2014 and 2013, there have been no charges to noncontrolling interests. Changes in the estimated redemption amounts of the put options are adjusted at each reporting period with a corresponding adjustment to equity. These adjustments will not impact the calculation of earnings per share.
Non refundable retainer fees are generally recognized on a straight line basis over the term of the specific customer arrangement. Commission revenue is earned and recognized upon the placement of advertisements in various media when the Company has no further performance obligations. Fixed fees for services are recognized upon completion of the earnings process and acceptance by the client. Per diem fees are recognized upon the performance of the Company’s services. In addition, for certain service transactions, which require delivery of a number of service acts, the Company uses the Proportional Performance model, which generally results in revenue being recognized based on the straight-line method.
2. Significant Accounting Policies – (continued)
Fees billed to clients in excess of fees recognized as revenue are classified as Advanced Billings.
A small portion of the Company’s contractual arrangements with customers includes performance incentive provisions, which allows the Company to earn additional revenues as a result of its performance relative to both quantitative
and qualitative goals. The Company recognizes the incentive portion of revenue under these arrangements when specific quantitative goals are assured, or when the Company’s clients determine performance against qualitative goals has been achieved. In all circumstances, revenue is only recognized when collection is reasonably assured. The Company records revenue net of sales and other taxes due to be collected and remitted to governmental authorities.
Interest Expense. Interest expense primarily consists of the cost of borrowing on the revolving credit agreement and Senior Notes. The Company amortizes deferred financing costs using the effective interest method over the life of the Senior Notes and straight line over the life of the revolving credit agreement.
Income Taxes. 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. The Company currently has a fully reserved valuation allowance for its US net operating losses. During the three and six months ended March 31,June 30, 2014 and 2013, the Company hadeffective tax rate was generally lower than the statutory rate due to losses in non-US based entities where a valuation allowance was not deemed necessary.necessary and utilization of previously fully reserved net operating losses.
Stock-Based Compensation. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period, which is the award’s vesting period. When awards are exercised, share capital is credited by the sum of the consideration paid together with the related portion previously credited to additional paid-in capital when compensation costs were charged against income or acquisition consideration. The Company uses its historical volatility derived over the expected term of the award, to determine the volatility factor used in determining the fair value of the award.
Stock-based awards that are settled in cash or may be settled in cash at the option of employees are recorded as liabilities. The measurement of the liability and compensation cost for these awards is based on the fair value of the award, and is recorded into operating income over the service period, that is the vesting period of the award. Changes in the Company’s payment obligation prior to the settlement date are recorded as compensation cost in operating income in the period of the change. The final payment amount for such awards is established on the date of the exercise of the award by the employee.
Stock-based awards that are settled in cash or equity at the option of the Company are recorded at fair value on the date of grant and recorded as additional paid-in capital. The fair value measurement of the compensation cost for these awards is based on using both the Black-Scholes option pricing-model and a lattice based model (Monte Carlo) and is recorded in operating income over the service period that is the vesting period of the award. The lattice based model is used for awards which are subject to achieving stock performance targets.
It is the Company’s policy for issuing shares upon the exercise of an equity incentive award to verify the amount of shares to be issued, as well as the amount of proceeds to be collected (if any) and delivery of new shares to the exercising party.
The Company has adopted the straight-line attribution method for determining the compensation cost to be recorded during each accounting period. However, awards based on performance conditions are recorded as compensation expense when the performance conditions are expected to be met.
The Company treats benefits paid by shareholders or equity members to employees as a stock based compensation charge with a corresponding credit to additional paid-in-capital.
From time to time, certain acquisitions and step up acquisitions include an element of compensation related payments. The Company accounts for those payments as stock-based compensation.
During the
threesix months ended
March 31,June 30, 2014, the Company issued
125,578213,783 restricted stock units (“RSUs”) to its employees and directors. The RSUs have an aggregate grant date fair value of
$3,166$5,237 and generally vest on the third anniversary date with certain awards subjected to accelerated vesting based on the financial performance of the Company.
A total of
806,920802,883 Class A shares of restricted stock, granted to employees as equity incentive awards but not yet vested, have been excluded in the Company’s calculation of Class A shares outstanding as of
March 31,June 30, 2014.
3. Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted
lossincome (loss) per common share from continuing operations.
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| Numerator | | | | | | | | |
| Numerator for basic loss per common share – loss from continuing operations | | $ | (7,378 | ) | | $ | (39,994 | ) |
| Net income attributable to the noncontrolling interests | | | (1,362 | ) | | | (982 | ) |
| Loss attributable to MDC Partners Inc. common shareholders from continuing operations | | | (8,740 | ) | | | (40,976 | ) |
| Effect of dilutive securities | | | — | | | | — | |
| Numerator for diluted loss per common share – loss attributable to MDC Partners Inc. common shareholders from continuing operations | | $ | (8,740 | ) | | $ | (40,976 | ) |
| Denominator | | | | | | | | |
| Denominator for basic loss per common share – adjusted weighted shares | | | 49,338,332 | | | | 46,850,840 | |
| Effect of dilutive securities | | | — | | | | — | |
| Denominator for diluted loss per common share - adjusted weighted shares | | | 49,338,332 | | | | 46,850,840 | |
| Basic and diluted loss per common share from continuing operations attributable to MDC Partners Inc. | | $ | (0.18 | ) | | $ | (0.87 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2014 |
| 2013 | | 2014 | | 2013 |
| Numerator | |
| |
| | |
| | |
|
| Numerator for basic income (loss) per common share - loss from continuing operations | $ | 18,371 |
|
| $ | 12,651 |
| | $ | 10,993 |
| | $ | (27,343 | ) |
| Net income attributable to the noncontrolling interests | (1,749 | ) |
| (1,514 | ) | | (3,111 | ) | | (2,496 | ) |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | 16,622 |
|
| 11,137 |
| | 7,882 |
| | (29,839 | ) |
| Effect of dilutive securities | — |
|
| — |
| | — |
| | — |
|
| Numerator for diluted income (loss) per common share - loss attributable to MDC Partners Inc. common shareholders from continuing operations | $ | 16,622 |
|
| $ | 11,137 |
| | $ | 7,882 |
| | $ | (29,839 | ) |
| Denominator | |
| |
| | |
| | |
|
| Denominator for basic income (loss) per common share - weighted average common shares | 49,546,062 |
|
| 47,098,392 |
| | 49,442,770 |
| | 46,975,299 |
|
| Effect of dilutive securities | 649,259 |
|
| 4,076,045 |
| | 663,775 |
| | — |
|
| Denominator for diluted income (loss) per common share - adjusted weighted shares and assumed conversions | 50,195,321 |
|
| 51,174,437 |
| | 50,106,545 |
| | 46,975,299 |
|
| Basic income (loss) per common share from continuing operations | $ | 0.34 |
|
| $ | 0.24 |
| | $ | 0.16 |
| | $ | (0.64 | ) |
| Diluted income (loss) per common share from continuing operations | $ | 0.33 |
| | $ | 0.22 |
|
| $ | 0.16 |
| | $ | (0.64 | ) |
During the three and six months ended March 31,June 30, 2014, options and other rights to purchase 1,113,2101,118,055 shares of common stock, which includes 1,000,7101,005,555 shares of non-vested restricted stock and restricted stock units, were outstanding and were included in the computation of diluted income per common share.
During the three months ended June 30, 2013, options and other rights to purchase 3,781,879 shares of common stock, which includes 855,959 shares of non-vested restricted stock, were outstanding and were included in the computation of diluted income per common share.
During the six months ended June 30, 2013, options and other rights to purchase 3,781,879 shares of common stock, which includes 855,959 shares of non-vested restricted stock and restricted stock units, were outstanding and were not included in the computation of diluted income per common share because their effect would be antidilutive.
During the three months ended March 31, 2013, options and other rights to purchase 5,718,488 shares of common stock, which includes 1,269,404 shares of non-vested restricted stock, were outstanding but were not included in the computation of diluted income per common share because their effect would be antidilutive.
4. Acquisitions
Pro forma financial information has not been presented for
the 2014 since there were no material acquisitions. During
the three months of 2014, the Company completed
a number of non-material acquisitions and a number of step-up transactions to increase its equity ownership percentage in majority owned entities. Included in the Company’s consolidated statement of operations for the three
and six months ended
March 31,June 30, 2014 was revenue of
$5,662,$10,480 and $16,141 and net income of
$724,$3,456 and $4,085, respectively, related to 2014 acquisitions.
During the first quarter of 2014, the Company entered into several acquisitions and various immaterial transactions with certain majority owned entities. Effective January 1, 2014, MDC acquired 60% of the equity interests of Luntz Global Partners LLC (“LG”). Effective February 14, 2014, MDC acquired 65% of the equity interests of Kingsdale Partners LP (“Kingsdale”). LG and Kingsdale
are both in the Company’s Performance Marketing Services segment.
In addition, in June 2014, MDC (through a subsidiary) entered into an immaterial acquisition.
The aggregate purchase price
of these acquisitions has an estimated present value at acquisition date of
$95,890$100,574 and consisted of total closing cash payments of
$41,315,$43,315, and additional deferred acquisition
considerationpayments that
arewill be based on the financial results of the underlying businesses from 2013 to 2017 with final payments due in
2018 that2018. These additional deferred payments have an estimated present value at acquisition date of
$54,575.$57,259. An allocation of excess purchase price consideration of these acquisitions to the fair value of the net assets acquired resulted in identifiable intangibles of
$22,998$24,374, consisting primarily of customer lists, a technology asset and covenants not to compete, and goodwill of
$132,478$135,651, representing the value of the assembled workforce. The identified assets will be amortized over a five to six year period in a manner represented by the pattern in which the economic benefits of the customer contracts/relationships are realized. In addition, the Company has recorded
$61,516$61,517 as the present value of noncontrolling interest. The intangibles and goodwill of
$57,880$101,290 are tax deductible.
The actual adjustments that the Company will ultimately make in finalizing the allocation of purchase price to fair value of the net assets acquired will depend on a number of factors.
During the fourth quarter
of 2013, the Company acquired a 70% interest in Local Biz Now LLC (“LBN”). The acquisition of LBN allows MDC to participate in the online local search market. LBN is in the Company’s Performance Marketing Services segment. During the year, the Company also entered into various immaterial transactions with certain majority owned entities.
The aggregate purchase price has an estimated present value at acquisition date of $38,202 and consisted of total closing cash payments of $12,000, and additional contingent deferred acquisition consideration that are based on the financial results of the underlying businesses from 2013 to 2017 with final payments due in 2018 that have an estimated present value at acquisition date of $26,202. An allocation of excess purchase price consideration of these acquisitions to the fair value of the net assets acquired resulted in identifiable intangibles of $10,835 consisting primarily of customer lists, a technology asset, and covenants not to compete, and goodwill of $35,956 representing the value of the assembled workforce. The identified assets will be amortized over a five to six year period in a manner represented by the pattern in which the economic benefits of the customer contracts/relationships are realized. In addition, the Company has recorded $11,090 as the present value of noncontrolling interest. The intangibles and goodwill of $46,791 are tax deductible.
The actual adjustments that the Company will ultimately make in finalizing the allocation of purchase price to fair value of the net assets acquired will depend on a number of factors.
Changes in the Company’s ownership interests in our less than
100 %100% owned subsidiaries during the
threesix months ended
March 31June 30, were as follows:
Net
LossIncome (Loss) Attributable to MDC Partners Inc. and
Transfers (to) from the Noncontrolling Interest
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| Net loss attributable to MDC Partners Inc. | | $ | (8,846 | ) | | $ | (43,158 | ) |
| Transfers to the noncontrolling interest: | | | | | | | | |
| Increase (Decrease) in MDC Partners Inc. paid-in capital for purchase of equity interests in excess of Redeemable Noncontrolling Interests and Noncontrolling Iinterests | | | (4,798 | ) | | | (1,059 | ) |
| Net transfers to noncontrolling interest | | $ | (4,798 | ) | | $ | (1,059 | ) |
| Change from net loss attributable to MDC Partners Inc. and transfers to noncontrolling interest | | $ | (13,644 | ) | | $ | (44,217 | ) |
| 5. | Accruals and Other Liabilities |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2014 |
| 2013 | | 2014 | | 2013 |
| Net income (loss) attributable to MDC Partners Inc. | $ | 16,470 |
|
| $ | 9,816 |
| | $ | 7,624 |
| | $ | (33,342 | ) |
| Transfers to (from) the noncontrolling Interest: | |
| | | | | |
| Increase (decrease) in MDC Partners Inc. paid in capital for purchase of equity interests in excess of Redeemable Noncontrolling Interests and Noncontrolling Interests | (1,440 | ) |
| 10,875 |
| | (6,238 | ) | | 9,816 |
|
| Net transfers to (from) noncontrolling interest | $ | (1,440 | ) |
| $ | 10,875 |
| | $ | (6,238 | ) | | $ | 9,816 |
|
| Change from Net income (loss) attributable to MDC Partners Inc. and transfers to non controlling interest | $ | 15,030 |
|
| $ | 20,691 |
| | $ | 1,386 |
| | $ | (23,526 | ) |
5. Accruals and Other Liabilities
At
March 31,June 30, 2014 and December 31, 2013, accruals and other liabilities included accrued media of
$156,551$171,793 and $144,161,respectively; trust liabilities of
$7,230$6,692 and nil; respectively, and included amounts due to noncontrolling interest holders, for their share of profits, which will be distributed within the next twelve months of
$4,243$3,250 and $5,210, respectively.
Changes in noncontrolling interest amounts included in accrued and other liabilities for the year ended December 31, 2013 and
threesix months ended
March 31,June 30, 2014 were as follows:
| | | Noncontrolling
Interests | |
| Balance, December 31, 2012 | | $ | 3,624 | |
| Income attributable to noncontrolling interests | | | 6,461 | |
| Distributions made | | | (5,525 | ) |
| Cumulative translation adjustments | | | 650 | |
| Balance, December 31, 2013 | | $ | 5,210 | |
| Income attributable to noncontrolling interests | | | 1,362 | |
| Distributions made | | | (2,276 | ) |
| Other | | | (53 | ) |
| Balance, March 31, 2014 | | $ | 4,243 | |
|
| | | |
| | Noncontrolling Interests |
| Balance, December 31, 2012 | $ | 3,624 |
|
| Income attributable to noncontrolling interests | 6,461 |
|
| Distributions made | (5,525 | ) |
| Cumulative translation adjustments | 650 |
|
| Balance, December 31, 2013 | $ | 5,210 |
|
| Income attributable to noncontrolling interests | 3,111 |
|
| Distributions made | (5,184 | ) |
| Other (1) | 113 |
|
| Balance, June 30, 2014 | $ | 3,250 |
|
(1) Other primarily relates to step-up transactions and discontinued operations and cumulative translation adjustments.
| 6. | Discontinued Operations |
6. Discontinued Operations
In 2013, the Company discontinued a subsidiary and an operating division.
Included in discontinued operations in the Company’s consolidated statements of operations for the three
and six months ended
March 31,June 30, 2014 and 2013 was the following:
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| Revenue | | $ | — | | | $ | 1,183 | |
| | | | | | | | | |
| Operating loss | | $ | — | | | $ | (683 | ) |
| | | | | | | | | |
| Other expense | | $ | (106 | ) | | $ | (69 | ) |
| | | | | | | | | |
| Noncontrolling interest expense (recovery) | | | — | | | | (42 | ) |
| | | | | | | | | |
| Loss on disposal | | | — | | | | (1,388 | ) |
| | | | | | | | | |
| Net loss from discontinued operations attributable to MDC Partners Inc., net of taxes | | $ | (106 | ) | | $ | (2,182 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended
June 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
| Revenue | $ | — |
|
| $ | 797 |
|
| $ | — |
|
| $ | 2,713 |
|
| | | | | | | |
| Operating loss | $ | (136 | ) |
| $ | (1,194 | ) |
| $ | (156 | ) |
| $ | (1,877 | ) |
| | | | | | | |
| Other expense | $ | (16 | ) |
| $ | (29 | ) |
| $ | (102 | ) |
| $ | (96 | ) |
| | | | | | | |
| Noncontrolling interest expense (recovery) | — |
|
| (13 | ) |
| — |
|
| (57 | ) |
| | | | | | | |
| Loss on disposal | — |
|
| (85 | ) |
| — |
|
| (1,473 | ) |
| | | | | | | |
| Net loss from discontinued operations attributable to MDC Partners Inc., net of taxes | $ | (152 | ) |
| $ | (1,321 | ) |
| $ | (258 | ) |
| $ | (3,503 | ) |
7. Debt
Debt consists of:
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| | | | | | | |
| Revolving credit agreement | | $ | 32,292 | | | $ | — | |
| 6.75% Senior Notes due 2020 | | | 660,000 | | | | 660,000 | |
| Original issue premium | | | 3,918 | | | | 4,056 | |
| Notes payable and other bank loans | | | 80 | | | | 120 | |
| | | | 696,290 | | | | 664,176 | |
| Obligations under capital leases | | | 934 | | | | 952 | |
| | | | 697,224 | | | | 665,128 | |
| | | | | | | | | |
| Less current portion: | | | 424 | | | | 467 | |
| | | $ | 696,800 | | | $ | 664,661 | |
|
| | | | | | | |
| June 30,
2014 |
| December 31, 2013 |
| Revolving credit agreement | $ | — |
| | $ | — |
|
| 6.75% Senior Notes due 2020 | 735,000 |
| | 660,000 |
|
| Original issue premium | 7,576 |
| | 4,056 |
|
| Notes payable and other bank loans | 80 |
| | 120 |
|
| | 742,656 |
| | 664,176 |
|
| Obligations under capital leases | 1,560 |
| | 952 |
|
| | 744,216 |
| | 665,128 |
|
| | | |
| Less current portion: | 617 |
| | 467 |
|
| | $ | 743,599 |
| | $ | 664,661 |
|
MDC Financing Agreement and Senior Notes
Issuance of 6.75% Senior Notes
On March 20, 2013, MDC Partners Inc. (“MDC”) entered into an indenture (the “Indenture”) among MDC, its existing and future restricted subsidiaries that guarantee, or are co-borrowers under or grant liens to secure, MDC’s senior secured revolving credit agreement (the “Credit Agreement”), as guarantors (the “Guarantors”) and The Bank of New York Mellon, as trustee, relating to the issuance by MDC of its 6.75% Senior Notes due 2020 (the 6.75% Notes”). The 6.75% Notes bear interest at a rate of 6.75% per annum, accruing from March 20, 2013. Interest is payable semiannually in arrears in cash on April 1 and October 1 of each year, beginning on October 1, 2013. The 6.75% Notes will mature on April 1, 2020, unless earlier redeemed or repurchased. The Company received net proceeds from the offering of the 6.75% Notes equal to approximately $537,600. The Company used the net proceeds to redeem all of the existing 11% Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge for loss on redemption of notes of $55,588, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes.
On November 15, 2013, the Company issued an additional $110,000 aggregate principal amount of its 6.75% Notes. The additional notes were issued under the Indenture governing the 6.75% Notes and treated as a single series with the original 6.75% Notes. The additional notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933, as amended. The Company received net proceeds before expenses of $111,925, which included an original issue premium of $4,125, and underwriter fees of $2,200. The Company used the net proceeds of the offering for general corporate purposes.
On April 2, 2014, the Company issued an additional $75,000 aggregate principal amount of 6.75% Notes. The additional notes were issued under the Indenture governing the 6.75% Notes and treated as a single series with the original 6.75% Notes. The additional notes were sold in private placement in reliance on exceptions from registration under the Securities Act of 1933, as amended. The Company received net proceeds before expenses of $77,452, which included an original issue premium of $3,938, and underwriter fees of $1,500 and prepayment of interest of $14. The Company used the net proceeds of the offering for general corporate purposes, including the funding of deferred acquisition consideration, working capital, acquisitions and the repayment of the amount outstanding under our senior secured revolving credit facility.
The 6.75% Notes are guaranteed on a senior unsecured basis by all of MDC’s existing and future restricted subsidiaries that guarantee, or are co-borrowers under or grant liens to secure, the Credit Agreement. The 6.75% Notes are unsecured and unsubordinated obligations of MDC and rank (i) equally in right of payment with all of MDC’s or any Guarantor’s existing and future senior indebtedness, (ii) senior in right of payment to MDC’s or any Guarantor’s existing and future subordinated indebtedness, (iii) effectively subordinated to all of MDC’s or any Guarantor’s existing and future secured indebtedness to the extent of the collateral securing such indebtedness, including the Credit Agreement, and (iv) structurally subordinated to all existing and future liabilities of MDC’s subsidiaries that are not Guarantors.
MDC may, at its option, redeem the 6.75% Notes in whole at any time or in part from time to time, on and after April 1, 2016 at a redemption price of 103.375% of the principal amount thereof if redeemed during the twelve-month period beginning on April 1, 2016, at a redemption price of 101.688% of the principal amount thereof if redeemed during the twelve-month period beginning on April 1, 2017 and at a redemption price of 100% of the principal amount thereof if redeemed on April 1, 2018 and thereafter.
Prior to April 1, 2016, MDC may, at its option, redeem some or all of the 6.75% Notes at a price equal to 100% of the principal amount of the 6.75% Notes plus a “make whole” premium and accrued and unpaid interest. MDC may also redeem, at its option, prior to April 1, 2016, up to 35% of the 6.75% Notes with the proceeds from one or more equity offerings at a redemption price of 106.750% of the principal amount thereof.
If MDC experiences certain kinds of changes of control (as defined in the Indenture), holders of the 6.75% Notes may require MDC to repurchase any 6.75% Notes held by them at a price equal to 101% of the principal amount of the 6.75% Notes plus accrued and unpaid interest. In addition, if MDC sells assets under certain circumstances, it must offer to repurchase the 6.75% Notes at a price equal to 100% of the principal amount of the 6.75% Notes plus accrued and unpaid interest.
Credit Agreement
The Indenture includes covenants that, among other things, restrict MDC’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments; create restrictions on the payment of dividends or other amounts from MDC’s restricted subsidiaries; sell assets; enter into transactions with affiliates; create liens; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The 6.75% Notes are also subject to customary events of default, including cross-payment default and cross-acceleration provision.
The Indenture contains no restrictions with respect to the amount of funds that may be loaned and/or advanced by and among Loan Parties, including Parent.
Credit Agreement
On March 20, 2013, MDC, Maxxcom Inc. (a subsidiary of MDC) and each of their subsidiaries party thereto entered into an amended and restated, $225 million senior secured revolving credit agreement due 2018 (the “Credit Agreement”) with Wells Fargo Capital Finance, LLC, as agent, and the lenders from time to time party thereto. Advances under the Credit Agreement will be used for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement. Capitalized terms used in this section and not otherwise defined have the meanings set forth in the Credit Agreement.
Advances under the Credit Agreement bear interest as follows: (a)(i) LIBOR Rate Loans bear interest at the LIBOR Rate and (ii) Base Rate Loans bear interest at the Base Rate, plus (b) an applicable margin. The initial applicable margin for borrowing is 1.25% in the case of
Base Rate Loans and 2.00% in the case of LIBOR Rate Loans. In addition to paying interest on outstanding principal under the Credit Agreement, MDC is required to pay an unused revolver fee to lenders under the Credit Agreement in respect of unused commitments thereunder.
The Credit Agreement is guaranteed by substantially all of MDC’s present and future subsidiaries, other than immaterial subsidiaries and subject to customary exceptions. The Credit Agreement includes covenants that, among other things, restrict MDC’s ability and the ability of its subsidiaries to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments; impose limitations on dividends or other amounts from MDC’s subsidiaries; incur certain liens, sell or otherwise dispose of certain assets; enter into transactions with affiliates; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The Credit Agreement also contains financial covenants, including a total leverage ratio, a senior leverage ratio, a fixed charge coverage ratio and a minimum earnings level. The Credit Agreement is also subject to customary events of default.
The Credit Agreement contains no restrictions with respect to the amount of funds that may be loaned and/or advanced by and among Loan Parties, including Parent.
The Company is currently in compliance with all of the terms and conditions of its Credit Agreement, and management believes, based on its current financial projections, that the Company will be in compliance with the covenants over the next twelve months.
At March 31,June 30, 2014, there were no borrowings under the Credit Agreement.
At June 30, 2014, the Company had issued
$5,192$4,990 of undrawn outstanding Letters of Credit.
At
March 31,June 30, 2014 and December 31, 2013, accounts payable included
$27,459$41,931 and $34,312 of outstanding checks, respectively.
| 8. | Fair Value Measurements |
8. Fair Value Measurements
Effective January 1, 2008, the Company adopted guidance regarding accounting for Fair Value Measurements, for financial assets and liabilities. This guidance defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The statement indicates, among other things, that a fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
In order to increase consistency and comparability in fair value measurements, the guidance establishes a hierarchy for observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
| • | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. |
| • | Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. |
| • | Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be level 3 inputs. During the fourth quarter of each year, the Company evaluates goodwill and indefinite-lived intangibles for impairment at the reporting unit level. For each acquisition, the Company performed a detailed review to identify intangible assets and a valuation is performed for all such identified assets. The Company used several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. The amounts allocated to assets acquired and liabilities assumed in the acquisitions were determined using level 3 inputs. Fair value for property and equipment was based on other observable transactions for similar property and equipment. Accounts receivable represents the best estimate of balances that will ultimately be collected, which is based in part on allowance for doubtful accounts reserve criteria and an evaluation of the specific receivable balances.
The following tables present certain information for our financial liabilities that is disclosed at fair value on a recurring basis at
March 31,June 30, 2014 and December 31, 2013:
| | | Level 1 | | | Level 1 | |
| | | March 31, 2014 | | | December 31, 2013 | |
| | | Carrying
Amount | | | Fair Value | | | Carrying
Amount | | | Fair Value | |
| Liabilities: | | | | | | | | | | | | | | | | |
| 6.75% Notes due 2020 | | $ | 663,918 | | | $ | 694,650 | | | $ | 664,056 | | | $ | 690,525 | |
|
| | | | | | | | | | | | | | | |
| | Level 1 |
| Level 1 |
| | June 30, 2014 |
| December 31, 2013 |
| | Carrying Amount |
| Fair Value |
| Carrying Amount |
| Fair Value |
| Liabilities: | |
|
| |
|
| |
|
| |
|
| 6.75% Notes due 2020 | $ | 742,576 |
|
| $ | 775,425 |
|
| $ | 664,056 |
|
| $ | 690,525 |
|
Our long term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices.
The following table presents changes in Deferred Acquisition Consideration.
| | | Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3) | |
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Beginning Balance of contingent payments | | $ | 151,848 | | | $ | 194,795 | |
| Payments | | | (3,965 | ) | | | (106,460 | ) |
| Grants | | | 46,088 | | | | 31,608 | |
| Redemption value adjustments | | | 9,415 | | | | 38,712 | |
| Transfers (to) from fixed payments | | | (5,146 | ) | | | (6,318 | ) |
| Foreign translation adjustment | | | (270 | ) | | | (489 | ) |
| Ending Balance of contingent payments | | $ | 197,970 | | | $ | 151,848 | |
|
| | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | June 30, |
| December 31, |
| | 2014 |
| 2013 |
| Beginning Balance of contingent payments | $ | 151,848 |
|
| $ | 194,795 |
|
| Payments | (53,083 | ) |
| (106,460 | ) |
| Grants (1) | 47,629 |
|
| 31,608 |
|
| Redemption value adjustments (2) | 14,819 |
|
| 38,712 |
|
| Transfers (to) from fixed payments | (5,146 | ) |
| (6,318 | ) |
| Foreign translation adjustment | 925 |
|
| (489 | ) |
| Ending Balance of contingent payments | $ | 156,992 |
|
| $ | 151,848 |
|
(1) Grants are the initial estimated deferred acquisition payments of new acquisitions completed within that fiscal
period.
(2) Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition
payments, including the accretion of present value and stock based compensation charges relating to acquisition
payments that are tied to continued employment.
In addition to the above amounts, there are fixed payments of
$20,808$23,814 and $2,065 for total deferred acquisition consideration of
$218,778$180,806 and $153,913, which reconciles to the consolidated financial statements at
March 31,June 30, 2014 and December 31, 2013, respectively.
The Company includes the payments of all deferred acquisition consideration in financing activities in the Company's consolidated statement of cash flows, as the Company believes these payments to be seller related financing activities, which is the predominant source of cash flows.
Level 3 payments relate to payments made for deferred acquisition consideration. Level 3 grants relate to contingent purchase price obligations related to acquisitions. The Company records the initial liability of the estimated present value. The estimated liability is determined in accordance with various contractual valuation formulas that may be dependent on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period, and, in some cases, the currency exchange rate of the date of payment. Level 3 redemption value adjustments relate to the remeasurement and change in these various contractual valuation formulas as well as adjustments of present value.
At
March 31,June 30, 2014 and December 31, 2013, the carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximated fair value because of their short-term maturity.
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| Other income (expense) | | $ | (20 | ) | | $ | (307 | ) |
| Distribution in excess of carrying value | | | — | | | | 3,058 | |
| Foreign currency loss | | | (6,517 | ) | | | (62 | ) |
| | | $ | (6,537 | ) | | $ | 2,689 | |
9. Other Income (Expense)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
| Other income (expense) | $ | 399 |
| | $ | 1 |
| | $ | 380 |
| | $ | (309 | ) |
| Distribution in excess of carrying value | — |
| | — |
| | — |
| | 3,058 |
|
| Foreign currency gain (loss) | 6,903 |
| | (2,881 | ) | | 385 |
| | (2,940 | ) |
| | $ | 7,302 |
| | $ | (2,880 | ) | | $ | 765 |
| | $ | (191 | ) |
10. Segment Information
The Company’s segment reporting is consistent with the current manner of how the Chief Operating Decision Maker (“CODM”) and the Board of Directors view the business. The Company is focused on expanding its capabilities in database marketing and data analytics in order to position the Company for future business development efforts and revenue growth.
In order to position this strategic focus along the lines of how the CODM and management will base their business decisions, the Company reports two segments. Decisions regarding allocation of resources are made and will be made based not only on the individual operating results of the subsidiaries but also on the overall performance of the reportable segments. These reportable segments are the aggregation of various reporting segments.
The Company reports in two segments plus corporate. The segments are as follows:
| • | TheStrategic Marketing Services segment consists of integrated marketing consulting services firms that offer a full complement of marketing, activation and consulting services including advertising and media, marketing communications including direct marketing, public relations, corporate communications, market research, corporate identity and branding, interactive marketing, and sales promotion. Each of the entities within the Strategic Marketing Services Group share similar economic characteristics, specifically related to the nature of their respective services, the manner in which the services are provided and the similarity of their respective customers. Due to the similarities in these businesses, they exhibit similar long term financial performance and have been aggregated together. |
| • | ThePerformance Marketing Services segment includes our firms that provide consumer insights and analytics to satisfy the growing need for targetable, measurable solutions or cost effective means of driving return on marketing investment. These services interface directly with the consumer of a client’s product or service. Such services include the design, development, research and implementation of consumer services, media planning and buying, and direct marketing initiatives. Each of the entities within the Performance Marketing Services Group share similar economic characteristics specifically related to the nature of their respective services, the manner in which the services are provided, and the similarity of their respective customers. Due to the similarities in these businesses, the services provided to the customer and they exhibit similar long term financial performance and have been aggregated together. |
The Strategic Marketing Services segment consists of integrated marketing consulting services firms that offer a full complement of marketing, activation and consulting services including advertising and media, marketing communications including direct marketing, public relations, corporate communications, market research, corporate identity and branding, interactive marketing, and sales promotion. Each of the entities within the Strategic Marketing Services Group share similar economic characteristics, specifically related to the nature of their respective services, the manner in which the services are provided and the similarity of their respective customers. Due to the similarities in these businesses, they exhibit similar long term financial performance and have been aggregated together.
The Performance Marketing Services segment includes our firms that provide consumer insights and analytics to satisfy the growing need for targetable, measurable solutions or cost effective means of driving return on marketing investment. These services interface directly with the consumer of a client’s product or service. Such services include the design, development, research and implementation of consumer services, media planning and buying, and direct marketing initiatives. Each of the entities within the Performance Marketing Services Group share similar economic characteristics specifically related to the nature of their respective services, the manner in which the services are provided, and the similarity of their respective customers. Due to the similarities in these businesses, the services provided to the customer and they exhibit similar long term financial performance and have been aggregated together.
The significant accounting policies of these segments are the same as those described in the summary of significant accounting policies included in the notes to the consolidated financial statements. The Company continues to evaluate its Corporate Group and the services provided by the Corporate Group to the operating segments.
Summary financial information concerning the Company’s operating segments is shown in the following tables:
Three Months Ended March 31,June 30, 2014 (thousands of United States dollars)
| | | Strategic
Marketing
Services | | | Performance
Marketing
Services | | | Corporate | | | Total | |
| | | | | | | | | | | | | |
| Revenue | | $ | 205,948 | | | $ | 86,621 | | | $ | — | | | $ | 292,569 | |
| | | | | | | | | | | | | | | | | |
| Cost of services sold | | | 133,132 | | | | 58,561 | | | | — | | | | 191,693 | |
| | | | | | | | | | | | | | | | | |
| Office and general expenses | | | 44,167 | | | | 24,032 | | | | 9,975 | | | | 78,174 | |
| | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 5,046 | | | | 5,747 | | | | 502 | | | | 11,295 | |
| | | | | | | | | | | | | | | | | |
| Operating Profit (Loss) | | | 23,603 | | | | (1,719 | ) | | | (10,477 | ) | | | 11,407 | |
| | | | | | | | | | | | | | | | | |
| Other Income (Expense): | | | | | | | | | | | | | | | | |
| Other income, net | | | | | | | | | | | | | | | (6,537 | ) |
| Interest expense, net | | | | | | | | | | | | | | | (12,645 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations before income taxes, equity in affiliates | | | | | | | | | | | | | | | (7,775 | ) |
| Income tax benefit | | | | | | | | | | | | | | | (334 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations before equity in affiliates | | | | | | | | | | | | | | | (7,441 | ) |
| Equity in earnings of non-consolidated affiliates | | | | | | | | | | | | | | | 63 | |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | | | | | | | | | | | | | | (7,378 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from discontinuing operations attributable to MDC Partners Inc., net of taxes | | | | | | | | | | | | | | | (106 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | (7,484 | ) |
| | | | | | | | | | | | | | | | | |
| Net income attributable to the noncontrolling interests | | | (1,342 | ) | | | (20 | ) | | | — | | | | (1,362 | ) |
| Net loss attributable to MDC Partners Inc. | | | | | | | | | | | | | | $ | (8,846 | ) |
| | | | | | | | | | | | | | | | | |
| Stock based compensation | | $ | 2,139 | | | $ | 1,277 | | | $ | 952 | | | $ | 4,368 | |
| | | | | | | | | | | | | | | | | |
| Supplemental Segment Information: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 1,621 | | | $ | 854 | | | $ | 541 | | | $ | 3,016 | |
| | | | | | | | | | | | | | | | | |
| Goodwill and intangibles | | $ | 512,931 | | | $ | 433,724 | | | $ | — | | | $ | 946,655 | |
| | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 839,792 | | | $ | 594,088 | | | $ | 136,392 | | | $ | 1,570,272 | |
|
| | | | | | | | | | | | | | | |
| | Strategic Marketing Services |
| Performance Marketing 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Segment Information: | |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital expenditures | $ | 2,373 |
|
| $ | 1,191 |
|
| $ | 265 |
|
| $ | 3,829 |
|
Three Months Ended March 31,June 30, 2013 (thousands of United States dollars)
| | | Strategic
Marketing
Services | | | Performance
Marketing
Services | | | Corporate | | | Total | |
| | | | | | | | | | | | | |
| Revenue | | $ | 183,430 | | | $ | 82,206 | | | $ | — | | | $ | 265,636 | |
| | | | | | | | | | | | | | | | | |
| Cost of services sold | | | 118,571 | | | | 59,287 | | | | — | | | | 177,858 | |
| | | | | | | | | | | | | | | | | |
| Office and general expenses | | | 36,428 | | | | 20,787 | | | | 10,145 | | | | 67,360 | |
| | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 5,774 | | | | 3,340 | | | | 365 | | | | 9,479 | |
| | | | | | | | | | | | | | | | | |
| Operating Profit (Loss) | | | 22,657 | | | | (1,208 | ) | | | (10,510 | ) | | | 10,939 | |
| | | | | | | | | | | | | | | | | |
| Other Income (Expense): | | | | | | | | | | | | | | | | |
| Other expense, net | | | | | | | | | | | | | | | 2,689 | |
| Interest expense, net | | | | | | | | | | | | | | | (67,913 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations before income taxes, equity in affiliates | | | | | | | | | | | | | | | (54,285 | ) |
| Income tax benefit | | | | | | | | | | | | | | | (14,250 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations before equity in affiliates | | | | | | | | | | | | | | | (40,035 | ) |
| Equity in earnings of non-consolidated affiliates | | | | | | | | | | | | | | | 41 | |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | | | | | | | | | | | | | | (39,994 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from discontinuing operations attributable to MDC Partners Inc., net of taxes | | | | | | | | | | | | | | | (2,182 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | (42,176 | ) |
| | | | | | | | | | | | | | | | | |
| Net income attributable to the noncontrolling interests | | | (762 | ) | | | (220 | ) | | | — | | | | (982 | ) |
| Net loss attributable to MDC Partners Inc. | | | | | | | | | | | | | | $ | (43,158 | ) |
| | | | | | | | | | | | | | | | | |
| Stock based compensation | | $ | 1,141 | | | $ | 829 | | | $ | 2,531 | | | $ | 4,501 | |
| | | | | | | | | | | | | | | | | |
| Supplemental Segment Information: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 1,774 | | | $ | 1,052 | | | $ | 89 | | | $ | 2,915 | |
| | | | | | | | | | | | | | | | | |
| Goodwill and intangibles | | $ | 528,944 | | | $ | 248,096 | | | $ | — | | | $ | 777,040 | |
| | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 852,901 | | | $ | 404,072 | | | $ | 161,536 | | | $ | 1,418,509 | |
|
| | | | | | | | | | | | | | | |
| | Strategic Marketing Services |
| Performance Marketing 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Segment Information: | |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital expenditures | $ | 3,828 |
|
| $ | 2,329 |
|
| $ | 531 |
|
| $ | 6,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2014
(thousands of United States dollars)
|
| | | | | | | | | | | | | | | |
| | Strategic
Marketing
Services |
| Performance
Marketing
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Segment Information: | |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital expenditures | $ | 3,994 |
|
| $ | 2,045 |
|
| $ | 806 |
|
| $ | 6,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Goodwill and intangibles | $ | 516,815 |
|
| $ | 434,669 |
|
| $ | — |
|
| $ | 951,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Assets | $ | 863,990 |
|
| $ | 617,576 |
|
| $ | 203,452 |
|
| $ | 1,685,018 |
|
Six Months Ended June 30, 2013
(thousands of United States dollars)
|
| | | | | | | | | | | | | | | |
| | Strategic
Marketing
Services |
| Performance
Marketing
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Segment Information: | |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital expenditures | $ | 5,606 |
|
| $ | 3,381 |
|
| $ | 620 |
|
| $ | 9,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Goodwill and intangibles | $ | 526,491 |
|
| $ | 244,709 |
|
| $ | — |
|
| $ | 771,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Assets | $ | 812,078 |
|
| $ | 381,921 |
|
| $ | 195,444 |
|
| $ | 1,389,443 |
|
A summary of the Company’s revenue by geographic area, based on the location in which the services originated, is set forth in the following table:
| | | United
States | | Canada | | Other | | Total | |
| Revenue | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | | | | | | |
| 2014 | | $ | 243,305 | | $ | 30,913 | | $ | 18,351 | | $ | 292,569 | |
| 2013 | | $ | 219,509 | | $ | 32,055 | | $ | 14,072 | | $ | 265,636 | |
| 11. | Commitments, Contingencies and Guarantees |
|
| | | | | | | | | | | | | | | |
| | United
States |
| Canada |
| Other |
| Total |
| Revenue | |
|
| |
|
| |
|
| |
|
| Three Months Ended June 30, | |
|
| |
|
| |
|
| |
|
| 2014 | $ | 258,597 |
|
| $ | 39,028 |
|
| $ | 20,094 |
|
| $ | 317,719 |
|
| 2013 | $ | 237,901 |
|
| $ | 33,950 |
|
| $ | 15,648 |
|
| $ | 287,499 |
|
| Six Months Ended June 30, | |
|
| |
|
| |
|
| |
|
| 2014 | $ | 501,902 |
|
| $ | 69,941 |
|
| $ | 38,445 |
|
| $ | 610,288 |
|
| 2013 | $ | 457,410 |
|
| $ | 66,005 |
|
| $ | 29,720 |
|
| $ | 553,135 |
|
11. Commitments, Contingencies and Guarantees
Deferred Acquisition Consideration. In addition to the consideration paid by the Company in respect of certain of its acquisitions at closing, additional consideration may be payable, or may be potentially payable based on the achievement of certain threshold levels of earnings. See Note 2 and Note 4.
Put Options. Owners of interests in certain subsidiaries have the right in certain circumstances to require the Company to acquire the remaining ownership interests held by them. The owners’ ability to exercise any such “put option” right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts during the remainder of 2014 to 2019. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights. The amount payable by the Company in the event such rights are exercised is dependent on various valuation formulas and on future events, such as the average earnings of the relevant subsidiary through the date of exercise, the growth rate of the earnings of the relevant subsidiary during that period, and, in some cases, the currency exchange rate at the date of payment.
Management estimates, assuming that the subsidiaries owned by the Company at
March 31,June 30, 2014, perform over the relevant future periods at their trailing twelve-months earnings levels, that these rights, if all exercised, could require the Company, in future periods, to pay an aggregate amount of approximately
$16,440$18,270 to the owners of such rights to acquire such ownership interests in the relevant subsidiaries. Of this amount, the Company is entitled, at its option, to fund approximately
$1,039$1,582 by the issuance of share capital. In addition, the Company is obligated under similar put option rights to pay an aggregate amount of approximately
$139,540$146,238 only upon termination of such owner’s employment with the applicable subsidiary or death. Included in redeemable noncontrolling interests at
March 31,June 30, 2014 is
$155,980$164,508 of these put options because they are not within the control of the Company. The ultimate amount payable relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.
Natural Disasters. Certain of the Company’s operations are located in regions of the United States and Caribbean which typically are subject to hurricanes. During the threesix months ended March 31,June 30, 2014 and 2013, these operations did not incur any costs related to damages resulting from hurricanes.
Guarantees. The Company has provided customary representations and warranties whose terms range in duration and may not be explicitly defined. The Company has also retained certain liabilities for events occurring prior to sale, relating to tax, environmental, litigation and other matters. Generally, the Company has indemnified the purchasers in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Legal Proceedings. The Company’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.
Commitments. The Company has commitments to fund $6,334$5,710 of investments. At March 31,June 30, 2014, the Company had issued $5,192$4,990 of undrawn outstanding letters of credit. | 12. | New Accounting Pronouncements |
12. New Accounting Pronouncements
In May 2014, the FASB issued Standards Update 2014-09, Revenue with Contracts from Customers. This update supersedes Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity must apply a five-step approach. ASU 2014-09 provides for one of two methods of transition: retrospective application to each prior period presented; or, recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. This guidance is effective for the Company beginning January 1, 2017. The Company is currently assessing the impact and transition method to choose.
In April 2014, the FASB issued Standards
UpdatreUpdate No 2014-08,
PresentationReporting Discontinued Operations and Disclosure of
Financial Statements and Property, Plant, and Equipment.Disposals of Components of an Entity. This update changes the requirements for reporting discontinued operations and requires additional disclosures. This guidance is effective for the Company beginning January 1, 2015. The implementation of the amended accounting guidance is not expected to have a material impact on our consolidated financial position or results of operations.
13. Subsequent Events
On April 2,July 31, 2014, Union Advertising Canada LP (a 70%-owned subsidiary of the Company), acquired 100% of the issued and outstanding stock of Trapeze Media Limited. Trapeze Media is a Toronto-based digital advertising company. Prior to the acquisition, the Company issued an additional $75,000owned 18% of the equity interests in Trapeze, and Miles Nadal (the Company’s President and Chief Executive Officer) owned 54% of the equity interests. The total aggregate principal amountconsideration for 100% of 6.75% senior unsecured notes due 2020 (the ���Notes”)the equity interests in Trapeze was $5,338 (or $4,375 excluding the Company’s current equity interest). Mr. Nadal recused himself from all Board discussions relating to Trapeze.
The
additional notes were issued under the Indenture governing the 6.75% NotesStock Purchase Agreement contains customary representations and
treated as a single serieswarranties and covenants of each party. Breaches of any representations and warranties will be subject to customary indemnification provisions. In connection with the
original 6.75% Notes. The additional notes were sold in private placement in reliance on exceptions from registration under the Securities Act of 1933, as amended. The Company received net proceeds before expenses of $77,452, which included an original issue premium of $3,938, and underwriter fees of $1,500 and prepayment of interest of $14. MDC intends to use the proceeds from the offering for general corporate purposes, including the funding of deferred acquisition consideration, working capital, acquisitions and the repaymentapproval of the
amount outstanding (if any) under our senior secured revolving credit facility.acquisition, the Audit Committee of the Company obtained a fairness opinion to confirm that the consideration to be paid by Union Advertising to the shareholders of Trapeze was fair from a financial point of view to the Company.
The acquisition of Trapeze by Union is expected to create an integrated agency with strong digital capabilities and more significant scale. In order to maximize the operating efficiency of the combined operations, the employees of Trapeze will relocate into Union’s current offices, and certain changes were made to the combined entity’s executive management team.
Effective August 1, 2014, MDC acquired a majority of the equity interests of one company and substantially all of the assets of a second company. The aggregate purchase price for these two transactions included $7,500 paid at closing, plus additional contingent amounts based on earnings for 2013 through 2018.
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
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,June 30, 2014 and 2013 and the financial condition of the Company as of
March 31,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.
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 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.
Three Months Ended March 31,June 30, 2014 (thousands of United States dollars)
| | | Strategic
Marketing
Services | | | Performance
Marketing
Services | | | Corporate | | | Total | |
| | | | | | | | | | | | | |
| Revenue | | $ | 205,948 | | | $ | 86,621 | | | $ | — | | | $ | 292,569 | |
| | | | | | | | | | | | | | | | | |
| Cost of services sold | | | 133,132 | | | | 58,561 | | | | — | | | | 191,693 | |
| | | | | | | | | | | | | | | | | |
| Office and general expenses | | | 44,167 | | | | 24,032 | | | | 9,975 | | | | 78,174 | |
| | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 5,046 | | | | 5,747 | | | | 502 | | | | 11,295 | |
| | | | | | | | | | | | | | | | | |
| Operating Profit (Loss) | | | 23,603 | | | | (1,719 | ) | | | (10,477 | ) | | | 11,407 | |
| | | | | | | | | | | | | | | | | |
| Other Income (Expense): | | | | | | | | | | | | | | | | |
| Other income, net | | | | | | | | | | | | | | | (6,537 | ) |
| Interest expense, net | | | | | | | | | | | | | | | (12,645 | ) |
| | | | | | | | | | | | | | | | | |
Loss from continuing operations before income taxes,
equity in affiliates | | | | | | | | | | | | | | | (7,775 | ) |
| Income tax benefit | | | | | | | | | | | | | | | (334 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations before equity in affiliates | | | | | | | | | | | | | | | (7,441 | ) |
| Equity in earnings of non-consolidated affiliates | | | | | | | | | | | | | | | 63 | |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | | | | | | | | | | | | | | (7,378 | ) |
Loss from discontinued operations attributable to MDC
Partners Inc., net of taxes | | | | | | | | | | | | | | | (106 | ) |
| Net loss | | | | | | | | | | | | | | | (7,484 | ) |
| | | | | | | | | | | | | | | | | |
| Net income attributable to the noncontrolling interests | | | (1,342 | ) | | | (20 | ) | | | — | | | | (1,362 | ) |
| Net loss attributable to MDC Partners Inc. | | | | | | | | | | | | | | $ | (8,846 | ) |
| | | | | | | | | | | | | | | | | |
| Stock based compensation | | $ | 2,139 | | | $ | 1,277 | | | $ | 952 | | | $ | 4,368 | |
|
| | | | | | | | | | | | | | | |
| | Strategic
Marketing
Services |
| Performance
Marketing
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 |
|
Three Months Ended March 31,June 30, 2013 (thousands of United States dollars)
| | | Strategic | | | Performance | | | | | | | |
| | | Marketing | | | Marketing | | | | | | | |
| | | Services | | | Services | | | Corporate | | | Total | |
| | | | | | | | | | | | | |
| Revenue | | $ | 183,430 | | | $ | 82,206 | | | $ | — | | | $ | 265,636 | |
| | | | | | | | | | | | | | | | | |
| Cost of services sold | | | 118,571 | | | | 59,287 | | | | — | | | | 177,858 | |
| | | | | | | | | | | | | | | | | |
| Office and general expenses | | | 36,428 | | | | 20,787 | | | | 10,145 | | | | 67,360 | |
| | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 5,774 | | | | 3,340 | | | | 365 | | | | 9,479 | |
| | | | | | | | | | | | | | | | | |
| Operating Profit (Loss) | | | 22,657 | | | | (1,208 | ) | | | (10,510 | ) | | | 10,939 | |
| | | | | | | | | | | | | | | | | |
| Other Income (Expense): | | | | | | | | | | | | | | | | |
| Other income, net | | | | | | | | | | | | | | | 2,689 | |
| Interest expense, net | | | | | | | | | | | | | | | (67,913 | ) |
| | | | | | | | | | | | | | | | | |
Loss from continuing operations before income taxes,
equity in affiliates | | | | | | | | | | | | | | | (54,285 | ) |
| Income tax benefit | | | | | | | | | | | | | | | (14,250 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations before equity in affiliates | | | | | | | | | | | | | | | (40,035 | ) |
| Equity in earnings of non-consolidated affiliates | | | | | | | | | | | | | | | 41 | |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | | | | | | | | | | | | | | (39,994 | ) |
| | | | | | | | | | | | | | | | | |
Loss from discontinued operations attributable to MDC
Partners Inc. net of taxes | | | | | | | | | | | | | | | (2,182 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | (42,176 | ) |
| | | | | | | | | | | | | | | | | |
| Net income attributable to the noncontrolling interests | | | (762 | ) | | | (220 | ) | | | — | | | | (982 | ) |
| Net loss attributable to MDC Partners Inc. | | | | | | | | | | | | | | $ | (43,158 | ) |
| | | | | | | | | | | | | | | | | |
| Stock based compensation | | $ | 1,141 | | | $ | 829 | | | $ | 2,531 | | | $ | 4,501 | |
|
| | | | | | | | | | | | | | | |
| | Strategic
Marketing
Services |
| Performance
Marketing
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 |
|
Six Months Ended June 30, 2014
(thousands of United States dollars)
|
| | | | | | | | | | | | | | | |
| | Strategic
Marketing
Services |
| Performance
Marketing
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 |
|
Six Months Ended June 30, 2013
(thousands of United States dollars)
|
| | | | | | | | | | | | | | | |
| | Strategic
Marketing
Services |
| Performance
Marketing
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 |
|
Three Months Ended March 31,June 30, 2014, Compared to Three Months Ended March 31,June 30, 2013 Revenue was
$292.6$317.7 million for the quarter ended
March 31,June 30, 2014, representing an increase of
$26.9$30.2 million, or
10.1%10.5%, compared to revenue of
$265.6$287.5 million for the quarter ended
March 31,June 30, 2013. This revenue increase related primarily to organic growth of
$22.1$20.0 million and acquisition growth of
$7.4$11.9 million. A strengthening of the US Dollar, primarily versus the Canadian dollar during the quarter ended
March 31,June 30, 2014, resulted in decreased revenues of
$2.6$1.6 million.
The operating profit for the quarter ended
March 31,June 30, 2014 was
$11.4$28.2 million, compared to operating profit of
$10.9$27.5 million for the quarter ended
March 31,June 30, 2013. The increase in operating profit was primarily the result of an increase in operating profit of
$0.9$7.7 million in the Strategic Marketing Services segment,
offset by a decrease of $0.5and $0.6 million within the Performance Marketing Services
segment.Losssegment, offset by an increase in corporate expenses of $7.5 million.
Income from continuing operations for the
firstsecond quarter of 2014 was
$7.4$18.4 million, compared to
a loss of $40.0$12.7 million for the
firstsecond quarter ended
March 31,June 30, 2013. This
decrease in lossincrease of
$32.6$5.7 million was primarily the result of
the 2013 premium on redemption of notes of $55.6 million, offset by a decreasean increase in other income of
$9.2$10.2 million, offset by increases in interest expense, net of $3.6 million, and
a decrease in the income tax
benefitexpense of
$13.9$1.7 million.
Marketing Communications Group
Revenues in the
thirdsecond quarter of 2014 attributable to the Marketing Communications Group, which consists of two reportable segments — Strategic Marketing Services and Performance Marketing Services, were
$292.6$317.7 million compared to
$265.6$287.5 million in the
firstsecond quarter of 2013, representing a year-over-year increase of
10.1%10.5%.
The components of the increase in revenue in 2014 are shown in the following table:
| | | Revenue | |
| | | $ 000’s | | | % | |
| Quarter ended March 31, 2013 | | $ | 265,636 | | | | | |
| Organic | | | 22,056 | | | | 8.3 | % |
| Acquisitions | | | 7,445 | | | | 2.8 | % |
| Foreign exchange impact | | | (2,568 | ) | | | (1.0 | )% |
| Quarter ended March 31, 2014 | | $ | 292,569 | | | | 10.1 | % |
|
| | | | | | |
| | 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
firstsecond quarter of 2014 and 2013 and is demonstrated in the following table:
| | | 2014 | | | 2013 | |
| US | | | 83 | % | | | 83 | % |
| Canada | | | 11 | % | | | 12 | % |
| Other | | | 6 | % | | | 5 | % |
|
| | | | | |
| | 2014 | | 2013 |
| US | 82 | % | | 83 | % |
| Canada | 12 | % | | 12 | % |
| Other | 6 | % | | 5 | % |
The operating profit of the Marketing Communications Group increased by $0.4$8.3 million to $21.9$40.8 million from $21.5$32.5 million. Operating margins decreasedincreased by 0.7%1.5% and were 7.5%12.8% for 2014, compared to 8.1%11.3% for 2013. The increase in operating profit and decrease 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, and depreciation and amortization. Direct costs increased as a percentage of revenues from 13.4% in 2013, to 13.7% in 2014.expenses. Total staff costs decreased as a percentage of revenue from 61.1%60.1% in 2013 to 59.4%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%.
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.
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.
Noncontrolling Interests
Net income attributable to the noncontrolling interests was $1.7 million for the second quarter of 2014, an increase of $0.2 million from the $1.5 million of noncontrolling interest expense incurred during the second quarter of 2013, primarily due to the Company’s increase in profitability of certain entities within the Strategic Marketing Services segment.
Discontinued Operations Attributable to MDC Partners Inc.
The loss from discontinued operations was $0.2 million for the second quarter of 2014, and $1.3 million for the second quarter of 2013.
Net Income attributable to MDC Partners Inc.
As a result of the foregoing, the net income attributable to MDC Partners Inc. recorded for the second quarter of 2014 was $16.5 million, or $0.33 per diluted share. This amount is compared to a net income attributable to MDC Partners Inc. of $9.8 million or $0.19 per diluted share reported for the second quarter of 2013.
Six Months Ended June 30, 2014, Compared to Six Months Ended June 30, 2013
Revenue was $610.3 million for the six months ended June 30, 2014, representing an increase of $57.2 million, or 10.3%, compared to revenue of $553.1 million for the six months ended June 30, 2013. This revenue increase related primarily to organic growth of $40.4 million and acquisition growth of $20.9 million. A strengthening of the US Dollar, primarily versus the Canadian dollar during the six months ended June 30, 2014, resulted in decreased revenues of $4.2 million.
The operating profit for the six months ended June 30, 2014 was $39.7 million, compared to operating profit of $38.4 million for the six months ended June 30, 2013. The increase in operating profit was primarily the result of an increase in operating profit of $8.7 million in the Strategic Marketing Services segment, offset by a decrease of $7.5 million within corporate.
Income from continuing operations for the six months of 2014 was $11.0 million, compared to a loss of $27.3 million for the six months ended June 30, 2013. This increase in income of $38.3 million was primarily the result of the 2013 premium on redemption of notes of $55.6 million, the increase in operating profit, an increase in other income of $1.0 million, offset by an increase in interest expense, net of $3.9 million, and an increase in the income tax expense of $15.6 million.
Marketing Communications Group
Revenues in the six months of 2014 attributable to the Marketing Communications Group, which consists of two reportable segments — Strategic Marketing Services and Performance Marketing Services, were $610.3 million compared to $553.1 million in the six months of 2013, representing a year-over-year increase of 10.3%.
The components of the increase in revenue in 2014 are shown in the following table:
|
| | | | | | |
| | Revenue |
| | $ 000’s |
| % |
| Six months ended June 30, 2013 | $ | 553,135 |
|
| |
|
| Organic | 40,460 |
|
| 7.3 | % |
| Acquisitions | 20,879 |
|
| 3.8 | % |
| Foreign exchange impact | (4,186 | ) |
| (0.8 | )% |
| Six months ended June 30, 2014 | $ | 610,288 |
|
| 10.3 | % |
The geographic mix in revenues was consistent between the six months 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 $8.7 million to $62.7 million from $54.0 million. Operating margins increased by 0.5% and were 10.3% for 2014, compared to 9.8% for 2013. The increase in operating profit and increase 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), office and general expenses, and depreciation and amortization. Total staff costs decreased as a percentage of revenue from 60.6% in 2013 to 58.1% 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 12.9% in 2013, to 13.4% in 2014. Direct costs increased as there were increased pass-through costs incurred on the clients’ behalf during the six months 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
21.5%20.5% in 2013, to
23.3%22.1% in 2014. This increase was primarily due to an increase of
$5.7$7.4 million in expense relating to estimated deferred acquisition consideration. Depreciation and amortization as a percentage of revenue increased from
3.4%3.3% in 2013 to
3.7%3.5% in 2014 due to the recent acquisitions in the fourth quarter of 2013 and
first quartersix months of 2014.
Strategic Marketing Services
Revenues attributable to Strategic Marketing Services in the
first quartersix months of 2014 were
$205.9$427.0 million, compared to
$183.4$384.1 million in the
first quartersix months of 2013. The year-over-year increase of
$22.5$42.9 million or
12.3%11.2% 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 decrease in revenues from the segment’s Canadian-based operations.
The operating profit of Strategic Marketing Services increased by
$0.9$8.7 million from
$22.7$50.4 million in the
first quartersix months of 2013 to
$23.6$59.1 million in the
first quartersix months of 2014. Operating margins
decreasedincreased from
12.4%13.1% in the
first quartersix months of 2013 to
11.5%13.8% in the
first quartersix months of 2014. The increase in operating profits and
decreaseincrease in operating margins was primarily due to increases in revenues and decreases in
directtotal staff costs,
(excluding staff labor), and depreciation and amortization, offset by
increasesan increase in total
staff costs and office and general costs. Direct costs
decreased from 9.1% in 2013 to(excluding staff labor) remained consistent at 8.7%
in 2014 .Total. Total staff costs
increaseddecreased as a percentage of revenue from
61.3%61.2% in the
first quartersix months of 2013 to
62.0%60.5% in the
first quartermonths of 2014. Total staff costs
decreased as the Company continues to benefit from prior investments in staff, which have resulted in increased
due to severance costs incurred due to certain client losses.revenues. Office and general expenses increased as a percentage of revenue from
19.9%19.5% in the
first quartersix months of 2013 to
21.5%20.3% in the
first quartersix months of 2014. The increase was due
primarily to an increase of
$3.9$1.5 million in expense relating to estimated deferred acquisition consideration. Depreciation and amortization as a percentage of revenue decreased from
3.2%3.0% in the
first quartersix months of 2013 to
2.5%2.4% in the
first quartersix months of 2014 due to increased revenue on relatively fixed costs.
Performance Marketing Services
The Performance Marketing Services segment generated revenues of
$86.6$183.3 million for the
first quartersix months of 2014, an increase of
$4.4$14.3 million, or
5.4%8.5% compared to
$82.2$169.0 million in the
first quartersix months of 2013. The year over year increase was attributed primarily to acquisition growth of
9.1%12.4%, offset by an organic revenue decline of
1.7%2.3% due to timing of when client projects and events will be
executed.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.operations of 1.6%.
The operating profit
and margins of Performance Marketing Services
decreased by $0.5was consistent at $3.5 million
from an operating loss of $1.2 million in the first quarter of 2013 to a loss of $1.7 million in the first quarter of 2014.and 2.0%. Operating
margins decreased from a loss of 1.5% in 2013, to a loss of 2.0% in 2014. The decrease in operating profits and operating margins were
primarily due toconsistent despite increases in direct costs (excluding staff labor), office and general costs and depreciation and amortization, offset by a decrease in total staff costs. Total staff costs decreased from
60.5%59.2% in 2013 to
53.2%52.4% in 2014 continuing the trend started in 2013 to reduce overall staff costs. Direct costs increased from
22.9%22.6% in 2013 to
25.6%24.3% in 2014. Office and general costs increased from
25.3%22.8% in 2013 to
27.7%26.2% in 2014. The increase was due to an increase of
$1.8$5.9 million in expense relating to estimated deferred acquisition consideration. Depreciation and amortization increased from
4.1%4.0% in 2013 to
6.6%6.0% in 2014 due to the recent acquisitions in the fourth quarter of 2013 and
first quartersix months of 2014.
Operating costs related to the Company’s Corporate operations
totaled $10.5increased $7.5 million to $23.0 million in the
first quartersix months of 2014
andfrom $15.5 million in the
first quartersix months of 2013.
Overall corporate operationThis increase was primarily related to the 2013 repayment in full of a previously fully reserved loan by the Company's CEO of $5.3 million and increases in compensation and related costs
were consistent year over year.of $0.9 million relating to incentive compensation and an increase in travel and entertainment.
Other income (expense)
decreasedincreased to
expenseincome of
$6.5$0.8 million in the
first quartersix months of 2014 compared to
incomeexpense of
$2.7$0.2 million in the
first quartersix months of 2013. The
decreaseincrease was primarily related to a distribution received in excess of the assets carrying value of $3.1 million, and an unrealized foreign exchange loss of
$0.1$2.9 million in 2013 compared to an unrealized foreign exchange
lossgain of
$6.5$0.4 million in 2014. 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 for the
first quartersix months of 2014 was
$12.6$26.5 million, a decrease of
$55.3$51.7 million over the
$67.9$78.2 million of net interest expense incurred during the
first quartersix months of 2013. The decrease in interest expense in 2014 was due to the 2013 loss paid on the redemption of the Company’s 11% Notes of $55.6 million, offset by an increase in the outstanding principal amount of
the 6.75%
senior notes.
Income tax
benefitexpense was
$0.3$3.0 million in the
first quartersix months of 2014 compared to a benefit of
$14.3$12.5 million for the
first quartersix months of 2013. The Company’s effective tax rate in 2014 was
substantially lower
than the statutory rate due to
utilization of previously fully reserved net operating losses and noncontrolling interest charges, offset by non-deductible stock based compensation. In addition, the Company’s effective tax rate was lower due to losses in certain tax jurisdictions where the benefits are not expected to be realized. The Company’s 2013 effective rate is consistent with the
statuarystatutory rate.
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 represents the income attributable to equity-accounted affiliate operations. Equity in affiliates had nominal income in both 2013 and 2014.
Net income attributable to the noncontrolling interests was
$1.4$3.1 million for the
first quartersix months of 2014, an increase of
$0.4$0.6 million from the
$1.0$2.5 million of noncontrolling interest expense incurred during the
first quartersix months of 2013, primarily due to the Company’s increase in profitability of certain entities within the Strategic Marketing Services segment.
Discontinued Operations Attributable to MDC Partners Inc.
The loss from discontinued operations was
$0.1$0.3 million for the
first quartersix months of 2014 and
$2.2$3.5 million for the
first quartersix months of 2013.
Net LossIncome (Loss) attributable to MDC Partners Inc. As a result of the foregoing, the net
lossincome attributable to MDC Partners Inc. recorded for the
first quartersix months of 2014 was
$8.8$7.6 million, or
a loss of $0.18$0.15 per diluted share. This amount is compared to a net loss attributable to MDC Partners Inc. of
$43.2$33.3 million or a loss of
$0.92$0.71 per diluted share reported for the
first quartersix months of 2013.
Liquidity and Capital Resources:
The following table provides summary information about the Company’s liquidity position:
| | | As of and for the
three months ended
March 31, 2014 | | | As of and for the
three months ended
March 31, 2013 | | | As of and for the
year ended
December 31, 2013 | |
| | | (000’s) | | | (000’s) | | | (000’s) | |
| Cash and cash equivalents | | $ | 17,497 | | | $ | 71,360 | | | $ | 102,007 | |
| Working capital (deficit) | | $ | (218,715 | ) | | $ | (165,908 | ) | | $ | (189,815 | ) |
| Cash from (used in) operations | | $ | (39,302 | ) | | $ | (32,958 | ) | | $ | 59,299 | |
| Cash from (used in) investing | | $ | (44,743 | ) | | $ | (1,021 | ) | | $ | (30,124 | ) |
| Cash from (used in) financing | | $ | (491 | ) | | $ | 45,068 | | | $ | 10,492 | |
| Long-term debt to total equity ratio | | | (2.79 | ) | | | (4.19 | ) | | | (2.40 | ) |
| Fixed charge coverage ratio | | | N/A | | | | N/A | | | | N/A | |
| Fixed charge deficiency | | $ | 7,767 | | | $ | 51,189 | | | $ | 131,829 | |
|
| | | | | | | | | | | |
| | As of and for the six months ended June 30, 2014 |
| As of and for the six months ended June 30, 2013 |
| As of and for the year ended December 31, 2013 |
| | (000’s) |
| (000’s) |
| (000’s) |
| Cash and cash equivalents | $ | 72,339 |
|
| $ | 77,336 |
|
| $ | 102,007 |
|
| Working capital (deficit) | $ | (228,920 | ) |
| $ | (204,528 | ) |
| $ | (189,815 | ) |
| Cash from operations | $ | 32,841 |
| | $ | 54,071 |
|
| $ | 59,299 |
|
| Cash from (used in) investing | $ | (58,331 | ) | | $ | (9,039 | ) |
| $ | (30,124 | ) |
| Cash from (used in) financing | $ | (3,848 | ) | | $ | (28,408 | ) |
| $ | 10,492 |
|
| Long-term debt to total equity ratio | (2.95 | ) |
| (3.80 | ) |
| (2.40 | ) |
| Fixed charge coverage ratio | 1.42 |
| N/A |
|
| N/A |
|
| Fixed charge deficiency | N/A |
|
| $ | 36,893 |
|
| $ | 131,829 |
|
As of
March 31,June 30, 2014 and December 31, 2013,
$7.4$6.8 million and $0.7 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.
At
March 31,June 30, 2014 the Company had a working capital deficit of
$218.7$228.9 million compared to a deficit of $189.8 million at December 31, 2013. The increase in working capital deficit was primarily due to seasonal shifts in the amounts collected from clients, and paid to suppliers, primarily media outlets. The Company includes amounts due to noncontrolling interest holders, for their share of profits, in accrued and other liabilities. At
March 31,June 30, 2014,
$4.2$3.3 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 flow
usedprovided by continuing operations, including changes in non-cash working capital, for the
threesix months ended
March 31,June 30, 2014 was
$39.2$33.1 million. This was attributable to
the lossincome from continuing operations of
$7.4$11.0 million,
depreciation and amortization of intangibles and stock compensation of $30.8 million, adjustments to deferred acquisition consideration of $13.0 million, amortization of deferred finance charges and debt discount of $1.1 million, an increase in accounts payable, accruals and other liabilities of $63.5 million, an increase in advanced billings of $42.3 million, and deferred income taxes of $2.2 million. This was offset by an increase in accounts receivable of
$54.5$83.1 million,
a netexpenditures billable to clients of $28.6 million, an increase in other non-current assets and liabilities of
$12.2$12.0 million,
an an increase in prepaid expenses and other current assets of
$9.2 million, a decrease in accounts payable, accruals, and other liabilities of $8.3 million, expenditures billable to clients of $6.2 million, and deferred income taxes of $0.6 million This was offset in part by an increase in advanced billings of $29.4 million, depreciation and amortization of intangibles and stock compensation of $15.7 million, amortization of deferred finance charges and debt discount of $0.6 million, adjustments to deferred acquisition consideration of $8.4$6.7 million, and foreign exchange of
$5.1$0.3 million. Discontinued operations attributable to MDC Partners used cash of
$0.1$0.3 million in the
threesix months ended
March 31,June 30, 2014.
Cash flow
used inprovided by continuing operations, including changes in non-cash working capital, for the
threesix months ended
March 31,June 30, 2013 was
$31.5$55.8 million. This was attributable
primarily to
a net loss from continuing operations of $40.0 million, an increase in accounts receivable of $41.3 million, a decrease in deferred income tax of $14.6 million, a decrease in accounts payables, accruals, and other liabilities of $13.3 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 stock compensation of
$14.0$28.2 million, an increase in
advanced billingsaccounts payable, accruals and other liabilities of
$13.0$34.6 million, amortization of deferred
financing costsfinance charges and debt discount of
$5.7$6.3 million, adjustments to deferred acquisition consideration
for $2.3of $4.4 million and increase in advance billings of $5.9 million, a decrease
in expenditures billable to clients of $1.7 million and foreign exchange of $1.4 million. This cash was offset in part by the loss from continuing operations of $27.3 million, an increase in accounts receivable of $12.0 million, deferred income taxes of $12.9 million, a net increase in other non-current assets and liabilities of
$1.2$17.1 million, an increase in prepaid expenses and other current assets of $4.6 million and
foreign exchangedistributions in excess of
$0.4carrying value of $3.1 million. Discontinued operations attributable to MDC Partners used cash of
$1.5$1.7 million in the
threesix months ended
March 31,June 30, 2013.
Cash flows used in investing activities was
$44.7$58.3 million for the
threesix months ended
March 31,June 30, 2014, compared with a cash flow used of
$1.0$9.0 million in the
threesix months ended
March 31,June 30, 2013. In the
threesix months ended
March 31,June 30, 2014, the Company used
$40.0$42.0 million, net of cash acquired for
the Kingsdale Partners LP and Luntz Global Partners LLC acquisitions. The Company also used
$2.1$3.5 million for other
investments.investments and $6.7 million for deposits. These outflows were offset by
$0.3$0.6 million of profit distributions from affiliates.
In the
threesix months ended
March 31,June 30, 2014, capital expenditures totaled
$3.0$6.8 million, of which
$1.6$4.0 million was incurred by the Strategic Marketing Services segment,
$0.9$2.0 million was incurred by the Performance Marketing Services segment, and
$0.5$0.8 million was incurred by corporate. In the
threesix months ended
March 31,June 30, 2013, capital expenditures totaled
$2.9$9.6 million of which
$1.7$5.6 million was incurred by the Strategic Marketing Services segment,
$1.1$3.4 million was incurred by the Performance Marketing Services segment, and
$0.1$0.6 million was incurred by corporate. These expenditures consisted primarily of computer equipment, furniture and fixtures, and leasehold improvements.
In the
threesix months ended
March 31,June 30, 2013, the Company paid
$1.2$2.2 million for other investments. These outflows were offset by $3.1 million of profit distributions from affiliates.
During the
threesix months ended
March 31,June 30, 2014, cash flows used in financing activities amounted to
$0.5$3.8 million, and consisted of
$10.7$61.4 million of acquisition related payments, payment of dividends of
$9.7 million, cash overdraft of $6.9$18.6 million, the purchase of treasury shares for income tax withholding requirements of
$3.1$3.5 million, distributions to noncontrolling partners of
$2.3$5.2 million, deferred financing costs of $1.5 million and repayments of long term debt of
$0.1$0.2 million, offset by
$32.3proceeds from the additional issuance of $78.9 million
borrowed under the credit agreement.and cash overdrafts of $7.6 million.
During the
threesix months ended
March 31,June 30, 2013, cash flows
provided byused in financing activities amounted to
$45.1$28.4 million, and consisted primarily of proceeds from the issuance of the 6.75% Notes of $550.0 million offset by the repayment of the 11% Notes of $425.0 million, premium paid on redemption of notes of $50.4 million, and deferred financing costs of $16.0 million. In addition, there was cash overdrafts of
$5.8$8.8 million,
$2.2$77.2 million of acquisition related payments, the purchase of treasury shares for income tax withholding requirements of
$3.4$4.4 million,
$1.4$4.9 million of distributions to noncontrolling partners, repayments of long term debt of
$0.6$0.7 million and
$0.2$9.2 million of dividend payments.
6.75% Senior Notes Due 2020
On March 20, 2013, MDC Partners Inc. (“MDC”) entered into an indenture (the “Indenture”) among MDC, its existing and future restricted subsidiaries that guarantee, or are co-borrowers under or grant liens to secure, MDC’s senior secured revolving credit agreement (the “Credit Agreement”), as guarantors (the “Guarantors”) and The Bank of New York Mellon, as trustee, relating to the issuance by MDC of its 6.75% Senior Notes due 2020 (the “6.75% Notes”). The 6.75% Notes bear interest at a rate of 6.75% per annum, accruing from March 20, 2013. Interest is payable semiannually in arrears in cash on April 1 and October 1 of each year, beginning on October 1, 2013. The 6.75% Notes will mature on April 1, 2020, unless earlier redeemed or repurchased. The Company received net proceeds from the offering of the 6.75% Notes equal to approximately $537.6 million. The Company used the net proceeds to redeem all of the existing 11% Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge during the nine months ended September 30, 2013, for loss on redemption of notes of $55.6 million, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes.
On November 15, 2013, the Company issued an additional $110 million aggregate principal amount of its 6.75% Notes. The additional notes were issued under the Indenture governing the 6.75% Notes and treated as a single series with the original 6.75% Notes. The additional notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933, as amended. The Company received net proceeds before expenses of $111.9 million, which included an original issue premium of $4.1 million, and underwriter fees of $2.2 million. The Company used the net proceeds of the offering for general corporate purposes.
On April 2, 2014, the Company issued an additional $75 million aggregate principal amount of 6.75% Notes due 2020 (the “Notes”). The additional notes were issued under the Indenture governing the 6.75% Notes and treated as a single series with the original 6.75% Notes. The additional notes were sold in private placement in reliance on exceptions from registration under the Securities Act of 1933, as amended. The Company received net proceeds before expenses of $77.5 million, which included an original issue premium of $3.9 million, and underwriter fees of $1.5million. The Company used the net proceeds of the offering for general corporate purposes, including the funding of deferred acquisition consideration, working capital, acquisitions and the repayment of the amount outstanding under our senior secured revolving credit facility.
The 6.75% Notes are guaranteed on a senior unsecured basis by all of MDC’s existing and future restricted subsidiaries that guarantee, or are co-borrowers under or grant liens to secure, the Credit Agreement. The 6.75% Notes are unsecured and unsubordinated obligations of MDC and rank (i) equally in right of payment with all of MDC’s or any Guarantor’s existing and future senior indebtedness, (ii) senior in right of payment to MDC’s or any Guarantor’s existing and future subordinated indebtedness, (iii) effectively subordinated to all of MDC’s or any Guarantor’s existing and future secured indebtedness to the extent of the collateral securing such indebtedness, including the Credit Agreement, and (iv) structurally subordinated to all existing and future liabilities of MDC’s subsidiaries that are not Guarantors.
MDC may, at its option, redeem the 6.75% Notes in whole at any time or in part from time to time, on and after April 1, 2016 at a redemption price of 103.375% of the principal amount thereof if redeemed during the twelve-month period
beginning on April 1, 2016, at a redemption price of 101.688% of the principal amount thereof if redeemed during the twelve-month period beginning on April 1, 2017 and at a redemption price of 100% of the principal amount thereof if redeemed on April 1, 2018 and thereafter.
Prior to April 1, 2016, MDC may, at its option, redeem some or all of the 6.75% Notes at a price equal to 100% of the principal amount of the 6.75% Notes plus a “make whole” premium and accrued and unpaid interest. MDC may also redeem, at its option, prior to April 1, 2016, up to 35% of the 6.75% Notes with the proceeds from one or more equity offerings at a redemption price of 106.750% of the principal amount thereof.
If MDC experiences certain kinds of changes of control (as defined in the Indenture), holders of the 6.75% Notes may require MDC to repurchase any 6.75% Notes held by them at a price equal to 101% of the principal amount of the 6.75% Notes plus accrued and unpaid interest. In addition, if MDC sells assets under certain circumstances, it must offer to repurchase the 6.75% Notes at a price equal to 100% of the principal amount of the 6.75% Notes plus accrued and unpaid interest.
The Indenture includes covenants that, among other things, restrict MDC’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments; create restrictions on the payment of dividends or other amounts from MDC’s restricted subsidiaries; sell assets; enter into transactions with affiliates; create liens; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The 6.75% Notes are also subject to customary events of default, including cross-payment default and cross-acceleration provisions.
The Indenture contains no restrictions with respect to the amount of funds that may be loaned and/or advanced by and among Loan Parties, including Parent.
Redemption of 11% Senior Notes Due 2016
On March 20, 2013, the Company redeemed all of the 11% Senior Notes due 2016.
Revolving Credit Agreement
On March 20, 2013, MDC, Maxxcom Inc. (a subsidiary of MDC) and each of their subsidiaries party thereto entered into an amended and restated, $225 million senior secured revolving credit agreement due 2018 (the “Credit Agreement”) with Wells Fargo Capital Finance, LLC, as agent, and the lenders from time to time party thereto. Advances under the Credit Agreement will be used for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement. Capitalized terms used in this section and not otherwise defined have the meanings set forth in the Credit
Agreement .Agreement.
Advances under the Credit Agreement bear interest as follows: (a)(i) LIBOR Rate Loans bear interest at the LIBOR Rate and (ii) Base Rate Loans bear interest at the Base Rate, plus (b) an applicable margin. The initial applicable margin for borrowing is 1.25% in the case of Base Rate Loans and 2.00% in the case of LIBOR Rate Loans. In addition to paying interest on outstanding principal under the Credit Agreement, MDC is required to pay an unused revolver fee to lenders under the Credit Agreement in respect of unused commitments thereunder.
The Credit Agreement is guaranteed by substantially all of MDC’s present and future subsidiaries, other than immaterial subsidiaries and subject to customary exceptions. The Credit Agreement includes covenants that, among other things, restrict MDC’s ability and the ability of its subsidiaries to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments; impose limitations on dividends or other amounts from MDC’s subsidiaries; incur certain liens, sell or otherwise dispose of certain assets; enter into transactions with affiliates; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The Credit Agreement also contains financial covenants, including a total leverage ratio, a senior leverage ratio, a fixed charge coverage ratio and a minimum earnings level (each as more fully described in the Credit Agreement). The Credit Agreement is also subject to customary events of default.
The The Credit Agreement contains no restrictions with respect to the amount of funds that may be loaned and/or advanced by and among Loan Parties, including Parent.
The foregoing descriptions of the Indenture and the Credit Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the agreements.
Debt as of
March 31,June 30, 2014 was
$697.2$744.2 million, an increase of
$32.1$79.1 million, compared with $665.1 million outstanding at December 31, 2013. This increase in debt was a result of the Company’s
borrowing on the Credit Agreement.additional issuance of $75 million of 6.75% Notes. At
March 31,June 30, 2014, approximately
$187.5$220.0 million was available under the Credit Agreement.
The Company is currently in compliance with all of the terms and conditions of the Credit Agreement, and management believes, based on its current financial projections, that the Company will be in compliance with its covenants over the next twelve months.
If the Company loses all or a substantial portion of its lines of credit under the Credit Agreement, or if the Company uses the maximum available amount under the Credit Agreement, it will be required to seek other sources of liquidity. If the Company were unable to find these sources of liquidity, for example through an equity offering or access to the capital markets, the Company’s ability to fund its working capital needs and any contingent obligations with respect to put options would be adversely affected.
Pursuant to the Credit Agreement, the Company must comply with certain financial covenants including, among other things, covenants for (i) senior leverage ratio, (ii) total leverage ratio, (iii) fixed charges ratio, and (iv) minimum earnings before interest, taxes and depreciation and amortization, in each case as such term is specifically defined in the Credit Agreement. For the period ended
March 31,June 30, 2014, the Company’s calculation of each of these covenants, and the specific requirements under the Credit Agreement, respectively, were as follows:
| | | March 31, 2014 | |
| Total Senior Leverage Ratio | | | 0.20 | |
| Maximum per covenant | | | 2.00 | |
| | | | | |
| Total Leverage Ratio | | | 3.74 | |
| Maximum per covenant | | | 5.50 | |
| | | | | |
| Fixed Charges Ratio | | | 5.89 | |
| Minimum per covenant | | | 1.00 | |
| | | | | |
| Earnings before interest, taxes, depreciation and amortization | | $ | 186,926 | |
| Minimum per covenant | | $ | 105,000 | |
|
| | | |
| | June 30, 2014 |
|
| Total Senior Leverage Ratio | (0.3 | ) |
| Maximum per covenant | 2.0 |
|
| | |
|
| Total Leverage Ratio | 3.8 |
|
| Maximum per covenant | 5.5 |
|
| | |
|
| Fixed Charges Ratio | 3.0 |
|
| Minimum per covenant | 1.0 |
|
| | |
|
| Earnings before interest, taxes, depreciation and amortization | $ | 182,218 |
|
| Minimum per covenant | $ | 105,000 |
|
These ratios are not based on generally accepted accounting principles and are not presented as alternative measures of operating performance or liquidity. They are presented here to demonstrate compliance with the covenants in the Company’s Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.
Deferred Acquisition Consideration (Earnouts)
Acquisitions of businesses by the Company may include commitments to contingent deferred purchase consideration payable to the seller. These contingent purchase obligations are generally payable within a one to five-year period following the acquisition date, and are based on achievement of certain thresholds of future earnings and, in certain cases, also based on the rate of growth of those earnings. The contingent consideration is recorded as an obligation of the Company when the contingency is resolved and the amount is reasonably determinable, for acquisitions prior to January 1, 2009. Contingent purchase price obligations related to acquisitions completed subsequent to December 31, 2008, are recorded as liabilities at estimated value and are remeasured at each reporting period. Based on various assumptions, all deferred consideration estimates based on future operating results of the relevant entities are recorded on the Company’s balance sheet at
March 31,June 30, 2014. The actual amount that the Company pays in connection with the obligations may differ materially from this estimate. At
March 31,June 30, 2014, there was
$218.8$180.8 million of deferred consideration included in the Company’s balance sheet.
Other-Balance Sheet Commitments
Put Rights of Subsidiaries’ Noncontrolling Shareholders
Owners of interests in certain of the Marketing Communications Group subsidiaries have the right in certain circumstances to require the Company to acquire the remaining ownership interests held by them. The owners’ ability to exercise any such “put
option” right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise. In addition, these rights cannot be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts during the remainder of 2014 to 2019. It is not determinable, at this time, if or when the owners of these put option rights will exercise all or a portion of these rights.
The amount payable by the Company in the event such put option rights are exercised is dependent on various valuation formulas and on future events, such as the average earnings of the relevant subsidiary through that date of exercise, the growth rate of the earnings of the relevant subsidiary during that period, and, in some cases, the currency exchange rate at the date of payment.
Management estimates, assuming that the subsidiaries owned by the Company at
March 31,June 30, 2014, perform over the relevant future periods at their trailing twelve-month earnings level, that these rights, if all exercised, could require the Company, in future periods, to pay an aggregate amount of approximately
$16.4$18.3 million to the owners of such rights to acquire such ownership interests in the relevant subsidiaries. Of this amount, the Company is entitled, at its option, to fund approximately
$1.0$1.6 million by the issuance of the Company’s Class A subordinate voting shares. In addition, the Company is obligated under similar put option rights to pay an aggregate amount of approximately
$139.4$146.2 million only upon termination of such owner’s employment with such applicable subsidiary or death. The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the Credit Agreement (and refinancings thereof) and, if necessary, through incurrence of additional debt. The ultimate amount payable and the incremental operating income in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.
Approximately $2.2Approximately$1.6 million of the estimated
$16.4$18.3 million that the Company would be required to pay subsidiaries noncontrolling shareholders upon the exercise of outstanding put option rights, relates to rights exercisable within the next twelve months. Upon the settlement of the total amount of such put options, the Company estimates that it would receive incremental operating income before depreciation and amortization of
$4.6$4.7 million.
The following table summarizes the potential timing of the consideration and incremental operating income before depreciation and amortization based on assumptions as described above.
| Consideration (4) | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 &
Thereafter | | | Total | |
| | | ($ Millions) | |
| Cash | | $ | 1.8 | | | $ | 3.7 | | | $ | 3.7 | | | $ | 4.1 | | | $ | 2.1 | | | $ | 15.4 | |
| Shares | | | 0.3 | | | | 0.3 | | | | 0.4 | | | | 0.0 | | | | 0.0 | | | | 1.0 | |
| | | $ | 2.1 | | | $ | 4.0 | | | $ | 4.1 | | | $ | 4.1 | | | $ | 2.1 | | | $ | 16.4 | (1) |
Operating income before depreciation and
amortization to be received(2) | | $ | 1.7 | | | $ | 1.9 | | | $ | 0.1 | | | $ | 0.9 | | | $ | — | | | $ | 4.6 | |
Cumulative operating income before
depreciation and amortization(3) | | $ | 1.7 | | | $ | 3.6 | | | $ | 3.7 | | | $ | 4.6 | | | $ | 4.6 | | | | | (5) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Consideration (4) | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 & Thereafter | | Total | |
| | | ($ Millions) | |
| Cash | | $ | 1.6 |
| | $ | 3.6 |
| | $ | 3.5 |
| | $ | 4.3 |
| | $ | 3.7 |
| | $ | 16.7 |
| |
| Shares | | — |
| | — |
| | 0.1 |
| | — |
| | 1.5 |
| | 1.6 |
| |
| | | $ | 1.6 |
| | $ | 3.6 |
| | $ | 3.6 |
| | $ | 4.3 |
| | $ | 5.2 |
| | $ | 18.3 |
| (1) |
| Operating income before depreciation and amortization to be received(2) | | $ | 1.8 |
| | $ | 1.9 |
| | $ | 0.1 |
| | $ | 0.9 |
| | $ | — |
| | $ | 4.7 |
| |
| Cumulative operating income before depreciation and amortization(3) | | $ | 1.8 |
| | $ | 3.7 |
| | $ | 3.8 |
| | $ | 4.7 |
| | $ | 4.7 |
| | | (5) |
| |
| (1) | This amount is in addition to put options only exercisable upon termination not within the control of the Company, or death, of $139.5$146.2 million, has been recognized in Redeemable Noncontrolling Interests on the Company’s balance sheet. |
| |
| (2) | This financial measure is presented because it is the basis of the calculation used in the underlying agreements relating to the put rights and is based on actual operating results. This amount represents additional amounts to be attributable to MDC Partners Inc., commencing in the year the put is exercised. |
| |
| (3) | Cumulative operating income before depreciation and amortization represents the cumulative amounts to be received by the Company. |
| |
| (4) | The timing of consideration to be paid varies by contract and does not necessarily correspond to the date of the exercise of the put. |
| |
| (5) | Amounts are not presented as they would not be meaningful due to multiple periods included. |
Critical Accounting Policies
The following summary of accounting policies has been prepared to assist in better understanding the Company’s consolidated financial statements and the related management discussion and analysis. Readers are encouraged to consider this information together with the Company’s consolidated financial statements and the related notes to the consolidated financial statements as included herein for a more complete understanding of accounting policies discussed below.
Estimates. The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States of America, or “GAAP”, requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including goodwill, intangible assets, redeemable noncontrolling interests, and deferred acquisition consideration, valuation allowances for receivables and deferred income tax assets and stock based compensation as well as the reported amounts of revenue and expenses during the reporting period. The statements are evaluated on an ongoing basis and estimates are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. Actual results can differ from those estimates, and it is possible that the differences could be material.
Revenue Recognition. The Company’s revenue recognition policies are as required by the Revenue Recognition topics of the FASB Accounting Standards Codification. The Company earns 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. A small portion of the Company’s contractual arrangements with clients includes performance incentive provisions, which allow the Company to earn additional revenues as a result of its performance relative to both quantitative and qualitative goals. The Company records revenue net of sales and other taxes, when persuasive evidence of an arrangement exists, services are provided or upon delivery of the products when ownership and risk of loss has transferred to the customer, the selling price is fixed or determinable and collection of the resulting receivable is reasonably assured. The Company recognizes the incentive portion of revenue under these arrangements when specific quantitative goals are assured, or when the Company’s clients determine performance against qualitative goals has been achieved. In all circumstances, revenue is only recognized when collection is reasonably assured. The Company records revenue net of sales and other taxes due to be collected and remitted to governmental authorities. In the majority of the Company’s businesses, the Company acts as an agent and records revenue equal to the net amount retained, when the fee or commission is earned. In certain arrangements, the Company acts as principal and contracts directly with suppliers for third party media and production costs. In these arrangements, revenue is recorded at the gross amount billed. Additional information about our revenue recognition policy appears in Note 2 to our consolidated financial statements.
Acquisitions, Goodwill and Other Intangibles. A fair value approach is used in testing goodwill for impairment to determine if an other than temporary impairment has occurred. One approach utilized to determine fair values is a discounted cash flow methodology. When available and as appropriate, comparative market multiples are used. Numerous estimates and assumptions necessarily have to be made when completing a discounted cash flow valuation, including estimates and assumptions regarding interest rates, appropriate discount rates and capital structure. Additionally, estimates must be made regarding revenue growth, operating margins, tax rates, working capital requirements and capital expenditures. Estimates and assumptions also need to be made when determining the appropriate comparative market multiples to be used. Actual results of operations, cash flows and other factors used in a discounted cash flow valuation will likely differ from the estimates used and it is possible that differences and changes could be material. The Company has historically made and expects to continue to make selective acquisitions of marketing communications businesses. In making acquisitions, the price paid is determined by various factors, including service offerings, competitive position, reputation and geographic coverage, as well as prior experience and judgment. Due to the nature of advertising, marketing and corporate communications services companies; the companies acquired frequently have significant identifiable intangible assets, which primarily consist of customer relationships. The Company has determined that certain intangibles (trademarks) have an indefinite life, as there are no legal, regulatory, contractual, or economic factors that limit the useful life.
Business Combinations. Valuation of acquired companies are based on a number of factors, including specialized know-how, reputation, competitive position and service offerings. Our acquisition strategy has been to focus on acquiring the expertise of an assembled workforce in order to continue building upon the core capabilities of our various strategic business platforms to better serve our clients. Consistent with our acquisition strategy and past practice of acquiring a majority ownership position, most acquisitions completed after 2009 include an initial payment at the time of closing and provide for future additional contingent purchase price payments. Contingent payments for these transactions, as well as certain acquisitions completed in prior years, are derived using the performance of the acquired entity and are based on pre-determined formulas. Contingent purchase price obligations for acquisitions completed prior to January 1, 2009 are accrued when the contingency is resolved and payment is certain. Contingent purchase price obligations related to acquisitions completed subsequent to December 31, 2008 are recorded as liabilities at estimated value and are remeasured at each reporting period. Changes in estimated value are recorded in results of operations. In addition, certain acquisitions also include put/call obligations for additional equity ownership interests. The estimated value of these interests are recorded as redeemable
noncontrolling interests. As of January 1, 2009, the Company expenses acquisition related costs in accordance with the Accounting Standard’s Codification’s new guidance on acquisition accounting.
For each of our acquisitions, we undertake a detailed review to identify other intangible assets and a valuation is performed for all such identified assets. We use several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. Like most service businesses, a substantial portion of the intangible asset value that we acquire is the specialized know-how of the workforce, which is treated as part of goodwill and is not required to be valued separately. The majority of the value of the identifiable intangible assets that we acquire is derived from customer relationships, including the related customer contracts, as well as trade names. In executing our acquisition strategy, one of the primary drivers in identifying and executing a specific transaction is the existence of, or the ability to, expand our existing client relationships. The expected benefits of our acquisitions are typically shared across multiple agencies and regions.
Redeemable Noncontrolling Interest. The minority interest shareholders of certain subsidiaries have the right to require the Company to acquire their ownership interest under certain circumstances pursuant to a contractual arrangement and the Company has similar call options under the same contractual terms. The amount of consideration under the put and call rights is not a fixed amount, but rather is dependent upon various valuation formulas and on future events, such as the average earnings of the relevant subsidiary through the date of exercise, the growth rate of the earnings of the relevant subsidiary through the date of exercise, etc. as described in Note 11.
Allowance for Doubtful Accounts. Trade receivables are stated less allowance for doubtful accounts. The allowance represents estimated uncollectible receivables usually due to customers’ potential insolvency. The allowance includes amounts for certain customers where risk of default has been specifically identified.
Income Tax Valuation Allowance. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management considers factors such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies, changes in tax laws and other factors. A change to any of these factors could impact the estimated valuation allowance and income tax expense.
Interest Expense. Interest expense primarily consists of the cost of borrowing on the revolving Credit Agreement, and the Senior Notes. The Company amortizes deferred financing costs using the effective interest method over the life of the Senior Notes and straight line over the life of the revolving Credit Agreement.
Stock-based Compensation. The fair value method is applied to all awards granted, modified or settled. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period that is the award’s vesting period. When awards are exercised, share capital is credited by the sum of the consideration paid together with the related portion previously credited to additional paid-in capital when compensation costs were charged against income or acquisition consideration. Stock-based awards that are settled in cash or may be settled in cash at the option of employees are recorded as liabilities. The measurement of the liability and compensation cost for these awards is based on the fair value of the award, and is recorded into operating income over the service period, that is the vesting period of the award. Changes in the Company’s payment obligation are revalued each period and recorded as compensation cost over the service period in operating income. The Company treats amounts paid by shareholders to employees as a stock based compensation charge with a corresponding credit to additional paid-in capital.
New Accounting Pronouncements
In May 2014, the FASB issued Standards Update 2014-09, Revenue with Contracts from Customers. This update supersedes Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity must apply a five-step approach. ASU 2014-09 provides for one of two methods of transition: retrospective application to each prior period presented; or, recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. This guidance is effective for the Company beginning January 1, 2017. The Company is currently assessing the impact and transition method to choose.
In April 2014, the FASB issued Standards Update No 2014-08,
PresentationReporting Discontinued Operations and Disclosure of
Financial Statements and Property, Plant, and Equipment.Disposals of Components of an Entity. This update changes the requirements for reporting discontinued operations and requires additional disclosures. This guidance is effective for the Company beginning January 1, 2015. The implementation of the amended accounting guidance is not expected to have a material impact on our consolidated financial position or results of operations.
This document contains forward-looking statements. The Company’s representatives may also make forward-looking statements orally from time to time. Statements in this document that are not historical facts, including statements about the Company’s beliefs and expectations, earnings guidance, recent business and economic trends, potential acquisitions, estimates of amounts for deferred acquisition consideration and “put” option rights, constitute forward-looking statements. These statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined in this section. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events, if any.
Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such risk factors include, but are not limited to, the following:
risks associated with severe effects of international, national and regional economic conditions;
the Company’s ability to attract new clients and retain existing clients;
the spending patterns and financial success of the Company’s clients;
the Company’s ability to retain and attract key employees;
the Company’s ability to remain in compliance with its debt agreements and the Company’s ability to finance its contingent payment obligations when due and payable, including but not limited to those relating to “put” option rights and deferred acquisition consideration;
the successful completion and integration of acquisitions which complement and expand the Company’s business capabilities; and
foreign currency fluctuations.
The Company’s business strategy includes ongoing efforts to engage in material acquisitions of ownership interests in entities in the marketing communications services industry. The Company intends to finance these acquisitions by using available cash from operations, from borrowings under the Credit Agreement and through incurrence of bridge or other debt financing, either of which may increase the Company’s leverage ratios, or by issuing equity, which may have a dilutive impact on existing shareholders proportionate ownership. At any given time, the Company may be engaged in a number of discussions that may result in one or more material acquisitions. These opportunities require confidentiality and may involve negotiations that require quick responses by the Company. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transactions, the announcement of any such transaction may lead to increased volatility in the trading price of the Company’s securities.
Investors should carefully consider these risk factors, and the risk factors outlined in more detail in the Company’s 2013 Annual Report on Form 10-K under the caption “Risk Factors”, and in the Company’s other SEC filings.
Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk related to interest rates and foreign currencies.
Debt Instruments: At
March 31,June 30, 2014, the Company’s debt obligations consisted of amounts outstanding under its Credit Agreement and Senior Notes. The Senior Notes bear a fixed 6.75% interest rate. The Credit Agreement bears interest at variable rates based upon the Eurodollar rate, US bank prime rate and US base rate, at the Company’s option. The Company’s ability to obtain the required bank syndication commitments depends in part on conditions in the bank market at the time of syndication. Given that there were
$32.3 millionno borrowings under the Credit Agreement, as of
March 31,June 30, 2014, a 1.0% increase or decrease in the weighted average interest rate, which was 4.5% at
March 31,June 30, 2014, would have
a $0.3 millionno interest impact.
Foreign Exchange: The Company conducts business in several currencies around the world. Our results of operations are subject to risk from the translation to the US dollar of the revenue and expenses of our non-US operations. The effects of currency exchange rate fluctuations on the translation of our results of operations are discussed in the “Management’s Discussion and Analysis of Financial Condition and Result of Operations”. For the most part, our revenues and expenses incurred related to our non-US operations are denominated in their functional currency. This minimizes the impact that fluctuations in exchange rates will have on profit margins. The Company does not enter into foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
The Company is exposed to foreign currency fluctuations relating to its intercompany balances between the US and Canada. For every one cent change in the foreign exchange rate between the US and Canada, the Company will incur a
$2.0$2.3 million impact to its financial statements.
Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be included in our SEC reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), who is our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. However, the Company’s disclosure controls and procedures are designed to provide reasonable assurances of achieving the Company’s control objectives.
We conducted an evaluation, under the supervision and with the participation of our management, including our CEO, our CFO and our management Disclosure Committee, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(e) and 15(d)-15(e) of the Exchange Act. Based on that evaluation, our CEO and CFO concluded that, as of
March 31,June 30, 2014, our disclosure controls and procedures are effective to ensure that decisions can be made timely with respect to required disclosures, as well as ensuring that the recording, processing, summarization and reporting of information required to be included in our Quarterly Report on Form 10-Q for the quarter ended
March 31,June 30, 2014 is appropriate.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the
firstsecond quarter of 2014 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
The certifications of our Chief Executive Officer and our Chief Financial Officer that are Exhibits 31.1 and 31.2, respectively, should be read in conjunction with the foregoing information for a more complete understanding of the references in those Exhibits to disclosure controls and procedures and internal control over financial reporting.
PART II. OTHER INFORMATION
The Company’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.
There are no material changes in the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures
Item 5. Other InformationNone
On August 11, 2014, the Company announced that Lori Senecal was appointed President and Chief Executive Officer of the MDC Partner Network, effective as of September 1, 2014. The Partner Network includes the MDC agency operations and the corporate Strategic Resources Group. In her new role, Ms. Senecal will report to Miles Nadal, President, Chairman and CEO of MDC Partners, who will continue to oversee all operational matters and lead the public company in all areas of corporate vision, shareholder leadership and investment strategy.
In addition, effective September 1, 2014, Ms. Senecal was appointed as a member of the Company’s Board of Directors. Ms. Senecal will not serve on any of the Committees of the Board of Directors.
Pursuant to the terms of her new employment agreement with the Company, Ms. Senecal will receive an annual base salary of $1 million; a perquisite allowance of $2,000 per month; and eligibility to receive an annual discretionary bonus of up to 100% of her base salary contingent upon achievement of individual target performance goals and the overall financial performance of the Company for a given year. Ms. Senecal will receive a sign-on equity award of 50,000 shares of Class A restricted stock, subject to three-year cliff vesting terms and conditions. Ms. Senecal’s employment agreement also contains, among other things, covenants imposing on her certain obligations with respect to confidentiality and proprietary information, and restrictions on her ability to engage in certain activities in competition with the Company during her employment and for a period of 24 months after termination. Ms. Senecal will not receive any additional compensation in connection with her service on the Company’s Board of Directors.
The exhibits required by this item are listed on the Exhibit Table.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| |
| MDC PARTNERS INC. |
| |
| /s/ Michael Sabatino | |
| Michael Sabatino |
| Senior Vice President, Chief Accounting Officer |
| |
April 29,August 11, 2014 |
|
| | |
| Exhibit No. | | Description |
| | | |
| 4.1 | | Fourth Supplemental Indenture, dated as of March 14, 2014, to the Indenture, dated as of March 20, 2013, among the Company, the Note Guarantors and The Bank of New York Mellon, as trustee, including the form of 6.75% Senior Notes due 2020.* |
| | |
4.2 | | Fifth Supplemental Indenture, dated as of April 2, 2014, to the Indenture, dated as of March 20, 2013, among the Company, the Note Guarantors and The Bank of New York Mellon, as trustee, including the form of 6.75% Senior Notes due 2020 (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 2, 2014). |
| | | |
| 10.1 | | Consent and Third Amendment, with an effective date of March 27, 2014, to Amended and Restated CreditUnderwriting Agreement, dated as of March 20, 2013,May 13, 2014, among the Company, MaxxcomMDC Partners Inc., a Delaware corporation, each of their subsidiaries party thereto, Wells FargoMiles S. Nadal and BMO Capital Finance, LLC, as agent, and the lenders from time to time party theretoMarkets Corp. (incorporated by reference to the Company’sCompany's Current Report on Form 8-K filed on March 28,May 16, 2014). |
| | |
| 10.2 | | Price Determination Agreement, dated May 13, 2014, among MDC Partners Inc., Miles S. Nadal and BMO Capital Markets Corp. (incorporated by reference to the Company's Current Report on Form 8-K filed on May 16, 2014). |
| | |
| 10.3 | | Amended and Restated Employment Agreement, dated as of August 10, 2014, between Lori Senecal and MDC Partners Inc.* |
| | | |
| 12 | | Statement of computation of ratio of earnings to fixed charges.* |
| | | |
| 31.1 | | Certification by Chief Executive Officer pursuant to Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | | |
| 31.2 | | Certification by Chief Financial Officer pursuant to Rules 13a - 14(a) and 15d - 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | | |
| 32.1 | | Certification by Chief Executive Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | | |
| 32.2 | | Certification by Chief Financial Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | | |
| 99.1 | | Schedule of ownership by operating subsidiary.* |
| | | |
| 101 | | Interactive data file.* |
* Filed electronically herewith.