.9 million in 2014, compared to an unrealized foreign exchange loss of $2.9 million in 2013. Specifically, these unrealized gains and losses were due primarily to the fluctuation in the US dollar during 2014 and 2013 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 second quarter of 2014 was $13.9 million, a increase of $3.6 million over the $10.3 million of net interest expense incurred during the second quarter of 2013. The increase in interest expense in 2014 was due to an increase in the outstanding principal amount of the 6.75% Senior Notes.


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Income Taxes

Income tax expense was $3.4 million in the second quarter of 2014, compared to $1.7 million for the second quarter of 2013. The Company's effective tax rate in 2014 and 2013 was substantially lower than the statutory rate due to the utilization of previously fully reserved net operating losses and noncontrolling interest charges, 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. Equity in affiliates had nominal income in both 2013 and 2014.

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