UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20172019
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 001-13718
MDC PARTNERS INC.
(Exact Name of Registrant as Specified in Its Charter)
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| Canada | | 98-0364441 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
745 Fifth Avenue, 19th330 Hudson Street, 10th Floor, New York, New York 1015110013
(646) 429-1800
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Trading Symbols | | Name of Each Exchange on Which Registered |
| Class A Subordinate Voting Shares, no par value | | MDCA | | NASDAQ |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YesAct. Yes oNo ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.YesAct. Yes o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesdays. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ýo Accelerated filer oý Non-accelerated filer (do not check if a smaller reporting company) o
Smaller reporting company oý Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes. Yes o No ý
The aggregate market value of the shares of all classes of voting and non-voting common stock of the registrant held by non-affiliates as of June 30, 201728, 2019, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $559.3$140.7 million, computed upon the basis of the closing sales price ($9.90/share)$2.52 of the Class A subordinate voting shares on that date.
As of February 21, 2018,2020, there were 58,432,67772,166,854 outstanding shares of Class A subordinate voting shares without par value, and 3,7553,749 outstanding shares of Class B multiple voting shares without par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant'sRegistrant’s Proxy Statement relating to the 20182020 Annual General Meeting of Stockholders are incorporated by reference in Part III of this report.
MDC PARTNERS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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| PART I |
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| PART II |
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| PART III |
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| PART IV |
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References in this Annual Report on Form 10-K to “MDC Partners,” “MDC,” the “Company,” “we,” “us” and “our” refer to MDC Partners Inc. and, unless the context otherwise requires or otherwise is expressly stated, its subsidiaries. References in thethis Annual Report on Form 10-K to “Partner Firms” generally refer to the Company’s subsidiary agencies.
All dollar amounts are stated in U.S. dollars unless otherwise stated.
DOCUMENTS INCORPORATED BY REFERENCE
The following sectionsPortions of the registrant’s Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders to be held on June 6, 2018, are incorporated by reference in Parts I and III: “Electioninto Part III of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation,” “Report of the Human Resources and Compensation Committeethis Annual Report on Executive Compensation,” “Outstanding Shares,” “Appointment of Auditors,” and “Certain Relationships and Related Transactions.”Form 10-K where indicated.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. The Company’s representatives may also make forward-looking statements orally or in writing from time to time. Statements in this document that are not historical facts, including statements about the Company’s beliefs and expectations, recent business and economic trends, potential acquisitions, and estimates of amounts for redeemable noncontrolling interests and deferred acquisition consideration, 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. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the Company’s control. Therefore, you should not place undue reliance on such statements. 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;conditions that could affect the Company or its clients, including as a result of the recent coronavirus outbreak;
the Company’s ability to attract new clients and retain existing clients;
thereduction in client spending patterns and changes in client advertising, marketing and corporate communications requirements;
financial successfailure of the Company’s clients;
the Company’s ability to retain and attract key employees;
the Company’s ability to achieve the full amount of its stated cost saving initiatives;
the Company’s implementation of strategic initiatives;
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 redeemable noncontrolling interests and deferred acquisition consideration;
the successful completion and integration of acquisitions which complement and expand the Company’s business capabilities; and
foreign currency fluctuations; and
risks associated with the ongoing Canadian class litigation claim.
The Company’s business strategy includes ongoing efforts to engage in 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 (as defined below) and through incurrence of bridge or other debt financing, any 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 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.fluctuations.
Investors should carefully consider these risk factors and the additional risk factors outlined in more detail in this Annual Report on Form 10-K under Item 1A, under the caption “Risk Factors” and in the Company’s other SEC filings.
SUPPLEMENTARY FINANCIAL INFORMATION
The Company reports its financial results in accordance with accounting principles generally accepted accounting principles ofin the United States of America (“U.S. GAAP”). However, the Company has included certain non-U.S. GAAPnon-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. These measures do not have a standardized meaning prescribed by U.S. 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 U.S. GAAP.
PART I
Item 1. Business
MDC PARTNERS INC.
MDC was formed by Certificate of Amalgamation effective December 19, 1986, pursuant to the Business Corporations Act (Ontario). Effective December 19, 1986, MDC amalgamated with Branbury Explorations Limited, and thereby became a public company operating under the name of MDC Corporation. On January 1, 2004, MDC changed its name to its current name, MDC Partners Inc., and on June 28, 2004, MDC was continued under Section 187 of the Canada Business Corporations Act. MDC’s registered address is located at 33 Draper Street, Toronto, Ontario, M5V 2M3, and its head office address is located at 745 Fifth Avenue, 19th330 Hudson Street, 10th Floor, New York, New York 10151.10013. MDC is not a “foreign private issuer” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
About Us
MDC Partners is a leading global providermarketing and communications network, providing marketing and business solutions that realize the potential of marketing, advertising, activation, communicationscombining data and strategic consulting solutions.creativity. Through its network of Partner Firms (as defined below),agencies, MDC delivers a broad range of customizedclient services, including (1) global advertising and marketing, (2) data analytics and insights, (3) mobile and technology experiences, (4) media buying, planning and optimization, (3) interactive and mobile marketing, (4)(5) direct marketing, (5)(6) database and customer relationship management, (6)(7) business consulting, (8) sales promotion, (7)(9) corporate communications, (8)(10) market research, (9) data analytics and insights, (10)(11) corporate identity, design and branding services, (11)(12) social media strategy and communications, (12)(13) product and service innovation, (13) e-commerce management, and (14) technology services.
Market Strategy
MDC’s strategy is to build, grow and acquire market-leading businesses that deliver innovative, value-added marketing, activation, communications and strategic consulting services to their clients. By doing so, MDC strives to be a partnership ofe-commerce management. These marketing, communications, and consulting companiesagencies (or “Partner Firms”) whose strategic, creative and innovative solutions are media-agnostic, challenge the status quo, achieve measurable superior returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
The MDC model is driven by three key elements:
Perpetual Partnership. The perpetual partnership model creates ongoing alignment of interests between MDC and its Partner Firms to drive the Company’s overall performance by (1) identifying the “right” Partner Firms with a sustainable differentiated position in the marketplace, (2) creating the “right” partnership structure by taking a majority ownership position and leaving a substantial noncontrolling equity or economic ownership position in the hands of operating management to incentivize long-term growth, (3) providing succession planning support and compensation models to incentivize future leaders and second-generation executives, (4) leveraging the network’s scale to provide access to strategic resources and best practices and (5) focusing on delivering financial results.
Entrepreneurialism. The entrepreneurial spirit of both MDC and its Partner Firms is optimized through (1) its unique perpetual partnership model that incentivizes senior-level involvement and ambition, (2) access to shared resources within the Corporate Group that allow individual firms to focus on client business and company growth and (3) MDC’s collaborative creation of customized solutions to support and grow Partner Firm businesses.
Human and Financial Capital. The perpetual partnership model balances accountability with financial flexibility and meaningful incentives to support growth.
Financial Reporting Segments
MDC has four reportable segments, plus an All Other category, all of which form the Advertising and Communications Group. The Partner Firms provide a wide range of service offerings both domestically and globally. While in some cases the firms provide the same or similar service offerings, the core or principal service offering is the key factor that distinguishes the Partner Firms from one another.
Market Strategy
MDC’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. MDC’s differentiation lies in its best-in-class creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. To be the modern marketing company of choice, MDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The following discussion provides additional detailed disclosureCompany’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
The MDC model is driven by:
Data + Creativity. MDC creates solutions that aim to realize the potential of data and creativity, bringing the network’s award-winning creativity to modern solutions in mobile, digital experiences, and all methods of marketing communications. This is reinforced by the venture investments the Company makes in technology solutions as well as those it makes in building its own proprietary technologies and solutions from the ground up.
Talent + Entrepreneurialism. The entrepreneurial spirit of both MDC and its firms is optimized through (1) its model that incentivizes senior-level ambition, including the creation of multi-agency networks that enable proven leaders to steward increasingly scaled platforms and provide growth opportunities for talent at all levels, and (2) best-in-class shared resources within the corporate group that allow individual firms to focus on client business and company growth.
Collaboration. MDC values collaboration as manifested through (1) MDC’s creation of customized solutions for clients across disciplines that foster the integration of complementary disciplines, driving better results for clients, and in turn, growth for its firms, and (2) the creation of multi-agency networks that drive greater opportunity for individual firms to benefit from the scale of the holding company and as well as resources of like-minded agencies within the group, and create fewer cost centers.
Reporting Segments
MDC has four reportable segments, plus an All Other category, all of which form the Advertising and Communications Group as of December 31, 2019.
The four reportable segments and the All Other category:category are as follows:
Global Integrated Agencies - This segment is comprised of the Company’s sixfour global, integrated Partner Firms with broad marketing communication capabilities, including advertising, branding, digital, social media, design and production services, serving multinational clients around the world. The Partner Firms within the Global Integrated Agenciesreportable segment provide a range of different services for their clients, including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast).
Domestic Creative Agencies - This segment is comprised of fourseven Partner Firms that are national advertising agencies leveraging creative capabilities at their core.
Specialist Communications - This segment is comprised of sevenfour Partner Firms that are each communications agencies with core service offerings in public relations and related communications services.
Media Services - This segment is comprised of a singleone operating segment with media buying and planning as its core competency.
All Other - This category consists of the Company’s remaining Partner Firms that provide a range of diverse marketing communication services but are not eligible for aggregation with the reportable segments. Each of the Partner Firms in the All Other category represent less than 10% of consolidated revenue and do not meet the criteria to be a separate reportable segment.
Corporate - In addition, MDC reports its corporate office expenses incurred in connection with the strategic resources provided to the Partner Firms, as well as certain other centrally managed expenses that are not fully allocated to the Partner Firms as Corporate.Corporate, including interest expense and public company overhead costs. Corporate provides client and business development support to the Partner Firms as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions. Additional expenses managed by the corporate office that are directly related to the Partner Firms are allocated to the appropriate reportable segment and the All Other category.
For further information relating to the Company’s segments, including financial information, refer tosee Note 15 (Segment Information)21 of the Notes to the Consolidated Financial Statements and to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mark Penn, Chief Executive Officer and Chairman of the Company, appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we are assessing a change in our reportable segments, effective with the Company’s 2020 fiscal year, to align our external reporting with how we operate the Networks under our new organizational structure.
Ownership Information
MDC maintains a majority or 100% ownership position in substantially all of its Partner Firms with management of the partner companiesPartner Firms owning the remaining equity. MDC generally has rights to increase ownership of non-wholly owned subsidiaries to 100% over a defined period of time. MDC’s effective economic interest in each Partner Firm may vary from its voting ownership interest due to certain factors, such as the existence of contingent deferred acquisition payments and/or cash distribution hurdles related to noncontrolling interest holders.
The table below sets forth MDC’s voting ownership percentage of each listed Partner Firm as of December 31, 2017.2019. The table does not display all agencies or components within each Partner Firm for which MDC may or may not maintain the same ownership percentage. See Note 4 of the Notes to the Consolidated Financial Statements for more information regarding the Company’s contingent purchase price obligations and noncontrolling interests.
MDC PARTNERS INC. AND SUBSIDIARIES
SCHEDULE OF ADVERTISING AND COMMUNICATIONS COMPANIES
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| | | Year of Initial | | | |
| Company | | Investment | | Locations | Ownership % |
| Consolidated: | | | | | |
| Global Integrated Agencies: | | | | | |
| 72andSunny | | 2010 | | Los Angeles, New York, Netherlands, Australia, Singapore | 100.0 | % |
| Anomaly | | 2011 | | New York, Los Angeles, Netherlands, Canada, UK, China, Germany | 100.0 | % |
| Crispin Porter + Bogusky | | 2001 | | Miami, Boulder, Los Angeles, UK, Denmark, Brazil, China | 100.0 | % |
| Doner | | 2012 | | Detroit, Cleveland, Los Angeles, UK | 65%/ 85%* |
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| Forsman & Bodenfors | | 2016 | | Sweden | 100.0 | % |
| kbs | | 2004 | | New York, Canada, China, UK, Los Angeles | 100.0 | % |
| Domestic Creative Agencies: | | | | | |
| Colle + McVoy | | 1999 | | Minneapolis | 100.0 | % |
| Laird + Partners | | 2011 | | New York | 65.0 | % |
| Mono Advertising | | 2004 | | Minneapolis, San Francisco | 70.0 | % |
| Union | | 2013 | | Canada | 75.0 | % |
| Specialist Communications: | | | | | |
| Allison & Partners | | 2010 | | San Francisco, Los Angeles, New York and other US Locations, China, France, Singapore, UK, Japan, Germany | 75.5 | % |
| Luntz Global | | 2014 | | Washington, D.C. | 100.0 | % |
| Sloane & Company | | 2010 | | New York | 100.0 | % |
| HL Group Partners | | 2007 | | New York, Los Angeles, China | 100.0 | % |
| Hunter PR | | 2014 | | New York, UK | 65.0 | % |
| Kwittken | | 2010 | | New York, UK, Canada | 77.5 | % |
| Veritas | | 1993 | | Canada | 95.0 | % |
| Media Services: | | | | | |
| MDC Media Partners | | 2010 | | New York, Detroit, Los Angeles, Austin | 100.0 | % |
| All Other: | | | | | |
| 6degrees Communications | | 1993 | | Canada | 74.9 | % |
| Bruce Mau Design | | 2004 | | Canada | 100.0 | % |
| Concentric Partners | | 2011 | | New York, UK | 72.8 | % |
| Gale Partners | | 2014 | | Canada, New York, India | 60.0 | % |
| Hello Design | | 2004 | | Los Angeles | 49.0 | % |
| Kenna | | 2010 | | Canada | 100.0 | % |
| Kingsdale | | 2014 | | Canada, New York | 65.0 | % |
| Northstar Research Partners | | 1998 | | Canada, New York, UK | 100.0 | % |
| Redscout | | 2007 | | New York, San Francisco, UK | 100.0 | % |
| Relevent | | 2010 | | New York | 100.0 | % |
TABLE OF CONTENTS |
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| | | Year of Initial | | | |
| Company | | Investment | | Locations (City or Country) | Ownership % |
| Consolidated: | | | | | |
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| Global Integrated Agencies: | | | | | |
| 72andSunny | | 2010 | | Los Angeles, New York, Netherlands, UK, Australia, Singapore | 100.0 | % |
| Anomaly | | 2011 | | New York, Los Angeles, Netherlands, Canada, UK, China, Germany | 100.0 | % |
| Crispin Porter Bogusky | | 2001 | | Boulder, Los Angeles, UK, Brazil, China | 100.0 | % |
| Forsman & Bodenfors | | 2004 | | Sweden, New York, Canada, China, UK, Los Angeles, Singapore | 100.0 | % |
| The Media Kitchen | | 2004 | | New York, Canada, UK | 100.0 | % |
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| Domestic Creative Agencies: | | | | | |
| Doner | | 2012 | | Detroit, Cleveland, Los Angeles, UK | 100.0 | % |
| Yes & Company | | 2018 | | New York | |
| HL Group Partners | | 2007 | | New York, Los Angeles, China
| 100.0 | % |
| Redscout | | 2007 | | New York, UK | 100.0 | % |
| Bruce Mau Design | | 2004 | | Canada, New York | 100.0 | % |
| Northstar Research Partners | | 1998 | | Canada, New York, UK, Indonesia | 100.0 | % |
| Colle McVoy | | 1999 | | Minneapolis | 100.0 | % |
| Laird + Partners | | 2011 | | New York | 100.0 | % |
| Mono Advertising | | 2004 | | Minneapolis, San Francisco | 70.0 | % |
| Union | | 2013 | | Canada | 75.0 | % |
| Yamamoto | | 2000 | | Minneapolis | 100.0 | % |
| Civilian | | 2000 | | Chicago | 100.0 | % |
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| Specialist Communications: | | | | | |
| Allison & Partners | | 2010 | | San Francisco, Los Angeles, New York and other US Locations, China, France, Singapore, UK, Japan, Germany | 100.0 | % |
| Luntz Global | | 2014 | | Washington, D.C. | 100.0 | % |
| Sloane & Company (Sold in February 2020) | | 2010 | | New York | 100.0 | % |
| Hunter PR | | 2014 | | New York, UK | 100.0 | % |
| KWT Global | | 2010 | | New York, UK, Canada | 77.5 | % |
| Veritas | | 1993 | | Canada | 90.0 | % |
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| Media Services: | | | | | |
| MDC Media Partners | | 2010 | | New York | |
| Attention | | 2009 | | New York, Los Angeles | 100.0 | % |
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| Source Marketing | | 1998 | | Norwalk, Pittsburgh | 97.0 | % |
| TEAM | | 2010 | | Ft. Lauderdale | 100.0 | % |
| Vitro | | 2004 | | San Diego, Austin | 81.6 | % |
| Yamamoto | | 2000 | | Minneapolis | 100.0 | % |
| Civilian | | 2000 | | Chicago | 100.0 | % |
| Y Media Labs | | 2015 | | Redwood City, New York, India, Atlanta, Indianapolis | 60.0 | % |
* The Company has 65% voting interest and convertible preferred interests that allow the Company to increase ordinary voting ownership to 85% at the Company’s option.
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| Varick Media Management | | 2010 | | New York | 100.0 | % |
| Assembly | | 2010 | | New York, Detroit, Atlanta, Los Angeles | 100.0 | % |
| EnPlay | | 2015 | | New York | 100.0 | % |
| Trade X | | 2011 | | New York | 90.0 | % |
| Unique Influence | | 2015 | | Austin | 100.0 | % |
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| All Other: | | | | | |
| 6degrees Communications | | 1993 | | Canada | 74.9 | % |
| Concentric Partners | | 2011 | | New York, UK | 72.3 | % |
| Gale Partners | | 2014 | | Canada, New York, India, Singapore | 60.0 | % |
| Instrument | | 2018 | | Portland | 51.0 | % |
| Kenna | | 2010 | | Canada | 100.0 | % |
| Relevent | | 2010 | | New York | 100.0 | % |
| TEAM | | 2010 | | Ft. Lauderdale | 100.0 | % |
| Vitro | | 2004 | | San Diego, Austin | 81.6 | % |
| Y Media Labs | | 2015 | | Redwood City, New York, India | 60.0 | % |
Competition
MDC operates in a highly competitive and fragmented industry. OurMDC Partner Firms compete for business and talent with the operating subsidiaries of large global holding companies such as Omnicom Group Inc., Interpublic Group of Companies, Inc., WPP plc, Publicis Groupe SA, Dentsu Inc. and Havas SA, as well as with numerous independent agencies that operate in multiple markets. Our firmsPartner Firms also face competition from consultancies, tech platforms, media companies and other services firms that have begun to offer related services. MDC’s Partner Firms must compete with all of these other companies to maintain and grow existing client relationships and to obtain new clients and assignments.
MDC’s Partner Firms compete at this level by providing clients with progressive advertising andinnovative marketing ideas and solutions that are focused on increasing clients’ revenuesleverage the full power of data, technology, and profits.superior creativity. MDC also benefits from cooperation among its entrepreneurial Partner Firms, through referrals and the sharing of both services and expertise, which enables MDC to service the full range of global clients’ varied marketing needs around the world by craftingthrough custom integrated solutions. Additionally, MDC’s consistent maintenance of separate, independent operating companies enables MDC to effectively manage potential conflicts of interest by representing competing clients across its network.
Industry Trends
There are several recent economic and industry trends that affect or may be expected to affect the Company’s results of operations. Historically, advertising has been the primary service provided by the marketing communications industry. However, as clients aim to establish one-to-one relationships with customers, and more accurately measure the effectiveness of their marketing expenditures, specialized and digital communications services and database marketingas well as data and analytics services are consuming a growing portion of marketing dollars. The Company believes these changes in the way consumers interact with media isare increasing the demand for a broader range of non-advertising marketing communications services (i.e., user experience design, product innovation, direct marketing, sales promotion, interactive, mobile, strategic communications and public relations), which we expect could have a positive impact on our results of operations. In addition, the rise of technology and data solutions have rendered scale less crucial as it once was in areas such as media buying, creating significant opportunities for agile and modern players. Global marketers now demand breakthrough and integrated creative ideas, and no longer require traditional brick-and-mortar communications partners in every market to optimize the effectiveness of their marketing efforts. Combined with the fragmentation of the media landscape, these factors provide new opportunities for small to mid-sized communications companies like those in the MDC network. In addition, marketers now require evereven greater speed-to-market to drive financial returns on their marketing and media investment, causing them to turn to more nimble, entrepreneurial and collaborative communications firms like MDCMDC’s Partner Firms.
As client procurement departments have focused increasingly on marketing services company fees in recent years, the Company has invested in resources to work with client procurement departments to ensure that we are able to deliver against client goals in a mutually beneficial way. For example, the Company has explored new compensation models, such as performance-based incentive payments and equity, in order to greater align our success with our clients. These incentive payments may offset negative pricing pressure from client procurement departments.
Clients
MDC serves a large base of clients across the full spectrum of industry verticals. In many cases, we serve the same clients in various geographic locations, across multiple disciplines, and through multiple Partner Firms. Representation of a client rarely means that MDC handles marketing communications for all brands or product lines of the client in every geographical location. During 2017, 20162019, 2018 and 2015,2017, the Company did not have a client that accounted for 5% or more of revenues. In addition, MDC’s
ten largest clients (measured by revenue generated) accounted for 23%,approximately 23% and 24% of 2017, 2016 and 2015 revenues, respectively.revenue for the three-year period ended December 31, 2019.
MDC’s agencies have written contracts with many of their clients. As is customary in the industry, these contracts generally provide for termination by either party on relatively short notice, usually 90 days.notice. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview” for a further discussion of MDC’s arrangements with its clients.
For further information regarding revenues and long-lived assets on a geographical basis for each of the last three years, see Note 15 of the Notes to the Consolidated Financial Statements.
Employees
As of December 31, 2017,2019, we employed approximately 6,2005,647 people worldwide. The following table provides a breakdown of full time employees across MDC’s four reportable segments, the All Other category, and Corporate:
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| | | |
| Segment | | Total |
| Global Integrated Agencies | | 3,0772,167 |
|
| Domestic Creative Agencies | | 4521,002 |
|
| Specialist Communications | | 638695 |
|
| Media Services | | 484336 |
|
| All Other | | 1,4671,381 |
|
| Corporate | | 8266 |
|
| Total | | 6,2005,647 |
|
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the effect of cost of services sold on MDC’s historical results of operations. Because of the personal service character of the marketing communications businesses, the quality of personnel is of crucial importance to MDC’s continuing success. MDC considers its relations with its employees to be satisfactory.
EffectSeasonality
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 Environmental Laws
MDC believes it is substantially in compliance with all regulations concerningmedia placements and retail-related consumer marketing occur. See Note 22 of the discharge of materials intoNotes to the environment, and such regulations have not had a material effect onConsolidated Financial Statements for information relating to the capital expenditures or operations of MDC.Company’s quarterly results.
Available Information
Information regarding the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, at the Company’s website at http:https://www.mdc-partners.com, as soon as reasonably practicable after the Company electronically files such reports with or furnishes them to the Securities and Exchange Commission (the “SEC”). The information found on, or otherwise accessible through, the Company’s website is for information purposes only and is included as an inactive textual reference. It should not be relied upon for investment purposes, nor is it incorporated by reference into and does not form a part of, this Annual Report oron Form 10-K. Any document that the Company files with the SEC may also be read and copied at the SEC’s Public Reference Room located at 100 F. Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of Public Reference Room. The Company’s filings are also available to the public from the SEC’s website at http:https://www.sec.gov.
The Company’s Code of Conduct (Whistleblower Policy) and each of the charters for the Audit Committee, Human Resources and Compensation Committee and Nominating and Corporate Governance Committee, are available free of charge on the Company’s website at http://www.mdc-partners.com or by writing to MDC Partners Inc., 745 Fifth Avenue, 19th Floor, New York, New York 10151, Attention: Investor Relations.
Item 1A. Risk Factors
You should carefully consider the risk factors set forth below, as well as the other information contained in this Form 10-K, including our consolidated financial statements and related notes. This Form 10-K contains forward-looking statements that involve risks and uncertainties. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. The following risk factors are not necessarily presented in order of relative importance and should not be considered to represent a complete set of all potential risks that could adversely affect the Company’s revenues,our business, financial condition or results of operations or financial condition. See also “Forward-Looking Statements.”operation.
Future economic and financial conditions could adversely impact our financial condition and results.
Advertising, marketing and communications expenditures are sensitive to global, national and regional macroeconomic conditions, as well as specific budgeting levels and buying patterns. Adverse developments including heightened economic uncertainty could reduce the demand for our services, which could adversely affecthave a material adverse effect on our revenue, results of operations, cash flows and financial position in 2018.position.
a. As a marketing services company, our revenues are highly susceptible to declines as a result of unfavorable economic conditions.
Global economic conditions affect the advertising and marketing services industry more severely than other industries. In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which include discretionary components that are easier to reduce in the short term than other operating expenses. This pattern may recur in the
future. Decreases in our revenue would negatively affect our financial results, including a reduction of our estimates of free cash flow from operations.
b. If our clients experience financial distress, their weakened financial position could negatively affect our own financial position and results.
We have a diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy protection or go out of business. The unfavorableUnfavorable economic and financial conditions that have impacted many sectors ofin the global economy could result in an increase in client financial difficulties that affect us. The direct impact on us could includeresulting in reduced demand for our services, reduced revenues, delayed payments by clients, and increased write offs of accounts receivable. If these effects were severe, the indirect impact could include impairments of goodwill, covenant violations relating to MDC’s senior secured revolving credit agreement (the “Credit Agreement”) or the $900 million aggregate principal amount of 6.50% notes due 2024 (the “6.50% Notes”), or reduced liquidity. Our ten largest clients (measured by revenue generated) accounted for 23% of our revenue in 2017.
c. Conditions in the credit markets could adversely impact our results of operations and financial position.
Turmoil in the credit markets or a contraction in the availability of credit would make it more difficult for businesses to meet their capital requirements and could lead clients to change their financial relationship with their vendors, including us. If that were to occur, it could materially adversely impact our results of operations and financial position.
d. Our financial condition and results of operations for fiscal 2020 may be adversely affected by the recent coronavirus outbreak.
In December 2019, a novel strain of coronavirus surfaced in Wuhan, China. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
MDC competes for clients in highly competitive industries.
The Company operates in a highly competitive environment in an industry characterized by numerous firmsadvertising and marketing agencies of varying sizes, with no single firmadvertising and marketing agency or group of firmsagencies having a dominant position in the marketplace. MDC is, however, smaller than several of its larger industry competitors. Competitive factors include creative reputation, management, personal relationships, quality and reliability of service and expertise in particular niche areas of the marketplace. In addition, because a firm’san agency’s principal asset is its people, barriers to entry are minimal, and relatively small firmsagencies are, on occasion, able to take all or some portion of a client’s business from a larger competitor.
While many of MDC’s client relationships are long-standing, companies put their advertising and marketing services businesses up for competitive review from time to time, including at times when clients enter into strategic transactions or experiencedexperience senior management changes. From year to year, the identities of MDC’s ten largest customers may change, as a result of client losses and additions and other factors. To the extent that the Company fails to maintain existing clients or attract new clients, MDC’s business, financial condition, and operating results, and cash flows may be affected in a materially adverse manner.
The loss of lines of credit under the Credit AgreementIf our available liquidity is insufficient, our financial condition could be adversely affect MDC’s liquidityaffected and our abilitywe may be unable to implement MDC’sfund contingent deferred acquisition strategyliabilities, and fund any put options if exercised.
MDC uses amounts available under the Credit Agreement,maintains a committed $250 million senior secured revolving credit agreements due May 3, 2021 (the “Credit Agreement”), together with cash flow from operations, to fund its working capital needs and to fund the exercise of put option
obligations and to fund our strategy of making selective acquisitions of ownership interests in entities in the marketing communications services industry, including through contingent deferred acquisition payments.
The Company is currently in compliance with all of the terms and conditions of the Credit Agreement. If however, eventscredit were to occur, which result in MDC losing allunavailable or a substantial portion of its available creditinsufficient under the Credit Agreement, or if MDC was prevented from accessing such lines of credit due to other restrictions such as those in the indenture governing the 6.50% Notes, MDCMDC’s liquidity could be required to seek other sources of liquidity. In addition, if MDC were unable to replace this source of liquidity, thenadversely affected and MDC’s ability to fund its working capital needs and any contingent obligations with respect to put options or contingent deferred acquisition payments wouldcould be materially adversely affected.
We have significant contingent obligations related to deferred acquisition consideration and noncontrolling interests in our subsidiaries, which will require us to utilize our cash flow and/or to incur additional debt to satisfy.
The Company MDC has made a number of acquisitions for which it has deferred payment of a portion of the purchase price, usually for a period between one to five years afterwith the acquisition. The deferred acquisition consideration is generally payable based on achievement of certain thresholds of future earnings of the acquired company and, in certain cases, also based on the rate of growth of those earnings. Once any contingency is resolved, the Company may pay the contingent consideration over time.
The Company records liabilities on its balance sheet for deferred acquisition payments at their estimated value based on the current performance of the business, which are remeasured each quarter. At December 31, 2017, these aggregate liabilities were $122.4 million, of which $50.2 million, $29.6 million, $24.9 million and $17.7 million would be payable in 2018, 2019, 2020 and thereafter, respectively.
company. In addition, to the Company’s obligations for deferred acquisition consideration, managers of certain of the Company’sa noncontrolling shareholder in an acquired subsidiaries hold noncontrolling interests in such subsidiaries. In the case of certain noncontrolling interests related to acquisitions, such managers are entitled to a proportionate distribution of earnings from the relevant subsidiary, which is recognized on the Company’s consolidated income statement under “Net income attributable to the noncontrolling interests.”
Noncontrolling shareholdersbusiness often havehas the right to require the CompanyMDC to purchase all or part of its interest, either at specified dates or upon the termination of such shareholder’s employment with the subsidiary or death (put rights). In addition, the Company usually has rights to call noncontrolling shareholders’ interests at a specified date. The purchase price for both puts and calls is typically calculated based on specified formulas tied to the financial performance of the subsidiary.
The Company recorded $62.9 million on its December 31, 2017 balance sheet as redeemable noncontrolling interests for its estimated obligations in respect of noncontrolling shareholder put and call rights based on the current performance of the subsidiaries, $15.9 million of which related to put rights for which, if exercised, the payments are due at specified dates, with the remainder of redeemable noncontrolling interests attributable to put or call rights exercisable only upon termination of employment or death. No estimated obligation is recorded on the balance sheet for noncontrolling interests for which the Company has a call right but the noncontrolling holder has no put right.
Payments to be made by the Company in respect of deferred acquisition consideration and noncontrolling shareholder put rights may be significantly higher than the amounts estimated amounts described aboveby MDC because the actual obligation adjusts based on the performance of the acquired businesses over time, including future growth in earnings from the calculations made at December 31, 2017. Similarly, the payments made by the Company under call rights would increase with growth in earnings of the acquired businesses. The Company expects that deferred contingent consideration and noncontrolling interests for managerstime. If available liquidity is insufficient, MDC may be features of future acquisitions that it may undertake and that it may also grant similar noncontrolling interestsunable to managers of its subsidiaries unrelated to acquisitions.
The Company expects that its obligations in respect offund contingent deferred acquisition consideration and payments to noncontrolling shareholders under put and call rights will be a significant use of the Company’s liquidity in the foreseeable future, whether in the form of free cash flow or borrowings under the Company’s revolving credit agreement or from other funding sources. For further information, see the disclosure under the heading “Business — Ownership Information” and the heading “Liquidity and Capital Resources.”payments.
MDC may not realize the benefits it expects from past acquisitions or acquisitions or other strategic transactions MDC may make in the future.
MDC’s business strategy includes ongoing efforts to engage in acquisitions of ownership interests in entities in the marketing communications services industry. MDC intends to finance these acquisitions by using available cash from operationsindustry and through incurrence of debt or bridge financing, either of which may increase its leverage ratios, or by issuing equity, which may have a dilutive impact on its existing shareholders. At any given time, MDC 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 MDC. 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 its securities.
Our expenses have, in certain periods, increased at a greater rate than revenues, which in part reflects both the increase in expenses for deferred acquisition consideration and from our investment in headcount for certain growth initiatives. Should our acquisitions continue to outperform current expectations, expenses for deferred acquisition consideration could increase as well in future periods. If our growth initiatives do not provide sufficient revenue to offset the incremental costs in future periods, profits could be reduced and severance expense could be incurred in order to return to targeted profit margins over time.other strategic transactions.
The success of acquisitions or strategic investments depends on the effective integration of newly acquired businesses into MDC’s current operations. Such integration is subject to risks and uncertainties, including realization of anticipated synergies and cost savings, the ability to retain and attract personnelexecutives and clients, the diversion of management’s attention from other business concerns, and undisclosed or potential legal liabilities of the acquired company. MDC’s failure to address these risks or other problems encountered in connection with our past or future acquisitions and other strategic transactions could cause MDC to fail to realize their anticipated benefits, incur unanticipated liabilities and harm MDC’s business generally. MDC’s acquisitions and other strategic transactions could also result in dilutive issuances of the Company’s equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which could harm its financial condition or operating results. Furthermore, the anticipated benefits or value of MDC’s acquisitions and other strategic transactions may not realize the strategic and financial benefits that it expects from any of its past acquisitions, or any future acquisitions.materialize.
MDC’s business could be adversely affected if it loses key clients or executives.clients.
MDC’s strategy has been to acquire ownership stakes in diverse marketing communications businesses to minimize the effects that might arise from the loss of any one client or executive.client. The loss of one or more clients could materially affect the results of the individual Partner Firmsagencies and the CompanyMDC as a whole. Management succession at
The loss of several of our operating units is very important to the ongoinglargest clients could have a material adverse effect on our business, results of operations, cash flows and financial position.
Our ten largest clients (measured by revenue generated) accounted for 23% of our revenue for the Company because, asthree-year period ended December 31, 2019. A significant reduction in any service business,spending on our services by our largest clients, or the successloss of a particular agency is dependent upon the leadershipseveral of key executives and management personnel. If key executives were to leave our operating units, the relationships that MDC has with itslargest clients, could be adversely affected.have a material adverse effect on our business, results of operations and financial position.
MDC’s ability to generate new business from new and existing clients may be limited.
To increase its revenues, MDC needs to obtain additional clients or generate demand for additional services from existing clients. MDC’s ability to generate initial demand for its services from new clients and additional demand from existing clients is subject to such clients’ and potential clients’ requirements, pre-existing vendor relationships, financial conditions, strategic plans and internal resources, as well as the quality of MDC’s employees, services and reputation and the breadth of its services. To the
extent MDC cannot generate new business from new and existing clients due to these limitations, MDC’s ability to grow its business and to increase its revenues will be limited.
MDC’s business could be adversely affected if it loses or fails to attract key executives or employees.
Management succession at our operating units is very important to the ongoing results of MDC because, as in any service business, the success of a particular agency is dependent upon the leadership of key executives and management. If key executives were to leave our operating units, the relationships that MDC has with its clients could be adversely affected.
Employees, including creative, research, analytics, media, technology development, account and practice group specialists, and their skills and relationships with clients, are among MDC’s most important assets. An important aspect of MDC’s competitiveness is its ability to retain key employee and management personnel. Compensation for these key employees is an essential factor in attracting and retaining them, and MDC may not offer a level of compensation sufficient to attract and retain these key employees. If MDC fails to hire and retain a sufficient number of these key employees, it may not be able to compete effectively. If key executives were to leave our operating units, the relationships that MDC has with its clients could be adversely affected.
MDC is exposed to the risk of client defaults.
MDC’s agencies often incur expenses on behalf of their clients for productions and in order to secure a variety of media time and space, in exchange for which they receive a fee. The difference between the gross cost of the production costs and media purchases and the net revenue earned by us can be significant. While MDC takes precautions against default on payment for these services (such as credit analysis, and advance billing of clients)clients, and in some cases acting as an agent for a disclosed principal) and has historically had a very low incidence of default, MDC is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn. Such a loss could have a material adverse effect on our results of operations, cash flows and financial position.
MDC’s results of operations are subject to currency fluctuation risks.
Although MDC’s financial results are reported in U.S. dollars, a portion of its revenues and operating costs are denominated in currencies other than the U.S. dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and other currencies, particularly the Canadian dollar, may affect MDC’s financial results and competitive position.
Goodwill, intangible assets and intangibleright-of-use assets may become impaired.
We have recorded a significant amount of goodwill and intangible assets in our consolidated financial statements in accordance with U.S. GAAP resulting from our acquisition activities, which principally represents the specialized know-how of the workforce at the agencies we have acquired. We test, at least annually, the carrying value of goodwill for impairment, as discussed in Note 2 of the Notes to the Consolidated Financial Statements included herein. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. As discussed in Note 2If MDC concludes that any intangible asset and goodwill values are impaired, any resulting non-cash impairment charge could have a material adverse effect on our results of operations and financial position. See Note 8 of the Notes to the Consolidated Financial Statements included herein,for details on goodwill impairment recorded for the yeartwelve months ended December 31, 2017,2019.
In addition, we have recorded goodwill impairmenta significant amount of $3.2 million. For the year ended December 31, 2017 there was a reductionright-of-use assets in goodwill of $17.6 million relating to the sale of certain subsidiaries. Asour consolidated financial statements in accordance with GAAP as a result of the these transactions,adoption of Accounting Standards Codification, Leases (“ASC 842”). Upon a triggering event, we test the Company performed interim goodwill testing on two reporting units and determined that there was noright-of-use assets for impairment, as discussed in Note 2 of the Notes to the Consolidated Financial Statements included herein. If a right-of-use asset is impaired, the resulting non-cash impairment charge in respectcould have a material adverse effect on our results of operations and financial position. See Note 10 of the Notes to the impacted reporting units.Consolidated Financial Statements for details on lease impairments recorded related to right-of-use assets.
MDC is subject to regulations and litigation risk that could restrict our activities or negatively impact our revenues.
Advertising and marketing communications businesses are subject to government regulation, both domestic and foreign. There has been an increasing tendencytrend in the United States on the part offor advertisers to resort to litigation and self-regulatory bodies to challenge comparative advertising on the grounds that the advertising is false and deceptive. Moreover, there has recently been an expansion of specific rules, prohibitions, media restrictions, labeling disclosures, and warning requirements with respect to advertising for certain products and the usage of personally identifiable information. Representatives within government bodies, both domestic and foreign, continue to initiate proposalsproducts. Proposals have been made to ban the advertising of specific products and to impose taxes on or deny deductions for advertising which, if successful, may have an adverse effect on advertising expenditures and consequently, on MDC’s revenues.
Certain of MDC’s agencies produce software and e-commerce tools for their clients, and these product offerings have become increasingly subject to litigation based on allegations of patent infringement or other violations of intellectual property rights. As we expand these product offerings, the possibility of an intellectual property claim against usMDC grows. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations and may result in us deciding to enter into license agreements to avoid ongoing patent litigation costs.operations. If we are not successful in defending such claims, we could be required to stop offering these services, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our clients. Such arrangements may cause our operating margins to decline.
In addition, laws and regulations related to userconsumer privacy, use of personal information and Internetdigital tracking technologies have been proposed or enacted in the United States and certain international markets (including the European Union’s recently enacted General Data Protection Regulation, or “GDPR”“GDPR,” the proposed European Union “ePrivacy Regulation” and the recently enacted California Consumer Privacy Act, or “CCPA”). TheseWe face increasing costs of compliance in an uncertain regulatory environment and any failure to comply with these legal requirements could result in regulatory penalties or other legal ability. Furthermore, these laws and regulations could affectmay impact the acceptanceefficacy and profitability of the Internet as an advertising medium.certain digital marketing and analytics services we provide to clients, making it difficult to achieve our clients’ goals. These actionsand other related factors could affect our business and reduce demand for certain of our services, which could have a material adverse effect on our results of operations and financial position.
TABLE OF CONTENTSCompliance with data privacy laws requires ongoing investment in systems, policies and personnel and will continue to impact our business in the future by increasing legal, operational and compliance costs. While we have taken steps to comply with data privacy laws, we cannot guarantee that our efforts will meet the evolving standards imposed by data protection authorities. In the event that we are found to have violated data privacy laws, we may be subject to additional potential private consumer, business
partner or securities litigation, regulatory inquiries, governmental investigations and proceedings and we may incur damage to our reputation. Any such developments may subject us to material fines and other monetary penalties and damages, divert management’s time and attention, and lead to enhanced regulatory oversight all of which could have a material adverse effect on our business and results of operations.
Some of MDC’s Partner Firms rely upon signatory service companies to employ union performers in commercials.
Some of MDC’s creative agencies that have not entered into the SAG-AFTRA Commercials Contract have traditionally used signatory service companies, which are parties to the SAG-AFTRA Commercials Contract, to employ SAG-AFTRA union performers appearing in television, new media, and other commercials produced by those agencies. SAG-AFTRA has recently persuaded the principal signatory service companies to change the way such signatory service companies do business. These changes will make it more cumbersome and expensive for advertising agencies which have not entered into the SAG-AFTRA Commercials Contract to produce advertisements using SAG-AFTRA members, and in some cases may preclude the use of SAG-AFTRA members in a production. If a Partner Firm is unable to produce a commercial using a union performer, it may reduce the amount of business conducted by such Partner Firm. Accordingly, if SAG-AFTRA’s recent restrictions on signatory service companies are not modified, it could have a material adverse effect on our business, results of operations and financial position.
We rely extensively on information technology systems.systems and cybersecurity incidents could adversely affect us.
We rely on information technologies and infrastructure to manage our business, including digital storage of client marketing and advertising information and developing new business opportunitiesopportunities. Increased cybersecurity threats and processing business transactions. Our information technologyattacks, which are becoming more sophisticated, pose a risk to our systems are potentially vulnerableand networks. Security breaches, improper use of our systems and unauthorized access to system failures and network disruptions, malicious intrusion and random attack. While we have taken what we believe are prudent measures to protect our data and information technologyby employees and others may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. We also have access to sensitive or personal data or information that is subject to privacy laws and regulations. Our systems and processes to protect against, detect, prevent, respond to and mitigate cybersecurity incidents and our organizational training for employees to develop an understanding of cybersecurity risks and threats may be unable to prevent material security breaches, theft, modification or loss of data, employee malfeasance and additional known and unknown threats. In addition, we cannot assure you that our efforts will prevent system failuresuse third-party service providers, including cloud providers, to store, transmit and process data. Any breakdown or network disruptions or breaches in our systems. Any such breakdowns or breachesbreach in our systems or data-protection policies, or those of our third-party service providers, could adversely affect our reputation or business.
The Company is subject to an ongoing securities class action litigation claim and a government investigation.
The Company remains subject to an ongoing securities class action litigation claim in Canada, although the U.S. securities class action was dismissed, with prejudice. We maintain insurance for a lawsuit of this nature; however, our insurance coverage does not apply in all circumstances. Moreover, adverse publicity associated with this litigation claim could decrease client demand for our partner agencies’ services.
In addition, in 2016 one of the Company’s subsidiary agencies received a subpoena from the U.S. Department of Justice Antitrust Division concerning its ongoing investigation of production practices in the advertising industry. The Company and its subsidiary are continuing to fully cooperate with this confidential investigation. Although the ultimate effect of this investigation is inherently uncertain, we do not at this time believe that the investigation will have a material adverse effect on our results of operations or financial position. However, the ultimate resolution of this investigation could be materially different from our current assessment.
Future issuances of equity securities, which may include securities that would rank senior to our Class A shares, may cause dilution to our existing shareholders and adversely affect the market price of our Class A shares.
The market price of our Class A shares could decline as a result of sales of a large number of our Class A shares in the market, or the sale of securities convertible into a large number of our Class A shares. The perception that these sales could occur may also depress the market price of our Class A shares. On March 7, 2017, we issued 95,000 Series 4 convertible preference shares (the “Series 4 Preference Shares”) with an initial aggregate liquidation preference of $95.0 million, which will be convertible into Class A shares or our Series 5 convertible preference shares at a current conversion price of $7.42 per share. On March 14, 2019, we issued 50,000 Series 6 convertible preference shares (the “Series 6 Preference Shares” and, together with the Series 4 Preference Shares, the “Preference Shares”) with an initial aggregate liquidation preference of $50.0 million, which will be convertible into Class A shares or our Series 7 convertible preference shares at an initial conversion price of $10.00$5.00 per share. The terms of the Preference Shares provide that the conversion price may be reduced, which would result in the Preference Shares being convertible into additional Class A shares upon certain events, including distributions on our Class A shares or issuances of additional Class A shares or equity-linked securities, at a price less than the then-applicable conversion price. The issuance of Class A Shares upon conversion of the Preference Shares would result in immediate and substantial dilution to the interests of our Class A shareholders. In addition, the holders of the Preference Shares may adversely affectultimately receive and sell all of the shares issuable in connection with the conversion of such Preference Shares, which could result in a decline in the market price of our Class A shares, and theshares. The market price of our Class A shares may also be affected by factors, such as whether the market price is near or above the conversion price, that could make conversion of the Preference Shares more likely. In addition,
Further, the Preference Shares rank senior to the Class A shares, which could affect the value of the Class A shares on liquidation or, as a result of contractual provisions, on a change in control transaction. For example, pursuant to the Purchase Agreement related to the issuance of the Preference Shares,purchase agreements, the Company has agreed, with the Purchaser, with certain exceptions, not to become party to certain change in control transactions that are approved by the Board other than a qualifying transaction in which holders of Preference Shares are entitled to receive cash or qualifying listed securities with a value equal to the then-applicable liquidation preference plus accrued and unpaid dividends. See Note 1215 of the Notes to the Consolidated Financial Statements for more information regarding the terms ofSeries 4 Preference Shares and the Series 6 Preference Shares.
Additionally, any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our Class A shares, and may result in dilution to owners of our Class A shares. Because our decision to issue additional debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot
predict or estimate the amount, timing or nature of our future issuances. Also, we cannot predict the effect, if any, of future issuances of our Class A shares on the market price of our Class A shares.
The indenture governing the 6.50% Notes and the Credit Agreement governing our secured line of credit contain various covenants that limit our discretion in the operation of our business.
MDC has issued 6.50% senior notes due 2024 in the aggregate principal amount of $900 million (the “6.50% Notes”). The indenture governing the 6.50% Notes and the Credit Agreement governing our lines of credit contain various provisions that limit our discretion in the operation of our business by restricting our ability to:
sell assets;
pay dividends and make other distributions;
redeem or repurchase our capital stock;
incur additional debt and issue capital stock;
create liens;
consolidate, merge or sell substantially all of our assets;
enter into certain transactions with our affiliates;
make loans, investments or advances;
repay subordinated indebtedness;
undergo a change in control;
enter into certain transactions with our affiliates;
engage in new lines of business; and
enter into sale and leaseback transactions.
These restrictions on our ability to operate our business in our discretion could seriously harm our business by, among other things, limiting our ability to take advantage of financing, mergers and acquisitions and other corporate opportunities. The Credit Agreement is subject to various additional covenants, including a senior leverage ratio, a total leverage ratio, a fixed charge coverage ratio, and a minimum EBITDA level (as defined). Events beyond our control could affect our ability to meet these financial tests, and we cannot assure you that they will be met.
Our substantial indebtedness could adversely affect our cash flow and prevent us from fulfilling our obligations, including the 6.50% Notes.
As of December 31, 2017,2019, MDC had $883.1$887.6 million, net of debt issuance costs, of indebtedness. In addition, we expect to make additional drawings under the Credit Agreement from time to time. OurAs a holding company, our ability to pay principal and interest on our indebtedness is dependent on the generation of cash flow by and distributions from our subsidiaries. Our subsidiaries’ business may not generate sufficient cash flow from operations to meet MDC’s debt service and other obligations. If we are unable to meet our expenses and debt service obligations, we may need to obtain additional debt, refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We may not be able to obtain additional debt, refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations, to obtain additional debt or to refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations.
Further, we currently receive senior unsecured and long-term debt and corporate quality ratings from Standard & Poor’s Rating Services and Moody’s Investor Service Inc. Our ratings are subject to periodic review, and we cannot assure you that we will be able to retain our current or any future ratings. If our ratings are reduced from their current levels, this could further adversely affect our liquidity and our business, financial condition and results of operation.
If we cannot make scheduled payments on our debt, we will be in default and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable; the lenders under the Credit Agreement could terminate their commitments to loan us money and foreclose against the assets securing our borrowings; and we could be forced into bankruptcy or liquidation. Our level of indebtedness could have important consequences. For example, it could:
make it more difficult for us to satisfy our obligations with respect to the 6.50% Notes;
make it difficult for us to meet our obligations with respect to our contingent deferred acquisition payments;
limit our ability to increase our ownership stake in our Partner Firms;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other activities;
limit our flexibility in planning for, or reacting to, changes in our business and the advertising industry, which may place us at a competitive disadvantage compared to our competitors that have less debt; and
limit, particularly in concert with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds or take other actions.
Despite our current debt levels, we may be able to incur substantially more indebtedness, which could further increase the risks associated with our leverage.
We may incur substantial additional indebtedness in the future. The terms of our Credit Agreement and the indenture governing the 6.50% Notes permit us and our subsidiaries to incur additional indebtedness subject to certain limitations. If we or our subsidiaries incur additional indebtedness, the related risks that we face could increase.
We may be subject to adverse tax consequences such as those related to changes in tax laws or tax rates or their interpretations, and the related application of judgment in determining our global provision for income taxes, deferred tax assets or liabilities or other tax liabilities given the ultimate tax determination is uncertain.
We are a Canada-domiciled multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our
tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be overturned by jurisdictional tax authorities may take a contrary view, which may have a significant impact on our global provision for income taxes.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The U.S. recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.
We are a holding company dependent on our subsidiaries for our ability to service our debt.
MDC is a holding company with no operations of our own. Consequently, our ability to service our debt is dependent upon the earnings from the businesses conducted by our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments.entities. Although our operating subsidiaries have generally agreed to allow us to consolidate and “sweep” cash, subject to the timing of payments due to noncontrolling interest holders, any distribution of earnings to us from our subsidiaries is contingent upon the subsidiaries’ earnings and various other business considerations. Also, our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of common stock to participate in those assets, will be structurally subordinated to the claims of that subsidiary’s creditors. In addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.
MDC may not be able to meet our performance targets and milestones.
MDC communicates to the public certain targets and milestones for our financial and operating performance. These targets and milestones are not predictions or guidance, and investors should not place undue reliance on them. MDC may fail to meet such targets and milestones because of the inherent risk and uncertainty of operating our business and executing on our strategic and other plans.
MDC is launching alliances among its agencies to improve collaboration and client service.
MDC is in the midst of transforming how its advertising and marketing agencies collaborate and work together in order to improve MDC’s ability to attract and retain clients, and expand the amount and variety of services provided to clients. There can be no guarantee that the structures and incentives we have put in place to improve collaboration among our agencies will be successful, or will lead to attracting or retaining clients, or expanding the amount and variety of services provided to clients. If our agency collaboration initiatives are unsuccessful, there could be a material adverse effect on our business, financial condition and results of operations and cash flows.
MDC is consolidating and densifying its real estate occupancy in New York.
MDC is in the midst of consolidating the real estate occupancy of its advertising and marketing agencies, in order to lower MDC’s leasing costs and improve collaboration among our agencies. MDC contemplates that in New York City its advertising and marketing agencies will colocate in a single location. MDC may not be able to sublease existing spaces to be vacated on expected terms or at all. Our anticipated savings from consolidating and densifying our real estate occupancy is subject to timely completing construction, and construction could be delayed. If we fail to sublet on expected terms the existing leased offices to be vacated, or construction of our consolidated leased space is delayed, there could be a material adverse effect on our business, financial condition and results of operations.
Our shares of common stock are thinly traded and our stock price may be volatile.
Because MDC’s Class A shares are thinly traded, their market price may fluctuate significantly more than the stock market in general or the stock prices of similar companies, which are exchanged, listed or quoted on NASDAQ or another stock exchange. Our Class A shares may be less liquid than the stock of companies with broader public ownership, and as a result, the trading price for our Class A shares may be more volatile. Among other things, trading of a relatively small volume of our Class A shares may have a greater impact on the trading price for our stock than would be the case if our public float were larger.
The Company has identified a material weakness in our internal control over financial reporting for income taxes. If we are unable to remediate the material weakness and otherwise maintain an effective system of internal control over financial reporting, it could result in us not preventing or detecting on a timely basis a material misstatement of the Company's financial statements.
Management identified a material weakness in the Company’s internal control over financial reporting for income taxes as of December 31, 2019, as described in Part II, Item 9A of this Form 10-K.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Although we intend to implement a plan to remediate this material weakness, we cannot be certain of the success of the plan. If our remedial measures are insufficient to address the material weakness, or if one or more additional material weaknesses or significant deficiencies in our disclosure controls and procedures or internal control over financial reporting are discovered or occur in the future, we may not be able to prevent or identify irregularities or ensure the fair and accurate presentation of our financial statements included in our periodic reports filed with the U.S. Securities and Exchange Commission.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
See Note 10 of the notes to the Company’s consolidated financial statementsConsolidated Financial Statements included in this Annual Report for a discussion of the Company’s lease commitments and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the impact of occupancy costs on the Company’s operating expenses.
The Company maintains office space in many cities in the United States, Canada,North America, Europe, Asia, South America, and South America.Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. This office space is in suitable and well-maintained condition for MDC’s current operations. All of the Company’s materially important office space is leased from third parties with varying expiration dates. Certain of these leases are subject to rent reviews or contain various escalation clauses and certain of our leases require our payment of various operating expenses, which may also be subject to escalation. In addition, leases related to the Company’s non-U.S. businesses are denominated in currencies other than U.S. dollars and are therefore subject to changes in foreign exchange rates.
The table below provides a brief description of all locations in which office space is maintained and the related reportable segment.
|
| | |
| Reportable Segment | | Office Locations |
| Global Integrated Agencies | | Los Angeles, New York, Miami, Boulder, Detroit, Cleveland, Canada, Sweden, UK, Netherlands, Denmark, China, Hong Kong, Australia, Singapore, Germany, and Brazil. |
| Domestic Creative Agencies | | Atlanta, Los Angeles, Cleveland, Chicago, Detroit, Pittsburgh, Norwalk, New York, Minneapolis, San Francisco, UK, and Canada. |
| Specialist Communications | | Atlanta, Boston, Chicago, Dallas, Gainsville, Minneapolis, Portland, Phoenix, San Francisco, San Diego, Seattle, Los Angeles, New York, Washington D.C., Canada, UK, China, France,Hong Kong, Singapore, Japan, Germany and Thailand. |
| Media Services | | New York, Detroit, Atlanta, Los Angeles, and Austin. |
| All Other | | Atlanta, Austin, Carlstadt, Los Angeles, Indianapolis, New York, Portland, San Francisco, Ft. Lauderdale, San Diego, Redwood City, Canada, India, and Singapore
|
| Corporate | | New York, Washington D.C., Canada, and UK |
Item 3. Legal Proceedings
Class Action Litigation
On August 7, 2015, Roberto Paniccia issuedIn the ordinary course of business, we are involved in various legal proceedings. We do not presently expect that these proceedings will have a Statementmaterial adverse effect on our results of Claim in the Ontario Superior Court of Justice in the City of Brantford, Ontario seeking to certify a class action suit naming the following as defendants: MDC, former CEO Miles S. Nadal, former CAO Michael C. Sabatino, CFO David Doft and BDO U.S.A. LLP. The Plaintiff alleges violations of section 138.1 of the
Ontario Securities Act (and equivalent legislation in other Canadian provinces and territories) as well as common law misrepresentation based on allegedly materially false and misleading statements in the Company’s public statements, as well as omitting to disclose material facts with respect to the SEC investigation. The Company intends to continue to vigorously defend this suit. The plaintiff has served his material for leave to proceed under the Ontario Securities Act and that motion is currently scheduled to be heard in April 2018. A motion by the Company and other defendants to address the scope of the proposed class definition was dismissed and the Company is appealing that decision.
Antitrust Subpoena
In June 2016, one of the Company’s subsidiaries received a subpoena from the U.S. Department of Justice Antitrust Division concerning the Division’s ongoing investigation of production practices in the advertising industry. The Company and its subsidiary are continuing to fully cooperate with this confidential investigation.operations, cash flows or financial position.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Class A Subordinate Voting Shares
The principal market on which the Company’s Class A subordinate voting shares are traded is the NASDAQ National Market (“NASDAQ”) (symbol: “MDCA”). There is no established public trading market for our Class B voting shares. As of February 21, 2018,2020, the approximate number of registered holders of our Class A subordinate voting shares and Class B voting shares, including those whose shares are held in nominee name, was 800. Quarterly high241 and low sales prices per share of the Company’s Class A subordinate voting shares, as reported on NASDAQ, for each quarter in the years ended December 31, 2017 and 2016, were as follows:
NASDAQ
|
| | | | | | |
| Quarter Ended | | High | | Low |
| | | | | |
| | | ($ per Share) |
| March 31, 2016 | | 23.85 |
| | 16.32 |
|
| June 30, 2016 | | 23.90 |
| | 15.94 |
|
| September 30, 2016 | | 18.64 |
| | 10.42 |
|
| December 31, 2016 | | 11.10 |
| | 2.75 |
|
| March 31, 2017 | | 9.95 |
| | 6.13 |
|
| June 30, 2017 | | 10.20 |
| | 6.80 |
|
| September 30, 2017 | | 11.43 |
| | 9.00 |
|
| December 31, 2017 | | 12.26 |
| | 9.51 |
|
As of February 16, 2018, the last reported sale price of the Class A subordinate voting shares was $9.70 on NASDAQ.87, respectively.
Dividend Practice
On November 3, 2016,The Company has not declared a dividend for the Company announced that it was suspending its quarterly dividend indefinitely.
In 2016, MDC’s board of directors declared the following dividends: a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on March 4, 2016; a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on May 24, 2016; a $0.21 per share quarterly dividend to all shareholders of record as of the close of business on August 10, 2016.three year period ending December 31, 2019.
The payment of any future dividends will be at the discretion of MDC’s board of directors and will depend upon limitations under applicable law and contained in our Credit Agreement and the indenture governing the 6.50% Notes, future earnings, capital requirements, our general financial condition and general business conditions.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forthFor information regardingon securities issuedauthorized for issuance under our equity compensation plans, assee Item 12, “Item 1. Security Ownership of December 31, 2017:
|
| | | | | | | |
| | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance [Excluding Column (a)] |
| | (a) | | (b) | | (c) |
| Equity compensation plans approved by stockholders | 327,500 | | $ | — |
| | 579,748 |
On May 26, 2005, the Company’s shareholders approved the 2005 Stock Incentive Plan,Certain Beneficial Owners and Management and Related Stockholder Matters,” which providesrelevant information will be included in our Proxy Statement for the issuance2020 Annual General Meeting of 3.0 million Class A shares. On June 2, 2009 and June 1, 2007, the Company’s shareholders approved amendments to the 2005 Stock Incentive Plan, which increased the number of shares available for issuance to 6.75 million Class A shares. In addition, the plan was amended to allow shares under this plan to be used to satisfy share obligations under the Stock Appreciation Rights Plan (the “SARS Plan”). On May 30, 2008, the Company’s shareholders approved the 2008 Key Partner Incentive Plan, which provides for the issuance of 900,000 Class A shares. On June 1, 2011, the Company’s shareholders approved the 2011 Stock Incentive Plan, which provides for the issuance of up to 3.0 million Class A shares. In June 2013, the Company’s shareholders approved an amendment to the SARS Plan to permit the Company to issue shares authorized under the SARS Plan to satisfy the grant and
vesting of awards under the 2011 Stock Incentive Plan. In June 2016, the Company’s shareholders approved the 2016 Stock Incentive Plan, which provides for the issuance of up to 1,500,000 Class A shares.
See also Note 11 of the Notes to the Consolidated Financial Statements included herein for further information.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
For the twelve months ended December 31, 2017,2019, the Company made no open market purchases of its Class A shares or its Class B shares. Pursuant to its Credit Agreement and the indenture governing the 6.50% Notes, the Company is currently limited from repurchasing its shares in the open market.
During 2017,2019, the Company’s employees surrendered 161,535 Class A shares valued at approximately $1.8 million in connection with the required tax withholding resulting from the vesting of restricted stock. The Company paid these withholding taxes on behalf of the related employees. These Class A shares were subsequently retired and no longer remain outstanding as of December 31, 2017.2019. The following table details those shares withheld during the fourth quarter of 2017:2019:
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publically Announced Program | | Maximum Number of Shares That May Yet Be Purchased Under the Program |
| 10/1/2017 - 10/31/2017 | | 20,813 |
| | $ | 11.19 |
| | — |
| | — |
|
| 11/1/2017 - 11/30/2017 | | 25,900 |
| | $ | 10.87 |
| | — |
| | — |
|
| 12/1/2017 - 12/31/2017 | | — |
| | $ | — |
| | — |
| | — |
|
| Total | | 46,713 |
| | $ | 11.01 |
| | — |
| | — |
|
Transfer Agent and Registrar for Common Stock
The transfer agent and registrar for the Company’s common stock is AST Trust Company (Canada). AST Trust Company (Canada) operates a telephone information inquiry line that can be reached by dialing toll-free 1-877-715-0494 or 416-682-3800.
Correspondence may be addressed to:
MDC Partners Inc.
C/o AST Trust Company (Canada)
P.O. Box 4202, Station A
Toronto, Ontario M5V 2V6
TABLE OF CONTENTS |
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares That May Yet Be Purchased Under the Program |
| 10/1/2019 - 10/31/2019 | | — |
| | $ | — |
| | — |
| | — |
|
| 11/1/2019 - 11/30/2019 | | — |
| | — |
| | — |
| | — |
|
| 12/1/2019 - 12/31/2019 | | 1,814 |
| | 2.68 | | — |
| | — |
|
| Total | | 1,814 |
| | $ | 2.68 |
| | — |
| | — |
|
Item 6. Selected Financial Data
The following selected financial data should be read in connection with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statementsConsolidated Financial Statements and related notesNotes that are included in this Form 10-K.
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | | | | | |
| | (Dollars in Thousands, Except per Share Data) | (Dollars in Thousands, Except per Share Data) |
| Operating Data | |
| | |
| | |
| | |
| | |
| | | | | | | | | |
| Revenues | $ | 1,513,779 |
| | $ | 1,385,785 |
| | $ | 1,326,256 |
| | $ | 1,223,512 |
| | $ | 1,062,478 |
| $ | 1,415,803 |
| | $ | 1,476,203 |
| | $ | 1,513,779 |
| | $ | 1,385,785 |
| | $ | 1,326,256 |
|
| Operating income (loss) | $ | 131,959 |
| | $ | 48,431 |
| | $ | 72,110 |
| | $ | 87,749 |
| | $ | (34,594 | ) | |
| Income (loss) from continuing operations | $ | 257,223 |
| | $ | (40,621 | ) | | $ | (20,119 | ) | | $ | 6,739 |
| | $ | (134,198 | ) | |
| Stock-based compensation included in income (loss) from continuing operations | $ | 24,350 |
| | $ | 21,003 |
| | $ | 17,796 |
| | $ | 17,696 |
| | $ | 100,405 |
| |
| Income (Loss) per Share | |
| | |
| | |
| | |
| | |
| |
| Operating income | | $ | 80,240 |
| | $ | 9,696 |
| | $ | 131,959 |
| | $ | 48,431 |
| | $ | 72,110 |
|
| Net income (loss) | | $ | 11,466 |
| | $ | (111,948 | ) | | $ | 257,223 |
| | $ | (40,621 | ) | | $ | (20,119 | ) |
| Stock-based compensation included in income (loss) | | $ | 31,040 |
| | $ | 18,416 |
| | $ | 24,350 |
| | $ | 21,003 |
| | $ | 17,796 |
|
| Net income (loss) per Share | | | | | | | | | | |
| Basic | |
| | |
| | |
| | |
| | |
| | | | | | | | | |
| Continuing operations attributable to MDC Partners Inc. common shareholders | $ | 3.72 |
| | $ | (0.89 | ) | | $ | (0.58 | ) | | $ | — |
| | $ | (2.99 | ) | |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.72 |
| | $ | (0.89 | ) | | $ | (0.58 | ) |
| Diluted | |
| | |
| | |
| | |
| | |
| | | | | | | | | |
| Continuing operations attributable to MDC Partners Inc. common shareholders | $ | 3.71 |
| | $ | (0.89 | ) | | $ | (0.58 | ) | | $ | — |
| | $ | (2.99 | ) | |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.71 |
| | $ | (0.89 | ) | | $ | (0.58 | ) |
| Cash dividends declared per share | $ | — |
| | $ | 0.63 |
| | $ | 0.84 |
| | $ | 0.74 |
| | $ | 0.46 |
| — |
| | — |
| | — |
| | 0.63 | | 0.84 |
| Financial Position Data | |
| | |
| | |
| | |
| | |
|
| |
| |
| |
| |
|
| Total assets | $ | 1,698,892 |
| | $ | 1,577,378 |
| | $ | 1,577,625 |
| | $ | 1,633,751 |
| | $ | 1,408,711 |
| $ | 1,839,492 |
| | $ | 1,611,573 |
| | $ | 1,698,892 |
| | $ | 1,577,378 |
| | $ | 1,577,625 |
|
| Total debt | $ | 883,119 |
| | $ | 936,436 |
| | $ | 728,883 |
| | $ | 727,988 |
| | $ | 648,612 |
| $ | 887,630 |
| | $ | 954,107 |
| | $ | 883,119 |
| | $ | 936,436 |
| | $ | 728,883 |
|
| Redeemable noncontrolling interests | $ | 62,886 |
| | $ | 60,180 |
| | $ | 69,471 |
| | $ | 194,951 |
| | $ | 148,534 |
| $ | 36,973 |
| | $ | 51,546 |
| | $ | 62,886 |
| | $ | 60,180 |
| | $ | 69,471 |
|
| Deferred acquisition consideration | $ | 122,426 |
| | $ | 229,564 |
| | $ | 347,104 |
| | $ | 205,368 |
| | $ | 153,913 |
| $ | 75,220 |
| | $ | 83,695 |
| | $ | 122,426 |
| | $ | 229,564 |
| | $ | 347,104 |
|
Fixed charge coverage ratio(1) | 2.03 |
| | N/A |
| | N/A |
| | 1.23 |
| | N/A |
| |
| Fixed charge deficiency | N/A |
| | $ | 49,593 |
| | $ | 16,764 |
| | N/A |
| | $ | 134,754 |
| |
(1) The calculation of the fixed charge coverage ratio excludes non-cash accretion of the convertible preference shares of $6.4 million for the year ended December 31, 2017.
A number of factors that should be considered when comparing the annual results shown above are as follows:
Year Ended December 31, 2017
On March 7, 2017 (the “Issue Date”),Effective January 1, 2019, the Company issued 95,000 newly created Preference Sharesadopted FASB Accounting Standards Codification (or “ASC”), Topic 842 Leases (“ASC 842”). As a result, comparative prior periods have not been adjusted and continue to affiliates of The Goldman Sachs Group, Inc. (collectively, the “Purchaser”) pursuant to a $95.0 million private placement. The Company received proceeds of approximately $90.2 million, net of fees and estimated expenses, which were primarily used to pay down existing debtbe reported under the Company’s credit facility and for general corporate purposes. Please seeFASB ASC Topic 840, Leases. See Note 12 of the Notes10 to the Consolidated Financial Statements included herein for further information.
Additionally during 2017,information regarding the Company sold alladoption of its ownership interests in three subsidiaries and completed a number of transactions with majority owned subsidiaries. Please see Note 4 of the Notes to the Consolidated Financial Statements included herein for a summary of these transactions.
On December 22, 2017, the U.S. government enacted comprehensive legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) which, among other things, reduced the U.S. federal corporate tax rate from 35% to 21%. As a result of the Tax Act, the Company remeasured its existing deferred tax assets and reduced its valuation allowance by $127.1 million. Additionally, during 2017 the Company reduced its valuation allowance by $105.5 million due to the Company’s determination that it would be able to realize its deferred tax assets in the future. The related effect on the accompanying consolidated statements of operations and comprehensive income or loss resulted in the Company recording a U.S. income tax benefit of $232.6
million for the year ended December 31, 2017. Please see Note 9 of the Notes to the Consolidated Financial Statements included herein for further information.
Year Ended December 31, 2016
During 2016, the Company completed one acquisition and a number of transactions with majority owned subsidiaries. Please see Note 4 of the Notes to the Consolidated Financial Statements included herein for a summary of these acquisitions.
On March 23, 2016, the Company issued and sold $900 million aggregate principal amount of the 6.50% Notes. The 6.50% 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 6.50% Notes bear interest at a rate of 6.50% per annum, accruing from March 23, 2016. Interest is payable semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2016. The 6.50% Notes mature on May 1, 2024, unless earlier redeemed or repurchased. The 6.50% Notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933. The Company received net proceeds from the offering of the 6.50% Notes equal to approximately $880 million. The Company used the net proceeds to redeem all of its existing 6.75% Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge for the loss on redemption of such notes of $33.3 million, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes, including funding of deferred acquisition consideration.
Year Ended December 31, 2015
During 2015, the Company completed two acquisitions and a number of transactions with majority owned subsidiaries. Please see Note 4 of the Notes to the Consolidated Financial Statements included herein for a summary of these acquisitions.
In May 2015, the Company completed its previously announced sale of the net assets of Accent. For further information, please see Note 4 of the Notes to the Consolidated Financial Statements included herein.
Year Ended December 31, 2014
During 2014, the Company completed a number of acquisitions and a number of transactions with majority owned subsidiaries.
On April 2, 2014, the Company issued an additional $75 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. We received net proceeds from the offering of approximately $77.5 million, and we used the proceeds 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 agreement.
During the quarter ended December 31, 2014, the Company made the decision to strategically sell the net assets of Accent. All periods reflect these discontinued operations.
Year Ended December 31, 2013
During 2013, the Company completed an acquisition and a number of transactions with majority owned subsidiaries.
On March 20, 2013, the Company issued and sold $550 million aggregate principal amount of the 6.75% Notes. The 6.75% Notes were guaranteed on a senior unsecured basis by all of MDC’s then-existing and future restricted subsidiaries that guarantee, or were co-borrowers under or granted liens to secure the Credit Agreement. The 6.75% Notes bore interest at a rate of 6.75% per annum, accruing from March 20, 2013. Interest was payable semiannually in arrears in cash on May 1 and November 1 of each year, beginning on October 1, 2013. The 6.75% Notes had a maturity date of April 1, 2020, unless earlier redeemed or repurchased. The 6.75% Notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933, as amended (the “Securities Act”). 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 its then-existing 11% Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge 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. In addition, the Company entered into an amended and restated $225 million senior secured revolving credit agreement due 2018.
In November 2013, stock-based compensation included a charge of $78.0 million relating to the cash settlement of the outstanding Stock Appreciation Rights (“SARs”).
On November 15, 2013, the Company issued an additional $110 million aggregate principal amount of the 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.
During 2013, the Company discontinued two subsidiaries and an operating division. All periods reflect these discontinued operations.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, references to the “Company” or “MDC” 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 year 20172019 means the period beginning January 1, 2017,2019, and ending December 31, 2017)2019).
The Company reports its financial results in accordance with generally accepted accounting principles (“GAAP”) of the United States of America (“U.S. GAAP”).GAAP. In addition, the Company has included certain non-U.S. GAAPnon-GAAP financial measures and ratios, which management uses to operate the business which it believes provide useful supplemental information to both management and readers of this report in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by U.S. GAAP and should not be construed as an alternative to other titled measures determined in accordance with U.S. GAAP.
Two such non-U.S. GAAPnon-GAAP measures are “organic revenue growth” or “organic revenue decline” that refer to the positive or negative results, respectively, of subtracting both the foreign exchange and acquisition (disposition) components from total revenue growth. The acquisition (disposition) component is calculated by aggregating the prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were disposed of in the current period. The organic revenue growth (decline) component reflects the constant currency impact (a) of the change in revenue of the Partner Firms which the Company has held throughout each of the comparable periods presented and (b) “non-GAAP acquisitions (dispositions), net.” Non-GAAP acquisitions (dispositions), net consists of (i) for acquisitions during the current year, the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and (ii) for acquisitions during the previous year, the revenue effect from such acquisitions as if they had been owned during that entire year or same period as the current reportable period, taking into account their respective pre-acquisition revenues for the applicable periods and (iii) for dispositions, the revenue effect from such disposition as if they had been disposed of during the equivalent period in the prior year. The Company believes that isolating the impact of acquisition activity and foreign currency impacts is an important and informative component to understand the overall change in the Company’s consolidated revenue. The change in the consolidated revenue that remains after these adjustments illustrates the underlying financial performance of the Company’s businesses. Specifically, it represents the impact of the Company’s management oversight, investments and resources dedicated to supporting the businesses’ growth strategy and operations. In addition, it reflects the network benefit of inclusion in the broader portfolio of firms that includes, but is not limited to, cross-selling and sharing of best practices. This approach isolates changes in performance of the business that take place under the Company’s stewardship, whether favorable or unfavorable, and thereby reflects the potential benefits and risks associated with owning and managing a talent-driven services business.
Accordingly, during the first twelve months of ownership by the Company, the organic growth measure may credit the Company with growth from an acquired business that is dependent on work performed prior to the acquisition date, and may include the impact of prior work in progress, existing contracts and backlog of the acquired businesses. It is the presumption of the Company that positive developments that may have taken place at an acquired business during the period preceding the acquisition will continue to result in value creation in the post-acquisition period.
While the Company believes that the methodology used in the calculation of organic revenue change is entirely consistent with our closest U.S. competitors, the calculations may not be comparable to similarly titled measures presented by other publicly traded companies in other industries. Additional information regarding the Company’s acquisition activity as it relates to potential revenue growth is provided in this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Certain Factors Affecting our Business.”
Direct costs represent billable or non-billable internal and third-party expenses that are directly tied to providing services to our clients where we are principal in the arrangement. Direct costs exclude staff costs, which are presented separately.
All amounts are in dollars unless otherwise stated. Amounts reported in millions herein are computed based on the amounts in thousands. As a result, the sum of the components, and related calculations, reported in millions may not equal the total amounts due to rounding.
The percentage changes included in the tables herein Item 7 that are not considered meaningful are presented as “NM”.
Recent Developments
On February 14, 2020, the Company sold substantially all the assets and certain liabilities of Sloane and Company LLC (“Sloane”), an indirectly wholly owned subsidiary of the Company, to an affiliate of The Stagwell Group LLC (“Stagwell”), for an aggregate purchase price of approximately $26 million, consisting of cash paid at closing plus contingent deferred payments expected to be paid over the next two years. The sale resulted in a gain estimated at approximately $16 million. An affiliate of Stagwell has a minority ownership interest in the Company. Mark Penn is the CEO and Chairman of the Board of Directors of the Company and is also manager of Stagwell.
On February 27, 2020, in connection with the centralization of our New York real estate portfolio, the Company entered into an agreement to lease space at One World Trade Center. The lease term is for approximately eleven years commencing on
April 1, 2020, with rental payments totaling approximately $115 million. As part of the centralization initiative, the Company will sublease existing properties currently under lease, resulting in the recovery of a significant portion of our rent obligation under such arrangements.
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mark Penn, Chief Executive Officer and Chairman of the Company, appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we are assessing a change in our reportable segments, effective with the Company’s 2020 fiscal year, to align our external reporting with how we operate the Networks under our new organizational structure.
Executive Summary
MDC conducts its business through its network of Partner Firms, the “Advertising and Communications Group,” whowhich provide a comprehensive array of marketing and communications services for clients both domesticallybusiness solutions that realize the potential of combining data and globally. The Company’s objectivecreativity. MDC’s strategy is to create shareholder value by building, growingbuild, grow and acquiringacquire market-leading Partner Firmsbusinesses that deliver innovative, value-addedthe modern suite of services that marketers need to thrive in a rapidly evolving business environment. MDC’s differentiation lies in its best-in-class creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to their clients. Management believesMDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that shareholder valueare technologically forward and media-agnostic. The Company’s work is maximized with an operating philosophy of “Perpetual Partnership” with proven committeddesigned to challenge the industry leaders in marketing communications.status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
MDC manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenues, operating expenses and capital expenditures. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth by client industry vertical, (iii) growth from existing clients and the addition of new clients, (iv) growth by primary discipline, (v) growth from currency changes, and (vi) growth from acquisitions, and (vii) the impact of dispositions.acquisitions. In addition to monitoring the foregoing financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our Partner Firms. These
indicators may include a Partner Firm’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the Company’sPartner Firm’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.
As discussedThe Company aggregates operating segments into one of the four reportable segments and combines and discloses those operating segments that do not meet the aggregation criteria in the All Other category. Due to changes in the composition of certain businesses and the Company’s internal management and reporting structure during 2019, reportable segment results for the 2018 and 2017 periods presented have been recast to reflect the reclassification of certain businesses between segments. See Note 1521 of the Notes to the Consolidated Financial Statements the Company reports in fourincluded herein for a description of each of our reportable segments plus theand All Other category withinand further information regarding the Advertising and Communications Group.
The four reportable segments are as follows:
Global Integrated Agencies - This segment is comprisedreclassification of the Company’s six global, integrated Partner Firms with broad marketing communication capabilities, including advertising, branding, digital, social media, design and production services, serving multinational clients around the world.
Domestic Creative Agencies - This segment is comprised of four Partner Firms that are national advertising agencies leveraging creative capabilities at their core.
Specialist Communications - This segment is comprised of seven Partner Firms that are each communications agencies with core service offerings in public relations and related communications services.
Media Services - This segment is comprised of a single operating segment with media buying and planning as its core competency.
The All Other category consists of the Company’s remaining Partner Firms that provide a range of diverse marketing communication services, but are not eligible for aggregation with the reportablecertain businesses between segments.
In addition, MDC reports its corporate office expenses incurred in connection with the strategic resources provided to the Partner Firms, as well as certain other centrally managed expenses that are not fully allocated to the Partner Firmsoperating segments as Corporate.Corporate, including interest expense and public company overhead costs. Corporate provides client and business development support to the Partner Firms as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions. Additional expenses managed by the corporate office that are directly related to the Partner Firms are allocated to the appropriate reportable segment and the All Other category.
The Partner Firms 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 Consolidated Financial Statements included herein.
MDC classifies 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 office and general expenses are the changes of the estimated value of our contingent purchase price obligations, including the accretion of present value and acquisition related costs. Depreciation and amortization are also included in operating expenses.
Because we are a service business, we monitor these costs on a percentage of revenue basis. Cost of services sold tend 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 as a significant portion of these expenses are relatively fixed in nature.
We measure capital expenditures as either maintenance or investment related. Maintenance capital expenditures are primarily composed of general upkeep of our office facilities and equipment that are required to continue to operate our businesses. Investment capital expenditures include expansion costs, the build out of new capabilities, technology, and other growth initiatives not related to the day to day upkeep of the existing operations. Growth capital expenditures are measured and approved based on the expected return of the invested capital.
Certain Factors Affecting Our BusinessOverallSignificant 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 due to a variety of factors. The two most significant factors are (i) our clients’ desire to change marketing communication firms, and (ii) the creative product that our Partner Firms offer. A client may choose to change marketing communication firms for a 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 orderfailing to generate additional revenues.
Clients will generally reducemeet the client’s expected financial or increase their spending or outsourcing needs based on their current business trends and profitability.other measures.
Acquisitions and Dispositions. The Company’s strategy includes acquiring ownership stakes in well-managed businesses with world class expertise and strong reputations in the industry. The Company provides post-acquisition support to Partner Firms in order to help accelerate growth, including in areas such as business and client development (including cross-selling), corporate communications, corporate development, talent recruitment and training, procurement, legal services, human resources, financial management and reporting, and real estate utilization, among other areas. As most of the Company’s acquisitions remain as stand-alone entities post acquisition, integration is typically implemented promptly, and new Partner Firms can begin to tap into the full
range of MDC’s resources immediately. Often the acquired businesses may begin to tap into certain MDC resources in the pre-acquisition period, such as talent recruitment or real estate. The Company engaged in a number of acquisition and disposition transactions during the 2009 to 2017 period, which affected revenues, expenses, operating income and net income. Additional information regarding acquisitions and dispositions is provided in Note 4 of the Notes to the Consolidated Financial Statements included herein for further information.
Foreign Exchange Fluctuation. Our financial results and competitive position are affected by fluctuations in the exchange rate between the U.S. dollar and non-U.S. dollar, primarily the Canadian dollar. See also “Item 7A - Quantitative and Qualitative Disclosures About Market Risk - Foreign Exchange.”
Seasonality. Historically, with some exceptions, we generatethe Company typically generates 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.
Fourth Quarter Results.Revenues were $402.7 million for See Note 22 of the fourth quarter of 2017, representing an increase of $12.3 million or 3.2%, compared to revenue of $390.4 million in fourth quarter of 2016. The increase in revenue primarily consisted from growth of existing Partner firms of $12.8 million or 3.3% and a foreign exchange impact of $5.6 million or 1.4%. These increases were partially offset by the negative impact of $6.1 million for the effect of dispositions. In the fourth quarter of 2017, operating profit increased by $33.4 million and operating margins increased 808 basis points in comparisonNotes to the fourth quarter of 2016. The increase in operating profits and margin was primarily attributable to decreased goodwill and an asset impairment expense decrease of $14.5 million, the change in deferred acquisition consideration of $9.0 million and a decrease in staff costs as a percentage of revenue. Income from continuing operationsConsolidated Financial Statements for the fourth quarter of 2017 was $231.5 million, compared to income from continuing operations of $11.2 million in 2016. Other income, net increased by $1.6 million or 210.0%, primarily consisted of a decrease of expense of $9.4 million from foreign currency fluctuations. Interest expense decreased $0.3 million or 1.9% from $16.4 million in 2016, to $16.1 million in 2017. Income tax benefit increased $175.1 million from $10.6 million in 2016, to $185.7 million in 2017. This increase was primarily relatedinformation relating to the releaseCompany’s quarterly results.
Results of the valuation allowance on U.S. deferred tax assets.Operations:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenue: | (Dollars in Thousands) |
| Global Integrated Agencies | $ | 598,184 |
| | $ | 610,290 |
| | $ | 688,011 |
|
| Domestic Creative Agencies | 230,718 |
| | 246,642 |
| | 277,587 |
|
| Specialist Communications | 180,591 |
| | 163,367 |
| | 153,506 |
|
| Media Services | 97,825 |
| | 121,859 |
| | 150,198 |
|
| All Other | 308,485 |
| | 334,045 |
| | 244,477 |
|
| Total | $ | 1,415,803 |
| | $ | 1,476,203 |
| | $ | 1,513,779 |
|
| | | | | | |
| Segment operating income (loss): | | | | | |
| Global Integrated Agencies | $ | 58,933 |
| | $ | 63,972 |
| | $ | 60,891 |
|
| Domestic Creative Agencies | 28,254 |
| | 51 |
| | 38,221 |
|
| Specialist Communications | 23,822 |
| | 17,316 |
| | 19,978 |
|
| Media Services | (5,398 | ) | | (51,169 | ) | | 13,900 |
|
| All Other | 20,397 |
| | 34,683 |
| | 39,825 |
|
| Corporate | (45,768 | ) | | (55,157 | ) | | (40,856 | ) |
| Total | $ | 80,240 |
| | $ | 9,696 |
| | $ | 131,959 |
|
| | | | | | |
| Other Income (expense): | | | | | |
| Interest expense and finance charges, net | $ | (64,942 | ) | | $ | (67,075 | ) | | $ | (64,364 | ) |
| Foreign exchange gain (loss) | 8,750 |
| | (23,258 | ) | | 18,137 |
|
| Other, net | (2,401 | ) | | 230 |
| | 1,346 |
|
| Income (loss) before income taxes and equity in earnings of non-consolidated affiliates | 21,647 |
| | (80,407 | ) | | 87,078 |
|
| Income tax expense (benefit) | 10,533 |
| | 31,603 |
| | (168,064 | ) |
| Income (loss) before equity in earnings of non-consolidated affiliates | 11,114 |
| | (112,010 | ) | | 255,142 |
|
| Equity in earnings of non-consolidated affiliates | 352 |
| | 62 |
| | 2,081 |
|
| Net income (loss) | 11,466 |
| | (111,948 | ) | | 257,223 |
|
| Net income attributable to the noncontrolling interest | (16,156 | ) | | (11,785 | ) | | (15,375 | ) |
| Net income (loss) attributable to MDC Partners Inc. | $ | (4,690 | ) | | $ | (123,733 | ) | | $ | 241,848 |
|
Results of Operations for the Years Ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenue: | | | | | |
| Global Integrated Agencies | $ | 786,644 |
| | $ | 696,410 |
| | $ | 652,987 |
|
| Domestic Creative Agencies | 90,663 |
| | 85,953 |
| | 91,658 |
|
| Specialist Communications | 172,565 |
| | 170,285 |
| | 153,920 |
|
| Media Services | 142,387 |
| | 131,498 |
| | 132,419 |
|
| All Other | 321,520 |
| | 301,639 |
| | 295,272 |
|
| Total | $ | 1,513,779 |
| | $ | 1,385,785 |
| | $ | 1,326,256 |
|
| | | | | | |
| Segment operating income (loss): | | | | | |
| Global Integrated Agencies | $ | 74,902 |
| | $ | 58,505 |
| | $ | 66,161 |
|
| Domestic Creative Agencies | 16,977 |
| | 16,583 |
| | 17,535 |
|
| Specialist Communications | 20,714 |
| | 1,939 |
| | 18,047 |
|
| Media Services | 12,963 |
| | 6,154 |
| | 20,116 |
|
| All Other | 47,259 |
| | 9,368 |
| | 15,423 |
|
| Corporate | (40,856 | ) | | (44,118 | ) | | (65,172 | ) |
| Total | $ | 131,959 |
| | $ | 48,431 |
| | $ | 72,110 |
|
| | | | | | |
| Other Income (Expense): | | | | | |
| Other income, net | $ | 1,346 |
| | $ | 414 |
| | $ | 7,238 |
|
| Foreign exchange gain (loss) | 18,137 |
| | (213 | ) | | (39,328 | ) |
| Interest expense and finance charges, net | (64,364 | ) | | (65,858 | ) | | (57,436 | ) |
| Loss on redemption of Notes | — |
| | (33,298 | ) | | — |
|
| Income (loss) from continuing operations before income taxes and equity in earnings of non-consolidated affiliates | 87,078 |
| | (49,716 | ) | | (17,416 | ) |
| Income tax expense (benefit) | (168,064 | ) | | (9,404 | ) | | 3,761 |
|
| Income (loss) from continuing operations before equity in earnings of non-consolidated affiliates | 255,142 |
| | (40,312 | ) | | (21,177 | ) |
| Equity in earnings (loss) of non-consolidated affiliates | 2,081 |
| | (309 | ) | | 1,058 |
|
| Income (loss) from continuing operations | 257,223 |
| | (40,621 | ) | | (20,119 | ) |
| Loss from discontinued operations attributable to MDC Partners Inc., net of taxes | — |
| | — |
| | (6,281 | ) |
| Net income (loss) | 257,223 |
| | (40,621 | ) | | (26,400 | ) |
| Net income attributable to the noncontrolling interest | (15,375 | ) | | (5,218 | ) | | (9,054 | ) |
| Net income (loss) attributable to MDC Partners Inc. | $ | 241,848 |
| | $ | (45,839 | ) | | $ | (35,454 | ) |
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Depreciation and amortization: | | | | | | (Dollars in Thousands) |
| Global Integrated Agencies | $ | 23,800 |
| | $ | 21,447 |
| | $ | 20,599 |
| $ | 16,572 |
| | $ | 21,179 |
| | $ | 21,206 |
|
| Domestic Creative Agencies | 1,434 |
| | 1,653 |
| | 1,855 |
| 4,843 |
| | 5,052 |
| | 5,143 |
|
| Specialist Communications | 4,714 |
| | 6,637 |
| | 11,201 |
| 2,577 |
| | 4,113 |
| | 4,567 |
|
| Media Services | 3,629 |
| | 5,718 |
| | 4,660 |
| 3,261 |
| | 2,693 |
| | 3,709 |
|
| All Other | 8,799 |
| | 9,406 |
| | 12,134 |
| 10,208 |
| | 12,397 |
| | 7,751 |
|
| Corporate | 1,098 |
| | 1,585 |
| | 1,774 |
| 868 |
| | 762 |
| | 1,098 |
|
| Total | 43,474 |
| | 46,446 |
| | 52,223 |
| $ | 38,329 |
| | $ | 46,196 |
| | $ | 43,474 |
|
| | | | | | | | | | | |
| Stock-based compensation: | | | | | | | | | | |
| Global Integrated Agencies | $ | 15,203 |
| | $ | 12,141 |
| | $ | 6,981 |
| $ | 26,207 |
| | $ | 8,095 |
| | $ | 14,666 |
|
| Domestic Creative Agencies | 845 |
| | 634 |
| | 644 |
| 1,532 |
| | 2,623 |
| | 2,301 |
|
| Specialist Communications | 2,954 |
| | 3,629 |
| | 1,510 |
| 209 |
| | 372 |
| | 2,160 |
|
| Media Services | 614 |
| | 301 |
| | 471 |
| 20 |
| | 276 |
| | 614 |
|
| All Other | 2,600 |
| | 1,773 |
| | 5,450 |
| 1,192 |
| | 2,391 |
| | 2,475 |
|
| Corporate | 2,134 |
| | 2,525 |
| | 2,740 |
| 1,880 |
| | 4,659 |
| | 2,134 |
|
| Total | $ | 24,350 |
| | $ | 21,003 |
| | $ | 17,796 |
| $ | 31,040 |
| | $ | 18,416 |
| | $ | 24,350 |
|
| | | | | | | | | | | |
| Capital expenditures: | | | | | | | | | | |
| Global Integrated Agencies | $ | 20,748 |
| | $ | 16,439 |
| | $ | 17,043 |
| $ | 8,223 |
| | $ | 8,731 |
| | $ | 18,897 |
|
| Domestic Creative Agencies | 1,032 |
| | 1,055 |
| | 1,321 |
| 3,044 |
| | 2,692 |
| | 4,695 |
|
| Specialist Communications | 1,288 |
| | 2,741 |
| | 1,311 |
| 1,166 |
| | 3,553 |
| | 1,181 |
|
| Media Services | 3,035 |
| | 5,110 |
| | 825 |
| 194 |
| | 806 |
| | 3,035 |
|
| All Other | 6,832 |
| | 4,054 |
| | 2,704 |
| 5,933 |
| | 4,415 |
| | 5,127 |
|
| Corporate | 23 |
| | 33 |
| | 371 |
| 36 |
| | 67 |
| | 23 |
|
| Total | $ | 32,958 |
| | $ | 29,432 |
| | $ | 23,575 |
| $ | 18,596 |
| | $ | 20,264 |
| | $ | 32,958 |
|
YEAR ENDED DECEMBER 31, 2017 Compared to Year Ended December2019 COMPARED TO YEAR ENDED DECEMBER 31, 20162018
Consolidated Results of Operations
Revenues
Revenue was $1.51$1.42 billion for the yeartwelve months ended December 31, 2017,2019 compared to revenue of $1.39$1.48 billion for the yeartwelve months ended December 31, 2016,2018. See the Advertising and Communications Group section below for a discussion regarding consolidated revenues.
Operating Income
Operating income for the twelve months ended December 31, 2019 was $80.2 million compared to $9.7 million for the twelve months ended December 31, 2018, representing an increasea change of $128.0 million, or 9.2%.$70.5 million. The change in revenueimprovement was driven by revenue growth from existing Partner Firmsa lower impairment charge in 2019 of $91.5$7.8 million or 6.6%,associated with the write-down of the carrying value of goodwill, right-of-use lease assets and related leasehold improvements compared to $80.1 million in 2018 primarily in connection with a positive foreign exchange impactwrite-down of $3.6 million, or 0.3%. Revenue from acquired Partner Firmsgoodwill. The decline in revenues was $43.5 million or 3.1%, including growth of $4.9 million from organic revenue growth, partiallymostly offset by a negative impact from dispositions of $10.6 million, or 0.8%.reduction in expenses.
Operating profitInterest Expense and Finance Charges, Net
Interest expense and finance charges, net, for the yeartwelve months ended December 31, 20172019 was $132.0$64.9 million compared to $48.4$67.1 million for the yeartwelve months ended December 31, 2016,2018, representing an increasea decrease of $83.5$2.2 million, or 172.5%. Operating profit increasedprimarily driven by $80.3 million, or 86.7%a decline in the Advertisement and Communication Group, while Corporate operating expenses decreased by $3.3 million, or 7.4%.average amounts outstanding under the Company’s revolving credit facility in 2019.
Income from continuing operations was $257.2 million
Foreign Exchange Transaction Gain (Loss)
The foreign exchange gain for the yeartwelve months ended December 31, 2017,2019 was $8.8 million compared to a loss of $40.6$23.3 million for the yeartwelve months ended December 31, 2016.2018. The increase of $297.8 millionchange in foreign exchange was primarily attributable to (1)the strengthening of the Canadian dollar against the U.S. dollar, in connection with a U.S. dollar denominated indebtedness that is an increase in income tax benefitobligation of $158.7 million, (2) an increase in operating profit of $83.5 million, (3) a loss on redemption of notes of $33.3 million recognized in the first quarter of 2016, (4) a foreign exchange gain of $18.1 millionour Canadian parent company.
Other, Net
Other, net, for the yeartwelve months ended December 31, 20172019 was a loss of $2.4 million compared to a foreign exchange lossincome of $0.2 million for the yeartwelve months ended December 31, 20162018. In 2019, we recognized a loss of $4.3 million primarily on the sale of Kingsdale Partners LP and (5)Kingsdale Shareholder Services US LLC (collectively, “Kingsdale”), partially offset by a gain of $2.3 million primarily related to the sale of certain investments.
Income Tax Expense (Benefit)
Income tax expense for the twelve months ended December 31, 2019 was $10.5 million (on income of $21.6 million resulting in an equityeffective tax rate of 48.7%), driven by the taxation of foreign operations and non-deductible stock compensation for which a tax benefit was not recognized. Income tax expense for the twelve months ended December 31, 2018 was $31.6 million (on a loss of $80.4 million resulting in an effective tax rate of negative 39.3%), driven by impairments and non-deductible stock compensation for which a tax benefit was not recognized.
Equity in Earnings (Losses) of Non-Consolidated Affiliates
Equity in earnings (losses) of non-consolidated affiliates represents the income or losses attributable to equity method investments. The Company recorded $0.4 million of $2.1income for the twelve months ended December 31, 2019 compared to $0.1 million of income for the twelve months ended December 31, 2018.
Noncontrolling Interests
The effect of noncontrolling interests for the twelve months ended December 31, 2019 was $16.2 million compared to $11.8 million for the yeartwelve months ended December 31, 20172018, attributable to an increase in operating results at Partner Firms with a noncontrolling interest.
Net Loss Attributable to MDC Partners Inc. Common Shareholders
As a result of the foregoing and the impact of accretion on and net income allocated to convertible preference shares, the net loss attributable to MDC Partners Inc. common shareholders for the twelve months ended December 31, 2019 was $17.0 million, or $0.25 per diluted loss per share, compared to a net loss attributable to MDC Partners Inc. common shareholders of $0.3$132.1 million, or $2.31 per diluted loss per share, for the yeartwelve months ended December 31, 2016.2018.
Advertising and Communications Group
The following discussion provides additional detailed disclosure for the Company’s networkeach of Partner Firms, the Advertising and Communications Group. The Advertising and Communications Group includes the Company’s four (4) reportable segments, plus itsthe “All Other” category.category, within the Advertising and Communications Group.
The components of the fluctuations in revenues for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | United States | | Canada | | Other |
| | $ | | % | | $ | | % | | $ | | % | | $ | | % |
| | (Dollars in Thousands) |
| December 31, 2018 | $ | 1,476,203 |
| | | | $ | 1,153,191 |
| | | | $ | 124,001 |
| | | | $ | 199,011 |
| | |
| Components of revenue change: | | | | | | | | | | | | | | | |
| Foreign exchange impact | (12,697 | ) | | (0.9 | )% | | — |
| | — | % | | (2,390 | ) | | (1.9 | )% | | (10,307 | ) | | (5.2 | )% |
| Non-GAAP acquisitions (dispositions), net | (1,561 | ) | | (0.1 | )% | | 11,340 |
| | 1.0 | % | | (15,483 | ) | | (12.5 | )% | | 2,582 |
| | 1.3 | % |
| Non-GAAP Organic revenue growth (decline) | (46,142 | ) | | (3.1 | )% | | (48,486 | ) | | (4.2 | )% | | (1,061 | ) | | (0.9 | )% | | 3,405 |
| | 1.7 | % |
| Total Change | (60,400 | ) | | (4.1 | )% | | (37,146 | ) | | (3.2 | )% | | (18,934 | ) | | (15.3 | )% | | (4,320 | ) | | (2.2 | )% |
| December 31, 2019 | $ | 1,415,803 |
| | | | $ | 1,116,045 |
| | | | $ | 105,067 |
| | | | $ | 194,691 |
| | |
Revenue for the Advertising and Communications Group was $1.42 billion for the twelve months ended December 31, 2019 compared to revenue of $1.48 billion for the twelve months ended December 31, 2018, representing a decrease of $60.4 million, or 4.1%.
The negative foreign exchange impact of $12.7 million, or 0.9%, was attributable to the fluctuation of the U.S. dollar against the Canadian dollar, Swedish Króna, Euro and British Pound.
The Company utilizes non-GAAP metrics called organic revenue growth (decline) and non-GAAP acquisitions (dispositions), net, as defined above. For the twelve months ended December 31, 2019, organic revenue decreased by $46.2 million or 3.1%, of which $54.5 million, or 3.7% pertained to Partner Firms the Company has owned throughout each of the comparable periods presented, offset by growth of $8.3 million, or 0.6%, generated from acquired Partner Firms. The decline in revenue from existing Partner Firms was attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients. The change in revenue was primarily driven by a decline in categories including healthcare, food and beverage and automotive, partially offset by growth in transportation, communications, and travel/lodging and technology.
The table below provides a reconciliation between the revenue in the Advertising and Communications Group from acquired/disposed businesses in the statement of operations to non-GAAP acquisitions (dispositions), net for the twelve months ended December 31, 2019:
|
| | | | | | | | | | | | | | |
| Acquisition Revenue Reconciliation | | Specialist Communications | | All Other | | Total |
| | | (Dollars in Thousands) |
| GAAP revenue from 2018 and 2019 acquisitions | | $ | 4,163 |
| | $ | 17,882 |
| | $ | 22,045 |
|
| Foreign exchange impact | | 17 |
| | 207 |
| | 224 |
|
| Contribution to non-GAAP organic revenue growth (decline) | | (864 | ) | — |
| (7,463 | ) | — |
| (8,327 | ) |
| Prior year revenue from dispositions | | — |
| | (15,503 | ) | | (15,503 | ) |
| Non-GAAP acquisitions (dispositions), net | | $ | 3,316 |
| | $ | (4,877 | ) | | $ | (1,561 | ) |
The geographic mix in revenues for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | |
| | 2019 | | 2018 |
| United States | 78.8 | % | | 78.1 | % |
| Canada | 7.4 | % | | 8.4 | % |
| Other | 13.8 | % | | 13.5 | % |
The change in operating results in the Advertising and Communications Group for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
|
| 2019 |
| 2018 |
| Change |
| Advertising and Communications Group |
| $ |
| % of
Revenue |
| $ | | % of
Revenue |
| $ |
| % |
|
| (Dollars in Thousands) |
| Revenue |
| $ | 1,415,803 |
|
|
|
|
| $ | 1,476,203 |
|
| |
| $ | (60,400 | ) |
| (4.1 | )% |
| Operating expenses |
|
|
|
|
|
|
| |
|
|
|
|
| Cost of services sold |
| 961,076 |
|
| 67.9 | % |
| 991,215 |
|
| 67.1 | % |
| (30,139 | ) |
| (3.0 | )% |
| Office and general expenses |
| 284,286 |
|
| 20.1 | % |
| 296,961 |
|
| 20.1 | % |
| (12,675 | ) |
| (4.3 | )% |
| Depreciation and amortization |
| 37,461 |
|
| 2.6 | % |
| 45,434 |
|
| 3.1 | % |
| (7,973 | ) |
| (17.5 | )% |
| Goodwill and other asset impairment charge |
| 6,972 |
|
| 0.5 | % |
| 77,740 |
|
| 5.3 | % |
| (70,768 | ) |
| (91.0 | )% |
|
| 1,289,795 |
|
| 91.1 | % |
| 1,411,350 |
|
| 95.6 | % |
| (121,555 | ) |
| (8.6 | )% |
| Operating profit |
| $ | 126,008 |
|
| 8.9 | % |
| $ | 64,853 |
|
| 4.4 | % |
| $ | 61,155 |
|
| 94.3 | % |
The increase in operating profit was attributable to a decline in revenue, more than offset by lower operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the Advertising and Communications Group for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Advertising and Communications Group | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 236,670 |
| | 16.7 | % | | $ | 213,354 |
| | 14.5 | % | | $ | 23,316 |
| | 10.9 | % |
| Staff costs | | 800,417 |
| | 56.5 | % | | 872,459 |
| | 59.1 | % | | (72,042 | ) | | (8.3 | )% |
| Administrative | | 173,712 |
| | 12.3 | % | | 189,063 |
| | 12.8 | % | | (15,351 | ) | | (8.1 | )% |
| Deferred acquisition consideration | | 5,403 |
| | 0.4 | % | | (457 | ) | | — | % | | 5,860 |
| | NM |
|
| Stock-based compensation | | 29,160 |
| | 2.1 | % | | 13,757 |
| | 0.9 | % | | 15,403 |
| | NM |
|
| Depreciation and amortization | | 37,461 |
| | 2.6 | % | | 45,434 |
| | 3.1 | % | | (7,973 | ) | | (17.5 | )% |
| Goodwill and other asset impairment charge | | 6,972 |
| | 0.5 | % | | 77,740 |
| | 5.3 | % | | (70,768 | ) | | (91.0 | )% |
| Total operating expenses | | $ | 1,289,795 |
| | 91.1 | % | | $ | 1,411,350 |
| | 95.6 | % | | $ | (121,555 | ) | | (8.6 | )% |
Direct costs were higher, inclusive of higher billable costs for client arrangements accounted for as principal.
The decrease in staff costs was primarily attributable to staffing reductions at Partner Firms in connection with the decline in revenues and cost savings initiatives.
The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives.
Deferred acquisition consideration change for the twelve months ended December 31, 2019 was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
The increase in stock-based compensation expense was driven by favorable operating results in connection with awards tied to performance.
For the twelve months ended December 31, 2019, an impairment charge of $7.0 million was recognized, in connection with goodwill and the sublet of leased properties, to reduce the carrying value of right-of-use lease assets and related leasehold improvements within the Global Integrated Agencies segment and the Media Services segment and in connection with the write-down of goodwill within the All Other segment.
For the twelve months ended December 31, 2018, an impairment charge of $77.7 million was recognized pertaining to goodwill within the Domestic Creative Agencies and Media Services Agencies reportable segment and a trademark within the Global Integrated Agencies reportable segment.
Global Integrated Agencies
The change in operating results in the Global Integrated Agencies reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Global Integrated Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 598,184 |
| | | | $ | 610,290 |
|
| | | $ | (12,106 | ) | | (2.0 | )% |
| Operating expenses | | | | | |
|
|
| | | | |
| Cost of services sold | | 397,918 |
| | 66.5 | % | | 397,313 |
|
| 65.1 | % | | 605 |
| | 0.2 | % |
| Office and general expenses | | 122,817 |
| | 20.5 | % | | 124,646 |
|
| 20.4 | % | | (1,829 | ) | | (1.5 | )% |
| Depreciation and amortization | | 16,572 |
| | 2.8 | % | | 21,179 |
|
| 3.5 | % | | (4,607 | ) | | (21.8 | )% |
| Other asset impairment | | 1,944 |
| | 0.3 | % | | 3,180 |
|
| 0.5 | % | | (1,236 | ) | | (38.9 | )% |
| | | 539,251 |
| | 90.1 | % | | 546,318 |
|
| 89.5 | % | | (7,067 | ) | | (1.3 | )% |
| Operating profit | | $ | 58,933 |
| | 9.9 | % | | $ | 63,972 |
|
| 10.5 | % | | $ | (5,039 | ) | | (7.9 | )% |
Revenue declined due to the unfavorable impact of foreign exchange of $9.7 million, or 1.6%, and by $2.4 million, or 0.4%, driven by client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients.
The decline in operating profit was primarily attributable to the decline in revenue, partially offset by lower operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the Global Integrated Agencies reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Global Integrated Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 62,803 |
| | 10.5 | % | | $ | 33,441 |
|
| 5.5 | % | | $ | 29,362 |
| | 87.8 | % |
| Staff costs | | 353,506 |
| | 59.1 | % | | 397,666 |
|
| 65.2 | % | | (44,160 | ) | | (11.1 | )% |
| Administrative | | 77,000 |
| | 12.9 | % | | 88,756 |
|
| 14.5 | % | | (11,756 | ) | | (13.2 | )% |
| Deferred acquisition consideration | | 1,219 |
| | 0.2 | % | | (5,999 | ) |
| (1.0 | )% | | 7,218 |
| | NM |
|
| Stock-based compensation | | 26,207 |
| | 4.4 | % | | 8,095 |
|
| 1.3 | % | | 18,112 |
| | NM |
|
| Depreciation and amortization | | 16,572 |
| | 2.8 | % | | 21,179 |
|
| 3.5 | % | | (4,607 | ) | | (21.8 | )% |
| Other asset impairment | | 1,944 |
| | 0.3 | % | | 3,180 |
|
| 0.5 | % | | (1,236 | ) | | (38.9 | )% |
| Total operating expenses | | $ | 539,251 |
| | 90.1 | % | | $ | 546,318 |
|
| 89.5 | % | | $ | (7,067 | ) | | (1.3 | )% |
Direct costs were higher, inclusive of higher billable costs for client arrangements accounted for as principal.
The decrease in staff costs was attributable to staffing reductions at certain Partner Firms in connection with the decline in revenue and cost savings initiatives.
The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives.
Deferred acquisition consideration change for the twelve months ended December 31, 2019 was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
The increase in stock-based compensation expense was driven by favorable operating results in connection with awards tied to performance.
For the twelve months ended December 31, 2019, an impairment charge of $1.9 million was recognized, in connection with the sublet of a leased property, to reduce the carrying value of a right-of-use lease asset and related leasehold improvements.
For the twelve months ended December 31, 2018, an impairment charge of $3.2 million was recognized to reduce the carrying value of a trademark.
Domestic Creative Agencies
The change in operating results in the Domestic Creative Agencies reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Domestic Creative Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 230,718 |
| | | | $ | 246,642 |
|
|
| | $ | (15,924 | ) | | (6.5 | )% |
| Operating expenses | | | | | |
|
|
| | | | |
| Cost of services sold | | 147,444 |
| | 63.9 | % | | 167,346 |
|
| 67.8 | % | | (19,902 | ) | | (11.9 | )% |
| Office and general expenses | | 50,177 |
| | 21.7 | % | | 56,365 |
|
| 22.9 | % | | (6,188 | ) | | (11.0 | )% |
| Depreciation and amortization | | 4,843 |
| | 2.1 | % | | 5,052 |
|
| 2.0 | % | | (209 | ) | | (4.1 | )% |
| Goodwill impairment | | — |
| | — | % | | 17,828 |
|
| 7.2 | % | | (17,828 | ) | | (100.0 | )% |
| | | 202,464 |
| | 87.8 | % | | 246,591 |
|
| 100.0 | % | | (44,127 | ) | | (17.9 | )% |
| Operating profit | | $ | 28,254 |
| | 12.2 | % | | $ | 51 |
| | 0.0 | % | | $ | 28,203 |
| | NM |
|
The decline in revenue was attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients.
The change in operating profit was primarily attributable to lower operating expenses, as outlined below, partially offset by the decline in revenue.
The change in the categories of expenses as a percentage of revenue in the Domestic Creative Agencies reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Domestic Creative Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 25,412 |
| | 11.0 | % | | $ | 29,124 |
|
| 11.8 | % | | $ | (3,712 | ) | | (12.7 | )% |
| Staff costs | | 141,958 |
| | 61.5 | % | | 159,130 |
|
| 64.5 | % | | (17,172 | ) | | (10.8 | )% |
| Administrative | | 28,443 |
| | 12.3 | % | | 31,516 |
|
| 12.8 | % | | (3,073 | ) | | (9.8 | )% |
| Deferred acquisition consideration | | 276 |
| | 0.1 | % | | 1,318 |
|
| 0.5 | % | | (1,042 | ) | | (79.1 | )% |
| Stock-based compensation | | 1,532 |
| | 0.7 | % | | 2,623 |
|
| 1.1 | % | | (1,091 | ) | | (41.6 | )% |
| Depreciation and amortization | | 4,843 |
| | 2.1 | % | | 5,052 |
|
| 2.0 | % | | (209 | ) | | (4.1 | )% |
| Goodwill impairment | | — |
| | — | % | | 17,828 |
|
| 7.2 | % | | (17,828 | ) | | (100.0 | )% |
| Total operating expenses | | $ | 202,464 |
| | 87.8 | % | | $ | 246,591 |
|
| 100.0 | % | | $ | (44,127 | ) | | (17.9 | )% |
The decrease in direct costs was in connection with the decline in revenues.
The decrease in staff costs was attributable to staffing reductions at certain Partner Firms in connection with the decline in revenue and cost savings initiatives.
The decrease in administrative costs was driven by lower spending in connection with savings initiatives.
For the twelve months ended December 31, 2018, an impairment charge of $17.8 million was recognized to reduce the carrying value of goodwill.
Specialist Communications
The change in operating results in the Specialist Communications reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Specialist Communications | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 180,591 |
| | | | $ | 163,367 |
|
|
|
| | $ | 17,224 |
| | 10.5 | % |
| Operating expenses | | | | | | |
|
| | | | |
| Cost of services sold | | 121,782 |
| | 67.4 | % | | 111,801 |
|
| 68.4 | % | | 9,981 |
| | 8.9 | % |
| Office and general expenses | | 32,410 |
| | 17.9 | % | | 30,137 |
|
| 18.4 | % | | 2,273 |
| | 7.5 | % |
| Depreciation and amortization | | 2,577 |
| | 1.4 | % | | 4,113 |
|
| 2.5 | % | | (1,536 | ) | | (37.3 | )% |
| | | 156,769 |
| | 86.8 | % | | 146,051 |
|
| 89.4 | % | | 10,718 |
| | 7.3 | % |
| Operating profit | | $ | 23,822 |
| | 13.2 | % | | $ | 17,316 |
|
| 10.6 | % | | $ | 6,506 |
| | 37.6 | % |
The increase in operating profit was primarily attributable to higher revenue, partially offset by an increase in operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the Specialist Communications reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Specialist Communications | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 46,914 |
| | 26.0 | % | | $ | 42,144 |
|
| 25.8 | % | | $ | 4,770 |
| | 11.3 | % |
| Staff costs | | 83,625 |
| | 46.3 | % | | 77,000 |
|
| 47.1 | % | | 6,625 |
| | 8.6 | % |
| Administrative | | 20,136 |
| | 11.2 | % | | 20,557 |
|
| 12.6 | % | | (421 | ) | | (2.0 | )% |
| Deferred acquisition consideration | | 3,308 |
| | 1.8 | % | | 1,865 |
|
| 1.1 | % | | 1,443 |
| | NM |
|
| Stock-based compensation | | 209 |
| | 0.1 | % | | 372 |
|
| 0.2 | % | | (163 | ) | | (43.8 | )% |
| Depreciation and amortization | | 2,577 |
| | 1.4 | % | | 4,113 |
|
| 2.5 | % | | (1,536 | ) | | (37.3 | )% |
| Total operating expenses | | $ | 156,769 |
| | 86.8 | % | | $ | 146,051 |
|
| 89.4 | % | | $ | 10,718 |
| | 7.3 | % |
The increase in direct costs was directly related to the growth in revenue.
The increase in staff costs was primarily attributable to contributions from an acquired Partner Firm and higher costs to support the growth of certain Partner Firms.
Deferred acquisition consideration change for the twelve months ended December 31, 2019 was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
Media Services
The change in operating results in the Media Services reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Media Services | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 97,825 |
| | | | $ | 121,859 |
|
| | | $ | (24,034 | ) | | (19.7 | )% |
| Operating expenses | | | | | | |
| | |
| |
|
|
| Cost of services sold | | 74,444 |
| | 76.1 | % | | 86,975 |
|
| 71.4 | % | | (12,531 | ) | | (14.4 | )% |
| Office and general expenses | | 24,589 |
| | 25.1 | % | | 31,319 |
|
| 25.7 | % | | (6,730 | ) | | (21.5 | )% |
| Depreciation and amortization | | 3,261 |
| | 3.3 | % | | 2,693 |
|
| 2.2 | % | | 568 |
| | 21.1 | % |
| Goodwill impairment and other | | 929 |
| | 0.9 | % | | 52,041 |
| | 42.7 | % | | (51,112 | ) | | (98.2 | )% |
| | | 103,223 |
| | 105.5 | % | | 173,028 |
|
| 142.0 | % | | (69,805 | ) | | (40.3 | )% |
| Operating loss | | $ | (5,398 | ) | | (5.5 | )% | | $ | (51,169 | ) |
| (42.0 | )% | | $ | 45,771 |
| | (89.5 | )% |
The decrease in revenue was primarily attributable to client losses and a reduction in spending by certain clients.
The operating loss declined primarily attributable to lower operating expenses, as outlined below, partially offset by a decline in revenue.
The change in the categories of expenses as a percentage of revenue in the Media Services reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Media Services | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 27,726 |
| | 28.3 | % | | $ | 30,326 |
| | 24.9 | % | | $ | (2,600 | ) | | (8.6 | )% |
| Staff costs | | 53,870 |
| | 55.1 | % | | 68,716 |
| | 56.4 | % | | (14,846 | ) | | (21.6 | )% |
| Administrative | | 17,342 |
| | 17.7 | % | | 18,697 |
| | 15.3 | % | | (1,355 | ) | | (7.2 | )% |
| Deferred acquisition consideration | | 75 |
| | 0.1 | % | | 279 |
| | 0.2 | % | | (204 | ) | | (73.1 | )% |
| Stock-based compensation | | 20 |
| | — | % | | 276 |
| | 0.2 | % | | (256 | ) | | (92.8 | )% |
| Depreciation and amortization | | 3,261 |
| | 3.3 | % | | 2,693 |
| | 2.2 | % | | 568 |
| | 21.1 | % |
| Goodwill impairment and other | | 929 |
| | 0.9 | % | | 52,041 |
| | 42.7 | % | | (51,112 | ) | | (98.2 | )% |
| Total operating expenses | | $ | 103,223 |
| | 105.5 | % | | $ | 173,028 |
| | 142.0 | % | | $ | (69,805 | ) | | (40.3 | )% |
The decrease in direct costs was directly related to the reduction in revenue.
The decrease in staff costs was attributable to staffing reductions in connection with client losses.
For the twelve months ended December 31, 2019, an impairment charge of $0.9 million was recognized, in connection with the sublet of a leased property, to reduce the carrying value of a right-of-use lease asset and related leasehold improvements.
For the twelve months ended December 31, 2018, an impairment charge of $52.0 million was recognized to reduce the carrying value of goodwill.
All Other
The change in operating results in the All Other category for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| All Other | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 308,485 |
| | | | $ | 334,045 |
| | | | $ | (25,560 | ) | | (7.7 | )% |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 219,488 |
| | 71.2 | % | | 227,780 |
| | 68.2 | % | | (8,292 | ) | | (3.6 | )% |
| Office and general expenses | | 54,293 |
| | 17.6 | % | | 54,494 |
| | 16.3 | % | | (201 | ) | | (0.4 | )% |
| Depreciation and amortization | | 10,208 |
| | 3.3 | % | | 12,397 |
| | 3.7 | % | | (2,189 | ) | | (17.7 | )% |
| Goodwill impairment | | 4,099 |
| | 1.3 | % | | 4,691 |
| | 1.4 | % | | (592 | ) | | (12.6 | )% |
| | | 288,088 |
| | 93.4 | % | | 299,362 |
| | 89.6 | % | | (11,274 | ) | | (3.8 | )% |
| Operating profit | | $ | 20,397 |
| | 6.6 | % | | $ | 34,683 |
| | 10.4 | % | | $ | (14,286 | ) | | (41.2 | )% |
The change in revenue included contributions of $11.3 million, or 3.4% from acquired Partner Firms, more than offset by a negative revenue impact of $16.2 million or 4.9% from the disposition of a Partner Firm. In addition, revenue from existing Partner Firms declined $19.5 million, or 5.8%, primarily due to client losses and a reduction in spending by certain clients at certain Partner Firms.
The change in the categories of expenses as a percentage of revenue in the All Other category for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| All Other | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 73,815 |
| | 23.9 | % | | $ | 78,319 |
|
| 23.4 | % | | $ | (4,504 | ) | | (5.8 | )% |
| Staff costs | | 167,458 |
| | 54.3 | % | | 169,947 |
|
| 50.9 | % | | (2,489 | ) | | (1.5 | )% |
| Administrative | | 30,791 |
| | 10.0 | % | | 29,537 |
|
| 8.8 | % | | 1,254 |
| | 4.2 | % |
| Deferred acquisition consideration | | 525 |
| | 0.2 | % | | 2,080 |
|
| 0.6 | % | | (1,555 | ) | | (74.8 | )% |
| Stock-based compensation | | 1,192 |
| | 0.4 | % | | 2,391 |
|
| 0.7 | % | | (1,199 | ) | | (50.1 | )% |
| Depreciation and amortization | | 10,208 |
| | 3.3 | % | | 12,397 |
|
| 3.7 | % | | (2,189 | ) | | (17.7 | )% |
| Goodwill impairment | | 4,099 |
| | 1.3 | % | | 4,691 |
|
| 1.4 | % | | (592 | ) | | (12.6 | )% |
| Total operating expenses | | $ | 288,088 |
| | 93.4 | % | | $ | 299,362 |
|
| 89.6 | % | | $ | (11,274 | ) | | (3.8 | )% |
The decrease in direct costs was directly related to the decline in revenues.
The decrease in staff costs was primarily attributable to staff reductions and the disposition of a Partner Firm.
The increase administrative costs was primarily attributable to contributions from an acquired Partner Firm.
The decrease in deferred acquisition consideration was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
For the twelve months ended December 31, 2019, the impairment charge was recognized to reduce the carrying value of goodwill for a Partner firm.
For the twelve months ended December 31, 2018, the impairment charge was recognized to reduce the carrying value of goodwill for a Partner Firm classified as held for sale.
Corporate
The change in operating expenses for Corporate for the twelve months ended December 31, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | Change |
| Corporate | | $ | | $ | | $ | | % |
| | | (Dollars in Thousands) |
| Staff costs | | $ | 29,434 |
| | $ | 30,179 |
| | $ | (745 | ) | | (2.5 | )% |
| Administrative | | 12,739 |
| | 17,240 |
| | (4,501 | ) | | (26.1 | )% |
| Stock-based compensation | | 1,880 |
| | 4,659 |
| | (2,779 | ) | | (59.6 | )% |
| Depreciation and amortization | | 868 |
| | 762 |
| | 106 |
| | 13.9 | % |
| Other asset impairment | | 847 |
| | 2,317 |
| | (1,470 | ) | | (63.4 | )% |
| Total operating expenses | | $ | 45,768 |
| | $ | 55,157 |
| | $ | (9,389 | ) | | (17.0 | )% |
Staff costs declined in connection with a reduction in staff.
The decrease in administrative costs was primarily related to lower professional fees and various other costs in connection with cost savings initiatives.
Stock-based compensation was lower in the twelve months ended December 31, 2019 due to the reversal of expense previously recognized in connection with the forfeiture of a performance-based equity award.
YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017
Consolidated Results of Operations
Revenues
Revenue was $1.48 billion for the twelve months ended December 31, 2018, compared to revenue of $1.51 billion for the yeartwelve months ended December 31, 2017. See the Advertising and Communications Group section below for a discussion regarding consolidated revenues.
Operating Income
Operating income for the twelve months ended December 31, 2018 was $9.7 million, compared to $132.0 million for the twelve months ended December 31, 2017, representing a decrease of $122.3 million, or 92.7%. Operating income decreased by $108.0 million, or 62.5% in the Advertisement and Communication Group, while Corporate operating expenses increased by $14.3 million, or 35.0%. The decrease in operating income was largely due to a write-down of goodwill and other assets and a decrease in revenue. The impact of adoption of ASC 606 increased operating income by $10.7 million. Adjusted to exclude the impact of the adoption of ASC 606, operating loss would have been $1.0 million, representing a decrease of $133.0 million compared to revenue of $1.39 billion2017.
Interest Expense and Finance Charges, Net
Interest expense and finance charges, net, for the yeartwelve months ended December 31, 2016,2018 was $67.1 million compared to $64.4 million for the twelve months ended December 31, 2017, representing an increase of $128.0 million, or 9.2%.$2.7 million. The changeincrease was primarily due to higher interest rates in revenue was driven by revenue growth from existing Partner Firms of $91.5 million, or 6.6%, and a positive foreign exchange impact of $3.6 million, or 0.3%. Revenue from acquired Partner Firms was $43.5 million, or 3.1%, including growth of $4.9 million from organic revenue growth, partially offset by a negative impact from dispositions of $10.6 million, or 0.8%. Revenue growth was attributable to net new client wins, increased spendingthe current year as well as expanded scopes of services by existing clients, and increased pass-through costs. There was broad based growth by client sector, with particular strength in communications, food & beverage, financials, and consumer products, partially offset by declines within technology and retail.
Revenue growth was driven byborrowings under the Company’s businessrevolving Credit Agreement in comparison to the prior period. See Note 11 of the Notes to the Consolidated Financial Statements for additional information on the Credit Agreement.
Foreign Exchange Transaction Gain (Loss)
Foreign exchange loss was $23.3 million for the twelve months ended December 31, 2018 compared to a foreign exchange gain of $18.1 million for the twelve months ended December 31, 2017. The foreign exchange loss is primarily attributable to the weakening of the Canadian dollar against the U.S. dollar in 2018, in connection with a U.S. dollar denominated indebtedness that is an obligation of our Canadian parent company.
Goodwill and Other Asset Impairment
The Company recognized an impairment of goodwill and other assets of $80.1 million in the United Statestwelve months ended December 31, 2018. The impairment primarily consisted of the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit one in each of the Global Integrated Agencies reportable segment, Domestic Creative Agencies reportable segment, the Media Services reportable segment and within the All Other category and the full write-down of a trademark for a
reporting unit also within the Global Integrated Agencies reportable segment. The trademark is no longer in active use given its merger with growthanother reporting unit in the third quarter of $68.72018.
Other, Net
Other income, net was $0.2 million or 6.2%, duefor the twelve months ended December 31, 2018 compared to net new client wins, increased spending$1.3 million for the twelve months ended December 31, 2017.
Income Tax Expense (Benefit)
Income tax expense for the twelve months ended December 31, 2018 was $31.6 million (associated with a pretax loss of $80.4 million) compared to an income tax benefit of $168.1 million (associated with pretax income of $87.1 million) for the twelve months ended December 31, 2017. Income tax expense in 2018 included the impact of increasing the valuation allowance by $49.4 million primarily associated with Canadian deferred tax assets and the income tax benefit in 2017 included the impact of a release of a valuation allowance of $232.6 million in certain jurisdictions as well as expanded scopesthe incremental tax benefit associated with the Tax Cuts and Jobs Act of services by existing clients, and increased pass-through costs. In Canada, revenue declined $1.0 million, or 0.8%, due to lower pass-through costs. Outside2017.
Equity in Earnings (Losses) of North America, revenue growth was $60.4 million, or 38.2%, including contributions from acquired Partner Firms of $43.5 million, or 27.6%. This growth was partially offset by a negative impact from dispositions of $3.5 million, or 2.2%. Revenue contributions from existing Partner Firms consisted of revenue growth of $18.9 million, or 12.0%, due to net new client wins, increased client spending, and higher pass-through costs, as well as a positive impact from foreign exchange of $1.4 million, or 0.9%.Non-Consolidated Affiliates
The Company also utilizes a non-GAAP metric called organic revenue growth (decline), defined in Item 7. Forrecorded income of $0.1 million for the yeartwelve months ended December 31, 2018 compared to $2.1 million for the twelve months ended December 31, 2017.
Noncontrolling Interests
Net income attributable to noncontrolling interests was $11.8 million for the twelve months ended December 31, 2018, compared to $15.4 million for the twelve months ended December 31, 2017, organic revenue growthrepresenting a decrease of $3.6 million. This decrease was $96.4attributable to a reduction in operating results at Partner Firms with a noncontrolling interest.
Net Income (Loss) Attributable to MDC Partners Inc. Common Shareholders
As a result of the foregoing, and the impact of accretion on and net income allocated to convertible preferences shares, net loss attributable to MDC Partners Inc. common shareholders for the twelve months ended December 31, 2018 was $132.1 million or 7.0%,$2.31 per diluted share, compared to a net income of which $91.5$205.6 million, or 6.6%, pertained to Partner Firms which3.71 per diluted share reported for the Company has held throughouttwelve months ended December 31, 2017.
Advertising and Communications Group
The following discussion provides additional detailed disclosure for each of the comparable periods presented. The remaining $4.9 million, or 0.4%, was generated through acquired Partner Firms. The other components of non-GAAP activity include non-GAAP acquisitions (dispositions), net adjustments of $30.4 million, or 2.2%,Company’s four (4) reportable segments, plus the “All Other” category, within the Advertising and a positive foreign exchange impact of $1.2 million, or 0.1%.Communications Group.
The components of the change in revenues in the Advertising and Communications Group for the yeartwelve months ended December 31, 20172018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2017 Non-GAAP Activity | | | | Change |
Advertising and Communications
Group | | 2016 Revenue | | Foreign
Exchange | | Non-GAAP Acquisitions
(Dispositions), net | | Organic
Revenue
Growth
(Decline) | | 2017 Revenue | | Foreign
Exchange | | Non-GAAP Acquisitions
(Dispositions), net | | Organic
Revenue
Growth
(Decline) | | Total
Revenue |
| | | (Dollars in Millions) | | | | | | | | |
| United States | | $ | 1,103.7 |
| | $ | — |
| | $ | (5.6 | ) | | $ | 74.3 |
| | $ | 1,172.4 |
| | — | % | | (0.5 | )% | | 6.7 | % | | 6.2 | % |
| Canada | | 124.1 |
| | 2.2 |
| | (1.5 | ) | | (1.7 | ) | | 123.1 |
| | 1.8 | % | | (1.2 | )% | | (1.4 | )% | | (0.8 | )% |
| Other | | 158.0 |
| | (1.0 | ) | | 37.5 |
| | 23.8 |
| | 218.3 |
| | (0.6 | )% | | 23.7 | % | | 15.1 | % | | 38.2 | % |
| Total | | $ | 1,385.8 |
| | $ | 1.2 |
| | $ | 30.4 |
| | $ | 96.4 |
| | $ | 1,513.8 |
| | 0.1 | % | | 2.2 | % | | 7.0 | % | | 9.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | United States | | Canada | | Other |
| | | $ | | % | | $ | | % | | $ | | % | | $ | | % |
| | | (Dollars in Thousands) |
| December 31, 2017 | | $ | 1,513,779 |
| | | | $ | 1,172,364 |
| | | | $ | 123,093 |
| | | | $ | 218,322 |
| | |
| Components of revenue change: | | | | | | | | | | | | | | | | |
| Foreign exchange impact | | (463 | ) | | — | % | | — |
| | — |
| | (301 | ) | | (0.2 | )% | | (162 | ) | | (0.1 | )% |
| Non-GAAP acquisitions (dispositions), net | | 13,644 |
| | 0.9 | % | | 14,466 |
| | 1.2 | % | | — |
| | — | % | | (822 | ) | | (0.4 | )% |
| Impact of adoption of ASC 606 | | (51,636 | ) | | (3.4 | )% | | (20,699 | ) | | (1.8 | )% | | 1,288 |
| | 1.0 | % | | (32,225 | ) | | (14.8 | )% |
| Non-GAAP organic revenue growth (decline) | | 879 |
| | 0.1 | % | | (12,940 | ) | | (1.1 | )% | | (79 | ) | | (0.1 | )% | | 13,898 |
| | 6.4 | % |
| Total Change | | (37,576 | ) | | (2.5 | )% | | (19,173 | ) | | (1.6 | )% | | 908 |
| | 0.7 | % | | (19,311 | ) | | (8.8 | )% |
| December 31, 2018 | | $ | 1,476,203 |
| | | | $ | 1,153,191 |
| | | | $ | 124,001 |
| | | | $ | 199,011 |
| | |
Revenue in the Advertising and Communications Group was $1.48 billion for the twelve months ended December 31, 2018, compared to revenue of $1.51 billion for the twelve months ended December 31, 2017, representing a decrease of $37.6 million, or 2.5%. The impact of the adoption of ASC 606 reduced revenue by $51.6 million, or 3.4%, primarily due to the shift in treatment of third-party costs from principal to agent for various client arrangements of certain Partner Firms and timing of revenue recognition.
The negative foreign exchange impact of $0.5 million was primarily due to the fluctuation of the U.S. dollar against British Pound, Euro, Canadian dollar and Swedish Króna.
The other components of the change in revenue included a negative foreign exchange impact of $0.5 million, and an adverse impact from dispositions of $14.7 million, or 1.0%, offset by revenue from acquisitions of $28.3 million, or 1.9%, and an increase in revenue from existing Partner Firms of $0.9 million. Excluding the impact of the adoption of ASC 606, the change in revenue was attributable to contribution from new client wins that was partially offset by client losses and reduction in spending by some clients. Additionally, the change in revenue was driven by growth in categories including transportation, consumer products, financials and healthcare offset by declines in automotive, and retail.
The Company also utilizes non-GAAP metrics called organic revenue growth (decline), and non-GAAP acquisitions (dispositions) as defined above. For the twelve months ended December 31, 2018, organic revenue growth was $0.9 million, or 0.1%, of which growth of $7.6 million, or 0.5% was generated through acquired Partner Firms and decline of $6.7 million or 0.4% was related to Partner Firms which the Company has held throughout each of the comparable periods presented.
The table below isprovides a reconciliation between the revenue in the Advertising and Communications Group from acquired businesses in the statement of operations to non-GAAP acquisitions (dispositions), net for the yeartwelve months ended December 31, 2017:2018:
|
| | | | | | | | | | | | | | | | |
| | | Global Integrated Agencies | | Media Services | | All Other | | Total |
| | | (Dollars in Millions) |
Revenue from acquisitions (dispositions), net (1) | | $ | 43.5 |
| | $ | — |
| | $ | — |
| | $ | 43.5 |
|
| Foreign exchange impact | | 2.4 |
| | — |
| | — |
| | 2.4 |
|
Contribution to organic revenue growth (decline) (2) | | (4.9 | ) | | — |
| | — |
| | (4.9 | ) |
| Prior year revenue from dispositions | | (3.5 | ) | | (5.6 | ) | | (1.5 | ) | | (10.6 | ) |
| Non-GAAP acquisitions (dispositions), net | | $ | 37.5 |
| | $ | (5.6 | ) | | $ | (1.5 | ) | | $ | 30.4 |
|
| |
(1) | Operating segments not impacted by revenue from acquired Partner Firms in the current and prior period were excluded. In addition, no acquisitions were completed during 2017. Refer to Note 4 of the Notes to the Consolidated Financial Statements included herein for further information pertaining to the current year dispositions. |
| |
(2) | Contributions to organic revenue growth (decline) represents the change in revenue, measured on a constant currency basis, relative to the comparable pre-acquisition period for acquired businesses that is included in the Company’s organic revenue growth (decline) calculation. |
|
| | | | | | | | | | | | | | | | | | | | |
| Acquisition Revenue Reconciliation | | Global Integrated | | Specialist Communications | | Media Services | | All Other | | Total |
| GAAP revenue from 2018 acquisitions | | $ | — |
| | $ | 1,276 |
| | $ | — |
| | $ | 34,841 |
| | $ | 36,117 |
|
| Impact of adoption of ASC 606 from 2018 acquisition | | — |
| | — |
| | — |
| | (168 | ) | | (168 | ) |
| Contribution to non-GAAP organic revenue (growth) | | — |
| | — |
| | — |
| | (7,606 | ) | | (7,606 | ) |
| Prior year revenue from dispositions | | (1,910 | ) | | — |
| | (11,569 | ) | | (1,220 | ) | | (14,699 | ) |
| Non-GAAP acquisitions (dispositions), net | | $ | (1,910 | ) | | $ | 1,276 |
| | $ | (11,569 | ) | | $ | 25,847 |
| | $ | 13,644 |
|
The geographic mix in revenues in the Advertising and Communications Group for the years ended December 31, 20172018 and 20162017 was as follows:
| | | | 2017 | | 2016 | 2018 | | 2017 |
| United States | 77.4 | % | | 79.6 | % | 78.1 | % | | 77.5 | % |
| Canada | 8.1 | % | | 9.0 | % | 8.4 | % | | 8.1 | % |
| Other | 14.4 | % | | 11.4 | % | 13.5 | % | | 14.4 | % |
OrganicThe impact of the adoption of ASC 606 decreased revenue growth in the Advertising and Communications Group was driven by the Company’s business in the United States with growth of $74.3by $20.7 million or 6.7%1.8%, dueand $32.2 million or 14.8% in other regions outside of North America with a minimal impact in Canada.
Organic revenue performance was attributable to a contribution from net new client wins increasedand additional spending as well as expanded scopesby some clients. The United States had organic revenue decline of services by existing clients, and higher pass-through costs.$12.9 million, or 1.1%. In Canada, organic revenue declined $1.7$0.1 million, or 1.4%, due to a decrease in pass-through costs.0.1%. Organic revenue growth from outside of North America was $23.8$13.9 million, or 15.1%6.4%, consisting of contributions from existing Partner Firms due to net new client wins, partially offset by an organic revenue decline of $4.9 million from acquired Partner Firms.wins.
The positive foreign exchange impact of $1.2 million, or 0.1%, was primarily due to the strengthening of the Canadian dollar and the European Euro against the U.S. dollar, partially offset by the weakening of the British Pound against the U.S. dollar.The change in expenses and operating profit as a percentage of revenue in the Advertising and Communications Group for the years ended December 31, 20172018 and 20162017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | Change |
Advertising and Communications
Group | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
| Revenue | | $ | 1,513.8 |
| | | | $ | 1,385.8 |
| | | | $ | 128.0 |
| | 9.2 | % |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 1,023.5 |
| | 67.6 | % | | 936.1 |
| | 67.6 | % | | 87.3 |
| | 9.3 | % |
| Office and general expenses | | 271.9 |
| | 18.0 | % | | 263.7 |
| | 19.0 | % | | 8.2 |
| | 3.1 | % |
| Depreciation and amortization | | 42.4 |
| | 2.8 | % | | 44.9 |
| | 3.2 | % | | (2.5 | ) | | (5.5 | )% |
| Goodwill impairment | | 3.2 |
| | 0.2 | % | | 48.5 |
| | 3.5 | % | | (45.3 | ) | | (93.3 | )% |
| | | $ | 1,341.0 |
| | 88.6 | % | | $ | 1,293.2 |
| | 93.3 | % | | $ | 47.7 |
| | 3.7 | % |
| Operating profit | | $ | 172.8 |
| | 11.4 | % | | $ | 92.5 |
| | 6.7 | % | | $ | 80.3 |
| | 86.7 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | Change |
| Advertising and Communications Group | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | |
| Revenue | | $ | 1,476,203 |
| | | | $ | 1,513,779 |
| | | | $ | (37,576 | ) | | (2.5 | )% |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 991,215 |
| | 67.1 | % | | 1,023,476 |
| | 67.6 | % | | (32,261 | ) | | (3.2 | )% |
| Office and general expenses | | 296,961 |
| | 20.1 | % | | 271,874 |
| | 18.0 | % | | 25,087 |
| | 9.2 | % |
| Depreciation and amortization | | 45,434 |
| | 3.1 | % | | 42,376 |
| | 2.8 | % | | 3,058 |
| | 7.2 | % |
| Goodwill and other asset impairment charge | | 77,740 |
| | 5.3 | % | | 3,238 |
| | 0.2 | % | | 74,502 |
| | NM |
|
| | 1,411,350 |
| | 95.6 | % | | 1,340,964 |
| | 88.6 | % | | 70,386 |
| | 5.2 | % |
| Operating profit | | $ | 64,853 |
| | 4.4 | % | | $ | 172,815 |
| | 11.4 | % | | $ | (107,962 | ) | | (62.5 | )% |
The decrease in operating profit was largely due to an increase in the goodwill and other asset impairment charge, and a decrease in revenue. The impact of the adoption of ASC 606 increased operating profit by $10.7 million. Excluding the impact of the adoption of ASC 606, operating profit would have been $54.1 million, representing a decrease of $118.7 million compared to 2017. The change in the categories of expenses as a percentage of revenue in the Advertising and Communications Group for the years ended December 31, 20172018 and 20162017 was as follows:
| | | | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
Advertising and Communications
Group | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
Direct costs (1) | | $ | 260.8 |
| | 17.2 | % | | $ | 212.3 |
| | 15.3 | % | | $ | 48.5 |
| | 22.9 | % | | $ | 213,354 |
| | 14.5 | % | | $ | 260,777 |
| | 17.2 | % | | $ | (47,423 | ) | | (18.2 | )% |
Staff costs (2) | | 829.6 |
| | 54.8 | % | | 781.9 |
| | 56.4 | % | | 47.6 |
| | 6.1 | % | | 872,459 |
| | 59.1 | % | | 829,568 |
| | 54.8 | % | | 42,891 |
| | 5.2 | % |
| Administrative costs | | 187.7 |
| | 12.4 | % | | 179.2 |
| | 12.9 | % | | 8.5 |
| | 4.7 | % | | 189,063 |
| | 12.8 | % | | 187,687 |
| | 12.4 | % | | 1,376 |
| | 0.7 | % |
| Deferred acquisition consideration | | (4.9 | ) | | (0.3 | )% | | 8.0 |
| | 0.6 | % | | (12.9 | ) | | (161.5 | )% | | (457 | ) | | — | % | | (4,898 | ) | | (0.3 | )% | | 4,441 |
| | (90.7 | )% |
| Stock-based compensation | | 22.2 |
| | 1.5 | % | | 18.5 |
| | 1.3 | % | | 3.7 |
| | 20.2 | % | | 13,757 |
| | 0.9 | % | | 22,216 |
| | 1.5 | % | | (8,459 | ) | | (38.1 | )% |
| Depreciation and amortization | | 42.4 |
| | 2.8 | % | | 44.9 |
| | 3.2 | % | | (2.5 | ) | | (5.5 | )% | | 45,434 |
| | 3.1 | % | | 42,376 |
| | 2.8 | % | | 3,058 |
| | 7.2 | % |
| Goodwill impairment | | 3.2 |
| | 0.2 | % | | 48.5 |
| | 3.5 | % | | (45.3 | ) | | (93.3 | )% | |
| Goodwill and other asset impairment | | | 77,740 |
| | 5.3 | % | | 3,238 |
| | 0.2 | % | | 74,502 |
| | NM |
|
| Total operating expenses | | $ | 1,341.0 |
| | 88.6 | % | | $ | 1,293.2 |
| | 93.3 | % | | $ | 47.7 |
| | 3.7 | % | | $ | 1,411,350 |
| | 95.6 | % | | $ | 1,340,964 |
| | 88.6 | % | | $ | 70,386 |
| | 5.2 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Operating profitThe decrease in direct costs was primarily attributable to the Advertising and Communications Groupadoption of ASC 606 in which various client arrangements of certain Partner Firms previously accounted for the year ended December 31, 2017 was $172.8 million, compared to $92.5 millionas principal are now accounted for the year ended December 31, 2016, representing an increase of $80.3 million, or 86.7%. Operating margins improved by 470 basis points from 6.7%as agent under ASC 606. The change resulted in 2016, to 11.4% in 2017. These improvements were largely due to a decline in the goodwill impairment charge, a decrease in staffthird-party costs as a percentageincluded in revenue of revenue, and a change in the deferred acquisition consideration adjustment,approximately $62.4 million. This decrease was partially offset by an increase in direct costs.
Direct costs in the Advertising and Communications Group for the year ended December 31, 2017 were $260.8 million, compared to $212.3 million for the year ended December 31, 2016, representing an increaserevenue of $48.5 million, or 22.9%. This increase was largely due to an acquisition during the year. As a percentage of revenue, direct costs increased from 15.3% in 2016 to 17.2% in 2017.
The increase in directstaff costs and as a percentage of revenue was primarily dueattributable to contributions from an acquired Partner Firm, which has aand higher direct cost to revenue ratio, in addition to an increase in costs incurred on the client’s behalf from some of our existing Partner Firms acting as principal.
Staff costs as a percentage of revenue in the Advertising and Communications Group decreased from 56.4% in 2016 to 54.8% in 2017, which was primarily driven by revenue growth as well improvements in staffing relative to the prior period. Staff costs for the year ended December 31, 2017 were $829.6 million, compared to $781.9 million for the year ended December 31, 2016, representing an increase of $47.6 million, or 6.1%. The increase in staff costs was due to increased headcount driven by certain Partner Firms to support the growth of their businesses as well as additional contributions from acquiredcertain Partner Firms, partially offset by staffing reductions at other Partner Firms.
Goodwill impairment in the Advertising and Communications GroupDeferred acquisition consideration change for the yeartwelve months ended December 31, 2018 and 2017 was $3.2 million, comparedprimarily due to $48.5 millionthe aggregate performance of certain Partner Firms in the respective years relative to the previously projected expectations.
Stock-based compensation change for the yeartwelve months ended December 31, 2016, representing a decrease of $45.3 million, or 93.3%. The decrease2018 was primarily due to a partialthe aggregate performance of certain Partner Firms in 2018 relative to the previously projected expectations.
The goodwill and other asset impairment in 20172018 primarily consisted of $3.2 million relatingthe write-down of goodwill equal to two non-materialthe excess carrying value above the fair value of a reporting unitsunit one in each of the Global Integrated Agencies reportable segment, the Media Services reportable segment and within the All Other category and the full write-down of a trademark for a reporting unit also within the Global Integrated Agencies reportable segment in comparison to a partial impairment in 2016 of $48.5 million relating to an experiential reporting unit and a non-material reporting unit. For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein.
Deferred acquisition consideration in the Advertising and Communications Group for the year ended December 31, 2017 resulted in income of $4.9 million compared to an expense of $8.0 million for the year ended December 31, 2016, representing a change of $12.9 million, or 161.5%. The change in the deferred acquisition consideration adjustment was primarily due to the higher than estimated liability in the prior period driven by the decrease in the Company’s estimated future stock price, pertaining to an equity funded acquisition, increased expenses pertaining to amendments to purchase agreements of previously acquired incremental ownership interest entered into during 2016, and the aggregate under-performance of certain Partner Firms in 2017 relative to the previously-forecasted expectations.
Stock-based compensation in the Advertising and Communications Group was $22.2 million for the year ended December 31, 2017, compared to $18.5 million for the year ended December 31, 2016, representing an increase of $3.7 million, or 20.2% . As a percentage of revenue, stock-based compensation increased from 1.3% in 2016 to 1.5% in 2017.
Depreciation and amortization expense in the Advertising and Communications Group for the year ended December 31, 2017 was $42.4 million compared to $44.9 million for the year ended December 31, 2016, representing a decrease of $2.5 million, or 5.5%. The decrease was primarily due to lower amortization from intangibles related to prior period acquisitions.
Global Integrated Agencies
Revenue in the Global Integrated Agencies reportable segment for the year ended December 31, 2017 was $786.6 million, compared to $696.4 million for the year ended December 31, 2016, representing an increase of $90.2 million, or 13.0%. The change in revenue included contributions from existing Partner Firms consisting of revenue growth of $47.6 million, or 6.8%, and a positive foreign exchange impact of $2.5 million, or 0.4%. Revenue growth was primarily driven by net new client wins, increased spending as well as expanded scopes of services by existing clients, and increased pass-through costs. Revenue from acquired Partner Firms was $43.5 million, or 6.3%, partially offset by a negative impact from dispositions of $3.5 million, or 0.5%.
The change in expenses as a percentage of revenue in the Global Integrated Agencies reportable segment for the yeartwelve months ended December 31, 20172018 and 20162017 was as follows:
| | | | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
| Global Integrated Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
| Revenue | | $ | 786.6 |
| | | | $ | 696.4 |
| | | | $ | 90.2 |
| | 13.0 | % | | $ | 610,290 |
| | | | $ | 688,011 |
| | | | $ | (77,721 | ) | | (11.3 | )% |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | |
| |
|
|
| Cost of services sold | | 540.3 |
| | 68.7 | % | | 472.1 |
| | 67.8 | % | | 68.2 |
| | 14.4 | % | | 397,313 |
| | 65.1 | % | | 474,315 |
| | 68.9 | % | | (77,002 | ) | | (16.2 | )% |
| Office and general expenses | | 147.7 |
| | 18.8 | % | | 144.3 |
| | 20.7 | % | | 3.3 |
| | 2.3 | % | | 124,646 |
| | 20.4 | % | | 131,599 |
| | 19.1 | % | | (6,953 | ) | | (5.3 | )% |
| Depreciation and amortization | | 23.8 |
| | 3.0 | % | | 21.4 |
| | 3.1 | % | | 2.4 |
| | 11.0 | % | | 21,179 |
| | 3.5 | % | | 21,206 |
| | 3.1 | % | | (27 | ) | | (0.1 | )% |
| Other asset impairment | | | 3,180 |
| | 0.5 | % | | — |
| | — | % | | 3,180 |
| | — | % |
| | | $ | 711.7 |
| | 90.5 | % | | $ | 637.9 |
| | 91.6 | % | | $ | 73.8 |
| | 11.6 | % | | 546,318 |
| | 89.5 | % | | 627,120 |
| | 91.1 | % | | (80,802 | ) | | (12.9 | )% |
| Operating profit | | $ | 74.9 |
| | 9.5 | % | | $ | 58.5 |
| | 8.4 | % | | $ | 16.4 |
| | 28.0 | % | | $ | 63,972 |
| | 10.5 | % | | $ | 60,891 |
| | 8.9 | % | | $ | 3,081 |
| | 5.1 | % |
Operating profit inThe impact of the adoption of ASC 606 reduced the Global Integrated Agencies reportable segment forrevenue by $56.3 million or 8.2%. The other components of the year ended December 31, 2017change included a decline in revenue from existing Partner Firms of $18.6 million, or 2.7%, due to cutbacks and spending delays from several existing clients and a slower pace of conversion of new business, partially offset by client wins, and a negative impact from dispositions of $1.9 million or 0.3%, as well as a negative foreign exchange impact of $1.0 million, or 0.1%.
The increase in operating profit was $74.9primarily attributable to the decline in expenses (as outlined below), offset by lower revenues and other asset impairment recognized in 2018. The impact of the adoption of ASC 606 increased operating profit by $7.4 million. Excluding the impact of the adoption of ASC 606, operating profit would have been $56.6 million in 2018, representing a decrease of $4.3 million compared to $58.5 million in for the year ended December 31, 2016, representing an increase of $16.4 million, or 28.0%. Operating margins improved by 110 basis points from 8.4% in 2016 to 9.5% in 2017. The increases in operating profit and margin were largely due to improvements in staff costs as a percentage of revenue and a reduction in the deferred acquisition consideration expense, partially offset by an increase in direct costs.
The change in the categories of expenses as a percentage of revenue in the Global Integrated Agencies reportable segment for the yearstwelve months ended December 31, 20172018 and 20162017 was as follows:
| | | | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
| Global Integrated Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
Direct costs (1) | | $ | 104.9 |
| | 13.3 | % | | $ | 65.9 |
| | 9.5 | % | | $ | 39.0 |
| | 59.3 | % | | $ | 33,441 |
| | 5.5 | % | | $ | 98,330 |
| | 14.3 | % | | $ | (64,889 | ) | | (66.0 | )% |
Staff costs (2) | | 459.7 |
| | 58.4 | % | | 434.5 |
| | 62.4 | % | | 25.3 |
| | 5.8 | % | | 397,666 |
| | 65.2 | % | | 394,947 |
| | 57.4 | % | | 2,719 |
| | 0.7 | % |
| Administrative | | 103.5 |
| | 13.2 | % | | 92.4 |
| | 13.3 | % | | 11.0 |
| | 11.9 | % | | 88,756 |
| | 14.5 | % | | 91,776 |
| | 13.3 | % | | (3,020 | ) | | (3.3 | )% |
| Deferred acquisition consideration | | 4.6 |
| | 0.6 | % | | 11.6 |
| | 1.7 | % | | (7.0 | ) | | (60.2 | )% | | (5,999 | ) | | (1.0 | )% | | 6,195 |
| | 0.9 | % | | (12,194 | ) | | NM |
|
| Stock-based compensation | | 15.2 |
| | 1.9 | % | | 12.1 |
| | 1.7 | % | | 3.1 |
| | 25.2 | % | | 8,095 |
| | 1.3 | % | | 14,666 |
| | 2.1 | % | | (6,571 | ) | | (44.8 | )% |
| Depreciation and amortization | | 23.8 |
| | 3.0 | % | | 21.4 |
| | 3.1 | % | | 2.4 |
| | 11.0 | % | | 21,179 |
| | 3.5 | % | | 21,206 |
| | 3.1 | % | | (27 | ) | | (0.1 | )% |
| Other asset impairment | | | 3,180 |
| | 0.5 | % | | — |
| | — | % | | 3,180 |
| | — | % |
| Total operating expenses | | $ | 711.7 |
| | 90.5 | % | | $ | 637.9 |
| | 91.6 | % | | $ | 73.8 |
| | 11.6 | % | | $ | 546,318 |
| | 89.5 | % | | $ | 627,120 |
| | 91.1 | % | | $ | (80,802 | ) | | (12.9 | )% |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reportedThe decrease in both cost of services sold and office and general expenses. |
Direct costs in the Global Integrated Agencies reportable segment for the year ended December 31, 2017 were $104.9 million compared to $65.9 million for the year ended December 31, 2016, representing an increase of $39.0 million, or 59.3%. As a percentage of revenue, direct costs increased from 9.5%was primarily attributable to the adoption of ASC 606 in 2016 to 13.3% in 2017. These increases were primarily due to contributions from an acquired Partner Firm which has a higher direct cost to revenue ratio, in addition to an increase in costs incurred on certain clients’ behalf from somevarious client arrangements of our existing Partner Firms acting as principal.
Staff costs in the Global Integrated Agencies reportable segment for the year ended December 31, 2017 were $459.7 million compared to $434.5 million for the year ended December 31, 2016, representing an increase of $25.3 million, or 5.8%. The increase
in staff costs was due to increased headcount driven by certain Partner Firms to support the growthpreviously accounted for as principal are now accounted for as agent under ASC 606. The change resulted in a decrease in third-party costs included in revenue of their businesses as well as additional contributions from acquired Partner Firms. As a percentage of revenue, staff costs decreased from 62.4% in 2016 to 58.4% in 2017, primarily driven by revenue growth as well improvements in staffing relative to the prior period.$62.4 million.
Deferred acquisition consideration inchange for the Global Integrated Agencies reportable segment resulted in an expense of $4.6 million in 2017, compared to an expense of $11.6 million in 2016, representing a decrease of $7.0 million, or 60.2%. The change in the deferred acquisition consideration adjustmenttwelve months ended December 31, 2018 was primarily due to the increased estimated liabilityaggregate performance of certain Partner Firms in 2018 relative to the prior period driven bypreviously projected expectations.
Stock-based compensation change for the decreasetwelve months ended December 31, 2018 was primarily due to the aggregate performance of certain Partner Firms in 2018 relative to the Company’s estimated future stock price, pertainingpreviously projected expectations.
The other asset impairment in 2018 primarily consisted of the full write-down of a trademark for a reporting unit in comparison to an equity funded acquisition completeda no impairment in 2016 as well as increased expenses pertaining to amendments to purchase agreements of previously acquired incremental ownership interest entered into during 2016.2017.
Domestic Creative Agencies
Revenue in the Domestic Creative Agencies reportable segment was $90.7 million for the year ended December 31, 2017, compared to $86.0 million for the year ended December 31, 2016, representing an increase of $4.7 million, or 5.5%. The change in revenue was due to revenue growth from Partner Firms of $4.5 million, or 5.3%, and a positive foreign exchange impact of $0.2 million, or 0.2%.
The change in expenses as a percentage of revenue in the Domestic Creative Agencies reportable segment for the yeartwelve months ended December 31, 20172018 and 20162017 was as follows:
| | | | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
| Domestic Creative Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
| Revenue | | $ | 90.7 |
| | | | $ | 86.0 |
| | | | $ | 4.7 |
| | 5.5 | % | | $ | 246,642 |
| | | | $ | 277,587 |
| | | | $ | (30,945 | ) | | (11.1 | )% |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services sold | | 52.5 |
| | 57.9 | % | | 49.2 |
| | 57.2 | % | | 3.3 |
| | 6.8 | % | | 167,346 |
| | 67.8 | % | | 178,425 |
| | 64.3 | % | | (11,079 | ) | | (6.2 | )% |
| Office and general expenses | | 19.7 |
| | 21.8 | % | | 18.5 |
| | 21.6 | % | | 1.2 |
| | 6.5 | % | | 56,365 |
| | 22.9 | % | | 52,560 |
| | 18.9 | % | | 3,805 |
| | 7.2 | % |
| Depreciation and amortization | | 1.4 |
| | 1.6 | % | | 1.7 |
| | 1.9 | % | | (0.2 | ) | | (13.2 | )% | | 5,052 |
| | 2.0 | % | | 5,143 |
| | 1.9 | % | | (91 | ) | | (1.8 | )% |
| Goodwill impairment | | | 17,828 |
| | 7.2 | % | | 3,238 |
| | 1.2 | % | | 14,590 |
| | NM |
|
| | | $ | 73.7 |
| | 81.3 | % | | $ | 69.4 |
| | 80.7 | % | | $ | 4.3 |
| | 6.2 | % | | 246,591 |
| | 100.0 | % | | 239,366 |
| | 86.2 | % | | 7,225 |
| | 3.0 | % |
| Operating profit | | $ | 17.0 |
| | 18.7 | % | | $ | 16.6 |
| | 19.3 | % | | $ | 0.4 |
| | 2.4 | % | | $ | 51 |
| | — | % | | $ | 38,221 |
| | 13.8 | % | | $ | (38,170 | ) | | NM |
|
Operating profitThe impact of the adoption of ASC 606 increased revenue in the Domestic Creative Agencies reportable segment for the year ended December 31, 2017 was $17.0 million compared to $16.6 million for the year ended December 31, 2016, representing an increase of $0.4by $2.7 million or 2.4%1.0%. Operating marginsIn addition, revenue from existing Partner Firms declined by 60 basis points from 19.3% in 2016 to 18.7% in 2017. $34.3 million or 12.4%.
The increase inadoption of ASC 606 did not have a significant impact on operating profit was largely due to revenue growth, partially offset by an increase in staff costs. The decline in operating margin was due to an increase in staff costs as a percentage of revenue.profit.
The change in the categories of expenses as a percentage of revenue in the Domestic Creative Agencies reportable segment for the yeartwelve months ended December 31, 20172018 and 20162017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | Change |
| Domestic Creative Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 2.4 |
| | 2.6 | % | | $ | 2.3 |
| | 2.6 | % | | $ | 0.1 |
| | 5.0 | % |
Staff costs (2) | | 57.8 |
| | 63.8 | % | | 54.2 |
| | 63.1 | % | | 3.6 |
| | 6.7 | % |
| Administrative | | 10.8 |
| | 12.0 | % | | 10.9 |
| | 12.7 | % | | — |
| | (0.4 | )% |
| Deferred acquisition consideration | | 0.4 |
| | 0.4 | % | | (0.3 | ) | | (0.3 | )% | | 0.6 |
| | nm |
|
| Stock-based compensation | | 0.8 |
| | 0.9 | % | | 0.6 |
| | 0.7 | % | | 0.2 |
| | 33.3 | % |
| Depreciation and amortization | | 1.4 |
| | 1.6 | % | | 1.7 |
| | 1.9 | % | | (0.2 | ) | | (13.2 | )% |
| Total operating expenses | | $ | 73.7 |
| | 81.3 | % | | $ | 69.4 |
| | 80.7 | % | | $ | 4.3 |
| | 6.2 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
TABLE OF CONTENTS |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Domestic Creative Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 29,124 |
| | 11.8 | % | | $ | 29,905 |
| | 10.8 | % | | $ | (781 | ) | | (2.6 | )% |
| Staff costs | | 159,130 |
| | 64.5 | % | | 165,668 |
| | 59.7 | % | | (6,538 | ) | | (3.9 | )% |
| Administrative | | 31,516 |
| | 12.8 | % | | 32,916 |
| | 11.9 | % | | (1,400 | ) | | (4.3 | )% |
| Deferred acquisition consideration | | 1,318 |
| | 0.5 | % | | 195 |
| | 0.1 | % | | 1,123 |
| | NM |
|
| Stock-based compensation | | 2,623 |
| | 1.1 | % | | 2,301 |
| | 0.8 | % | | 322 |
| | 14.0 | % |
| Depreciation and amortization | | 5,052 |
| | 2.0 | % | | 5,143 |
| | 1.9 | % | | (91 | ) | | (1.8 | )% |
| Goodwill impairment | | 17,828 |
| | 7.2 | % | | 3,238 |
| | 1.2 | % | | 14,590 |
| | NM |
|
| Total operating expenses | | $ | 246,591 |
| | 100.0 | % | | $ | 239,366 |
| | 86.2 | % | | $ | 7,225 |
| | 3.0 | % |
Staff costsThe decrease in the Domestic Creative Agencies reportable segment for the year ended December 31, 2017 were $57.8 million compared to $54.2 million for the year ended December 31, 2016, representing an increase of $3.6 million, or 6.7%. As a percentage of revenue,direct and staff costs increased from 63.1%was primarily attributable to lower costs to support the decline in 2016 to 63.8% in 2017. These increases were primarily due to increases in workforces atrevenue of certain Partner Firms to support revenue growth and new business wins.Firms.
Specialist Communications
Revenue in the Specialist Communications reportable segment was $172.6 million for the year ended December 31, 2017, compared to revenue of $170.3 million for the year ended December 31, 2016, representing an increase of $2.3 million, or 1.3%. The increasechange in revenue was attributable to revenue growth of $2.2 million, or 1.3%, from existing Partner Firms and a positive foreign exchange impact of $0.1 million.
The change in expenses as a percentage of revenue in the Specialist Communications reportable segment for the yeartwelve months ended December 31, 20172018 and 20162017 was as follows:
| | | | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
| Specialist Communications | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
| Revenue | | $ | 172.6 |
| | | | $ | 170.3 |
| | | | $ | 2.3 |
| | 1.3 | % | | $ | 163,367 |
| | | | $ | 153,506 |
| | | | $ | 9,861 |
| | 6.4 | % |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services sold | | 117.2 |
| | 67.9 | % | | 118.1 |
| | 69.4 | % | | (0.9 | ) | | (0.8 | )% | | 111,801 |
| | 68.4 | % | | 103,104 |
| | 67.2 | % | | 8,697 |
| | 8.4 | % |
| Office and general expenses | | 29.9 |
| | 17.4 | % | | 24.7 |
| | 14.5 | % | | 5.3 |
| | 21.3 | % | | 30,137 |
| | 18.4 | % | | 25,857 |
| | 16.8 | % | | 4,280 |
| | 16.6 | % |
| Depreciation and amortization | | 4.7 |
| | 2.7 | % | | 6.6 |
| | 3.9 | % | | (1.9 | ) | | (29.0 | )% | | 4,113 |
| | 2.5 | % | | 4,567 |
| | 3.0 | % | | (454 | ) | | (9.9 | )% |
| Goodwill impairment | | — |
| | — | % | | 18.9 |
| | 11.1 | % | | (18.9 | ) | | (100.0 | )% | |
| | | $ | 151.9 |
| | 88.0 | % | | $ | 168.3 |
| | 98.9 | % | | $ | (16.5 | ) | | (9.8 | )% | | 146,051 |
| | 89.4 | % | | 133,528 |
| | 87.0 | % | | 12,523 |
| | 9.4 | % |
| Operating profit | | $ | 20.7 |
| | 12.0 | % | | $ | 1.9 |
| | 1.1 | % | | $ | 18.8 |
| | 968.3 | % | | $ | 17,316 |
| | 10.6 | % | | $ | 19,978 |
| | 13.0 | % | | $ | (2,662 | ) | | (13.3 | )% |
Operating profit
The impact of the adoption of ASC 606 increased revenue in the Specialist Communications reportable segment for the year ended December 31, 2017 was $20.7 million compared to $1.9 million in for the year ended December 31, 2016, representing an increase of $18.8by $0.8 million or 968.3%0.5%. Operating margins improved by 1,090 basis pointsThe other components of the change included growth in revenue from 1.1%existing Partner Firms of $7.6 million or 5.0%, revenue contributions of $1.3 million or 0.8% from an acquired Partner Firm.
The decrease in 2016 to 12.0% in 2017. These increases were largelyoperating profit was due to a goodwill impairment recognized in the prior period,higher operating expenses, partially offset by reduced income from deferred acquisition consideration.increase in revenues, as outlined below.
The change in the categories of expenses as a percentage of revenue in the Specialist Communications reportable segment for the yeartwelve months ended December 31, 20172018 and 20162017 was as follows:
| | | | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
| Specialist Communications | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
Direct costs (1) | | $ | 42.8 |
| | 24.8 | % | | $ | 41.9 |
| | 24.6 | % | | $ | 0.8 |
| | 2.0 | % | | $ | 42,144 |
| | 25.8 | % | | $ | 38,656 |
| | 25.2 | % | | $ | 3,488 |
| | 9.0 | % |
Staff costs (2) | | 79.9 |
| | 46.3 | % | | 80.8 |
| | 47.5 | % | | (0.9 | ) | | (1.2 | )% | | 77,000 |
| | 47.1 | % | | 69,283 |
| | 45.1 | % | | 7,717 |
| | 11.1 | % |
| Administrative | | 22.0 |
| | 12.7 | % | | 21.7 |
| | 12.7 | % | | 0.3 |
| | 1.4 | % | | 20,557 |
| | 12.6 | % | | 19,633 |
| | 12.8 | % | | 924 |
| | 4.7 | % |
| Deferred acquisition consideration | | (0.4 | ) | | (0.2 | )% | | (5.2 | ) | | (3.1 | )% | | 4.8 |
| | (92.0 | )% | | 1,865 |
| | 1.1 | % | | (771 | ) | | (0.5 | )% | | 2,636 |
| | NM |
|
| Stock-based compensation | | 3.0 |
| | 1.7 | % | | 3.6 |
| | 2.1 | % | | (0.7 | ) | | (18.6 | )% | | 372 |
| | 0.2 | % | | 2,160 |
| | 1.4 | % | | (1,788 | ) | | (82.8 | )% |
| Depreciation and amortization | | 4.7 |
| | 2.7 | % | | 6.6 |
| | 3.9 | % | | (1.9 | ) | | (29.0 | )% | | 4,113 |
| | 2.5 | % | | 4,567 |
| | 3.0 | % | | (454 | ) | | (9.9 | )% |
| Goodwill impairment | | $ | — |
| | — | % | | $ | 18.9 |
| | 11.1 | % | | $ | (18.9 | ) | | (100.0 | )% | |
| Total operating expenses | | $ | 151.9 |
| | 88.0 | % | | $ | 168.3 |
| | 98.9 | % | | $ | (16.5 | ) | | (9.8 | )% | | $ | 146,051 |
| | 89.4 | % | | $ | 133,528 |
| | 87.0 | % | | $ | 12,523 |
| | 9.4 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Goodwill impairmentThe increase in direct and staff costs were primarily attributable to supporting the Specialist Communications reportable segment was $18.9 million for the year ended December 31, 2016 pertaining to a partial impairmentgrowth in revenue of goodwill relating to one of the Company’s strategic communications reporting units. For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein for further information.certain Partner Firms, and contributions from an acquired Partner Firm.
Deferred acquisition consideration in the Specialist Communications reportable segment for the year ended December 31, 2017 resulted in income of $0.4 million compared to income of $5.2 million in for the year ended December 31, 2016, representing a decrease in income of $4.8 million, or 92.0%. The change in the deferred acquisition consideration adjustment was due to the aggregate under-performanceperformance of certain Partner Firms in 20162018 as compared to forecastedtheir performance in 2017.
Stock-based compensation declined for the twelve months ended December 31, 2018 primarily due to the aggregate performance of certain Partner Firms in 2018 relative to the previously projected expectations.
Media Services
Revenue in the Media Services reportable segment was $142.4 million for the year ended December 31, 2017, compared to revenue of $131.5 million for the year ended December 31, 2016, representing an increase of $10.9 million, or 8.3%. The increase in revenue was driven by revenue growth of $16.5 million, or 12.5%, primarily due to new business wins and an increase in pass-through costs, partially offset by a negative disposition impact of $5.6 million, or 4.3%.
The change in revenues and expenses as a percentage of revenue in the Media Services reportable segment for the yeartwelve months ended December 31, 20172018 and 20162017 was as follows:
| | | | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
| Media Services | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
| Revenue | | $ | 142.4 |
| | | | $ | 131.5 |
| | | | $ | 10.9 |
| | 8.3 | % | | $ | 121,859 |
| | | | $ | 150,198 |
| | | | $ | (28,339 | ) | | (18.9 | )% |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services sold | | 92.9 |
| | 65.3 | % | | 95.4 |
| | 72.5 | % | | (2.4 | ) | | (2.5 | )% | | 86,975 |
| | 71.4 | % | | 97,881 |
| | 65.2 | % | | (10,906 | ) | | (11.1 | )% |
| Office and general expenses | | 32.9 |
| | 23.1 | % | | 24.3 |
| | 18.5 | % | | 8.6 |
| | 35.4 | % | | 31,319 |
| | 25.7 | % | | 34,708 |
| | 23.1 | % | | (3,389 | ) | | (9.8 | )% |
| Depreciation and amortization | | 3.6 |
| | 2.5 | % | | 5.7 |
| | 4.3 | % | | (2.1 | ) | | (36.5 | )% | | 2,693 |
| | 2.2 | % | | 3,709 |
| | 2.5 | % | | (1,016 | ) | | (27.4 | )% |
| Goodwill impairment | | | 52,041 |
| | 42.7 | % | | — |
| | — | % | | 52,041 |
| | — | % |
| | | $ | 129.4 |
| | 90.9 | % | | $ | 125.3 |
| | 95.3 | % | | $ | 4.1 |
| | 3.3 | % | | 173,028 |
| | 142.0 | % | | 136,298 |
| | 90.7 | % | | 36,730 |
| | 26.9 | % |
| Operating profit | | $ | 13.0 |
| | 9.1 | % | | $ | 6.2 |
| | 4.7 | % | | $ | 6.8 |
| | 110.7 | % | |
| Operating profit (loss) | | | $ | (51,169 | ) | | (42.0 | )% | | $ | 13,900 |
| | 9.3 | % | | $ | (65,069 | ) | | NM |
|
Operating profitThe impact of the adoption of ASC 606 increased revenue in the Media Services reportable segment forby $0.1 million or 0.1%. The decline in revenue was primarily attributable to client losses and a reduction in spending by certain clients.
The operating loss in 2018 was driven by the year ended December 31, 2017goodwill impairment. The change in operating profit was $13.0 million compared to $6.2 million for the year ended December 31, 2016, representing an increase of $6.8 million, 110.7%. Operating margins improved by 440 basis points from 4.7% in 2016 to 9.1% in 2017. These increases were largelyalso due to a decline in revenue, growth andpartially offset by a decrease in administrative costs and depreciation and amortization expense, partially offset by an increase in direct costs.operating expenses, as outlined below.
The adoption of ASC 606 did not have a significant impact on operating profit.
The change in the categories of expenses as a percentage of revenue in the Media Services reportable segment for the yeartwelve months ended December 31, 20172018 and 20162017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | Change |
| Media Services | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 38.0 |
| | 26.7 | % | | $ | 31.2 |
| | 23.7 | % | | $ | 6.8 |
| | 21.8 | % |
Staff costs (2) | | 68.6 |
| | 48.2 | % | | 64.8 |
| | 49.3 | % | | 3.8 |
| | 5.8 | % |
| Administrative | | 19.4 |
| | 13.6 | % | | 22.7 |
| | 17.3 | % | | (3.3 | ) | | (14.6 | )% |
| Deferred acquisition consideration | | (0.8 | ) | | (0.6 | )% | | 0.6 |
| | 0.4 | % | | (1.4 | ) | | nm |
|
| Stock-based compensation | | 0.6 |
| | 0.4 | % | | 0.3 |
| | 0.2 | % | | 0.3 |
| | 104.0 | % |
| Depreciation and amortization | | 3.6 |
| | 2.5 | % | | 5.7 |
| | 4.3 | % | | (2.1 | ) | | (36.5 | )% |
| Total operating expenses | | $ | 129.4 |
| | 90.9 | % | | $ | 125.3 |
| | 95.3 | % | | $ | 4.1 |
| | 3.3 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Direct costs in the Media Services reportable segment for the year ended December 31, 2017 were $38.0 million compared to $31.2 million for the year ended December 31, 2016, representing an increase of $6.8 million, or 21.8%. As a percentage of revenue, direct costs increased from 23.7% in 2016 to 26.7% in 2017. The increase in direct costs is primarily due to increases in pass-through costs incurred on clients’ behalf, from one of the Company’s Partner Firms acting as Principal versus Agent.
Administrative costs in the Media Services reportable segment for the year ended December 31, 2017 were $19.4 million compared to $22.7 million for the year ended December 31, 2016, representing a decrease of $3.3 million, or 14.6%. As a percentage
of revenue, administrative costs decreased from 17.3% |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Media Services | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 30,326 |
| | 24.9 | % | | $ | 38,430 |
| | 25.6 | % | | $ | (8,104 | ) | | (21.1 | )% |
| Staff costs | | 68,716 |
| | 56.4 | % | | 73,845 |
| | 49.2 | % | | (5,129 | ) | | (6.9 | )% |
| Administrative | | 18,697 |
| | 15.3 | % | | 20,519 |
| | 13.7 | % | | (1,822 | ) | | (8.9 | )% |
| Deferred acquisition consideration | | 279 |
| | 0.2 | % | | (819 | ) | | (0.5 | )% | | 1,098 |
| | NM |
|
| Stock-based compensation | | 276 |
| | 0.2 | % | | 614 |
| | 0.4 | % | | (338 | ) | | (55.0 | )% |
| Depreciation and amortization | | 2,693 |
| | 2.2 | % | | 3,709 |
| | 2.5 | % | | (1,016 | ) | | (27.4 | )% |
| Goodwill impairment | | 52,041 |
| | 42.7 | % | | — |
| | — | % | | 52,041 |
| | — | % |
| Total operating expenses | | $ | 173,028 |
| | 142.0 | % | | $ | 136,298 |
| | 90.7 | % | | $ | 36,730 |
| | 26.9 | % |
The decline in 2016 to 13.6% in 2017. The decrease in administrativedirect costs was primarily attributable to costs incurred in the prior year for a disposed Partner Firm.
The decline in staff costs was primarily attributable to staffing reductions at certain Partner Firms due to a reductiondeclines in outside professional services fees as well as occupancy cost savings realized from real estate consolidation initiatives.
Depreciationrevenue and amortization expensecosts incurred in the Media Services reportable segmentprior year for a disposed Partner Firm.
The goodwill impairment in 2018 primarily consisted of the year ended December 31, 2017 was $3.6 million comparedwrite-down of goodwill equal to $5.7 million for the year ended December 31, 2016, representingexcess carrying value above the fair value of a decreasereporting unit. For more information see Note 8 of $2.1 million, or 36.5%. The decrease was primarily duethe Notes to lower amortization from intangibles related to prior period acquisitions.the Consolidated Financial Statements included herein.
All Other
Revenue in the All Other category was $321.5 million for the year ended December 31, 2017 compared to revenue of $301.6 million for the year ended December 31, 2016, representing an increase of $19.9 million, or 6.6%. The increase was driven by revenue growth from existing Partner Firm of $20.6 million, or 6.8%, and a positive foreign exchange impact of $0.8 million, or 0.3%, partially offset by a negative impact from dispositions of $1.5 million, or 0.5%.
The change in revenue and expenses as a percentage of revenue in the All Other category for the years ended December 31, 20172018 and 20162017 was as follows:
| | | | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
| All Other | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
| Revenue | | $ | 321.5 |
| | | | $ | 301.6 |
| | | | $ | 19.9 |
| | 6.6 | % | | $ | 334,045 |
| | | | $ | 244,477 |
| | | | $ | 89,568 |
| | 36.6 | % |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services sold | | 220.5 |
| | 68.6 | % | | 201.3 |
| | 66.7 | % | | 19.2 |
| | 9.5 | % | | 227,780 |
| | 68.2 | % | | 169,751 |
| | 69.4 | % | | 58,029 |
| | 34.2 | % |
| Office and general expenses | | 41.7 |
| | 13.0 | % | | 51.9 |
| | 17.2 | % | | (10.2 | ) | | (19.7 | )% | | 54,494 |
| | 16.3 | % | | 27,150 |
| | 11.1 | % | | 27,344 |
| | NM |
|
| Depreciation and amortization | | 8.8 |
| | 2.7 | % | | 9.4 |
| | 3.1 | % | | (0.6 | ) | | (6.0 | )% | | 12,397 |
| | 3.7 | % | | 7,751 |
| | 3.2 | % | | 4,646 |
| | 59.9 | % |
| Goodwill impairment | | 3.2 |
| | 1.0 | % | | $ | 29.7 |
| | 9.8 | % | | (26.4 | ) | | (89.1 | )% | | 4,691 |
| | 1.4 | % | | — |
| | — | % | | 4,691 |
| | — | % |
| | | $ | 274.3 |
| | 85.3 | % | | $ | 292.3 |
| | 96.9 | % | | $ | (18.0 | ) | | (6.2 | )% | | 299,362 |
| | 89.6 | % | | 204,652 |
| | 83.7 | % | | 94,710 |
| | 46.3 | % |
| Operating profit (loss) | | $ | 47.3 |
| | 14.7 | % | | $ | 9.4 |
| | 3.1 | % | | $ | 37.9 |
| | 404.5 | % | |
| Operating profit | | | $ | 34,683 |
| | 10.4 | % | | $ | 39,825 |
| | 16.3 | % | | $ | (5,142 | ) | | (12.9 | )% |
Operating profitThe impact of the adoption of ASC 606 increased revenue in the All Other category for the year ended December 31, 2017 was $47.3 million compared to $9.4 million for the year ended December 31, 2016, representing an increase of $37.9by $1.0 million or 404.5%0.4%. Operating margins improvedThe other components of the change included revenue growth from existing Partner Firms of $63.0 million or 25.8%, revenue contributions of $25.8 million or 10.6% from an acquired Partner Firm net of dispositions, offset by 1,160 basis points from 3.1%an immaterial negative foreign exchange impact.
These decrease in 2016 to 14.7% in 2017. These increases were largelyoperating profit was primarily due to a decline in the goodwill impairment charge and the change in the deferred acquisition consideration adjustment, partiallyhigher revenue, being more than offset by an increase in staff costsoperating expenses, as a percentageoutlined below. The impact of revenue.the adoption of ASC 606 increased operating profit by $1.0 million or 0.4%.
The change in the categories of expenses as a percentage of revenue in the All Other category for the years ended December 31, 20172018 and 20162017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | Change |
| All Other | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 72.7 |
| | 22.6 | % | | $ | 71.0 |
| | 23.5 | % | | $ | 1.7 |
| | 2.4 | % |
Staff costs (2) | | 163.5 |
| | 50.9 | % | | 147.6 |
| | 48.9 | % | | 15.9 |
| | 10.8 | % |
| Administrative | | 32.0 |
| | 9.9 | % | | 31.5 |
| | 10.4 | % | | 0.5 |
| | 1.5 | % |
| Deferred acquisition consideration | | (8.6 | ) | | (2.7 | )% | | 1.3 |
| | 0.4 | % | | (10.0 | ) | | nm |
|
| Stock-based compensation | | 2.6 |
| | 0.8 | % | | 1.8 |
| | 0.6 | % | | 0.8 |
| | 46.6 | % |
| Depreciation and amortization | | 8.8 |
| | 2.7 | % | | 9.4 |
| | 3.1 | % | | (0.6 | ) | | (6.0 | )% |
| Goodwill impairment | | 3.2 |
| | 1.0 | % | | $ | 29.7 |
| | 9.8 | % | | (26.4 | ) | | (89.1 | )% |
| Total operating expenses | | $ | 274.3 |
| | 85.3 | % | | $ | 292.3 |
| | 96.9 | % | | $ | (18.0 | ) | | (6.2 | )% |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| All Other | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 78,319 |
| | 23.4 | % | | $ | 55,456 |
| | 22.7 | % | | $ | 22,863 |
| | 41.2 | % |
| Staff costs | | 169,947 |
| | 50.9 | % | | 125,825 |
| | 51.5 | % | | 44,122 |
| | 35.1 | % |
| Administrative | | 29,537 |
| | 8.8 | % | | 22,843 |
| | 9.3 | % | | 6,694 |
| | 29.3 | % |
| Deferred acquisition consideration | | 2,080 |
| | 0.6 | % | | (9,698 | ) | | (4.0 | )% | | 11,778 |
| | NM |
|
| Stock-based compensation | | 2,391 |
| | 0.7 | % | | 2,475 |
| | 1.0 | % | | (84 | ) | | (3.4 | )% |
| Depreciation and amortization | | 12,397 |
| | 3.7 | % | | 7,751 |
| | 3.2 | % | | 4,646 |
| | 59.9 | % |
| Goodwill impairment | | 4,691 |
| | 1.4 | % | | — |
| | — | % | | 4,691 |
| | — | % |
| Total operating expenses | | $ | 299,362 |
| | 89.6 | % | | $ | 204,652 |
| | 83.7 | % | | $ | 94,710 |
| | 46.3 | % |
This increase in the All Other category for the year ended December 31, 2017 were $163.5 million compared to $147.6 million for the year ended December 31, 2016, representing an increase of $15.9 million, or 10.8%. As a percentage of revenue,direct and staff costs increased from 48.9% in 2016 to 50.9% in 2017. These increases were primarily due to higher headcount atcontributions from an acquired Partner Firm and an expansion in workforce in certain Partner Firms to support growth of the business.revenue growth.
DeferredThe change in deferred acquisition consideration in the All Other category resulted in income of $8.6 million for the year ended December 31, 2017 compared to an expense of $1.3 million for the year ended December 31, 2016, representing a change of $10.0 million. The change was primarily due to aggregate underhigher performance of certain Partner Firms as compared to forecasted expectations in the current period.
Goodwill impairment in the All Other category for the year ended December 31, 2017 was $3.2 million compared to $29.7 million for the year ended December 31, 2016, representing a decrease of $26.4 million, or 89.1%. The goodwill impairment in 20172018 was comprised of a partial impairment of $3.2 million relating to two non-material reporting units.a Partner Firm that was classified as Held For Sale as of December 31, 2018. For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein for further information.
Corporate
The change in operating expenses for Corporate for the years ended December 31, 20174 and 2016 was as follows:
|
| | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | Variance |
| Corporate | | $ | | $ | | $ | | % |
| | | (Dollars in Millions) |
Staff costs (1)
| | $ | 20.9 |
| | $ | 27.8 |
| | $ | (6.9 | ) | | (24.9 | )% |
| Administrative | | 15.5 |
| | 12.2 |
| | 3.4 |
| | 27.7 | % |
| Stock-based compensation | | 2.1 |
| | 2.5 |
| | (0.4 | ) | | (15.5 | )% |
| Depreciation and amortization | | 1.1 |
| | 1.6 |
| | (0.5 | ) | | (30.7 | )% |
| Goodwill and other asset impairment | | 1.2 |
| | — |
| | 1.2 |
| | NA |
|
| Total operating expenses | | $ | 40.9 |
| | $ | 44.1 |
| | $ | (3.3 | ) | | (7.4 | )% |
| |
(1) | Excludes stock-based compensation. |
Total operating expenses for Corporate decreased by $3.3 million to $40.9 million in 2017, compared to $44.1 million in 2016.
Staff costs for Corporate decreased by $6.9 million, or 24.9%. The decrease was primarily due to reductions in executive compensation expense and severance expense.
Administrative costs for Corporate increased by $3.4 million, or 27.7%. This increase was primarily due to an increase in professional fees of $2.4 million relating to the implementation of ASC 606, Revenue from Contracts with Customers, which is effective January 1, 2018. Additionally, there was a reduction in insurance proceeds of $4.8 million received by the Company in 2016 compared to 2017, relating to the class action litigation and the completed SEC investigation, offset by reductions in legal fees in 2017 relating to the class action litigation and the completed SEC investigation. In addition, for the year ended December 31, 2016, the Company paid a one-time SEC civil penalty payment of $1.5 million.
For the year ended December 31, 2017, the Company incurred a $1.2 million other asset impairment charge.
Other Income, Net
Other income, net, increased by $0.9 million from $0.4 million for the year ended December 31, 2016 to $1.3 million for the year ended December 31, 2017.
Foreign Exchange
Foreign exchange gain was $18.1 million in 2017 compared to a foreign exchange loss of $0.2 million in 2016. The foreign exchange gain in 2017 was primarily related to the U.S. dollar denominated indebtedness that was an obligation of the Company’s Canadian parent company and was driven by the appreciation of the Canadian dollar against the U.S. dollar in the period.
Interest Expense and finance charges
Interest expense and finance charges, net, for the year ended December 31, 2017 was $64.4 million compared to $65.1 million for the year ended December 31, 2016, representing a decrease of $0.7 million. The decrease was primarily due to lower borrowings under the Company’s revolving Credit Agreement in comparison to the prior period. See Note 10 of the Notes to the Consolidated Financial Statements for additional information on the Wells Fargo Credit Agreement.
Loss on Redemption of Notes
For the year ended December 31, 2016, the Company incurred a $33.3 million loss on redemption of the 6.75% Notes in the first quarter of 2016.
Income Tax Expense (Benefit)
Income tax benefit for the year ended December 31, 2017 was $168.1 million compared to $9.4 million for the year ended December 31, 2016, representing an increase of $158.7 million. The increase was due to the release of the Company’s deferred tax asset valuation allowance in certain tax jurisdictions as well the additional incremental tax benefit as a result of the Tax Cuts and Jobs Act of 2017.
Equity in Earnings (Losses) of Non-Consolidated Affiliates
Equity in earnings (losses) of non-consolidated affiliates represents the income attributable to equity-accounted affiliate operations. For the year ended December 31, 2017, the Company recorded income of $2.1 million compared to a loss of $0.3 million for the year ended December 31, 2016.
Noncontrolling Interests
The effects of noncontrolling interests was $15.4 million for the year ended December 31, 2017, compared to $5.2 million for the year ended December 31, 2016, representing an increase of $10.2 million. This increase was attributable to the noncontrolling interests of certain Partner Firms that attained the right to distribution of earnings in the current period.
Net Income (Loss) Attributable to MDC Partners Inc.
As a result of the foregoing, the net income attributable to MDC Partners Inc. for the year ended December 31, 2017 was $241.8 million or income of $3.72 per diluted share, compared to a net loss of $45.8 million, or $0.89 per diluted share reported for the year ended December 31, 2016.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue was $1.39 billion for the year ended December 31, 2016, representing an increase of $59.5 million, or 4.5%, compared to revenue of $1.33 billion for the year ended December 31, 2015. Revenue from acquisitions for 2016 was $51.1 million or 3.8%, inclusive of a $10.1 million contribution to organic revenue growth. Additionally, a negative impact of $0.5 million is included to reflect a disposition. Excluding the effect of the acquisitions and disposition, revenue growth was $20.0 million or 1.5%, partially offset by an adverse foreign exchange impact of $11.0 million or 0.8%.
Operating profit for the year ended 2016 was $48.4 million, compared to $72.1 million in 2015. Operating profit decreased by $44.7 million in the Advertising and Communications Group, while Corporate operating expenses decreased by $21.1 million.
Loss from continuing operations was $40.6 million in 2016, compared to a loss of $20.1 million in 2015.The increase of $20.5 million was primarily attributable to (1) a decrease in operating profit of $23.7 million, primarily due to goodwill impairment expense of $48.5 million, (2) an increase in net interest expense of $40.9 million, partially offset by (3) a decrease in foreign exchange loss of $39.1 million, (4) a decrease in other income, net, of $6.8 million, and (5) an increase in the income tax benefit of $13.2 million.
Advertising and Communications Group
The following discussion provides additional detailed disclosure for each of the Company’s four (4) reportable segments, plus “All Other,” within the Advertising and Communications Group.
Revenue in the Advertising and Communications Group was $1.39 billion for the year ended December 31, 2016, representing an increase of $59.5 million, or 4.5%, compared to revenue of $1.33 billion for the year ended December 31, 2015. Revenue from acquisitions for 2016 was $51.1 million or 3.8%, inclusive of a $10.1 million contribution to organic revenue growth. Additionally, a negative impact of $0.5 million is included to reflect a disposition. Excluding the effect of the acquisitions and dispositions, revenue growth was $20.0 million or 1.5%, partially offset by an adverse foreign exchange impact of $11.0 million or 0.8%, which was attributable to new client wins partially offset by client losses and reductions in spending by some clients. There was mixed performance by client sector, with strength in communications, food & beverage and auto, offset by declines led by retail, technology, and financial services. The performance by disciplines was mixed with strength led by technology & data science, and public relations, partially offset by declines primarily in design firms. For the year ended December 31, 2016, revenue was negatively impacted by decreased billable pass-through costs incurred on client’s behalf from the Company acting as principal in experiential and other businesses.
Revenue growth in the Advertising and Communications Group was driven by the Company’s business outside of North America primarily consisting of revenue from acquisitions of $40.4 million or 3.1%, inclusive of a $6.2 million contribution to organic revenue growth. Revenue growth excluding acquisitions was $12.3 million or 0.9%, partially offset by an adverse foreign exchange impact of $6.9 million or 0.5%. The revenue growth in North America was comprised of revenue from acquisitions of $10.7 million or 0.8%, in addition to revenue growth of $8.0 million or 0.6% excluding acquisitions from the United States, offset by a minimal revenue decrease from Canada. United States saw modest growth due to client wins partially offset by client losses and reduction in client spending, as well as decrease in billable pass-through cost. The majority of the revenue growth outside of North America was attributable to the Company’s European and Asian operations.
The Company also utilizes a non-GAAP metric called organic revenue growth (decline), defined in Item 7. For the year ended December 31, 2016, organic revenue growth was $30.1 million or 2.3%, of which $20.0 million pertained to Partner Firms which the Company has held throughout each of the comparable periods presented, while the remaining $10.1 million was contributed by acquisitions. The increase in revenue was also a result of non-GAAP acquisition (disposition), net adjustments of $42.0 million or 3.2%, which was partially offset by an adverse foreign exchange impact of $12.5 million or 0.9%.
The components of the change in revenues in the Advertising and Communications Group for the year ended December 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2016 Non-GAAP Activity | | | | Change |
Advertising and Communications
Group | | 2015 Revenue | | Foreign
Exchange | | Non-GAAP Acquisitions
(Dispositions), net | | Organic
Revenue
Growth
(Decline) | | 2016 Revenue | | Foreign
Exchange | | Non-GAAP Acquisitions
(Dispositions), net | | Organic
Revenue
Growth
(Decline) | | Total
Revenue |
| | | (Dollars in Millions) | | | | | | | | |
| United States | | $ | 1,085.1 |
| | $ | — |
| | $ | 6.8 |
| | $ | 11.9 |
| | $ | 1,103.7 |
| | — | % | | 0.6 | % | | 1.1 | % | | 1.7 | % |
| Canada | | 129.0 |
| | (4.1 | ) | | (0.5 | ) | | (0.3 | ) | | 124.1 |
| | (3.2 | )% | | (0.4 | )% | | (0.2 | )% | | (3.8 | )% |
| Other | | 112.2 |
| | (8.4 | ) | | 35.7 |
| | 18.5 |
| | 158.0 |
| | (7.5 | )% | | 31.9 | % | | 16.5 | % | | 40.8 | % |
| Total | | $ | 1,326.3 |
| | $ | (12.5 | ) | | $ | 42.0 |
| | $ | 30.1 |
| | $ | 1,385.8 |
| | (0.9 | )% | | 3.2 | % | | 2.3 | % | | 4.5 | % |
The below is a reconciliation between the revenue in the Advertising and Communications Group from acquired businesses in the statement of operations to non-GAAP acquisitions (dispositions), net for the year ended December 31, 2016:
|
| | | | | | | | | | | | | | | | |
| | | Global Integrated Agencies | | Media Services | | All Other | | Total |
| | | (Dollars in Millions) |
Revenue from acquisitions (dispositions), net (1) | | $ | 39.6 |
| | $ | 4.8 |
| | $ | 6.7 |
| | $ | 51.1 |
|
| Foreign exchange impact | | 1.5 |
| | — |
| | — |
| | 1.5 |
|
Contribution to organic revenue growth (decline) (2) | | (5.9 | ) | | (1.4 | ) | | (2.8 | ) | | (10.1 | ) |
| Prior year revenue from dispositions | | — |
| | — |
| | (0.5 | ) | | (0.5 | ) |
| Non-GAAP acquisitions (dispositions), net | | $ | 35.1 |
| | $ | 3.5 |
| | $ | 3.4 |
| | $ | 42.0 |
|
| |
(1) | For the year ended December 31, 2016, revenue from acquisitions was comprised of $11.5 million from acquisitions completed in 2015 and $39.6 million from acquisitions completed in 2016. |
| |
(2) | Contributions to organic revenue growth (decline) represents the change in revenue, measured on a constant currency basis, relative to the comparable pre-acquisition period for acquired businesses that is included in the Company’s organic revenue growth (decline) calculation. |
The geographic mix in revenues in the Advertising and Communications Group for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | |
| | 2016 | | 2015 |
| United States | 79.6 | % | | 81.8 | % |
| Canada | 9.0 | % | | 9.7 | % |
| Other | 11.4 | % | | 8.5 | % |
Overall, organic revenue growth in the Advertising and Communications Group was driven by the Company’s business outside of North America, with organic revenue growth of 16.5%, primarily attributable to new client wins and increased spend from existing clients as the Company extended its capabilities into new markets throughout Europe, Asia, and South America. For the year ended December 31, 2016, 11.4% of the Company’s total revenue came from outside North America, up from 8.5% for the year ended December 31, 2015. Additional revenue growth came from acquisitions of Partner Firms that helped expand the Company’s capabilities in mobile development and digital media buying, as well as expand the Company’s global footprint.
The adverse currency impact was primarily due to the weakening of the British Pound and the Canadian dollar against the U.S. dollar during the twelve months ended December 31, 2016, as compared to the twelve months ended December 31, 2015.
The change in expenses as a percentage of revenue in the Advertising and Communications Group for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
Advertising and Communications
Group | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
| Revenue | | $ | 1,385.8 |
| | | | $ | 1,326.3 |
| | | | $ | 59.5 |
| | 4.5 | % |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 936.1 |
| | 67.6 | % | | 879.7 |
| | 66.3 | % | | 56.4 |
| | 6.4 | % |
| Office and general expenses | | 263.7 |
| | 19.0 | % | | 258.8 |
| | 19.5 | % | | 4.9 |
| | 1.9 | % |
| Depreciation and amortization | | 44.9 |
| | 3.2 | % | | 50.4 |
| | 3.8 | % | | (5.6 | ) | | (11.1 | )% |
| Goodwill impairment | | 48.5 |
| | 3.5 | % | | — |
| | — | % | | 48.5 |
| | NA |
|
| | | $ | 1,293.2 |
| | 93.3 | % | | $ | 1,189.0 |
| | 89.6 | % | | $ | 104.3 |
| | 8.8 | % |
| Operating profit | | $ | 92.5 |
| | 6.7 | % | | $ | 137.3 |
| | 10.4 | % | | $ | (44.7 | ) | | (32.6 | )% |
The change in the categories of expenses as a percentage of revenue in the Advertising and Communications Group for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
Advertising and Communications
Group | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 212.3 |
| | 15.3 | % | | $ | 195.3 |
| | 14.7 | % | | $ | 17.0 |
| | 8.7 | % |
Staff costs (2) | | 781.9 |
| | 56.4 | % | | 732.4 |
| | 55.2 | % | | 49.5 |
| | 6.8 | % |
| Administrative costs | | 179.2 |
| | 12.9 | % | | 159.4 |
| | 12.0 | % | | 19.8 |
| | 12.4 | % |
| Deferred acquisition consideration | | 8.0 |
| | 0.6 | % | | 36.3 |
| | 2.7 | % | | (28.4 | ) | | (78.1 | )% |
| Stock-based compensation | | 18.5 |
| | 1.3 | % | | 15.1 |
| | 1.1 | % | | 3.4 |
| | 22.7 | % |
| Depreciation and amortization | | 44.9 |
| | 3.2 | % | | 50.4 |
| | 3.8 | % | | (5.6 | ) | | (11.1 | )% |
| Goodwill impairment | | 48.5 |
| | 3.5 | % | | — |
| | — | % | | 48.5 |
| | NA |
|
| Total operating expenses | | $ | 1,293.2 |
| | 93.3 | % | | $ | 1,189.0 |
| | 89.6 | % | | $ | 104.3 |
| | 8.8 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Operating profit in the Advertising and Communications Group in 2016 was $92.5 million, compared to $137.3 million in 2015, with operating margins declining 370 basis points from 10.4% in 2015 to 6.7% in 2016. These decreases were largely due to the goodwill impairment charge of $48.5 million and increases in staff costs as a percentage of revenue, partially offset by decreased deferred acquisition consideration expense.
Direct costs in the Advertising and Communications Group increased by $17.0 million, or 8.7% and as a percentage of revenue increased from 14.7% in 2015 to 15.3% in 2016. This increase was largely due to an acquisition during the year.
Staff costs in the Advertising and Communications Group increased by $49.5 million, or 6.8% and as a percentage of revenue increased from 55.2% in 2015 to 56.4% in 2016. The increase in staff costs was due to increased headcount driven by certain Partner Firms to support the growth of their businesses, as well as additional contributions from acquisitions. The increase in staff costs as a percentage of revenue was due to an increase in staffing levels in advance of revenue at certain Partner Firms, as well as slower reductions in staffing at other Partner Firms.
Administrative costs in the Advertising and Communications Group increased year over year and as a percentage of revenue primarily due to higher occupancy expenses and other general and administrative expenses. These increases were incurred to support the growth and expansion of certain Partner Firms, as well as some real estate consolidation initiatives.
Deferred acquisition consideration in the Advertising and Communications Group resulted in an expense of $8.0 million in 2016, compared to expense of $36.3 million in 2015. The decrease in deferred acquisition consideration expense was due to the aggregate under-performance of certain Partner Firms in 2016 relative to forecast expectations as compared to 2015. This decrease was partially offset by expenses pertaining to amendments to purchase agreements of previously acquired incremental ownership interests entered into during 2016, as well as increased estimated liability driven by the decrease in the Company’s estimated future stock price, pertaining to an acquisition in which the Company used its equity as purchase consideration.
Stock-based compensation in the Advertising and Communications Group remained consistent at approximately 1% of revenue.
Depreciation and amortization expense in the Advertising and Communications Group decreased by $5.6 million primarily due to lower amortization from intangibles related to prior year acquisitions.
Goodwill impairment in the Advertising and Communications Group of $48.5 million was comprised of $27.9 million relating to an experiential reporting unit, a partial impairment of goodwill of $18.9 million relating to a strategic communications reporting unit, and a partial impairment of goodwill of $1.7 million relating to a non-material reporting unit. For more information see Note 8 of our Consolidated Financial Statements.
Global Integrated Agencies
Revenue in the Global Integrated Agencies reportable segment was $696.4 million for the year ended December 31, 2016, representing an increase of $43.4 million, or 6.6%, compared to revenue of $653.0 million for the year ended December 31, 2015. The increase related to revenue growth from existing Partner Firms, excluding the effect of acquisitions, of $15.6 million, or 2.4%, as well as revenue from acquisitions of $35.1 million, or 5.4%. These increases were partially offset by an adverse foreign exchange impact of $7.3 million, or 1.1%.
The change in expenses as a percentage of revenue in the Global Integrated Agencies reportable segment for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| Global Integrated Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
| Revenue | | $ | 696.4 |
| | | | $ | 653.0 |
| | | | $ | 43.4 |
| | 6.6 | % |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 472.1 |
| | 67.8 | % | | 431.3 |
| | 66.0 | % | | 40.9 |
| | 9.5 | % |
| Office and general expenses | | 144.3 |
| | 20.7 | % | | 135.0 |
| | 20.7 | % | | 9.4 |
| | 7.0 | % |
| Depreciation and amortization | | 21.4 |
| | 3.1 | % | | 20.6 |
| | 3.2 | % | | 0.8 |
| | 4.1 | % |
| | | $ | 637.9 |
| | 91.6 | % | | $ | 586.8 |
| | 89.9 | % | | $ | 51.1 |
| | 8.7 | % |
| Operating profit | | $ | 58.5 |
| | 8.4 | % | | $ | 66.2 |
| | 10.1 | % | | $ | (7.7 | ) | | (11.6 | )% |
Operating profit in the Global Integrated Agencies reportable segment in 2016 was $58.5 million, compared to $66.2 million in 2015. Operating margins declined by 170 basis points from 10.1% in 2015 to 8.4% in 2016. These decreases were largely due to increases in direct costs as a percentage of revenue as well as staff costs, partially offset by decreased deferred acquisition consideration expense.
The change in the categories of expenses as a percentage of revenue in the Global Integrated Agencies reportable segment for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| Global Integrated Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 65.9 |
| | 9.5 | % | | $ | 51.0 |
| | 7.8 | % | | $ | 14.9 |
| | 29.1 | % |
Staff costs (2) | | 434.5 |
| | 62.4 | % | | 406.9 |
| | 62.3 | % | | 27.6 |
| | 6.8 | % |
| Administrative costs | | 92.4 |
| | 13.3 | % | | 84.3 |
| | 12.9 | % | | 8.2 |
| | 9.7 | % |
| Deferred acquisition consideration | | 11.6 |
| | 1.7 | % | | 17.1 |
| | 2.6 | % | | (5.5 | ) | | (32.3 | )% |
| Stock-based compensation | | 12.1 |
| | 1.7 | % | | 7.0 |
| | 1.1 | % | | 5.2 |
| | 73.9 | % |
| Depreciation and amortization | | 21.4 |
| | 3.1 | % | | 20.6 |
| | 3.2 | % | | 0.8 |
| | 4.1 | % |
| Total operating expenses | | $ | 637.9 |
| | 91.6 | % | | $ | 586.8 |
| | 89.9 | % | | $ | 51.1 |
| | 8.7 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Direct costs in the Global Integrated Agencies reportable segment increased by $14.9 million, or 29.1%, and as a percentage of revenue increased from 7.8% in 2015 to 9.5% in 2016, largely due to contributions from a Partner Firm acquired in the second half of 2016.
Staff costs in the Global Integrated Agencies reportable segment increased by $27.6 million, or 6.8%, and as a percentage of revenue remained consistent at approximately 62.4% in 2015 and 2016. The increase was due to increased headcount at certain Partner Firms to support the growth of their businesses as well as additional contributions from a Partner Firm acquired in the second half of 2016.
Administrative costs in the Global Integrated Agencies reportable segment increased by $8.2 million, or 9.7%, and as a percentage of revenue increased from 12.9% in 2015 to 13.3% in 2016, primarily due to higher occupancy expenses and other general and administrative expenses attributable to existing Partner Firms as well as contributions from a Partner Firm acquired in the second half of 2016. These increases were incurred in 2016 to support the growth and expansion of certain Partner Firms and in support of some real estate consolidation initiatives.
Deferred acquisition consideration in the Global Integrated Agencies reportable segment resulted in an expense of $11.6 million in 2016, compared to an expense of $17.1 million in 2015. The decrease was due to the aggregate under-performance of certain Partner Firms in 2016 relative to forecast expectations as compared to 2015 aggregate out-performance relative to forecast expectations in 2015. The decrease was partially offset by expenses pertaining to an amendment to a purchase agreement of previously acquired incremental ownership interests entered into during 2016, as well as increased estimated liability driven by the decrease in the Company’s estimated future stock price, pertaining to an equity funded acquisition.
Domestic Creative Agencies
Revenue in the Domestic Creative Agencies reportable segment was $86.0 million for the year ended December 31, 2016, representing a decrease of $5.7 million, or 6.2%, compared to revenue of $91.7 million for the year ended December 31, 2015. The decrease related to a revenue decline of $5.3 million, or 5.9% from existing Partner Firms and an adverse foreign exchange impact of $0.4 million, or 0.4%.
The change in expenses as a percentage of revenue in the Domestic Creative Agencies reportable segment for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| Domestic Creative Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
| Revenue | | $ | 86.0 |
| | | | $ | 91.7 |
| | | | $ | (5.7 | ) | | (6.2 | )% |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 49.2 |
| | 57.2 | % | | 53.0 |
| | 57.9 | % | | (3.8 | ) | | (7.2 | )% |
| Office and general expenses | | 18.5 |
| | 21.6 | % | | 19.2 |
| | 21.0 | % | | (0.7 | ) | | (3.7 | )% |
| Depreciation and amortization | | 1.7 |
| | 1.9 | % | | 1.9 |
| | 2.0 | % | | (0.2 | ) | | (10.9 | )% |
| | | $ | 69.4 |
| | 80.7 | % | | $ | 74.1 |
| | 80.9 | % | | $ | (4.8 | ) | | (6.4 | )% |
| Operating profit | | $ | 16.6 |
| | 19.3 | % | | $ | 17.5 |
| | 19.1 | % | | $ | (1.0 | ) | | (5.4 | )% |
Operating profit in the Domestic Creative Agencies reportable segment in 2016 was $16.6 million, compared to $17.5 million in 2015. Operating margins improved 20 basis points from 19.1% in 2015 to 19.3% in 2016. The decrease in operating profit was largely due to a decline in revenue, partially offset by a decrease in staff costs.
The change in the categories of expenses as a percentage of revenue in the Domestic Creative Agencies reportable segment for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| Domestic Creative Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 2.3 |
| | 2.6 | % | | $ | 2.5 |
| | 2.7 | % | | $ | (0.2 | ) | | (8.9 | )% |
Staff costs (2) | | 54.2 |
| | 63.1 | % | | 58.4 |
| | 63.7 | % | | (4.2 | ) | | (7.2 | )% |
| Administrative costs | | 10.9 |
| | 12.7 | % | | 11.3 |
| | 12.3 | % | | (0.4 | ) | | (3.8 | )% |
| Deferred acquisition consideration | | (0.3 | ) | | (0.3 | )% | | (0.6 | ) | | (0.6 | )% | | 0.3 |
| | (50.7 | )% |
| Stock-based compensation | | 0.6 |
| | 0.7 | % | | 0.6 |
| | 0.7 | % | | — |
| | (1.4 | )% |
| Depreciation and amortization | | 1.7 |
| | 1.9 | % | | 1.9 |
| | 2.0 | % | | (0.2 | ) | | (10.9 | )% |
| Total operating expenses | | $ | 69.4 |
| | 80.7 | % | | $ | 74.1 |
| | 80.9 | % | | $ | (4.8 | ) | | (6.4 | )% |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Staff costs in the Domestic Creative Agencies reportable segment decreased by $4.2 million, or 7.2%, and as a percentage of revenue decreased from 63.7% in 2015 to 63.1% in 2016, primarily due to decreased headcount in client serving functions as a result of a decline in revenue at certain Partner Firms.
Specialist Communications
Revenue in the Specialist Communications reportable segment was $170.3 million for the year ended December 31, 2016, representing an increase of $16.4 million, or 10.6%, compared to revenue of $153.9 million for the year ended December 31, 2015. The increase in revenue was attributable to revenue growth of $17.4 million, or 11.3% from existing Partner Firms, partially offset by an adverse foreign exchange impact of $1.0 million, or 0.7%.
The change in expenses as a percentage of revenue in the Specialist Communications reportable segment for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| Specialist Communications | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
| Revenue | | $ | 170.3 |
| | | | $ | 153.9 |
| | | | $ | 16.4 |
| | 10.6 | % |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 118.1 |
| | 69.4 | % | | 101.4 |
| | 65.9 | % | | 16.7 |
| | 16.5 | % |
| Office and general expenses | | 24.7 |
| | 14.5 | % | | 23.2 |
| | 15.1 | % | | 1.4 |
| | 6.2 | % |
| Depreciation and amortization | | 6.6 |
| | 3.9 | % | | 11.2 |
| | 7.3 | % | | (4.6 | ) | | (40.7 | )% |
| Goodwill impairment | | 18.9 |
| | 11.1 | % | | — |
| | — | % | | 18.9 |
| | N/A |
|
| | | $ | 168.3 |
| | 98.9 | % | | $ | 135.9 |
| | 88.3 | % | | $ | 32.5 |
| | 23.9 | % |
| Operating profit | | $ | 1.9 |
| | 1.1 | % | | $ | 18.0 |
| | 11.7 | % | | $ | (16.1 | ) | | (89.3 | )% |
Operating profit in the Specialist Communications reportable segment in 2016 was $1.9 million, compared to $18.0 million in 2015. Operating margins declined 1,060 basis points from 11.7% in 2015 to 1.1% in 2016. These decreases were largely due to a goodwill impairment as well as increases in both staff costs and direct costs as a percentage of revenue, partially offset by a decrease in depreciation and amortization and higher income from deferred acquisition consideration.
The change in the categories of expenses as a percentage of revenue in the Specialist Communications reportable segment for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| Specialist Communications | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 41.9 |
| | 24.6 | % | | $ | 34.0 |
| | 22.1 | % | | $ | 8.0 |
| | 23.4 | % |
Staff costs (2) | | 80.8 |
| | 47.5 | % | | 72.2 |
| | 46.9 | % | | 8.6 |
| | 11.9 | % |
| Administrative costs | | 21.7 |
| | 12.7 | % | | 19.6 |
| | 12.7 | % | | 2.1 |
| | 10.7 | % |
| Deferred acquisition consideration | | (5.2 | ) | | (3.1 | )% | | (2.6 | ) | | (1.7 | )% | | (2.6 | ) | | 101.5 | % |
| Stock-based compensation | | 3.6 |
| | 2.1 | % | | 1.5 |
| | 1.0 | % | | 2.1 |
| | 140.2 | % |
| Depreciation and amortization | | 6.6 |
| | 3.9 | % | | 11.2 |
| | 7.3 | % | | (4.6 | ) | | (40.7 | )% |
| Goodwill impairment | | $ | 18.9 |
| | 11.1 | % | | $ | — |
| | — | % | | $ | 18.9 |
| | N/A |
|
| Total operating expenses | | $ | 168.3 |
| | 98.9 | % | | $ | 135.9 |
| | 88.3 | % | | $ | 32.5 |
| | 23.9 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Direct costs in the Specialist Communications reportable segment increased by $8.0 million, or 23.4%, and as a percentage of revenue increased from 22.1% in 2015 to 24.6% in 2016, primarily due to an increase in pass-through costs incurred on clients’ behalf at certain Partner Firms acting as principal verses agent.
Staff costs in the Specialist Communications reportable segment increased by $8.6 million, or 11.9%, and as a percentage of revenue increased from 46.9% in 2015 to 47.5% in 2016, primarily due to increased headcount at certain Partner Firms to support the growth of their businesses.
Depreciation and amortization in the Specialist Communications reportable segment decreased by $4.6 million, or 40.7%, and as a percentage of revenue decreased from 7.3% in 2015 to 3.9% in 2016, primarily due to lower amortization from intangibles related to prior year acquisitions.
Goodwill impairment in the Specialist Communications reportable segment was $18.9 million in 2016 pertaining to a partial impairment of goodwill relating to one of the Company’s strategic communications reporting units. For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein.
Media Services
Revenue in the Media Services reportable segment was $131.5 million for the year ended December 31, 2016 compared to revenue of $132.4 million for the year ended December 31, 2015, representing a decrease of $0.9 million, or 0.7%. The decrease in revenue was driven by revenue declines of $4.4 million, or 3.3% from existing Partner Firms, excluding the effect of acquisitions, partially offset by revenue contribution from an acquired Partner Firm of $3.5 million, or 2.6%.
The change in expenses as a percentage of revenue in the Media Services reportable segment for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| Media Services | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
| Revenue | | $ | 131.5 |
| | | | $ | 132.4 |
| | | | $ | (0.9 | ) | | (0.7 | )% |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 95.4 |
| | 72.5 | % | | 92.4 |
| | 69.8 | % | | 2.9 |
| | 3.2 | % |
| Office and general expenses | | 24.3 |
| | 18.5 | % | | 15.2 |
| | 11.5 | % | | 9.0 |
| | 59.4 | % |
| Depreciation and amortization | | 5.7 |
| | 4.3 | % | | 4.7 |
| | 3.5 | % | | 1.1 |
| | 22.7 | % |
| | | $ | 125.3 |
| | 95.3 | % | | $ | 112.3 |
| | 84.8 | % | | $ | 13.0 |
| | 11.6 | % |
| Operating profit (loss) | | $ | 6.2 |
| | 4.7 | % | | $ | 20.1 |
| | 15.2 | % | | $ | (14.0 | ) | | (69.4 | )% |
Operating profit in the Media Services reportable segment in 2016 was $6.2 million, compared to $20.1 million in 2015. Operating margins declined 1,050 basis points from 15.2% in 2015 to 4.7% in 2016. These decreases were largely due to increases as a percentage of revenue in both staff costs and administrative costs, partially offset by a decrease in direct costs.
The change in the categories of expenses as a percentage of revenue in the Media Services reportable segment for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| Media Services | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 31.2 |
| | 23.7 | % | | $ | 36.2 |
| | 27.3 | % | | $ | (5.0 | ) | | (13.7 | )% |
Staff costs (2) | | 64.8 |
| | 49.3 | % | | 57.5 |
| | 43.5 | % | | 7.3 |
| | 12.7 | % |
| Administrative | | 22.7 |
| | 17.3 | % | | 17.2 |
| | 13.0 | % | | 5.5 |
| | 32.3 | % |
| Deferred acquisition consideration | | 0.6 |
| | 0.4 | % | | (3.7 | ) | | (2.8 | )% | | 4.3 |
| | (115.5 | )% |
| Stock-based compensation | | 0.3 |
| | 0.2 | % | | 0.5 |
| | 0.4 | % | | (0.2 | ) | | (36.1 | )% |
| Depreciation and amortization | | 5.7 |
| | 4.3 | % | | 4.7 |
| | 3.5 | % | | 1.1 |
| | 22.7 | % |
| Total operating expenses | | $ | 125.3 |
| | 95.3 | % | | $ | 112.3 |
| | 84.8 | % | | $ | 13.0 |
| | 11.6 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Direct costs in the Media Services reportable segment decreased by $5.0 million, or 13.7%, and as a percentage of revenue decreased from 27.3% in 2015 to 23.7% in 2016, primarily due to a decline in pass-through costs incurred on clients’ behalf at certain Partner Firms acting as principal verses agent.
Staff costs in the Media Services reportable segment increased by $7.3 million, or 12.7%, and as a percentage of revenue increased from 43.5% in 2015 to 49.3% in 2016. The increase was due to additional headcount at certain Partner Firms to support the growth of their business. The increase in staff costs as a percentage of revenue was due to an increase in staffing levels at certain Partner Firms in advance of revenue.
Administrative costs in the Media Services reportable segment increased by $5.5 million, or 32.3%, and as a percentage of revenue increased from 13.0% in 2015 to 17.3% in 2016. These increases were due to higher occupancy expenses and other general and administrative expenses, which were incurred in 2016 to support the growth and expansion of certain Partner Firms as well as real estate consolidation initiatives.
All Other
Revenue in the All Other category was $301.6 million for the year ended December 31, 2016, representing an increase of $6.4 million, or 2.2%, compared to revenue of $295.3 million for the year ended December 31, 2015. The increase was driven by revenue growth from existing Partner Firms, excluding acquisitions, of $6.8 million, or 2.3%, as well as contributions from an acquired Partner Firm of $3.9 million, partially offset by an adverse foreign exchange impact of $3.8 million, or 1.3% and a disposition adjustment of $0.5 million, or 0.2%.
The change in expenses as a percentage of revenue in the All Other category for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| All Other | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
| Revenue | | $ | 301.6 |
| | | | $ | 295.3 |
| | | | $ | 6.4 |
| | 2.2 | % |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 201.3 |
| | 66.7 | % | | 201.6 |
| | 68.3 | % | | (0.2 | ) | | (0.1 | )% |
| Office and general expenses | | 51.9 |
| | 17.2 | % | | 66.1 |
| | 22.4 | % | | (14.2 | ) | | (21.5 | )% |
| Depreciation and amortization | | 9.4 |
| | 3.1 | % | | 12.1 |
| | 4.1 | % | | (2.8 | ) | | (22.9 | )% |
| Goodwill impairment | | 29.7 |
| | 9.8 | % | | $ | — |
| | — | % | | 29.7 |
| | N/A |
|
| | | $ | 292.3 |
| | 96.9 | % | | $ | 279.8 |
| | 94.8 | % | | $ | 12.4 |
| | 4.4 | % |
| Operating profit | | $ | 9.4 |
| | 3.1 | % | | $ | 15.4 |
| | 5.2 | % | | $ | (6.1 | ) | | (39.3 | )% |
Operating profit in the All Other category in 2016 was $9.4 million, compared to $15.4 million in 2015. Operating margins declined 210 basis points from 5.2% in 2015 to 3.1% in 2016. These decreases were largely due to the goodwill impairment charge and an increase in staff costs as a percentage of revenue, partially offset by decreased deferred acquisition consideration expense.
The change in the categories of expenses as a percentage of revenue in the All Other category for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | Change |
| All Other | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Millions) |
Direct costs (1) | | $ | 71.0 |
| | 23.5 | % | | $ | 71.6 |
| | 24.3 | % | | $ | (0.6 | ) | | (0.9 | )% |
Staff costs (2) | | 147.6 |
| | 48.9 | % | | 137.4 |
| | 46.5 | % | | 10.3 |
| | 7.5 | % |
| Administrative | | 31.5 |
| | 10.4 | % | | 27.1 |
| | 9.2 | % | | 4.4 |
| | 16.2 | % |
| Deferred acquisition consideration | | 1.3 |
| | 0.4 | % | | 26.1 |
| | 8.9 | % | | (24.8 | ) | | (94.9 | )% |
| Stock-based compensation | | 1.8 |
| | 0.6 | % | | 5.5 |
| | 1.8 | % | | (3.7 | ) | | (67.5 | )% |
| Depreciation and amortization | | 9.4 |
| | 3.1 | % | | 12.1 |
| | 4.1 | % | | (2.8 | ) | | (22.9 | )% |
| Goodwill impairment | | 29.7 |
| | 9.8 | % | | $ | — |
| | — | % | | 29.7 |
| | N/A |
|
| Total operating expenses | | $ | 292.3 |
| | 96.9 | % | | $ | 279.8 |
| | 94.8 | % | | $ | 12.4 |
| | 4.4 | % |
| |
(2) | Excludes stock-based compensation and is comprised of amounts reported in both cost of services sold and office and general expenses. |
Staff costs in the All Other category increased by $10.3 million, or 7.5%, and as a percentage of revenue increased from 46.5% in 2015 to 48.9% in 2016, primarily due to increased headcount at certain Partner Firms to support the growth of their businesses as well as contributions from a 2015 acquisition.
Deferred acquisition consideration in the All Other category resulted in an expense of $1.3 million in 2016, compared to an expense of $26.1 million in 2015. The decrease was due to the aggregate out-performance relative to forecast expectations of certain Partner Firms in 2015 that did not reoccur in 2016.
Goodwill impairment in the All Other category was comprised of $27.9 million relating to an experiential reporting unit and partial impairment of goodwill of $1.7 million relating to a non-material reporting unit. For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein.
Corporate
The change in operating expenses for Corporate for the yearstwelve months ended December 31, 20162018 and 20152017 was as follows:
| | | | | | | | | Variance | | 2018 | | 2017 | | Change |
| Corporate | | 2016 | | 2015 | | $ | | % | | $ | | $ | | $ | | % |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
Staff costs (1)
| | $ | 27.8 |
| | $ | 42.4 |
| | $ | (14.6 | ) | | (34.4 | )% | |
| Administrative costs | | 12.2 |
| | 18.2 |
| | (6.1 | ) | | (33.3 | )% | |
Staff costs
| | | $ | 30,179 |
| | $ | 20,926 |
| | $ | 9,253 |
| | 44.2 | % |
| Administrative | | | 17,240 |
| | 15,521 |
| | 1,719 |
| | 11.1 | % |
| Stock-based compensation | | 2.5 |
| | 2.7 |
| | (0.2 | ) | | (7.8 | )% | | 4,659 |
| | 2,134 |
| | 2,525 |
| | NM |
|
| Depreciation and amortization | | 1.6 |
| | 1.8 |
| | (0.2 | ) | | (10.7 | )% | | 762 |
| | 1,098 |
| | (336 | ) | | (30.6 | )% |
| Other asset impairment | | | 2,317 |
| | 1,177 |
| | 1,140 |
| | 96.9 | % |
| Total operating expenses | | $ | 44.1 |
| | $ | 65.2 |
| | $ | (21.1 | ) | | (32.3 | )% | | $ | 55,157 |
| | $ | 40,856 |
| | $ | 14,301 |
| | 35.0 | % |
| |
(1) | Excludes stock-based compensation. |
Total operating expenses for Corporate decreased by $21.1 million to $44.1 millionThe increase in 2016, compared to $65.2 million in 2015.
Staffstaff costs for Corporate decreased by $14.6 million, or 34.4%. The decrease was primarily dueattributable to a one-time charge of $5.8 million in 2015 for the balance of prior cash bonus award amounts that were paid to the former Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”) but will not be recovered pursuant to the repayment terms of the applicable Separation Agreements. In addition, there was lower executive compensationseverance expense in 2016.
Administrative costs for Corporate decreased by $6.1 million, or 33.3%, primarily due to reductions in the following categories: (1) legal fees related to the class action litigation and SEC investigation of $9.6 million, (2) advertising and promotional expenses of $1.4 million, (3) professional fees of $1.0 million, (4) travel and entertainment expenses of $0.3 million, (5) occupancy costs of $0.6 million, and (6) various other administrative costs of $1.1 million. In addition, the Company received $5.9 million of insurance proceeds for the year ended December 31, 2016 comparedcertain corporate actions taken in 2018 in comparison to $1.0 million for the year ended December 31, 2015 relating to the class action litigation and SEC investigation. These reductions2017.
The increase in administrative costs and receipt of insurance proceeds were partially offset by the $11.3 million of perquisite reimbursements from the former CEO received for the year ended December 31, 2015 and the one-time SEC civil penalty payment of $1.5 million for the year ended December 31, 2016.
Other Income, Net
Other income, net, decreased by $6.8 million from income of $7.2 million for the year ended December 31, 2015 to income of $0.4 million for the year ended December 31, 2016. The decrease pertains to the gain on sale of certain investments completed in 2015 of $6.5 million compared to the gain on sale of investments of $1.9 million completed in 2016, as well as a loss of $0.8 million related to the sale of Bryan Mills to the noncontrolling shareholders. In addition, the Company had other income of $0.4 million in 2016 compared to other income of $0.1 million in 2015.
Foreign Exchange
Foreign exchange loss was $0.2 million in 2016 compared to a foreign exchange loss of $39.3 million in 2015. The foreign exchange losses in both 2016 and 2015 primarily related to the U.S. dollar denominated indebtedness that was an obligation of the Company’s Canadian parent company and were driven by the appreciation of the U.S. dollar against the Canadian dollar in the period.
Interest Expense, finance charges, and loss on redemption of notes, net
Interest expense and finance charges, net, for the year ended December 31, 2016 was $65.9 million, an increase of $8.0 million over the $57.9 million of interest expense and finance charges, net, incurred for the year ended December 31, 2015. The increase was due to higher average outstanding debt in 2016. In addition, the Company incurred a $33.3 million loss on redemption of the 6.75% Notes in March 2016.
Income Tax Expense (Benefit)
Income tax benefit for the year ended December 31, 2016 was $9.4 million compared to an expense of $3.8 million for the year ended December 31, 2015. The Company’s effective rate in 2016 and 2015 was lower than the statutory rate due to losses in certain tax jurisdictions where a valuation allowance was deemed necessary.
The Company’s U.S. 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 profits.
Equity in Earnings (Losses) of Non-Consolidated Affiliates
Equity in earnings (losses) of non-consolidated affiliates represents the income attributable to equity-accounted affiliate operations. For the year ended December 31, 2016, the Company recorded a loss of $0.3 million compared to earnings of $1.1 million for the year ended December 31, 2015.
Noncontrolling Interests
The effects of noncontrolling interests was $5.2 million for the year ended December 31, 2016, a decrease of $3.9 million from the $9.1 million for the year ended December 31, 2015. This decrease related to an increase in ownership in Partner Firms where there are noncontrolling shareholders.
Discontinued Operations
The loss, netprofessional fees of taxes, from discontinued operations was $6.3$5.4 million, primarily related to fees for the year ended December 31, 2015. Thereimplementation of ASC 606, which was no impact for the year ended December 31, 2016.
Net Loss Attributable to MDC Partners Inc.
As a result of the foregoing, the net loss attributable to MDC Partners Inc. for the year ended December 31, 2016 was $45.8 million or a loss of $0.89 per diluted share, compared to a net loss of $35.5 million, or $0.71 per diluted share reported for the year ended December 31, 2015.adopted effective January 1, 2018.
Liquidity and Capital ResourcesResources:
Liquidity
The following table provides summary information about the Company’s liquidity position:
|
| | | | | | | | | | | | |
| Liquidity | | 2017 | | 2016 | | 2015 |
| | | | | | | |
| | | (In Millions, Except for Long-Term Debt to Shareholders’ Equity Ratio) |
| Cash and cash equivalents | | $ | 46.2 |
| | $ | 27.9 |
| | $ | 61.5 |
|
| Working capital (deficit) | | $ | (232.9 | ) | | $ | (313.2 | ) | | $ | (418.0 | ) |
| Cash provided by (used in) operating activities | | $ | 115.3 |
| | $ | (1.2 | ) | | $ | 161.4 |
|
| Cash used in investing activities | | $ | (20.9 | ) | | $ | (25.2 | ) | | $ | (29.9 | ) |
| Cash used in financing activities | | $ | (75.4 | ) | | $ | (9.3 | ) | | $ | (188.6 | ) |
| Ratio of long-term debt to shareholders’ deficit | | (5.68 | ) | | (1.84 | ) | | (1.47 | ) |
As of December 31, 2017, 2016 and 2015, $4.6 million, $5.3 million, and $5.2 million, respectively, of the Company’s consolidated cash position was held by subsidiaries. Although this amount is available for the subsidiaries’ use, it does not represent cash that is distributable as earnings to MDC for use to reduce its indebtedness. It is the Company’s intent through its cash management system to reduce outstanding borrowings under the Credit Agreement by using available cash. |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| | (In Thousands, Except for Long-Term Debt to Shareholders’ Equity Ratio)
|
| Cash and cash equivalents | $ | 106,933 |
| | $ | 30,873 |
| | $ | 46,179 |
|
| Working capital deficit | $ | (196,563 | ) | | $ | (152,682 | ) | | $ | (232,859 | ) |
| Cash provided by operating activities | $ | 86,539 |
| | $ | 17,280 |
| | $ | 71,786 |
|
| Cash provided by (used in) investing activities | $ | 115 |
| | $ | (50,431 | ) | | $ | (20,884 | ) |
| Cash provided by (used in) financing activities | $ | (11,729 | ) | | $ | 21,434 |
| | $ | (32,599 | ) |
| Ratio of long-term debt to shareholders' deficit | (4.95) |
| | (3.87) |
| | (5.68) |
|
The Company intendsexpects to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months. The Company has historically been able to maintain and expand its business using cash generated from operating activities, funds available under its Credit Agreement, and other initiatives, such as obtaining additional debt and equity financing. At December 31, 2017,2019, the Company had $247.8no borrowings outstanding and $245.2 million available under the Credit Agreement. The Company expects to use any advances under the Credit Agreement for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement.
The Company’s obligations extending beyond twelve months primarily consist of deferred acquisition payments, capital expenditures, scheduled lease obligation payments, and interest payments on borrowings under the Company’s 6.50% Senior Notes due 2024.Notes. Based on the current outlook, the Company believes future cash flows from operations, together with the Company’s existing cash balance and availability of funds under the Company’s Credit Agreement, will be sufficient to meet the Company’s anticipated cash needs for the foreseeable future.next twelve months. The Company’s ability to make scheduled deferred acquisition payments, principal and interest payments, to refinance indebtedness or to fund planned capital expenditures will depend on future performance, which is subject to general economic conditions, the competitive environment and other factors, including those described in Item 1A of Part I of thisthe Company’s 2019 Annual Report on Form 10-K and in the Company’s other SEC filings.filings, including under “Risk Factors” and elsewhere.
As market conditions warrant, the Company may from time to time seek to purchase its 6.50% Notes, in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing its indebtedness, any purchase made by the Company may be funded with the net proceeds from any asset dispositions or the use of cash on its balance sheet. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material.
Working Capital
At December 31, 2017,2019, the Company had a working capital deficit of $232.9$196.6 million compared to a deficit of $313.2$152.7 million at December 31, 2016. Working capital deficit decreased by $80.4 million primarily due to the net proceeds from the issuance of the convertible preference shares and timing of media payments, offset by the net repayments under the Credit Agreement and payments of deferred acquisition consideration. During the twelve months ended December 31, 2016, the Company’s working capital was negatively impacted by increased volatility caused by a shift in seasonality relating to the changing client base in our media business.2018. The Company’s working capital is impacted by seasonality in media buying, amounts spent by clients, and timing of amounts received from clients and subsequently paid to suppliers. Media buying is impacted by the timing of certain events, such as major sporting competitions and national holidays, and there can be a quarter to quarter lag between the time amounts received from clients for the media buying are subsequently paid to suppliers. At December 31, 2017, the Company had no borrowings outstanding under its Credit Agreement. The Company includes amounts due to noncontrolling interest holders, for their share of profits, in accrued and other liabilities. During 2017, 2016 and 2015, the Company made distributions to these noncontrolling interest holders of $8.9 million, $7.8 million and $9.5 million, respectively. At December 31, 2017, $11.0 million remains 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 working capital should there be a need to do so from time to time.
Cash Flows
Operating Activities
Cash flows provided by continuing operationsoperating activities for 2017 were $115.3 million. Thisthe twelve months ended December 31, 2019 was attributable primarily to income from continuing operations of $257.2 million, inclusive of benefit related to deferred taxes of $173.0 million primarily related to a reversal of the valuation allowance on its United States deferred tax assets, stock-based compensation of $24.4 million, depreciation and amortization of $46.5 million, goodwill and other asset impairment of $4.4 million, a decrease in accounts payable, accruals and other current liabilities of $13.4$86.5 million, primarily driven by the timing of payments to suppliers, a decrease in prepaid expenses and other current assets of $6.6 million, a decrease in expenditures billable to clients of $1.9 million, and an increase in advanced billings of $14.5 million. This was partially offsetcash flows from earnings, accompanied by an increase in accounts receivable of $50.0 million, foreign exchange of $17.6 million, a gain on the sale of assets of $1.6 million, a net increase in other and non-current assets and liabilities of $4.4 million, adjustments to deferred acquisition consideration of $4.8 million, and income in non-consolidated affiliates of $2.1 million.
Cash flows used in continuing operations for 2016 were $1.2 million. This was attributable primarily to a loss from continuing operations of $40.6 million, decrease in accounts payable, accruals and other current liabilities of $110.0 million primarily driven by the timing of payments to suppliers, an increase in accounts receivable of $16.8 million, an increase in prepaid expenses and other current assets of $13.6 million, foreign exchange of $8.2 million, deferred income taxes of $10.0 million, and a gain on the sale of assets of $0.4 million. This was partially offset by depreciation and amortization of $55.6 million, goodwill impairment of $48.5 million, a loss on the redemption of the 6.75% Notes of $26.9 million, stock-based compensation of $21.0 million, a net decrease in other and non-current assets and liabilities of $13.5 million, a decrease in expenditures billable to clients of $13.0 million, an increase in advanced billings of $11.4 million, adjustments to deferred acquisition consideration of $8.2 million, and losses of non-consolidated affiliates of $0.3 million.nominal unfavorable working capital requirements.
Cash flows provided by continuing operationsoperating activities for 2015 were $162.7 million. Thisthe twelve months ended December 31, 2018 was attributable$17.3 million, primarily to an increase in accounts payable, accrualsreflecting unfavorable working capital requirements, driven by media and other current liabilities of $75.1 million, depreciation and amortization of $54.5 million, adjustments tosupplier payments, deferred acquisition consideration payments as well as net income (loss) adjusted to reconcile to net cash used in operating activities.
Cash flows provided by operating activities for the twelve months ended December 31, 2017 was $71.8 million, primarily reflecting unfavorable working capital requirements, driven by timing of $38.9 million, foreign exchangeaccounts receivable, as well as acquisition related contingent consideration payments, being more than offset by the net income adjusted to reconcile to net cash provided by operating activities.
Investing Activities
During the twelve months ended December 31, 2019, cash flows provided by investing activities was $0.1 million, and an decreasewhich primarily consisted of proceeds of $23.1 million from the sale of the Company’s equity interest in prepaid expenses and other current assets of $1.6 million. This wasKingsdale, partially offset by an decrease in advanced billings$18.6 million of $23.5 million, a loss from continuing operations of $20.1 million, a gain on sale of investments of $6.5 million, an increase in accounts receivable ofcapital expenditures and $4.8 million an increase in expenditures billable to clients of $3.9 million, and earnings of non-consolidated affiliates of $1.1 million. Discontinued operations usedpaid for acquisitions.
During the twelve months ended December 31, 2018, cash of $1.3 million.
Investing Activities
Cash flows used in investing activities was $50.4 million, primarily consisting of continuing operations were $20.9cash paid of $32.7 million for 2017, compared with $25.2 million for 2016,acquisitions and $29.9 million in 2015.capital expenditures of $20.3 million.
InDuring the yeartwelve months ended December 31, 2017, cash flows used in investing activities was $20.9 million, primarily consisting of capital expenditures totaledof $33.0 million, primarily driven by $20.7 million incurred by the Global Integrated Agencies reportable segment. These expenditures consisted primarily of computer equipment, furniture and fixtures, and leasehold improvements. Additionally, the Company paid $2.2 million for other investments. These outflows were partially offset by $3.7 million of distributions from non-consolidated affiliates and $10.6 million ofnet proceeds from the sale of assets.
In the year ended December 31, 2016, capital expenditures totaled $29.4 million, primarily driven by $16.4 million incurred by the Global Integrated Agencies reportable segment. These expenditures consisted primarilythree subsidiaries of computer equipment, furniture and fixtures, and leasehold improvements. Additionally, the Company paid $3.8 million for other investments and
$2.5 million for deposits on capital expenditures not yet placed into service. These outflows were partially offset by $7.4 million of distributions from non-consolidated affiliates, $2.5 million of net cash acquired from acquisitions and $0.7 million of proceeds from the sale of assets.
In the year ended December 31, 2015, capital expenditures totaled $23.6 million, primarily driven by $17.0 million incurred by the Global Integrated Agencies reportable segment. These expenditures consisted primarily of computer equipment, furniture and fixtures, and leasehold improvements. Additionally, the Company paid $24.8 million, net of cash acquired, for acquisitions and $7.3 million for other investments. These outflows were partially offset by $8.6 million of proceeds from the sale of assets. The Company also received $17.1 million of cash proceeds in 2015 from the sale of Accent.$10.6 million.
Financing Activities
During the yeartwelve months ended December 31, 2019, cash flows used in financing activities was $11.7 million, primarily driven by $98.6 million in proceeds, net of fees, from the issuance of common and preferred shares, more than offset by $68.1 million in net repayments under the Credit Agreement, $30.2 million in deferred acquisition consideration payments and $11.4 million in distribution payments.
During the twelve months ended December 31, 2018, cash flows provided by financing activities was $21.4 million, primarily driven by $68.1 million in net borrowings under the Credit Agreement and $32.2 million of acquisition related payments.
During the twelve months ended December 31, 2017, cash flows used in financing activities were $75.4was $32.6 million, and consisted of $99.9 million of acquisition related payments,primarily driven by $54.4 million ofin net repayments under the Credit Agreement, $4.8$57.1 million of issuance costs paid in connection with the issuance of convertible preference shares, payment of dividends of $0.3 million,acquisition related payments and distributions to noncontrolling partners of $8.9 million, the purchase of treasury shares for income tax withholding requirements of $1.8 million, and repayments of long-term debt of $0.4 million. These amounts were partially offset by $95.0 million of gross proceeds from the issuance of convertible preference shares.
During the year ended December 31, 2016, cash flows used in financing activities were $9.3 million, and consistedTotal Debt
Debt, inclusive of the redemption of the 6.75% Notes of $735.0 million, a premium paid in connection with such redemption of $26.9 million including accrued interest through the settlement date, $135.7 million of acquisition related payments, payment of dividends of $32.9 million, $21.6 million of debt issuance costs paid in connection with the issuance of the 6.50% Notes, distributions to noncontrolling partners of $7.8 million, the purchase of treasury shares for income tax withholding requirements of $3.4 million, and repayments of long-term debt of $0.5 million. These amounts were partially offset by $900.0 million in proceeds from the issuance of the 6.50% Notes and $54.4 million in net borrowingsdrawn under the Credit Agreement.
During the year ended December 31, 2015, cash flows used in financing activities were $188.6 million, and consisted of $134.1 million of acquisition related payments, payment of dividends of $42.3 million, distributions to noncontrolling partners of $9.5 million, the purchase of treasury shares for income tax withholding requirements of $2.4 million and repayments of long-term debt of $0.5 million. These amounts were partially offset by proceeds from other financing activities of $0.2 million.
Total Debt
6.50% Senior Notes Due 2024
On March 23, 2016, 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, the Credit Agreement, as guarantors (the “Guarantors”) and The Bank of New York Mellon, as trustee, relating to the issuance by MDC of its $900 million aggregate principal amount of 6.50% senior unsecured notes due 2024. The 6.50% Notes were sold in a private placement in reliance on exceptions from registration under the ’33 Act. The 6.50% Notes bear interest at a rate of 6.50% per annum, accruing from March 23, 2016. Interest is payable semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2016. The 6.50% Notes mature on May 1, 2024, unless earlier redeemed or repurchased. The Company received net proceeds from the offering of the 6.50% Notes equal to approximately $880,000. The Company used the net proceeds to redeem all of its existing 6.75% Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge for the loss on redemption of such notes of $33,298, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes, including funding of deferred acquisition consideration.
The 6.50% 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 6.50% 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 6.50% Notes in whole at any time or in part from time to time, on and after May 1, 2019 (i) at a redemption price of 104.875% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2019, (ii) at a redemption price of 103.250% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2020, (iii) at a redemption price of 101.625% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2021, and (iv) at a redemption price of 100% of the principal amount thereof if redeemed on May 1, 2022 and thereafter.
Prior to May 1, 2019, MDC may, at its option, redeem some or all of the 6.50% Notes at a price equal to 100% of the principal amount of the 6.50% Notes plus a “make whole” premium and accrued and unpaid interest. MDC may also redeem, at its option, prior to May 1, 2019, up to 35% of the 6.50% Notes with the proceeds from one or more equity offerings at a redemption price of 106.50% of the principal amount thereof.
If MDC experiences certain kinds of changes of control (as defined in the Indenture), holders of the 6.50% Notes may require MDC to repurchase any 6.50% Notes held by them at a price equal to 101% of the principal amount of the 6.50% Notes plus accrued and unpaid interest. In addition, if MDC sells assets under certain circumstances, it must apply the proceeds from such sale and offer to repurchase the 6.50% Notes at a price equal to 100% of the principal amount 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 6.50% Notes are also subject to customary events of default, including a cross-payment default and cross-acceleration provision. The Company was in compliance with all covenants at December 31, 2017.
Redemption of 6.75% Senior Notes Due 2020
On March 23, 2016, the Company redeemed the 6.75% Notes in whole at a redemption price of 103.375% of the principal amount thereof with the proceeds from the issuance of the 6.50% Notes.
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.
Effective October 23, 2014, MDC, Maxxcom Inc. and each of their subsidiaries entered into an amendment of its Credit Agreement. The amendment: (i) expanded the commitments under the facility, by $100 million, from $225 million to $325 million; (ii) extended the date by an additional eighteen months to September 30, 2019; (iii) reduced the base borrowing interest rate by 25 basis points (the applicable margin for borrowing is 1.00% in the case of Base Rate Loans and 1.75% in the case of LIBOR Rate Loans) ; and (iv) modified certain covenants to provide the Company with increased flexibility to fund its continued growth and other general corporate purposes.
Effective May 3, 2016, MDC and its subsidiaries entered into an additional amendment to its Credit Agreement. The amendment: (i) extends the date by an additional nineteen months to May 3, 2021; (ii) reduces the base borrowing interest rate by 25 basis points; (iii) provides the Company the ability to borrow in foreign currencies; and (iv) certain other modifications to provide additional flexibility in operating the Company’s business.
Advances under the Credit Agreement bear interest as follows: (a)(i) Non-Prime Rate Loans bear interest at the Non-Prime Rate and (ii) all other Obligations bear interest at the Prime Rate, plus (b) an applicable margin. The applicable margin for borrowing is 1.50% in the case of Non-Prime Rate Loans and Prime Rate Loans that are European Advances, and 0.75% on all other Obligations. In addition to paying interest on outstanding principal under the Credit Agreement, MDC is required to pay an unused revolver fee of 0.25% 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 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, net of debt issuance costs, as of December 31, 20172019 was $883.1$887.6 million a decrease of $53.3 million,as compared with $936.4to $954.1 million outstanding at December 31, 2016. This2018. The decrease of $66.5 million in debt was primarily a result of proceeds received from the issuanceCompany’s net repayments on the Credit Agreement. See Note 11 of
convertible preference shares the Notes to the Consolidated Financial Statements for information regarding the Company’s $900 million aggregate principal amount of its 6.50% Notes and cash flows generated from operations, partially offset by$250 million available under the payment of acquisition related payments. At December 31, 2017, there were approximately $5.1 million in outstanding letters of credit.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 continue to 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 or asset sales, the Company’s ability to fund its working capital needs and any contingent obligations with respect to acquisitions and redeemable noncontrolling interests 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 December 31, 2017,2019, the Company’s calculation of each of these covenants, and the specific requirements under the Credit Agreement, respectively, were calculated based on the trailing twelve months as follows:
|
| | |
| December 31, 2017 |
Total Senior Leverage Ratio | (0.01 | ) |
Maximum per covenant | 2.00 |
|
Total Leverage Ratio | 4.33 |
|
Maximum per covenant | 5.50 |
|
Fixed Charges Ratio | 2.54 |
|
Minimum per covenant | 1.00 |
|
Earnings before interest, taxes, depreciation and amortization | $208.2 million |
Minimum per covenant | $105.0 million |
|
|
| | | |
| | December 31, 2019 |
| Total Senior Leverage Ratio | (0.37 | ) |
| Maximum per covenant | 2.00 |
|
| | |
|
| Total Leverage Ratio | 4.52 |
|
| Maximum per covenant | 6.25 |
|
| | |
|
| Fixed Charges Ratio | 2.55 |
|
| Minimum per covenant | 1.00 |
|
| | |
|
| Earnings before interest, taxes, depreciation and amortization (in millions) | $ | 184.2 |
|
| Minimum per covenant (in millions) | $ | 105.0 |
|
These ratios and measures are not based on generally accepted accounting principles and are not presented as alternative measures of operating performance or liquidity. Some of these ratios and measures include, among other things, pro forma adjustments for acquisitions, one-time charges, and other items, as defined in the Credit Agreement. They are presented here to demonstrate compliance with the covenants in the Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.
Contractual Obligations and Other Commercial Commitments
The following table provides a payment schedule of present and future obligations. Management anticipates that the obligations outstanding at December 31, 20172019 will be repaid with new financing, equity offerings, asset sales and/or cash flow from operations (in thousands):operations:
| | | | | Payments Due by Period | | Payments Due by Period |
| Contractual Obligations | | Total | | Less than
1 Year | | 1 – 3 Years | | 3 – 5 Years | | After
5 Years | | Total | | Less than
1 Year | | 1 – 3 Years | | 3 – 5 Years | | After
5 Years |
| | | (Dollars in Millions) | | (Dollars in Thousands) |
Indebtedness (1) | | $ | 900.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 900.0 |
| | $ | 900,000 |
| | $ | — |
| | $ | — |
| | $ | 900,000 |
| | $ | — |
|
| Capital lease obligations | | 0.7 |
| | 0.3 |
| | 0.4 |
| | — |
| | — |
| |
| Operating leases | | 367.4 |
| | 58.2 |
| | 111.8 |
| | 74.4 |
| | 122.9 |
| |
| Operating lease obligations | | | 339,562 |
| | 60,504 |
| | 99,147 |
| | 79,925 |
| | 99,986 |
|
| Interest on debt | | 370.6 |
| | 58.5 |
| | 117.0 |
| | 117.0 |
| | 78.0 |
| | 263,250 |
| | 58,500 |
| | 117,000 |
| | 87,750 |
| | — |
|
Deferred acquisition consideration (2) | | 122.4 |
| | 50.2 |
| | 54.6 |
| | 17.7 |
| | — |
| | 75,220 |
| | 45,521 |
| | 29,699 |
| | — |
| | — |
|
| Other long-term liabilities | | 7.9 |
| | 3.2 |
| | 4.4 |
| | 0.3 |
| | — |
| | 2,830 |
| | 782 |
| | 2,048 |
| | — |
| | — |
|
Total contractual obligations (3) | | $ | 1,768.9 |
| | $ | 170.4 |
| | $ | 288.2 |
| | $ | 209.4 |
| | $ | 1,100.9 |
| | $ | 1,580,862 |
| | $ | 165,307 |
| | $ | 247,894 |
| | $ | 1,067,675 |
| | $ | 99,986 |
|
On February 27, 2020, in connection with the centralization of our New York real estate portfolio, the Company entered into an agreement to lease space at One World Trade Center. The lease term is for approximately eleven years commencing on April 1, 2020, with rental payments totaling approximately $115 million. As part of the centralization initiative, the Company will sublease existing properties currently under lease, resulting in the recovery of a significant portion of our rent obligation under such arrangements.
| |
(1) | Indebtedness includes no borrowings under the Credit Agreement which is due in 2021. |
| |
(2) | Deferred acquisition consideration excludes future payments with an estimated fair value of $26.8$8.6 million that are contingent upon employment terms as well as financial performance and will be expensed as stock-based compensation over the required retention period. Of this amount, the Company estimates $2.5$3.3 million will be paid in less than one year, $16.92020 and $5.3 million will be paid in one to three years $7.4 million will be paid in three to five years, and nil will be paid after five years.. |
| |
(3) | Pension obligations of $15.8 million are not included since the timing of payments are not known. |
The following table provides a summary of other commercial commitments (in thousands) at December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Other Commercial Commitments | | Total | | Less than 1 Year | | 1 – 3 Years | | 3 – 5 Years | | After 5 Years |
| | | (Dollars in Millions) |
| Lines of credit | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Letters of credit | | 5.1 |
| | 5.1 |
| | — |
| | — |
| | — |
|
| Total Other Commercial Commitments | | $ | 5.1 |
| | $ | 5.1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
For further detail on MDC’s long-term debt principal and interest payments, see Note 10 Debt and Note 17 Commitments, Contingencies and Guarantees of the Company’s Notes to the Consolidated Financial Statements included in this Form 10-K. See also “Deferred Acquisition Consideration” and “Other-Balance Sheet Commitments” below.
Capital Resources
At December 31, 2017, there were no borrowings under the Credit Agreement and $5.1 million of undrawn outstanding letters of credit. Cash and undrawn commitments available to support the Company’s future cash requirements at December 31, 2017 was approximately $294.0 million.
The Company expects to incur approximately $25.0 million of capital expenditures in 2018. Such capital expenditures are expected to include leasehold improvements, furniture and fixtures, and computer equipment at certain of the Company’s operating subsidiaries. The Company intends to maintain and expand its business using cash from operating activities, together with funds available under the Credit Agreement. Management believes that the Company’s cash flow from operations, funds available under the Credit Agreement and other initiatives will be sufficient to meet its ongoing working capital, capital expenditures and other cash needs over the next twelve months. If the Company spends capital on future acquisitions, management expects that the Company may need to obtain additional financing in the form of debt and/or equity financing.
Other-Balance Sheet Commitments
Media and Production
The Company’s agencies enter into contractual commitments with media providers and agreements with production companies on behalf of ourits clients at levels that exceed the revenue from services. Some of our agencies purchase media for clients and act
as an agent for a disclosed principal.on behalf of their clients. These commitments are included in accounts payableAccruals and other liabilities when the media services are delivered by the media providers. MDC takes precautions against default on payment for these services and has historically
had a very low incidence of default. MDC is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn.
Deferred Acquisition Consideration
AcquisitionsDeferred acquisition consideration on the balance sheet consists of a business, or a majority interest of a business, by the Company may include future additionaldeferred obligations related to contingent and fixed purchase price obligations payablepayments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel. See Note 2 and 9 of the Notes to the seller, which are recorded asConsolidated Financial Statements for additional information regarding contingent deferred acquisition consideration liabilities on the Company’s balance sheet at the estimated acquisition date fair value and are remeasured at each reporting period. 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, the rate of growth of those earnings. The actual amount that the Company pays in connection with such contingent purchase obligations may differ materially from this estimate.
In connection with such contingent purchase obligations, the Company may have the option or, in some cases, the requirement, to purchase the remaining interest. Generally, the Company’s option or requirement to purchase the incremental ownership interest coincides with the final payment of the purchase price obligation related to the Company’s initial majority acquisition. If the Company subsequently acquires the remaining incremental ownership interest, the acquisition fair value of the purchase price, net of any cash paid at closing, is recorded as a liability, any noncontrolling interests are removed and any difference between the purchase price and noncontrolling interest is recorded to additional paid-in capital.
The deferred acquisition consideration and redeemable noncontrolling interests are impacted by (i) present value adjustments to accrete the acquisition date fair value of the obligation to the estimated future payment amount at the reporting date, (ii) changes in the estimated future payment obligation resulting from the underlying subsidiary’s financial performance, and (iii) amendments to purchase agreements of previously acquired incremental ownership interests. Redeemable noncontrolling interests are not adjusted below the related initial redemption value. Significant changes in actual results and metrics, such as profit margins and growth rates among others, relative to expectations would result in a higher or lower redemption value adjustment. In addition, the deferred acquisition consideration and redeemable noncontrolling interests could be materially impacted by future acquisition activity, if any, and the particular structure of such acquisitions.
As a result, and due to the factors noted above, the Company does not have a view of the future trajectory and quantification of potential changes in the deferred acquisition consideration and redeemable noncontrolling interests.
consideration.
The following table presents the changes in the deferred acquisition consideration by segment for the yearsyear ended December 31, 2017 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Global Integrated Agencies | | Domestic Creative Agencies | | Specialist Communications | | Media Services | | All Other | | Total |
| | (Dollars in Millions) |
| Beginning Balance of contingent payments | $ | 148.8 |
| | $ | 0.8 |
| | $ | 15.0 |
| | $ | 7.1 |
| | $ | 53.1 |
| | $ | 224.8 |
|
Payments (1) | (78.4 | ) | | (1.1 | ) | | (10.0 | ) | | (2.6 | ) | | (18.1 | ) | | (110.2 | ) |
Additions (2) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Redemption value adjustments (3) | 10.4 |
| | 0.4 |
| | 0.5 |
| | (0.8 | ) | | (7.2 | ) | | 3.3 |
|
| Foreign translation adjustment | 0.7 |
| | — |
| | — |
| | — |
| | 0.6 |
| | 1.3 |
|
| Ending Balance of contingent payments | 81.4 |
| | — |
| | 5.5 |
| | 3.7 |
| | 28.5 |
| | 119.1 |
|
| Fixed payments | 2.3 |
| | — |
| | 0.3 |
| | — |
| | 0.7 |
| | 3.3 |
|
| | $ | 83.7 |
| | $ | — |
| | $ | 5.8 |
| | $ | 3.7 |
| | $ | 29.2 |
| | $ | 122.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Global Integrated Agencies | | Domestic Creative Agencies | | Specialist Communications Agencies | | Media Services | | All Other | | Total |
| | (Dollars in Thousands) |
| Beginning balance of contingent payments | $ | 47,880 |
| | $ | 3,747 |
| | $ | 13,193 |
| | $ | 2,689 |
| | $ | 15,089 |
| | $ | 82,598 |
|
| Payments | (20,788 | ) | | (801 | ) | | (3,830 | ) | | (2,763 | ) | | (2,537 | ) | | (30,719 | ) |
| Additions - acquisitions and step-up transactions | — |
| | 801 |
| | 6,344 |
| | — |
| | — |
| | 7,145 |
|
Redemption value adjustments (1) | 1,219 |
| | 276 |
| | 3,308 |
| | 75 |
| | 525 |
| | 5,403 |
|
| Stock-based compensation | 9,049 |
| | 33 |
| | — |
| | — |
| | 966 |
| | 10,048 |
|
Other (2) | — |
| | 194 |
| | (12 | ) | | — |
| | 14 |
| | 196 |
|
| Ending balance of contingent payments | 37,360 |
| | 4,250 |
| | 19,003 |
| | 1 |
| | 14,057 |
| | 74,671 |
|
| Fixed payments | 263 |
| | 286 |
| | — |
| | — |
| | — |
| | 549 |
|
| | $ | 37,623 |
| | $ | 4,536 |
| | $ | 19,003 |
| | $ | 1 |
| | $ | 14,057 |
| | $ | 75,220 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Global Integrated Agencies | | Domestic Creative Agencies | | Specialist Communications | | Media Services | | All Other | | Total |
| | (Dollars in Millions) |
| Beginning Balance of contingent payments | $ | 157.4 |
| | $ | 4.2 |
| | $ | 42.5 |
| | $ | 7.9 |
| | $ | 94.6 |
| | $ | 306.7 |
|
Payments (1) | (36.3 | ) | | (3.2 | ) | | (20.5 | ) | | (1.4 | ) | | (43.8 | ) | | (105.2 | ) |
Additions (2) | 15.6 |
| | — |
| | 0.5 |
| | — |
| | — |
| | 16.1 |
|
Redemption value adjustments (3) | 16.2 |
| | (0.3 | ) | | (3.5 | ) | | 0.6 |
| | 0.9 |
| | 13.9 |
|
Other (4) | (2.4 | ) | | — |
| | (4.1 | ) | | — |
| | — |
| | (6.4 | ) |
| Foreign translation adjustment | (1.9 | ) | | — |
| | — |
| | — |
| | 1.4 |
| | (0.5 | ) |
| Ending Balance of contingent payments | 148.8 |
| | 0.8 |
| | 15.0 |
| | 7.1 |
| | 53.1 |
| | 224.8 |
|
| Fixed payments | 2.9 |
| | — |
| | 0.6 |
| | 0.3 |
| | 1.0 |
| | 4.8 |
|
| | $ | 151.7 |
| | $ | 0.8 |
| | $ | 15.5 |
| | $ | 7.5 |
| | $ | 54.1 |
| | $ | 229.6 |
|
| |
(1)(2) | For the year ended December 31, 2017 and 2016, payments include $28.7 million and $10.5 million, respectively,Other primarily consists of deferred acquisition consideration settled through the issuance of 3,353,939 and 691,559, respectively, MDC Class A subordinate voting shares in lieu of cash. |
| |
(2) | Additions are the initial estimated deferred acquisition payments of new acquisitions and step-up transactions completed within that fiscal period. |
| |
(3) | 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. |
| |
(4) | Other is comprised of (i) $2.4 million transferred to shares to be issued related to 100,000 MDC Class A subordinate voting shares that are contingent on specific thresholds of future earnings that management expects to be attained; and, (ii) $4.1 million of contingent payments eliminated through the acquisition of incremental ownership interests.translation adjustments. |
Deferred acquisition consideration excludes future payments withRedeemable Noncontrolling Interest
When acquiring less than 100% ownership of an estimated fair value of $26.8 million that are contingent upon employment terms as well as financial performance and will be expensed as stock-based compensation over the required retention period. Of this amount,entity, the Company estimates $2.5 million will be paid inmay enter into agreements that give the current year, $16.9 million will be paid in oneCompany an option to three years, $7.4 million will be paid in three to five years, and nil will be paid after five years.
Put Rights of Subsidiaries’ Noncontrolling Shareholders
As noted above, noncontrolling shareholders in certain subsidiaries have the right in certain circumstances topurchase, or require the Company to acquirepurchase, the remainingincremental ownership interests held by them. Theunder certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling shareholders’ ability to exercise any such option right is subject tointerests in the satisfactionequity section of certain conditions, including conditions requiring notice in advance of exercise and specific employment termination conditions. In addition, these rights cannotthe Company’s balance sheet. Where the incremental purchase may be exercised prior to specified staggered exercise dates. The exercise of these rights at their earliest contractual date would result in obligationsrequired of the Company, to fund the related amounts during 2018 to 2023. 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 Companyare recorded as redeemable noncontrolling interests in the event such contractual rights are exercised is dependent on various valuation formulasmezzanine equity. See Notes 2 and on future events, such as the average earnings13 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 December 31, 2017 perform over the relevant future periods at their trailing twelve-month earnings level, that these rights, if all are exercised, could require the Company to pay an aggregate amount of approximately $15.9 millionNotes to the owners of such rights in future periods to acquire such ownership interests in the relevant subsidiaries. Of this amount, the Company is entitled, at its option, to fund approximately $0.2 million by the issuance of share capital.Consolidated Financial Statements included herein for further information.
In addition, the Company is obligated under similar put option rights to pay an aggregate amount of approximately $41.7 million only upon termination of such owner’s employment with the applicable subsidiary or death.
The amount the Company would be required to pay to the holders should the Company acquire the remaining ownership interests is $5.3 million less than the initial redemption value recorded in redeemable noncontrolling interests.
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 the incurrence of additional debt and/or issuance of additional equity. 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 $4.1 million of the estimated $15.9 million that the Company would be required to pay subsidiaries noncontrolling shareholders upon the exercise of outstanding contractual rights, relates to rights exercisable within the next twelve months. Upon the settlement of the total amount of such options to purchase, the Company estimates that it would receive incremental annual operating income before depreciation and amortization of $4.4 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) | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 & Thereafter | | Total | |
| | | (Dollars in Millions) | |
| Cash | | $ | 4.1 |
| | $ | 2.8 |
| | $ | 5.0 |
| | $ | 1.9 |
| | $ | 1.8 |
| | $ | 15.6 |
| |
| Shares | | — |
| | 0.1 |
| | 0.1 |
| | — |
| | — |
| | 0.2 |
| |
| | | $ | 4.1 |
| | $ | 2.9 |
| | $ | 5.1 |
| | $ | 1.9 |
| | $ | 1.8 |
| | $ | 15.8 |
| (1) |
Operating income before depreciation and amortization to be received (2) | | $ | 2.4 |
| | $ | — |
| | $ | 1.5 |
| | $ | — |
| | $ | 0.5 |
| | $ | 4.4 |
| |
Cumulative operating income before depreciation and amortization (3) | | $ | 2.4 |
| | $ | 2.4 |
| | $ | 3.9 |
| | $ | 3.9 |
| | $ | 4.4 |
| | | (5) |
| |
(1) | This amount is in addition to (i) the $41.7 million of options to purchase only exercisable upon termination not within the control of the Company, or death, and (ii) the $5.3 million excess of the initial redemption value recorded in redeemable noncontrolling interests over the amount the Company would be required to pay to the holders should the Company acquire the remaining ownership interests. |
| |
(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. |
Guarantees
Generally, the Company has indemnified the purchasers of certain of its assets 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 severala number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no provisionamounts 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.
Critical Accounting Policies and Estimates
The following summary of accounting policies hasOur Consolidated Financial Statements have been prepared in accordance with GAAP. Preparation of the Consolidated Financial Statements and related disclosures requires us to assistmake judgments, assumptions and estimates that affect the amounts reported and disclosed in better understanding the Company’s consolidatedaccompanying financial statements and footnotes. Our significant accounting policies are discussed in Note 2 of the relatedConsolidated Financial Statements. Our critical accounting policies are those that are considered by management discussion
to require significant judgment and analysis. Readers are encouraged to consider this information together with the Company’s consolidateduse of estimates and that could have a significant impact on our financial statements and the related notes to the consolidated financial statements as included herein for a more completestatements. An understanding of our critical accounting policies discussed below.is necessary to analyze our financial results.
Estimates. The preparation of the Company’s financial statements in conformity with “U.S. GAAP,” requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities (including goodwill, intangible assets,Our critical accounting policies include our accounting for revenue recognition, business combinations, deferred acquisition consideration, redeemable noncontrolling interests, goodwill and deferred acquisition consideration), valuation allowances for receivables, deferredintangible assets, income tax assetstaxes and stock-based compensation, as well as the reported amounts of revenue and expenses during the reporting period.compensation. The financial 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 topicsis recognized when control of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”). The Company earns revenue from agency arrangements in the form of retainer feespromised goods 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 hasis transferred to our clients, in an amount that reflects 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 dueconsideration we expect to be collected and remittedentitled 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 feein exchange for those goods 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 inservices. See Note 25 of the Notes to the Consolidated Financial Statements included herein.herein for further information.
Business Combinations. The Company has historically made, and expects tomay 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.
Valuations 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 include an initial payment at the time of closing and provide for future additional contingent purchase price payments. Contingent purchase price obligations for these transactions is recorded as a liability and are derived from the performance of the acquired entity and are based on predetermined formulas. These various contractual valuation formulas 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 on the date of payment. The liability is adjusted quarterly based on changes in current information affecting each subsidiary’s current operating results and the impact this information will have on future results included in the calculation of the estimated liability. In addition, changes in various contractual valuation formulas as well as adjustments to present value impact quarterly adjustments. These adjustments are recorded in results of operations. In addition, certain acquisitions also include options to purchase additional equity ownership interests. The estimated value of these interests are recorded as redeemable noncontrolling interests.
For each of the Company’s acquisitions, a detailed review is undertaken to identify other intangible assets and a valuation is performed for all such identified assets. The Company uses 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 the Company acquires 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 the Company acquires is derived from customer relationships, including the related customer contracts, as well as trade names. In executingtrademarks.
Deferred Acquisition Consideration. Consistent with our past practice of acquiring a majority ownership position, most acquisitions include an initial payment at the time of closing and provide for future additional contingent purchase price payments. Contingent purchase price obligations for these transactions is recorded as a deferred acquisition strategy, oneconsideration liability, are derived from the performance of the primary driversacquired entity and are based on predetermined formulas. These various contractual valuation formulas may be dependent on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period, and, in identifyingsome cases, the currency exchange rate on the date of payment. The liability is adjusted quarterly based on changes in current information affecting each subsidiary’s current operating results and executingthe impact this information will have on future results included in the calculation of the estimated liability. In addition, changes in various contractual valuation formulas as well as adjustments to present value impact quarterly adjustments. These adjustments are recorded in results of operations.
Redeemable Noncontrolling Interests. Many of the Company’s acquisitions include contractual arrangements where the noncontrolling shareholders have an option to purchase, or may require the Company to purchase, such noncontrolling shareholders’ incremental ownership interests under certain circumstances and the Company has similar call options under the same contractual terms. The amount of consideration under these contractual arrangements is not a specific transactionfixed amount, but rather is dependent upon various valuation formulas, such as the existenceaverage earnings of the relevant subsidiary through the date of exercise or the abilitygrowth rate of the earnings of the relevant subsidiary during that period. In the event that an incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity on the Consolidated Balance Sheet at their acquisition date fair value and adjusted for changes to expand our existing client relationships. The expected benefitstheir estimated redemption value through Common stock and other paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. These adjustments will not impact the calculation of our acquisitionsearnings (loss) per share if the redemption values are typically shared across multiple agencies and regions.less than the estimated fair values.
Goodwill and Other Intangibles. The Company reviews goodwill and other intangible assets with indefinite lives not subject to amortization for impairment annually as of October 1st of each year or more frequently if indicators of potential impairment exist. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates step two from the two-step goodwill impairment test. Under the new guidance, an entity will performThe Company performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizerecognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. The Company has early adopted this guidance for its impairment test performed in 2017.
For the annual impairment testing, the Company has the option of assessing qualitative factors to determine whether it is more likely than not that the carrying amount of a reporting unit exceeds its fair value or performing a quantitative goodwill impairment test. Qualitative factors considered in the assessment include industry and market considerations, the competitive environment, overall financial performance, changing cost factors such as labor costs, and other factors specific to each reporting unit such as change in management or key personnel.
If the Company elects to perform the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is more than its carrying amount, then goodwill is not considered impaired and the quantitative impairment
test is not necessary. For reporting units for which the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount and for reporting units for which the qualitative assessment is not performed, the Company will perform the quantitative impairment test, which compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not considered impaired and additional analysis is not required. However, if the carrying amount of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the recognition of an impairment charge is required.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. For the 20172019 annual impairment test, the Company used a combination of thean income approach, which incorporates the use of the discounted cash flow (“DCF”) method,method. The income approach requires the exercise of significant judgment, including judgment about the amount and the market approach, which incorporates the usetiming of earningsexpected future cash flows, assumed terminal value and revenue multiples based on market data. The Company generally applied an equal weighting to the income and market approaches for the impairment test.appropriate discount rates.
The DCF estimates incorporate expected cash flows that represent a spectrum of the amount and timing of possible cash flows of each reporting unit from a market participant perspective. The expected cash flows are developed as part offrom the Company’s routine long-range planning process using projections of revenue and expensesoperating results and related cash flows based on assumed long-term growth rates and demand trends and appropriate discount rates based on a reporting units weighted average cost of capital (“WACC”) as determined by considering the observable WACC of comparable companies and factors specific to the reporting unit (for example, size).unit. The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and the Company’s expectations. We performed the quantitative impairment test in 2019. See Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding the Company’s impairment test and impairment charges recognized.
The assumptions used for the long-term growth rate and WACC in the annual goodwill impairment teststest are as follows:
|
| |
| | October 1, |
| | 20172019 |
| Long-term growth rate | 3%2.0% |
| WACC | 9.67% - 11.85%9.91% |
The Company’s reporting units vary in size with respect to revenue and operating profits. These differences drive variations in fair value of the reporting units. In addition, these differences as well as differences in book value, including goodwill, cause variations in the amount by which fair value exceeds the carrying amount of the reporting units. The reporting unit goodwill balances vary by reporting unit primarily because it relates specifically to the Partner Firm’s goodwill which was determined at the date of acquisition.
For the 20172019 annual goodwill impairment test, the Company had 3225 reporting units, all of which were subject to the quantitative goodwill impairment test and the carrying amount of two of the Company’s reporting units exceeded their fair value, resulting in a partial impairment of goodwill of $3.2 million. The fair value of all other reporting units were in excess of their respective carrying amounts and as a result there was no additional impairment of goodwill.test. The range of the excess of fair value over the carrying amount for the Company’s reporting units was from 12%24% to over 100%. The Company performed a sensitivity analysis which included a 1% increase to the WACC. Based on the results of that analysis, no additionalother reporting units were at risk of failingunit failed the quantitative impairment test.
The Company believes the estimates and assumptions used in the calculations are reasonable. However, if there was an adverse change in the facts and circumstances, then an impairment charge may be necessary in the future. The Company will monitor its reporting units to determine if there is an indicator of potential impairment. Should the fair value of any of the Company’s reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. Subsequent to the annual impairment test at October 1, 2017, there were no events or circumstances that triggered the need for an interim impairment test.
Prior to the adoption of ASU 2017-04, the Company’s impairment tests used the income approach to estimate aThe Company monitors its reporting unit’s fair value. The income approach requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates. The Company’s quantitative impairment tests included two-steps. The first step compared the fair value of each reporting unit to their respective carrying amounts. If the fair value of the reporting unit exceeded the carrying amount of the net assets assigned to that reporting unit, goodwill was not considered impaired and additional analysis was not required. However, if the carrying amount of the net assets assigned to the reporting unit exceeded the fair value of the reporting unit, then the second step of the goodwill impairment test was performedunits to determine the implied fair valueif there is an indicator of the reporting unit’s goodwill. Under the second step of the goodwill impairment test, the Company utilized both a market approach and income approach to estimate the implied fair value of a reporting unit’s goodwill. For the market approach, the Company utilized both the guideline public company method and the precedent transaction method. For the income approach, the Company utilized a DCF method. The Company weighted the market and income approaches
to arrive at an implied fair value of goodwill. If the Company determined that the carrying amount of a reporting unit’s goodwill exceeded its implied fair value, an impairment loss equal to the difference was recorded.
During the third quarter of 2016, there was a change to the Company’s reporting units. This change, coupled with a decline in operating performance required the Company to perform interim goodwill testing on one of its experiential reporting units. Additionally, a triggering event occurred during the third quarter of 2016 that required the Company to perform interim goodwill testing on one non-material reporting unit. This interim impairment analysis resulted in a partial impairment of goodwill of $27.9 million and $1.7 million relating to the experiential reporting unit and non-material reporting unit, respectively.
For the 2016 annual impairment test, a partial impairment of goodwill of $18.9 million was recognized in 1 of the Company’s strategic communications reporting units. The fair value for all other reporting units were in excess of their respective carrying amounts and as a result there was no additional impairment of goodwill.potential impairment.
Indefinite-lived intangible assets are primarily evaluated on an annual basis, generally in conjunction with the Company’s evaluation of goodwill balances. There were no impairment indicators as of December 31, 2017.
Redeemable Noncontrolling Interests. The noncontrolling interest shareholders of certain subsidiaries have the right to require the Company to acquire their ownership interests 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 earningsSee Note 8 of the relevant subsidiary throughNotes to the date of exercise and the growth rate of the earnings of the relevant subsidiary through the date of exercise.
AllowanceConsolidated Financial Statements 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.additional information.
Income Taxes. 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 evaluates on a quarterly basis all available positive and negative evidence considering 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. The periodic assessment of the net carrying value of the Company’s deferred tax assets under the applicable accounting rules requires significant management judgment. A change to any of these factors could impact the estimated valuation allowance and income tax expense.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions, including a reduction of the corporate income tax rate to 21% effective January 1, 2018. The Company is required to recognize the effect of the tax law changes in the period of enactment, which required the Company to re-measure its U.S. deferred tax assets and liabilities and to reassess the net realizability of its deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, the Company considers the accounting of the deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. See Note 9 in the Notes to the Consolidated Financial Statements included herein for additional information.
Interest Expense. Interest expense primarily consists of the cost of borrowing on the Company’s previously outstanding 6.75% Notes; the Company’s 6.50% Notes; and the Company’s revolving Credit Agreement. The Company uses the effective interest method to amortize the deferred financing costs on the 6.50% Notes and previously outstanding 6.75% Notes as well as the original issue premium on the previously outstanding 6.75% Notes and the straight-line method to amortize the deferred financing costs related to 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. Awards based on performance conditions are recorded as compensation expense when the performance conditions are expected to be met. When awards are exercised, share capital is credited by the sumSee Note 15 of the consideration paid together withNotes to 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 costConsolidated Financial Statements 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 reporting period and recorded as compensation cost over the service period in operating income.further information.
The Company treats amounts paid by shareholders 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 transactions include an element of compensation related payments. The Company accounts for those payments as stock-based compensation.
New Accounting Pronouncements
Information regarding new accounting guidancepronouncements can be found in Note 183 of the Notes to the Consolidated Financial Statements included herein.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to interest rates, and foreign currencies and impairment risk.
Debt Instruments: At December 31, 2017,2019, the Company’s debt obligations consisted of amounts outstanding under its Credit Agreement and the Senior6.50% Notes. The Senior6.50% Notes bear a fixed 6.50% interest rate. The Credit Agreement bears interest at variable rates based upon the EurodollarEuro rate, U.S. bank prime rate and U.S. 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 nil$0.0 million in borrowings under the Credit Agreement as of December 31, 2017,2019, a 1%1.0% increase or decrease in the weighted average interest rate, which was 3.67%4.92% at December 31, 2017,2019, would have anno interest impact of nil.rate impact.
Foreign Exchange: While the Company primarily conducts business in markets that use the U.S. dollar, the Canadian dollar, the Euro and the British Pound, its non-U.S. operations transact business in numerous different currencies. The Company’s results of operations are subject to risk from the translation to the U.S. dollar of the revenue and expenses of its non-U.S. operations. The effects of currency exchange rate fluctuations on the translation of the Company’s results of operations are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 2 of this Annual Report on Form 10-K for the Notes to the Consolidated Financial Statements included herein.year ended December 31, 2019 . For the most part, revenues and expenses incurred related to the non-U.S. operations are denominated in their functional currency. This minimizes the impact that fluctuations in exchange rates will have on profit margins. Intercompany debt which is not intended to be repaid is included in cumulative translation adjustments. Translation of intercompany debt, which is not intended to be repaid, is included in cumulative translation adjustments. Translation of current intercompany balances are included in net earnings.earnings (loss). The Company generally 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 U.S. and Canada. For every one cent change in the foreign exchange rate between the U.S. and Canada, the impact to the Company’s financial statements would be approximately $3.1$3.4 million.
Impairment Risk: At December 31, 2017,2019, the Company had goodwill of $835.9$740.7 million and other intangible assets of $70.6$54.9 million. The Company will assess the net realizable value of thereviews goodwill and other intangible assets on a regular basis, but at leastwith indefinite lives not subject to amortization for impairment annually onas of October 1, to determine1st of each year or more frequently if indicators of potential impairment exist. See the Company incurs any declines in the value of its capital investment. For the year ended December 31, 2017, the Company recorded goodwill impairment of $3.2 million from two non-material operating units in the Other segment. For the year ended December 31, 2016, the Company recorded goodwill impairment of $48.5 million. See Note 2Critical Accounting Policies and Estimates section above and Note 8 of the Notes to the Consolidated Financial Statements included herein for further information. The Company may incur additional impairment charges in future periods.
Item 8. Financial Statements and Supplementary Data
MDC PARTNERS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
MDC Partners Inc.
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MDC Partners Inc. (the “Company”) and subsidiaries as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and schedules presented in Item 15 (collectively referred to as the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 20172019 and 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 20185, 2020 expressed an unqualifiedadverse opinion thereon.
Change in Accounting Principles
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for leases on January 1, 2019 due to the adoption of Accounting Standards Codification, Leases (“ASC 842”).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’sCompany's auditor since 2006.
New York, New York
March 1, 2018
MDC PARTNERS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of United States Dollars, Except per Share Amounts)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenue: | |
| | |
| | |
|
| Services | $ | 1,513,779 |
| | $ | 1,385,785 |
| | $ | 1,326,256 |
|
| Operating Expenses: | |
| | |
| | |
|
| Cost of services sold | 1,023,476 |
| | 936,133 |
| | 879,716 |
|
| Office and general expenses | 310,455 |
| | 306,251 |
| | 322,207 |
|
| Depreciation and amortization | 43,474 |
| | 46,446 |
| | 52,223 |
|
| Goodwill and other asset impairment | 4,415 |
| | 48,524 |
| | — |
|
| | 1,381,820 |
| | 1,337,354 |
| | 1,254,146 |
|
| Operating income | 131,959 |
| | 48,431 |
| | 72,110 |
|
| Other Income (Expenses): | |
| | |
| | |
|
| Other income, net | 1,346 |
| | 414 |
| | 7,238 |
|
| Foreign exchange gain (loss) | 18,137 |
| | (213 | ) | | (39,328 | ) |
| Interest expense and finance charges | (65,123 | ) | | (65,858 | ) | | (57,903 | ) |
| Loss on redemption of Notes | — |
| | (33,298 | ) | | — |
|
| Interest income | 759 |
| | 808 |
| | 467 |
|
| | (44,881 | ) | | (98,147 | ) | | (89,526 | ) |
| Income (loss) from continuing operations before income taxes and equity in earnings of non-consolidated affiliates | 87,078 |
| | (49,716 | ) | | (17,416 | ) |
| Income tax (benefit) expense | (168,064 | ) | | (9,404 | ) | | 3,761 |
|
| Income (loss) from continuing operations before equity in earnings of non-consolidated affiliates | 255,142 |
| | (40,312 | ) | | (21,177 | ) |
| Equity in earnings (losses) of non-consolidated affiliates | 2,081 |
| | (309 | ) | | 1,058 |
|
| Income (loss) from continuing operations | 257,223 |
| | (40,621 | ) | | (20,119 | ) |
| Loss from discontinued operations attributable to MDC Partners Inc., net of taxes | — |
| | — |
| | (6,281 | ) |
| Net income (loss) | 257,223 |
| | (40,621 | ) | | (26,400 | ) |
| Net income attributable to the noncontrolling interests | (15,375 | ) | | (5,218 | ) | | (9,054 | ) |
| Net income (loss) attributable to MDC Partners Inc. | 241,848 |
| | (45,839 | ) | | (35,454 | ) |
| Accretion on convertible preference shares | (6,352 | ) | | — |
| | — |
|
| Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | 235,496 |
| | $ | (45,839 | ) | | $ | (35,454 | ) |
| Income (Loss) Per Common Share: | |
| | |
| | |
|
| Basic | |
| | |
| | |
|
| Net income (loss) from continuing operations attributable to MDC Partners Inc. common shareholders | $ | 3.72 |
| | $ | (0.89 | ) | | $ | (0.58 | ) |
| Discontinued operations attributable to MDC Partners Inc. common shareholders | — |
| | — |
| | (0.13 | ) |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | 3.72 |
| | $ | (0.89 | ) | | $ | (0.71 | ) |
| Diluted | |
| | |
| | |
|
| Net income (loss) from continuing operations attributable to MDC Partners Inc. common shareholders | $ | 3.71 |
| | $ | (0.89 | ) | | $ | (0.58 | ) |
| Discontinued operations attributable to MDC Partners Inc. common shareholders | — |
| | — |
| | (0.13 | ) |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | 3.71 |
| | $ | (0.89 | ) | | $ | (0.71 | ) |
| Weighted Average Number of Common Shares Outstanding: | |
| | |
| | |
|
| Basic | 55,255,797 |
| | 51,345,807 |
| | 49,875,282 |
|
| Diluted | 55,481,786 |
| | 51,345,807 |
| | 49,875,282 |
|
| Stock-based compensation expense is included in the following line items above: | |
| | |
| | |
|
| Cost of services sold | $ | 19,015 |
| | $ | 14,237 |
| | $ | 11,710 |
|
| Office and general expenses | 5,335 |
| | 6,766 |
| | 6,086 |
|
| Total | $ | 24,350 |
| | $ | 21,003 |
| | $ | 17,796 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands of United States Dollars)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Comprehensive Income (Loss) | |
| | |
| | |
|
| Net income (loss) | $ | 257,223 |
| | $ | (40,621 | ) | | $ | (26,400 | ) |
| Other comprehensive income (loss), net of applicable tax: | |
| | |
| | |
|
| Foreign currency translation adjustment | 3,611 |
| | (4,586 | ) | | 9,564 |
|
| Benefit plan adjustment, net of income tax benefit, $528 for 2017, nil for 2016, and nil for 2015 | (1,336 | ) | | (3,101 | ) | | (423 | ) |
| Other comprehensive income (loss) | 2,275 |
| | (7,687 | ) | | 9,141 |
|
| Comprehensive income (loss) for the year | 259,498 |
| | (48,308 | ) | | (17,259 | ) |
| Comprehensive income attributable to the noncontrolling interests | (17,780 | ) | | (5,612 | ) | | (4,186 | ) |
| Comprehensive income (loss) attributable to MDC Partners Inc. | $ | 241,718 |
| | $ | (53,920 | ) | | $ | (21,445 | ) |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of United States Dollars)
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | |
| | |
|
| Current Assets: | |
| | |
|
| Cash and cash equivalents | $ | 46,179 |
| | $ | 27,921 |
|
| Cash held in trusts | 4,632 |
| | 5,341 |
|
| Accounts receivable, less allowance for doubtful accounts of $2,453 and $1,523 | 434,072 |
| | 388,340 |
|
| Expenditures billable to clients | 31,146 |
| | 33,118 |
|
| Other current assets | 26,742 |
| | 34,862 |
|
| Total Current Assets | 542,771 |
| | 489,582 |
|
| Fixed assets, at cost, less accumulated depreciation of $123,599 and $105,134 | 90,306 |
| | 78,377 |
|
| Investment in non-consolidated affiliates | 6,307 |
| | 4,745 |
|
| Goodwill | 835,935 |
| | 844,759 |
|
| Other intangible assets, net | 70,605 |
| | 85,071 |
|
| Deferred tax assets | 115,325 |
| | 41,793 |
|
| Other assets | 37,643 |
| | 33,051 |
|
| Total Assets | $ | 1,698,892 |
| | $ | 1,577,378 |
|
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ DEFICIT | |
| | |
|
| Current Liabilities: | |
| | |
|
| Accounts payable | $ | 244,527 |
| | $ | 251,456 |
|
| Trust liability | 4,632 |
| | 5,341 |
|
| Accruals and other liabilities | 327,812 |
| | 303,581 |
|
| Advance billings | 148,133 |
| | 133,925 |
|
| Current portion of long-term debt | 313 |
| | 228 |
|
| Current portion of deferred acquisition consideration | 50,213 |
| | 108,290 |
|
| Total Current Liabilities | 775,630 |
| | 802,821 |
|
| Long-term debt, less current portion | 882,806 |
| | 936,208 |
|
| Long-term portion of deferred acquisition consideration | 72,213 |
| | 121,274 |
|
| Other liabilities | 54,110 |
| | 56,012 |
|
| Deferred tax liabilities | 6,760 |
| | 110,359 |
|
| Total Liabilities | 1,791,519 |
| | 2,026,674 |
|
| Redeemable Noncontrolling Interests (See Note 2) | 62,886 |
| | 60,180 |
|
| Commitments, Contingencies and Guarantees (See Note 17) |
|
| |
|
|
| Shareholders’ Deficit: | |
| | |
|
| Convertible preference shares (liquidation preference $101,352) | 90,220 |
| | — |
|
| Common shares | 352,432 |
| | 317,784 |
|
| Shares to be issued, 100,000 shares in 2016 | — |
| | 2,360 |
|
| Charges in excess of capital | (314,241 | ) | | (311,581 | ) |
| Accumulated deficit | (340,000 | ) | | (581,848 | ) |
| Accumulated other comprehensive loss | (1,954 | ) | | (1,824 | ) |
| MDC Partners Inc. Shareholders’ Deficit | (213,543 | ) | | (575,109 | ) |
| Noncontrolling Interests | 58,030 |
| | 65,633 |
|
| Total Shareholders’ Deficit | (155,513 | ) | | (509,476 | ) |
| Total Liabilities, Redeemable Noncontrolling Interests and Shareholders’ Deficit | $ | 1,698,892 |
| | $ | 1,577,378 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of United States Dollars)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash flows provided by (used in) operating activities: | |
| | |
| | |
|
| Net income (loss) | $ | 257,223 |
| | $ | (40,621 | ) | | $ | (26,400 | ) |
| Loss from discontinued operations | — |
| | — |
| | (6,281 | ) |
| Income (loss) from continuing operations | 257,223 |
| | (40,621 | ) | | (20,119 | ) |
| Adjustments to reconcile income (loss) from continuing operations to cash provided by (used in) operating activities: | |
| | |
| | |
|
| Stock-based compensation | 24,350 |
| | 21,003 |
| | 17,796 |
|
| Depreciation | 23,873 |
| | 22,293 |
| | 18,871 |
|
| Amortization of intangibles | 19,601 |
| | 24,153 |
| | 33,352 |
|
| Amortization of deferred finance charges and debt discount | 3,022 |
| | 9,135 |
| | 2,270 |
|
| Goodwill and other asset impairment | 4,415 |
| | 48,524 |
| | — |
|
| Loss on redemption of Notes | — |
| | 26,873 |
| | — |
|
| Adjustment to deferred acquisition consideration | (4,819 | ) | | 8,227 |
| | 38,887 |
|
| Deferred income taxes | (173,019 | ) | | (10,038 | ) | | (79 | ) |
| Gain on sale of assets | (1,600 | ) | | (424 | ) | | (6,526 | ) |
| Earnings (losses) of non-consolidated affiliates | (2,081 | ) | | 309 |
| | (1,058 | ) |
| Other and non-current assets and liabilities | (4,420 | ) | | 13,527 |
| | 4,680 |
|
| Foreign exchange | (17,637 | ) | | (8,240 | ) | | 30,185 |
|
| Changes in working capital: | |
| | |
| | |
|
| Accounts receivable | (50,030 | ) | | (16,752 | ) | | (4,796 | ) |
| Expenditures billable to clients | 1,892 |
| | 13,048 |
| | (3,879 | ) |
| Prepaid expenses and other current assets | 6,569 |
| | (13,608 | ) | | 1,550 |
|
| Accounts payable, accruals and other current liabilities | 13,398 |
| | (110,018 | ) | | 75,111 |
|
| Advance billings | 14,548 |
| | 11,397 |
| | (23,508 | ) |
| Cash flows provided by (used in) continuing operating activities | 115,285 |
| | (1,212 | ) | | 162,737 |
|
| Discontinued operations | — |
| | — |
| | (1,342 | ) |
| Net cash provided by (used in) operating activities | 115,285 |
| | (1,212 | ) | | 161,395 |
|
| Cash flows used in investing activities: | |
| | |
| | |
|
| Capital expenditures | (32,958 | ) | | (29,432 | ) | | (23,575 | ) |
| Deposits | — |
| | (2,528 | ) | | — |
|
| Proceeds from sale of assets | 10,631 |
| | 666 |
| | 8,631 |
|
| Acquisitions, net of cash acquired | — |
| | 2,531 |
| | (24,778 | ) |
| Distributions from non-consolidated affiliates | 3,672 |
| | 7,402 |
| | — |
|
| Other investments | (2,229 | ) | | (3,835 | ) | | (7,272 | ) |
| Cash flows used in continuing investing activities | (20,884 | ) | | (25,196 | ) | | (46,994 | ) |
| Discontinued operations | — |
| | — |
| | 17,101 |
|
| Net cash used in investing activities | (20,884 | ) | | (25,196 | ) | | (29,893 | ) |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of United States Dollars) – (continued)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash flows used in financing activities: | |
| | |
| | |
|
| Proceeds from issuance of 6.50% Notes | — |
| | 900,000 |
| | — |
|
| Repayment of 6.75% Notes | — |
| | (735,000 | ) | | — |
|
| Repayments of revolving credit facility | (1,479,632 | ) | | (1,790,108 | ) | | (703,020 | ) |
| Proceeds from revolving credit facility | 1,425,207 |
| | 1,844,533 |
| | 703,020 |
|
| Proceeds from issuance of convertible shares | 95,000 |
| | — |
| | — |
|
| Convertible preference shares issuance costs | (4,780 | ) | | — |
| | — |
|
| Acquisition related payments | (99,873 | ) | | (135,693 | ) | | (134,056 | ) |
| Distributions to noncontrolling interests | (8,865 | ) | | (7,772 | ) | | (9,503 | ) |
| Payment of dividends | (284 | ) | | (32,918 | ) | | (42,313 | ) |
| Repayment of long-term debt | (404 | ) | | (507 | ) | | (534 | ) |
| Premium paid on redemption of Notes | — |
| | (26,873 | ) | | — |
|
| Deferred financing costs | — |
| | (21,569 | ) | | — |
|
| Purchase of shares | (1,758 | ) | | (3,350 | ) | | (2,388 | ) |
| Other | — |
| | — |
| | 224 |
|
| Cash flows used in continuing financing activities | (75,389 | ) | | (9,257 | ) | | (188,570 | ) |
| Discontinued operations | — |
| | — |
| | (40 | ) |
| Net cash used in financing activities | (75,389 | ) | | (9,257 | ) | | (188,610 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (754 | ) | | 2,128 |
| | 5,218 |
|
| (Decrease) increase in cash and cash equivalents | 18,258 |
| | (33,537 | ) | | (51,890 | ) |
| Cash and cash equivalents at beginning of year | 27,921 |
| | 61,458 |
| | 113,348 |
|
| Cash and cash equivalents at end of year | $ | 46,179 |
| | $ | 27,921 |
| | $ | 61,458 |
|
| Supplemental disclosures: | |
| | |
| | |
|
| Cash income taxes paid | $ | 8,099 |
| | $ | 2,895 |
| | $ | 1,887 |
|
| Cash interest paid | $ | 62,895 |
| | $ | 64,671 |
| | $ | 52,666 |
|
| Change in cash held in trusts | $ | (709 | ) | | $ | 219 |
| | $ | (1,297 | ) |
| Non-cash transactions: | |
| | |
| | |
|
| Capital leases | $ | 670 |
| | $ | 265 |
| | $ | 140 |
|
| Note receivable exchanged for shares of subsidiary | $ | 6,139 |
| | $ | — |
| | $ | — |
|
| Dividends payable | $ | 453 |
| | $ | 739 |
| | $ | 912 |
|
| Deferred acquisition consideration settled through issuance of shares | $ | 28,727 |
| | $ | 10,458 |
| | $ | — |
|
| Value of shares issued for acquisition | $ | — |
| | $ | 34,219 |
| | $ | — |
|
| Leasehold improvements paid for by landlord | $ | — |
| | $ | 7,250 |
| | $ | — |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(Thousands of United States Dollars)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preference Shares | | Common Shares | | Share Capital to Be Issued | | Additional Paid-in Capital | | Charges in Excess of Capital | | Accumulated Deficit | | Stock Subscription Receivable | | Accumulated Other Comprehensive Income (Loss) | | MDC Partners Inc. Shareholders’ Deficit | | Noncontrolling Interests | | Total Shareholders’ Deficit |
| | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2014 | — |
| | $ | — |
| | 49,683,864 |
| | $ | 265,818 |
| | — |
| | $ | — |
| | $ | — |
| | $ | (209,668 | ) | | $ | (500,555 | ) | | $ | — |
| | $ | (7,752 | ) | | $ | (452,157 | ) | | $ | 92,655 |
| | $ | (359,502 | ) |
| Net income attributable to MDC Partners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (35,454 | ) | | — |
| | — |
| | (35,454 | ) | | — |
| | (35,454 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,009 |
| | 14,009 |
| | (4,868 | ) | | 9,141 |
|
| Issuance of restricted stock | — |
| | — |
| | 365,873 |
| | 6,069 |
| | — |
| | — |
| | (6,069 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Shares acquired and canceled | — |
| | — |
| | (96,777 | ) | | (2,388 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,388 | ) | | — |
| | (2,388 | ) |
| Options exercised | — |
| | — |
| | 37,500 |
| | 343 |
| | — |
| | — |
| | (119 | ) | | — |
| | — |
| | — |
| | — |
| | 224 |
| | — |
| | 224 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,437 |
| | — |
| | — |
| | — |
| | — |
| | 8,437 |
| | — |
| | 8,437 |
|
| Changes in redemption value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,809 | ) | | — |
| | — |
| | — |
| | — |
| | (22,809 | ) | | — |
| | (22,809 | ) |
| Decrease in noncontrolling interests and redeemable noncontrolling interests from business acquisitions and step-up transactions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (42,780 | ) | | — |
| | — |
| | — |
| | — |
| | (42,780 | ) | | (8,708 | ) | | (51,488 | ) |
| Dividends paid and to be paid | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (42,253 | ) | | — |
| | — |
| | — |
| | — |
| | (42,253 | ) | | — |
| | (42,253 | ) |
| Transfer to charges in excess of capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 105,593 |
| | (105,593 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2015 | — |
| | $ | — |
| | 49,990,460 |
| | $ | 269,842 |
| | — |
| | $ | — |
| | $ | — |
| | $ | (315,261 | ) | | $ | (536,009 | ) | | $ | — |
| | $ | 6,257 |
| | $ | (575,171 | ) | | $ | 79,079 |
| | $ | (496,092 | ) |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(Thousands of United States Dollars) – (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preference Shares | | Common Shares | | Share Capital to Be Issued | | Additional Paid-in Capital | | Charges in Excess of Capital | | Accumulated Deficit | | Stock Subscription Receivable | | Accumulated Other Comprehensive Income (Loss) | | MDC Partners Inc. Shareholders’ Deficit | | Noncontrolling Interests | | Total Shareholders’ Deficit |
| | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2015 | — |
| | $ | — |
| | 49,990,460 |
| | $ | 269,842 |
| | — |
| | $ | — |
| | $ | — |
| | $ | (315,261 | ) | | $ | (536,009 | ) | | $ | — |
| | $ | 6,257 |
| | $ | (575,171 | ) | | $ | 79,079 |
| | $ | (496,092 | ) |
| Net loss attributable to MDC Partners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (45,839 | ) | | — |
| | — |
| | (45,839 | ) | | — |
| | (45,839 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,081 | ) | | (8,081 | ) | | 394 |
| | (7,687 | ) |
| Deferred acquisition consideration settled through issuance of shares | — |
| | — |
| | 691,559 |
| | 10,458 |
| | 100,000 |
| | 2,360 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,818 |
| | — |
| | 12,818 |
|
| Issuance of restricted stock and stock options | — |
| | — |
| | 425,915 |
| | 6,615 |
| | — |
| | — |
| | (6,615 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Shares issued, acquisition | — |
| | — |
| | 1,900,000 |
| | 34,219 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 34,219 |
| | — |
| | 34,219 |
|
| Shares acquired and canceled | — |
| | — |
| | (205,876 | ) | | (3,350 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,350 | ) | | — |
| | (3,350 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,662 |
| | — |
| | — |
| | — |
| | — |
| | 10,662 |
| | — |
| | 10,662 |
|
| Changes in redemption value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,604 |
| | — |
| | — |
| | — |
| | — |
| | 9,604 |
| | — |
| | 9,604 |
|
| Changes in noncontrolling interests and redeemable noncontrolling interests from business acquisitions and step-up transactions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 22,776 |
| | — |
| | — |
| | — |
| | — |
| | 22,776 |
| | (13,840 | ) | | 8,936 |
|
| Dividends paid and to be paid | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32,747 | ) | | — |
| | — |
| | — |
| | — |
| | (32,747 | ) | | — |
| | (32,747 | ) |
| Transfer to charges in excess of capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,680 | ) | | 3,680 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2016 | — |
| | $ | — |
| | 52,802,058 |
| | $ | 317,784 |
| | 100,000 |
| | $ | 2,360 |
| | $ | — |
| | $ | (311,581 | ) | | $ | (581,848 | ) | | $ | — |
| | $ | (1,824 | ) | | $ | (575,109 | ) | | $ | 65,633 |
| | $ | (509,476 | ) |
The accompanying notes to the consolidated financial statements are an integral part of these statements.5, 2020
MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of United States dollars, except per share amounts)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenue: | | | | | |
| Services | $ | 1,415,803 |
| | $ | 1,476,203 |
| | $ | 1,513,779 |
|
| Operating Expenses: | | | | |
|
|
| Cost of services sold | 961,076 |
| | 991,198 |
| | 1,023,476 |
|
| Office and general expenses | 328,339 |
| | 349,056 |
| | 310,455 |
|
| Depreciation and amortization | 38,329 |
| | 46,196 |
| | 43,474 |
|
| Goodwill and other asset impairment | 7,819 |
| | 80,057 |
| | 4,415 |
|
| | 1,335,563 |
| | 1,466,507 |
| | 1,381,820 |
|
| Operating income | 80,240 |
| | 9,696 |
| | 131,959 |
|
| Other Income (expense): | | | | | |
| Interest expense and finance charges, net | (64,942 | ) | | (67,075 | ) | | (64,364 | ) |
| Foreign exchange gain (loss) | 8,750 |
| | (23,258 | ) | | 18,137 |
|
| Other, net | (2,401 | ) | | 230 |
| | 1,346 |
|
| | (58,593 | ) | | (90,103 | ) | | (44,881 | ) |
| Income (loss) before income taxes and equity in earnings of non-consolidated affiliates | 21,647 |
| | (80,407 | ) | | 87,078 |
|
| Income tax expense (benefit) | 10,533 |
| | 31,603 |
| | (168,064 | ) |
| Income (loss) before equity in earnings of non-consolidated affiliates | 11,114 |
| | (112,010 | ) | | 255,142 |
|
| Equity in earnings of non-consolidated affiliates | 352 |
| | 62 |
| | 2,081 |
|
| Net income (loss) | 11,466 |
| | (111,948 | ) | | 257,223 |
|
| Net income attributable to the noncontrolling interest | (16,156 | ) | | (11,785 | ) | | (15,375 | ) |
| Net income (loss) attributable to MDC Partners Inc. | (4,690 | ) | | (123,733 | ) | | 241,848 |
|
| Accretion on and net income allocated to convertible preference shares | (12,304 | ) | | (8,355 | ) | | (36,254 | ) |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | (16,994 | ) | | $ | (132,088 | ) | | $ | 205,594 |
|
| Income (loss) Per Common Share: | | | | | |
| Basic | | | | | |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.72 |
|
| Diluted | | | | | |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.71 |
|
| Weighted Average Number of Common Shares Outstanding: | | | | | |
| Basic | 69,132,100 |
| | 57,218,994 |
| | 55,255,797 |
|
| Diluted | 69,132,100 |
| | 57,218,994 |
| | 55,481,786 |
|
| Stock-based compensation expense is included in the following line items above: | | | | | |
| Cost of services sold | $ | 29,160 |
| | $ | 12,513 |
| | $ | 19,015 |
|
| Office and general expenses | 1,880 |
| | 5,903 |
| | 5,335 |
|
| Total | $ | 31,040 |
| | $ | 18,416 |
| | $ | 24,350 |
|
See notes to the Consolidated Financial Statements.
MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(thousands of United States dollars)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Comprehensive Income (Loss) | | | | | |
| Net income (loss) | $ | 11,466 |
| | $ | (111,948 | ) | | $ | 257,223 |
|
| | | | | | |
| Other comprehensive income (loss), net of applicable tax: | | | | | |
| Foreign currency translation adjustment | (6,691 | ) | | 3,158 |
| | 3,611 |
|
| Benefit plan adjustment, net of income tax expense (benefit) of ($740) for 2019, $223 for 2018 and nil for 2017 | (1,911 | ) | | 555 |
| | (1,336 | ) |
| Other comprehensive income (loss) | (8,602 | ) | | 3,713 |
| | 2,275 |
|
| Comprehensive income (loss) for the period | 2,864 |
| | (108,235 | ) | | 259,498 |
|
| Comprehensive income attributable to the noncontrolling interests | (16,543 | ) | | (8,824 | ) | | (17,780 | ) |
| Comprehensive income (loss) attributable to MDC Partners Inc. | $ | (13,679 | ) | | $ | (117,059 | ) | | $ | 241,718 |
|
See notes to the Consolidated Financial Statements.
MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of United States dollars)
|
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| | | | |
| ASSETS | |
| | |
|
| Current Assets: | |
| | |
|
| Cash and cash equivalents | $ | 106,933 |
| | $ | 30,873 |
|
| Accounts receivable, less allowance for doubtful accounts of $3,304 and $1,879 | 450,403 |
| | 395,200 |
|
| Expenditures billable to clients | 30,133 |
| | 42,369 |
|
| Assets held for sale | — |
| | 78,913 |
|
| Other current assets | 35,613 |
| | 42,499 |
|
| Total Current Assets | 623,082 |
| | 589,854 |
|
| Fixed assets, at cost, less accumulated depreciation of $129,579 and $128,546 | 81,054 |
| | 88,189 |
|
| Right-of-use assets - operating leases | 223,622 |
| | — |
|
| Investments in non-consolidated affiliates | 6,161 |
| | 6,556 |
|
| Goodwill | 740,674 |
| | 740,955 |
|
| Other intangible assets, net | 54,893 |
| | 67,765 |
|
| Deferred tax assets | 85,988 |
| | 92,741 |
|
| Other assets | 24,018 |
| | 25,513 |
|
| Total Assets | $ | 1,839,492 |
| | $ | 1,611,573 |
|
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ DEFICIT | |
| | |
|
| Current Liabilities: | |
| | |
|
| Accounts payable | $ | 200,148 |
| | $ | 221,995 |
|
| Accruals and other liabilities | 353,575 |
| | 313,141 |
|
| Liabilities held for sale | — |
| | 35,967 |
|
| Advance billings | 171,742 |
| | 138,505 |
|
| Current portion of lease liabilities - operating leases | 48,659 |
| | — |
|
| Current portion of deferred acquisition consideration | 45,521 |
| | 32,928 |
|
| Total Current Liabilities | 819,645 |
| | 742,536 |
|
| Long-term debt | 887,630 |
| | 954,107 |
|
| Long-term portion of deferred acquisition consideration | 29,699 |
| | 50,767 |
|
| Long-term lease liabilities - operating leases | 219,163 |
| | — |
|
| Other liabilities | 21,584 |
| | 54,255 |
|
| Deferred tax liabilities | 4,187 |
| | 5,329 |
|
| Total Liabilities | 1,981,908 |
| | 1,806,994 |
|
| Redeemable Noncontrolling Interests | 36,973 |
| | 51,546 |
|
| Commitments, Contingencies and Guarantees (Note 14) | | | |
| Shareholders’ Deficit: | | | |
| Convertible preference shares, 145,000 authorized, issued and outstanding at December 31, 2019 and 95,000 at December 31, 2018 | 152,746 |
| | 90,123 |
|
| Common stock and other paid-in capital | 101,469 |
| | 58,579 |
|
| Accumulated deficit | (469,593 | ) | | (464,903 | ) |
| Accumulated other comprehensive (loss) income | (4,269 | ) | | 4,720 |
|
| MDC Partners Inc. Shareholders' Deficit | (219,647 | ) | | (311,481 | ) |
| Noncontrolling interests | 40,258 |
| | 64,514 |
|
| Total Shareholders' Deficit | (179,389 | ) | | (246,967 | ) |
| Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Deficit | $ | 1,839,492 |
| | $ | 1,611,573 |
|
See notes to the Consolidated Financial Statements.
MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of United States dollars)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | |
| | |
| | |
| Net income (loss) | $ | 11,466 |
| | $ | (111,948 | ) | | $ | 257,223 |
|
| Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | | | |
| Stock-based compensation | 31,040 |
| | 18,416 |
| | 24,350 |
|
| Depreciation | 25,133 |
| | 27,111 |
| | 23,873 |
|
| Amortization of intangibles | 13,196 |
| | 19,085 |
| | 19,601 |
|
| Amortization of deferred finance charges and debt discount | 3,346 |
| | 3,193 |
| | 3,022 |
|
| Goodwill and other asset impairment | 7,819 |
| | 80,057 |
| | 4,415 |
|
| Adjustment to deferred acquisition consideration | 5,403 |
| | (374 | ) | | (4,819 | ) |
| Deferred income taxes (benefits) | 5,008 |
| | 23,573 |
| | (173,019 | ) |
| (Gain) loss on disposition of assets | 3,237 |
| | (1,867 | ) | | (1,600 | ) |
| Earnings of non-consolidated affiliates | (352 | ) | | (62 | ) | | (2,081 | ) |
| Other non-current assets and liabilities | (863 | ) | | 392 |
| | (4,420 | ) |
| Foreign exchange | (9,475 | ) | | 20,795 |
| | (17,637 | ) |
| Changes in working capital: | | | | | |
| Accounts receivable | (37,763 | ) | | 30,211 |
| | (50,030 | ) |
| Expenditures billable to clients | 12,236 |
| | (11,223 | ) | | 1,892 |
|
| Prepaid expenses and other current assets | 3,474 |
| | (17,189 | ) | | 6,569 |
|
| Accounts payable, accruals and other current liabilities | (14,077 | ) | | (18,222 | ) | | 13,398 |
|
| Acquisition related payments | (5,223 | ) | | (29,141 | ) | | (42,790 | ) |
| Cash in trusts | — |
| | (656 | ) | | (709 | ) |
| Advance billings | 32,934 |
| | (14,871 | ) | | 14,548 |
|
| Net cash provided by operating activities | 86,539 |
|
| 17,280 |
| | 71,786 |
|
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (18,596 | ) | | (20,264 | ) | | (32,958 | ) |
| Proceeds from sale of assets | 23,050 |
| | 2,082 |
| | 10,631 |
|
| Acquisitions, net of cash acquired | (4,823 | ) | | (32,713 | ) | | — |
|
| Distributions from non-consolidated affiliates | — |
| | 963 |
| | 3,672 |
|
| Other investments | 484 |
| | (499 | ) | | (2,229 | ) |
| Net cash provided by (used in) investing activities | 115 |
|
| (50,431 | ) | | (20,884 | ) |
| Cash flows from financing activities: | |
| | |
| | |
| Repayment of revolving credit facility | (1,303,350 | ) | | (1,625,862 | ) | | (1,479,632 | ) |
| Proceeds from revolving credit facility | 1,235,205 |
| | 1,694,005 |
| | 1,425,207 |
|
| Proceeds from issuance of common and convertible preference shares, net of issuance costs | 98,620 |
| | — |
| | 90,220 |
|
| Acquisition related payments | (30,155 | ) | | (32,172 | ) | | (57,083 | ) |
| Distributions to noncontrolling interests | (11,392 | ) | | (13,419 | ) | | (8,865 | ) |
| Payment of dividends | (56 | ) | | (196 | ) | | (284 | ) |
| Purchase of shares | (601 | ) | | (776 | ) | | (1,758 | ) |
| Other | — |
| | (146 | ) | | (404 | ) |
| Net cash provided by (used in) financing activities | (11,729 | ) |
| 21,434 |
| | (32,599 | ) |
| Effect of exchange rate changes on cash, cash equivalents, and cash held in trusts | 1 |
| | 77 |
| | (754 | ) |
MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(thousands of United States dollars)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
| Net increase (decrease) in cash, cash equivalents, and cash held in trusts including cash classified within assets held for sale | 74,926 |
| | (11,640 | ) | | 17,549 |
|
| Change in cash and cash equivalents held in trusts classified within held for sale | (3,307 | ) | | (8,298 | ) | | — |
|
| Change in cash and cash equivalents classified within assets held for sale | 4,441 |
| | — |
| | — |
|
| Net increase (decrease) in cash and cash equivalents | 76,060 |
| | (19,938 | ) | | 17,549 |
|
| Cash and cash equivalents at beginning of period | 30,873 |
| | 50,811 |
| | 33,262 |
|
| Cash and cash equivalents at end of period | $ | 106,933 |
| | $ | 30,873 |
| | $ | 50,811 |
|
| Supplemental disclosures: | |
| | |
| | |
| Cash income taxes paid | $ | 2,296 |
| | $ | 3,836 |
| | $ | 8,099 |
|
| Cash interest paid | $ | 62,223 |
| | $ | 64,012 |
| | $ | 62,895 |
|
See notes to the Consolidated Financial Statements.
MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(thousands of United States dollars, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31, 2019 |
| | Convertible Preference Shares | | Common Shares | | Common Stock and Other Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | MDC Partners Inc. Shareholders' Deficit | | Noncontrolling Interests | | Total Shareholder's Deficit |
| | | | | | | | |
| | Shares | | Amount | | Shares | | | | | | |
| Balance at December 31, 2018 | 95,000 |
| | $ | 90,123 |
| | 57,521,323 |
| | $ | 58,579 |
| | $ | (464,903 | ) | | $ | 4,720 |
| | $ | (311,481 | ) | | $ | 64,514 |
| | $ | (246,967 | ) |
| Net income attributable to MDC Partners Inc. | — |
| | — |
| | — |
| | — |
| | (4,690 | ) | | — |
| | (4,690 | ) | | — |
| | (4,690 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (8,989 | ) | | (8,989 | ) | | 387 |
| | (8,602 | ) |
| Issuance of common and convertible preference shares | 50,000 |
| | 62,623 |
| | 14,285,714 |
| | 35,997 |
| | — |
| | — |
| | 98,620 |
| | — |
| | 98,620 |
|
| Issuance of restricted stock | — |
| | — |
| | 576,932 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Shares acquired and cancelled | — |
| | — |
| | (229,366 | ) | | (601 | ) | | — |
| | — |
| | (601 | ) | | — |
| | (601 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | 3,655 |
| | — |
| | — |
| | 3,655 |
| | — |
| | 3,655 |
|
| Changes in redemption value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | 3,160 |
| | — |
| | — |
| | 3,160 |
| | — |
| | 3,160 |
|
| Business acquisitions and step-up transactions, net of tax | — |
| | — |
| | — |
| | 1,911 |
| | — |
| | — |
| | 1,911 |
| | — |
| | 1,911 |
|
| Changes in ownership interest | — |
| | — |
| | — |
| | (91 | ) | | — |
| | — |
| | (91 | ) | | (24,642 | ) | | (24,733 | ) |
| Other | — |
| | — |
| | — |
| | (1,141 | ) | | — |
| | — |
| | (1,141 | ) | | (1 | ) | | (1,142 | ) |
| Balance at December 31, 2019 | 145,000 |
| | $ | 152,746 |
| | 72,154,603 |
| | $ | 101,469 |
| | $ | (469,593 | ) | | $ | (4,269 | ) | | $ | (219,647 | ) | | $ | 40,258 |
| | $ | (179,389 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31, 2018 |
| | Convertible Preference Shares | | Common Shares | | Common Stock and Other Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | MDC Partners Inc. Shareholders' Deficit | | Noncontrolling Interests | | Total Shareholder's Deficit |
| | | | | | | |
| | Shares | | Amount | | Shares | | | | | | |
| Balance at December 31, 2017 | 95,000 |
| | $ | 90,220 |
| | 56,375,131 |
| | $ | 38,191 |
| | $ | (340,000 | ) | | $ | (1,954 | ) | | $ | (213,543 | ) | | $ | 58,030 |
| | $ | (155,513 | ) |
| Net loss attributable to MDC Partners Inc. | — |
| | — |
| | — |
| | — |
| | (123,733 | ) | | — |
| | (123,733 | ) | | — |
| | (123,733 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 6,674 |
| | 6,674 |
| | (2,961 | ) | | 3,713 |
|
| Expenses for convertible preference shares | — |
| | (97 | ) | | — |
| | — |
| | — |
| | — |
| | (97 | ) | | — |
| | (97 | ) |
| Issuance of restricted stock | — |
| | — |
| | 243,529 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Shares acquired and cancelled | — |
| | — |
| | (108,898 | ) | | (776 | ) | | — |
| | — |
| | (776 | ) | | — |
| | (776 | ) |
| Shares issued, acquisitions | — |
| | — |
| | 1,011,561 |
| | 7,030 |
| | — |
| | — |
| | 7,030 |
| | — |
| | 7,030 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | 8,165 |
| | — |
| | — |
| | 8,165 |
| | — |
| | 8,165 |
|
| Changes in redemption value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | (4,171 | ) | | — |
| | — |
| | (4,171 | ) | | — |
| | (4,171 | ) |
| Business acquisitions and step-up transactions, net of tax | — |
| | — |
| | — |
| | 10,140 |
| | — |
| | — |
| | 10,140 |
| | 15,410 |
| | 25,550 |
|
| Changes in ownership interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,965 | ) | | (5,965 | ) |
| Cumulative effect of adoption of ASC 606 | — |
| | — |
| | — |
| | — |
| | (1,170 | ) | | — |
| | (1,170 | ) | | — |
| | (1,170 | ) |
| Balance at December 31, 2018 | 95,000 |
| | $ | 90,123 |
| | 57,521,323 |
| | $ | 58,579 |
| | $ | (464,903 | ) | | $ | 4,720 |
| | $ | (311,481 | ) | | $ | 64,514 |
| | $ | (246,967 | ) |
MDC PARTNERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT - (continued)
(thousands of United States dollars, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31, 2017 |
| | Convertible Preference Shares | | Common Shares | | Common Stock and Other Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | MDC Partners Inc. Shareholders' Deficit | | Noncontrolling Interests | | Total Shareholder's Deficit |
| | | | | | | |
| | Shares | | Amount | | Shares | | | | | | |
| Balance at December 31, 2016 | — |
| | $ | — |
| | 52,802,058 |
| | $ | 8,563 |
| | $ | (581,848 | ) | | $ | (1,824 | ) | | $ | (575,109 | ) | | $ | 65,633 |
| | $ | (509,476 | ) |
| Net income attributable to MDC Partners Inc. | — |
| | — |
| | — |
| | — |
| | 241,848 |
| | — |
| | 241,848 |
| | — |
| | 241,848 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (130 | ) | | (130 | ) | | 2,405 |
| | 2,275 |
|
| Issuance of common and convertible preference shares | 95,000 |
| | 90,220 |
| | — |
| | — |
| | — |
| | — |
| | 90,220 |
| | — |
| | 90,220 |
|
| Issuance of restricted stock | — |
| | — |
| | 380,669 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Shares acquired and cancelled | — |
| | — |
| | (161,535 | ) | | (1,758 | ) | | — |
| | — |
| | (1,758 | ) | | — |
| | (1,758 | ) |
| Deferred acquisition consideration settled through issuance of shares | — |
| | — |
| | 3,353,939 |
| | 27,852 |
| | — |
| | — |
| | 27,852 |
| | — |
| | 27,852 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | 8,028 |
| | — |
| | — |
| | 8,028 |
| | — |
| | 8,028 |
|
| Changes in redemption value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | (1,498 | ) | | — |
| | — |
| | (1,498 | ) | | — |
| | (1,498 | ) |
| Business acquisitions and step-up transactions, net of tax | — |
| | — |
| | — |
| | 2,315 |
| | — |
| | — |
| | 2,315 |
| | (11,965 | ) | | (9,650 | ) |
| Changes in ownership interest | — |
| | — |
| | — |
| | (5,654 | ) | | — |
| | — |
| | (5,654 | ) | | 12,614 |
| | 6,960 |
|
| Dispositions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,657 | ) | | (10,657 | ) |
| Other | — |
| | — |
| | — |
| | 343 |
| | — |
| | — |
| | 343 |
| | — |
| | 343 |
|
| Balance at December 31, 2017 | 95,000 |
| | $ | 90,220 |
| | 56,375,131 |
| | $ | 38,191 |
| | $ | (340,000 | ) | | $ | (1,954 | ) | | $ | (213,543 | ) | | $ | 58,030 |
| | $ | (155,513 | ) |
See notes to the Consolidated Financial Statements.
MDC PARTNERS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(Thousands of United States Dollars) – (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preference Shares | | Common Shares | | Share Capital to Be Issued | | Additional Paid-in Capital | | Charges in Excess of Capital | | Accumulated Deficit | | Stock Subscription Receivable | | Accumulated Other Comprehensive Loss | | MDC Partners Inc. Shareholders’ Deficit | | Noncontrolling Interests | | Total Shareholders’ Deficit |
| | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2016 | — |
| | $ | — |
| | 52,802,058 |
| | $ | 317,784 |
| | 100,000 |
| | $ | 2,360 |
| | $ | — |
| | $ | (311,581 | ) | | $ | (581,848 | ) | | $ | — |
| | $ | (1,824 | ) | | $ | (575,109 | ) | | $ | 65,633 |
| | $ | (509,476 | ) |
| Net loss attributable to MDC Partners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 241,848 |
| | — |
| | — |
| | 241,848 |
| | — |
| | 241,848 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (130 | ) | | (130 | ) | | 2,405 |
| | 2,275 |
|
| Issuance of Series 4 convertible preference shares in private placement | 95,000 |
| | 90,220 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 90,220 |
| | — |
| | 90,220 |
|
| Issuance of restricted stock | — |
| | — |
| | 380,669 |
| | 7,679 |
| | — |
| | — |
| | (7,679 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Shares acquired and canceled | — |
| | — |
| | (161,535 | ) | | (1,758 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,758 | ) | | — |
| | (1,758 | ) |
| Deferred acquisition consideration settled through issuance of shares | — |
| | — |
| | 3,353,939 |
| | 28,727 |
| | (100,000 | ) | | (2,360 | ) | | 1,485 |
| | — |
| | — |
| | — |
| | — |
| | 27,852 |
| | — |
| | 27,852 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,028 |
| | — |
| | — |
| | — |
| | — |
| | 8,028 |
| | — |
| | 8,028 |
|
| Changes in redemption value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,498 | ) | | — |
| | — |
| | — |
| | — |
| | (1,498 | ) | | — |
| | (1,498 | ) |
| Changes in noncontrolling interest and redeemable noncontrolling interests from business acquisitions and step-up transactions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,315 |
| | — |
| | — |
| | — |
| | — |
| | 2,315 |
| | (11,965 | ) | | (9,650 | ) |
| Changes in noncontrolling interests and redeemable noncontrolling interests from changes in ownership interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,654 | ) | | — |
| | — |
| | — |
| | — |
| | (5,654 | ) | | 12,614 |
| | 6,960 |
|
| Dispositions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,657 | ) | | (10,657 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 343 |
| | — |
| | — |
| | — |
| | — |
| | 343 |
| | — |
| | 343 |
|
| Transfer to charges in excess of capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,660 |
| | (2,660 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2017 | 95,000 |
| | $ | 90,220 |
| | 56,375,131 |
| | $ | 352,432 |
| | — |
| | $ | — |
| | $ | — |
| | $ | (314,241 | ) | | $ | (340,000 | ) | | $ | — |
| | $ | (1,954 | ) | | $ | (213,543 | ) | | $ | 58,030 |
| | $ | (155,513 | ) |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Exceptdollars, except per Share Amounts)
share amounts, unless otherwise stated)
1. Basis of Presentation and Recent Developments
The accompanying consolidated financial statements include the accounts of MDC Partners Inc. (the “Company” or “MDC”) and its subsidiaries and variable interest entities for which the Company is the primary beneficiary. References herein to “Partner Firms” generally refer to the Company’s subsidiary agencies.
MDC has prepared the consolidated financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for reporting financial information on Form 10-K. The preparation of financial statements in conformity with GAAP, which requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions.
The accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in accordance with generally accepted accounting principlesthe opinion of management are necessary for a fair presentation, in all material respects, of the United Statesinformation contained therein. Intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
Due to changes in the composition of America (“U.S. GAAP”).certain businesses and the Company’s internal management and reporting structure during 2019, reportable segment results for the 2018 and 2017 periods presented have been recast to reflect the reclassification of certain businesses between segments. See Note 21 of the Notes to the Consolidated Financial Statements included herein for further information.
Nature of Operations
MDC is a leading provider of global marketing, advertising, activation, communications and strategic consulting solutions. MDC’s Partner Firms deliver a wide range of customized services in order to drive growth and business performance for its clients.
MDC Partners Inc., formerly MDC Corporation Inc., is incorporated under the laws of Canada. The Company commenced using the name MDC Partners Inc. on November 1, 2003 and legally changed its name through amalgamation with a wholly-owned subsidiary on January 1, 2004. The Company operates primarilyin North America, Europe, Asia, South America, and Australia.
Recent Developments
On February 14, 2020, the Company sold substantially all the assets and certain liabilities of Sloane and Company LLC (“Sloane”), an indirectly wholly owned subsidiary of the Company, to an affiliate of The Stagwell Group LLC (“Stagwell”), for an aggregate purchase price of approximately $26 million, consisting of cash paid at closing plus contingent deferred payments expected to be paid over the next two years. The sale resulted in a gain estimated at approximately $16 million. An affiliate of Stagwell has a minority ownership interest in the U.S., Canada, Europe, Asia,Company. Mark Penn is the CEO and Latin America.Chairman of the Board of Directors (the "Board") of the Company and is also manager of Stagwell.
On February 27, 2020, in connection with the centralization of our New York real estate portfolio, the Company entered into an agreement to lease space at One World Trade Center. The lease term is for approximately eleven years commencing on April 1, 2020, with rental payments totaling approximately $115 million. As part of the centralization initiative, the Company will sublease existing properties currently under lease, resulting in the recovery of a significant portion of our rent obligation under such arrangements.
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mark Penn, Chief Executive Officer and Chairman of the Company, appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we are assessing a change in our reportable segments, effective with the Company’s 2020 fiscal year, to align our external reporting with how we operate the Networks under our new organizational structure.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies
The Company’s significant accounting policies are summarized as follows:
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of MDC Partners Inc. and its domestic and international controlled subsidiaries that are not considered variable interest entities, and variable interest entities for which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.
Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including goodwill, intangible assets, contingent deferred acquisition consideration, valuation allowances for receivables,redeemable noncontrolling interests, deferred tax assets and the amounts of revenue and expenses reported during the period. These estimates are evaluated on an ongoing basis and are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. ActualThese estimates require the use of assumptions about future performance, which are uncertain at the time of estimation. To the extent actual results could differ from these estimates.the assumptions used, results of operations and cash flows could be materially affected.
Fair Value. The Company applies the fair value measurement guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”) Topic 820, Fair Value Measurements, for financial assets and liabilities that are required to be measured at fair value and for non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis, including goodwill and other identifiable intangible assets. The measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations where inputs are observable or where significant value drivers are observable.
Level 3 - Instruments where significant value drivers are unobservable to third parties.
When available, the Company uses quoted market prices in active markets to determine the fair value of its financial instruments and classifies such items in Level 1. In some cases, quoted market prices are used for similar instruments in active markets and the Company classifies such items in Level 2. See Note 19 of the Notes to the Consolidated Financial Statements included herein for additional information regarding fair value measurements.
Concentration of Credit Risk. The Company provides marketing communications services to clients who operate in most industry sectors. Credit is granted to qualified clients in the ordinary course of business. Due to the diversified nature of the Company’s client base, the Company does not believe that it is exposed to a concentration of credit risk. No client accounted for more than 10% of the Company’s consolidated accounts receivable as of December 31, 2017 and 2016.2019 or December 31, 2018. No clientssales to an individual client or country other than in the United States accounted for more than 10% of revenue for the Company’s revenue in each of thefiscal years ended December 31, 2017, 2016, and 2015.2019, 2018, or 2017. As the Company operates in foreign markets, it is always considered at least reasonably possible foreign operations will be disrupted in the near term.
Cash and Cash Equivalents. The Company’s cash equivalents are primarily comprised of investments in overnight interest-bearing deposits, commercial paper and money market instruments and other short-term investments with original maturity dates
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
of three months or less at the time of purchase. The Company has a concentration of credit risk in that there are cash deposits in excess of federally insured amounts.
Cash in Trust. A subsidiary of the Company holds restricted cash in trust accounts related to funds received on behalf of clients. Such amounts are held in escrow under depositary service agreements and distributed at the direction of the clients. The funds are presented as a corresponding liability on the balance sheet.
Allowance for Doubtful Accounts. Trade receivables are stated at invoiced amounts less allowances for doubtful accounts. The allowances represent estimated uncollectible receivables associated with potential customer defaults usually due to customers’ potential insolvency. The allowances include amounts for certain customers where a risk of default has been specifically identified. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience and existing economic conditions.
Expenditures Billable to Clients. Expenditures billable to clients consist principally of outside vendor costs incurred on behalf of clients when providing advertising, marketing and corporate communications services that have not yet been invoiced to clients. Such amounts are invoiced to clients at various times over the course of the production process.
Fixed Assets. Fixed assets are stated at cost, net of accumulated depreciation. Computers, furniture and fixtures are depreciated on a straight-line basis over periods of three to seven years. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset. Repairs and maintenance costs are expensed as incurred.
Leases. Effective January 1, 2019, the Company adopted ASC 842, Leases. As a result, comparative prior periods have not been adjusted and continue to be reported under ASC 840, Leases. The Company recognizes on the balance sheet at the time of
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies - (continued)
lease commencement a right-of-use lease asset and a lease liability, initially measured at the present value of the lease payments. All right-of-use lease assets are reviewed for impairment. See Note 3 and Note 10 of the Notes to the Consolidated Financial Statements included herein for further information on leases.
Impairment of Long-lived Assets. In accordance with the FASB ASC, aA long-lived asset or asset group is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, the Company compares the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of such asset or asset group. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows where observable fair values are not readily determinable. The discount rate applied to these cash flows is based on the Company’s weighted average cost of capital (“WACC”), risk adjusted where appropriate.appropriate, or other appropriate discount rate.
Equity Method Investments. The equityEquity method is used to account forinvestments are investments in entities in which the Company has an ownership interest of less than 50% and has significant influence, or joint control by contractual arrangement, (i) over the operating and financial policies of the affiliate or (ii) has an ownership interest greater than 50%; however, the substantive participating rights of the noncontrolling interest shareholders preclude the Company from exercising unilateral control over the operating and financial policies of the affiliate. The Company’s investments that were accounted for usingCompany’s proportionate share of the net income or loss of equity method investments is included in the results of operations and any dividends and distributions reduce the carrying value of the investments. The Company’s equity method investments, include various interests in investment funds.funds, are included in Investments in non-consolidated affiliates within the Consolidated Balance Sheets. The Company’s management periodically evaluates these investments to determine if there has been a decline in value that is other than temporary. These investments are included in investments in non-consolidated affiliates.
During the year ended December 31, 2016, the Company sold its ownership in two of these equity method investments for $4,023 and recognized a gain of $623 in Other income.
Cost Method Investments. From time to time, the Company makes non-material cost based investments in start-upstart-ups, such as advertising technology companies and innovative consumer product companies, where the Company does not exercise significant influence over the operating and financial policies of the investee. Non-marketable equity investments (cost method investments) do not have a readily determinable fair value and are recorded at cost, less any impairment, adjusted for qualifying observable investment balance changes. The total net cost basis ofcarrying amount for these investments, which isare included in Other Assets onassets within the balance sheet,Consolidated Balance Sheets as of December 31, 20172019 and 20162018 was $9,527$9,854 and $10,132,$8,072, respectively. These
The Company is required to measure these other investments are periodically evaluatedat fair value and recognize any changes in fair value within net income or loss unless for investments that don’t have readily determinable fair values and don’t qualify for certain criteria an alternative for measurement exists. The alternative is to determine whethermeasure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company has elected to measure these investments under the alternative method. The Company performs a qualitative assessment to review these investments for impairment by identifying any impairment indicators, such as significant eventdeterioration of earnings or significant change in circumstances has occurred that may impactthe industry. If the qualitative assessment indicates an investment is impaired, the Company estimates the fair value of each investment other than temporary declines below book value. A variety of factors are considered when determining if a decline is other than temporary, including, among others,and reduces the financial condition and prospectscarrying value of the investee, as well asinvestment down to its fair value with the Company’s investment intent.
During the year ended December 31, 2017, the Company sold its ownership in three of these cost method investments for an aggregate purchase price of $3,557 and recognized a gain of $3,018 in Other income. In addition, the Company recognized a loss of $935 pertaining to the dissolution of five of these cost method investments.
During the year ended December 31, 2016, the Company sold its ownership in three of these cost method investments for an aggregate purchase price of $4,074 and recognized a gain of $1,309 in Other income.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
In addition, the Company’s partner agencies may receive noncontrolling equity interests from start-up companies in lieu of fees. These types of arrangements were not significant to the Company’s financial statements for the three years ended December 31, 2017.recorded within net income or loss.
Goodwill and Indefinite Lived Intangibles. In accordance withGoodwill (the excess of the FASB ASC topic, Goodwillacquisition cost over the fair value of the net assets acquired) and Other Intangible Assets, goodwill andan indefinite life intangible assets (trademarks)asset (a trademark) acquired as a result of a business combination which are not subject to amortization are tested for impairment annually as of October 1st of each year, or more frequently if indicators of potential impairment exist. For goodwill, impairment is assessed at the reporting unit level.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates step two from the two-step goodwill impairment test. Under the new guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. The Company has early adopted this guidance for its impairment test performed in 2017.
For the annual impairment testingtest, the Company has the option of assessing qualitative factors to determine whether it is more likely than not that the carrying amount of a reporting unit exceeds its fair value or performing a quantitative goodwill impairment test. Qualitative factors considered in the assessment include industry and market considerations, the competitive environment, overall financial performance, changing cost factors such as labor costs, and other factors specific to each reporting unit such as change in management or key personnel.
If the Company elects to perform the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is more than its carrying amount, then goodwill is not considered impaired and the quantitative impairment test is not necessary. For reporting units for which the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount and for reporting units for which the qualitative assessment is not performed, the Company will perform the quantitative impairment test, which compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies - (continued)
is not considered impaired. However, if the fair value of the reporting unit is lower than the carrying amount of the net assets assigned to the reporting unit, then the recognition of an impairment charge is required.recognized equal to the excess of the carrying amount over the fair value.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. For the 20172019 annual impairment test, the Company used a combination of thean income approach, which incorporates the use of the discounted cash flow (“DCF”) method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. The Company generally applied an equal weighting to the income and market approaches for the impairment test.method. The income approach and the market approach both requirerequires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
The DCF estimates incorporate expected cash flows that represent a spectrum of the amount and timing of possible cash flows of each reporting unit from a market participant perspective. The expected cash flows are developed as part offrom the Company’s routine long-range planning process using projections of revenue and expensesoperating results and related cash flows based on assumed long-term growth rates, and demand trends and appropriate discount rates based on a reporting unitsunit’s WACC as determined by considering the observable WACC of comparable companies and factors specific to the reporting unit (for example, size).unit. The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and the Company’s expectations. The assumptions used for the long-term growth rate and WACC in the annual goodwill impairment tests are as follows:
|
| |
| October 1, |
| 2017 |
Long-term growth rate | 3% |
WACC | 9.67% - 11.85% |
The Company’s reporting units vary in size with respect to revenue and operating profits. These differences drive variations in fair valueSee Note 8 of the reporting units. In addition, these differences as well as differences in book value, including goodwill, cause variations in the amount by which fair value exceeds the carrying amount of the reporting units. The reporting unit goodwill
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
balances vary by reporting unit primarily because it relates specificallyNotes to the Partner Firm’s goodwill which was determined at the date of acquisition.
For the 2017 annual goodwill impairment test, the Company had 32 reporting units, all of which were subject to the quantitative goodwill impairment test and the carrying amount of two of the Company’s reporting units exceeded their fair value, resulting in a partial impairment of goodwill of $3,238. The fair value of all other reporting units were in excess of their respective carrying amounts and as a result there was noConsolidated Financial Statements included herein for additional impairment of goodwill. The range of the excess of fair value over the carrying amount for the Company’s reporting units was from 12% to over 100%. The Company performed a sensitivity analysis which included a 1% increase to the WACC. Based on the results of that analysis, no additional reporting units were at risk of failing the quantitative impairment test. In addition, a reporting unit within the Domestic Creative Agencies segment to which $14,853 of goodwill is allocated had a negative carrying amount on December 31, 2017.
The Company believes the estimates and assumptions used in the calculations are reasonable. However, if there was an adverse change in the facts and circumstances, then an impairment charge may be necessary in the future. The Company will monitor its reporting units to determine if there is an indicator of potential impairment. Should the fair value of any of the Company’s reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. Subsequent to the annual impairment test at October 1, 2017, there were no events or circumstances that triggered the need for an interim impairment test.
Prior to the adoption of ASU 2017-04,information regarding the Company’s impairment tests used the income approach to estimate a reporting unit’s fair value. The income approach requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates. The Company’s quantitative impairment tests included two-steps. The first step compared the fair value of each reporting unit to their respective carrying amounts. If the fair value of the reporting unit exceeded the carrying amount of the net assets assigned to that reporting unit, goodwill was not considered impaired and additional analysis was not required. However, if the carrying amount of the net assets assigned to the reporting unit exceeded the fair value of the reporting unit, then the second step of the goodwill impairment test was performed to determine the implied fair value of the reporting unit’s goodwill. Under the second step of the goodwill impairment test, the Company utilized both a market approach and income approach to estimate the implied fair value of a reporting unit’s goodwill. For the market approach, the Company utilized both the guideline public company method and the precedent transaction method. For the income approach, the Company utilized a DCF method. The Company weighted the market and income approaches to arrive at an implied fair value of goodwill. If the Company determined that the carrying amount of a reporting unit’s goodwill exceeded its implied fair value, an impairment loss equal to the difference was recorded.
During the third quarter of 2016, there was a change to the Company’s reporting units. This change, coupled with a decline in operating performance required the Company to perform interim goodwill testing on one of its experiential reporting units. Additionally, a triggering event occurred during the third quarter of 2016 that required the Company to perform interim goodwill testing on one non-material reporting unit. This interim impairment analysis resulted in a partial impairment of goodwill of $27,893 and $1,738 relating to the experiential reporting unit and non-material reporting unit, respectively.
For the 2016 annual impairment test, a partial impairment of goodwill of $18,893 in one of the Company’s strategic communications reporting units. The fair value for all other reporting units were in excess of their respective carrying amounts and as a result there was no additional impairment of goodwill. In addition, a reporting unit within the All Other segment to which $5,479 of goodwill is allocated had a negative carrying amount on December 31, 2016.test.
Indefinite-lived intangible assets are primarily evaluated on an annual basis, generally in conjunction with the Company’s evaluation of goodwill balances. There were no impairment indicators as of December 31, 2017.
Definite Lived Intangible Assets. In accordance with the FASB ASC, acquired intangiblesDefinite lived intangible assets are subject to amortization over their useful lives. The method of amortization selected reflects the pattern in which the economic benefits of the specific intangible asset is consumed or otherwise used up.used. If that pattern cannot be reliably determined, a straight-line amortization method is used over the estimated useful life. Intangible assets that are subject to amortization are reviewed for potential impairment at least annually or whenever events or circumstances indicate that carrying amounts may not be recoverable. See Note 8 of the Notes to the Consolidated Financial Statements included herein for further information.
Business Combinations. Business combinations are accounted for using the acquisition method and accordingly, the assets acquired (including identified intangible assets), the liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values. The Company’s acquisition model typically provides for an initial payment at closing and for future additional contingent purchase price obligations. Contingent purchase price obligations are recorded as
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
deferred acquisition consideration on the balance sheet at the acquisition date fair value and are remeasured at each reporting period. Changes in such estimated values are recorded in the results of operations. For the years ended December 31, 2017, 2016 and 2015, operating income of $4,896, and operating expense of $7,972 and $36,344, respectively, was recorded pertaining to changes in the estimated value. For further information, see Note 4 and Note 13 of the Notes to the Consolidated Financial Statements included herein. For the years ended December 31, 2017, 2016, and 2015, $877, $2,640 and $2,912, respectively, of acquisition related costs were charged to operations.
For each acquisition, the Company undertakes a detailed review to identify other intangible assets and a valuation is performed for all such identified assets. The Company uses 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. A substantial portion of the intangible assetassets value that the Company acquires 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 acquired is derived from customer relationships, including the related customer contracts, as well as trade names. In executingtrademarks.
Deferred Acquisition Consideration. Consistent with past practice of acquiring a majority ownership position, most acquisitions include an initial payment at the Company’s overalltime of closing and provide for future additional contingent purchase price payments. Contingent purchase price obligations for these transactions are recorded as deferred acquisition strategy, oneconsideration liabilities, and are derived from the projected performance of the primary drivers in identifyingacquired entity and executing a specific transaction isare based on predetermined formulas. These various contractual valuation formulas may be dependent on future events, such as the existence of, or the ability to, expand the existing client relationships. The expected benefitsgrowth rate of the Company’s acquisitionsearnings of the relevant subsidiary during the contractual period. The liability is adjusted quarterly based on changes in current information affecting each subsidiary’s current operating results and the impact this information will have on future results included in the calculation of the estimated liability. In addition, changes in various contractual valuation formulas as well as adjustments to present value impact quarterly adjustments. These adjustments are typically shared across multiple agencies and regions.recorded in results of operations.
Redeemable Noncontrolling Interests. Many of the Company’s acquisitions include contractual arrangements where the noncontrolling shareholders have an option to purchase, or may require the Company to purchase, such noncontrolling shareholders’ incremental ownership interests under certain circumstances and thecircumstances. The Company has similar call options under the same contractual terms. The amount of consideration under these contractual arrangements is not a fixed amount, but rather is dependent upon various valuation formulas, such as described in Note 17the average earnings of the Notes torelevant subsidiary through the Consolidated Financial Statements included herein.date of exercise or the growth rate of the earnings of the relevant subsidiary during that period. In the event that an incremental purchase may be required ofby the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity on the balance sheetConsolidated Balance
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies - (continued)
Sheets at their acquisition date fair value and adjusted for changes to their estimated redemption value through additionalCommon stock and other paid-in capital in the Consolidated Balance Sheets (but not less than their initial redemption value), except for foreign currency translation adjustments. These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. ForSee Note 13 of the three years ended December 31, 2017, 2016, and 2015, there was noNotes to the Consolidated Financial Statements for detail on the impact on the Company’s earnings (loss) per share calculation.
The following table presents changes in redeemable noncontrolling interests:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Beginning Balance as of January 1, | $ | 60,180 |
| | $ | 69,471 |
| | $ | 194,951 |
|
| Redemptions | (910 | ) | | (1,708 | ) | | (155,042 | ) |
| Granted | 1,666 |
| | 2,274 |
| | 7,703 |
|
| Changes in redemption value | 1,498 |
| | (9,604 | ) | | 22,809 |
|
| Currency translation adjustments | 452 |
| | (253 | ) | | (950 | ) |
| Ending Balance as of December 31, | $ | 62,886 |
| | $ | 60,180 |
| | $ | 69,471 |
|
Subsidiary and Equity Investment Stock Transactions. Transactions involving the purchase, sale or issuance of stock of a subsidiary where control is maintained are recorded as a reduction in the redeemable noncontrolling interests or noncontrolling interests, as applicable. Any difference between the purchase price and noncontrolling interest is recorded to additionalCommon stock and other paid-in capital.capital in the Consolidated Balance Sheets. In circumstances where the purchase of shares of an equity investment results in obtaining control, the existing carrying value of the investment is remeasured to the acquisition date fair value and any gain or loss is recognized in results of operations.
Variable Interest EntityRevenue Recognition. Effective March 28, 2012, the Company invested in Doner Partners LLC (“Doner”). The Company acquired a 30% voting interest and convertible preferred interests that allow the Company to increase ordinary voting ownership to 70% at the Company’s option. Effective April 1, 2017, the Company acquired an additional 15% voting and convertible preferred interest that allowed the Company to increase ordinary voting ownership to 85% at the Company’s option. The Company now has a 65% voting interest. The Company has determined that (i) this entityrevenue is a variable interest entity and (ii) the Company is the primary beneficiary because it receives a disproportionate share of profits and losses as compared to its ownership percentage. As such, Doner is consolidated for all periods subsequent to the date of investment.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
Doner is a full service integrated creative agency that is included as partrecognized when control of the Company’s portfoliopromised goods or services is transferred to our clients, in an amount that reflects the Global Integrated Agencies segment. The Company’s Credit Agreement (see Note 10) is guaranteed and secured by all of Doner’s assets.
Total assets and total liabilities of Doner includedconsideration we expect to be entitled to in the Company’s consolidated balance sheet at December 31, 2017 and 2016, were $105,191 and $59,783, and $102,456 and $57,622, respectively.
Guarantees. Guarantees issuedexchange for those goods or modified by the Company to third parties after January 1, 2003 are generally recognized, at the inception or modification of the guarantee, as a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The initial measurement of that liability is the fair value of the guarantee. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee. The Company’s liability associated with guarantees is not significant.services. See Note 175 of the Notes to the Consolidated Financial Statements included herein for furtheradditional information.
Revenue Recognition. The Company’s revenue recognition policies are established in accordance with the Revenue Recognition topics of the FASB ASC, and accordingly, revenue is recognized when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the selling price is fixed or determinable; (iii) services have been performed or upon delivery of the products when ownership and risk of loss has transferred to the client; and (iv) collection of the resulting receivable is reasonably assured.
The Company follows the Multiple-Element Arrangement topic of the FASB ASC, which addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities and how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.
The Company follows the Principal Agent Consideration topic of the FASB ASC which addresses (i) whether revenue should be recorded at the gross amount billed because it has earned revenue from the sale of goods or services, or recorded at the net amount retained because it has earned a fee or commission, and (ii) that reimbursements received for out-of-pocket expenses incurred should be characterized in the income statement as revenue. Accordingly, the Company has included such reimbursed expenses in revenue.
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.
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 a limited number of 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.
For arrangements with customers for which the Company earns a fixed fee for development of customized mobile applications (“Apps”), revenue is recognized in accordance with the accounting guidance contained in ASC 605-35 and is primarily recognized using the proportional performance method of accounting. Performance is generally measured based upon the efforts incurred to date in relation to total estimated efforts to the completion of the contract.
Fees billed to clients in excess of fees recognized as revenue are classified as advanced billings on the Company’s balance sheet.
A small portion of the Company’s contractual arrangements with customers includes performance incentive provisions, which allow the Company to earn additional revenue 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.
Cost of Services Sold. Cost of services sold primarily consists of staff costs, and does not include depreciation charges for fixed assets.
Interest Expense. Interest expense primarily consists of the cost of borrowing on the Company’s previously outstanding 6.75% Senior Notes due 2020 (the “6.75% Notes”); the Company’s currently outstanding 6.50% senior unsecured notes due 2024 (the
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
“6.50% Notes”); and the Company’s $325,000 senior secured revolving credit agreement due 2021 (the “Credit Agreement”). The Company uses the effective interest method to amortize deferred financing costs and any original issue premium or discount, if applicable. The Company also uses the straight-line method, which approximates the effective interest method, to amortize the deferred financing costs on the 6.75% Notes, the 6.50% Notes as well as the original issue premium on the previously outstanding 6.75% Notes.Credit Agreement.
Income Taxes. The Company also uses the straight-line method to amortize the deferred financing costs on the Credit Agreement. For the years ended December 31, 2017, 2016, and 2015, interest expense included $100, $255, and $2,543, respectively, relating to present value adjustments for fixed deferred acquisition consideration payments.
Deferred Taxes. The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are provided for the temporary difference between the financial reporting basis and tax basis of the Company’s assets and liabilities. Deferred tax benefits result primarily from certain tax carryover benefits, from recording certain expenses in the financial statements that are not currently deductible for tax purposes and from differences between the tax and book basis of assets and liabilities recorded in connection with acquisitions. Deferred tax assets are reduced byrecords a valuation allowance against deferred income tax assets when in the opinion of management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. DeferredManagement evaluates on a quarterly basis all available positive and negative evidence considering factors such as the reversal of deferred income tax liabilities, result primarily from deductions recorded for tax purposes in excess of that recorded inprojected future taxable income, the financial statements or income for financial statement purposes in excesscharacter of the amount forincome tax purposes. The effect ofasset, tax planning strategies, changes in tax rates is recognized inlaws and other factors. The periodic assessment of the periodnet carrying value of the rateCompany’s deferred tax assets under the applicable accounting rules requires significant management judgment. A change is enacted.to any of these factors could impact the estimated valuation allowance and income tax expense.
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, in this casegenerally the award’s vesting period. The Company recognizes forfeitures as they occur. 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 The Company recognizes forfeitures 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 in operating income over the service period, in this case the award’s vesting period. Changes in the Company’s payment obligation prior to the settlement date of a stock-based award 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.they occur.
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.grant. The fair value measurement of the compensation cost for these awards is based on using the Black-Scholes option pricing-model or other acceptable method and is recorded in operating income over the service period, in this case the award’s vesting period.
It is the Company’s policy for issuing shares upon the exercise and/or vesting 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 to deliver 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. The Company commences recording compensation expense related to awards that are based on performance conditions under the straight-line attribution method when it is probable that such performance conditions will 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 transactions include an element of compensation related payments. The Company accounts for those payments as stock-based compensation.
PensionRetirement Costs. Several of the Company’s U.S. and Canadian subsidiaries offer employees access to certain defined contribution pensionretirement programs. Under the defined contribution plans, these subsidiaries, in some cases, make annual contributions to participants’ accounts which are subject to vesting. The Company’s contribution expense pursuant to these plans was $10,124, $10,026$11,909, $11,136 and $6,731$10,031 for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively. The Company also has a defined benefit pension plan. See Note 1912 of the Notes to the Consolidated Financial Statements included herein for further information.additional information on the defined benefit plan.
Income (Loss) per Common Share. Basic income (loss) per common share is based upon the weighted average number of common shares outstanding during each period. Share capital to be issued as reflected in the shareholders’ deficit on the balance sheet, are also included if there is no circumstance under which those shares would not be issued. Diluted income (loss) per common share is based on the above, in addition, if dilutive, common share equivalents, which include outstanding options, stock appreciation rights, and unvested restricted stock
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
2. Significant Accounting Policies –- (continued)
rights, and unvested restricted stock units. In periods of net loss, all potentially issuable common shares are excluded from diluted net loss per common share because they are anti-dilutive.
During the first quarter of 2017, theThe Company has 145,000 authorized and issued and sold 95,000 newly authorized Series 4 Convertible Preference Shares (the “Preference Shares”) in a private placement.convertible preference shares. The two-class method is applied to calculate basic net income (loss) attributable to MDC Partners Inc. per common share in periods in which shares of convertible preference shares wereare outstanding, as shares of convertible preference shares are participating securities due to their dividend rights. See Notes 11 and 12Note 15 of the Notes to the Consolidated Financial Statements included herein for furtheradditional information. The two-class method is an earnings allocation method under which earnings per share is calculated for common stock considering a participating security’s rights to undistributed earnings as if all such earnings had been distributed during the period. Either the two-class method or the if-converted method is applied to calculate diluted net income per common share, depending on which method results in more dilution. The Company’s participating securities are not included in the computation of net loss per common share in periods of net loss because the convertible preference shareholders have no contractual obligation to participate in losses.
Foreign Currency Translation. The Company’s financial statements were prepared in accordance with the requirements of FASB ASC Topic 830 Foreign Currency Matters. The functional currency of the Company is the Canadian dollar anddollar; however, it has decided to use U.S. dollars as its reporting currency for consolidated reporting purposes. Generally, the Company’s subsidiaries use their local currency as their functional currency. Accordingly, the currency impacts of the translation of the balance sheetsConsolidated Balance Sheets of the Company and its non-U.S. dollar based subsidiaries to U.S. dollar statements are included as cumulative translation adjustments in accumulatedAccumulated other comprehensive (loss) income. Translation of intercompany debt, which is not intended to be repaid, is included in cumulative translation adjustments. Cumulative translation adjustments are not included in net earnings (loss) unless they are actually realized through a sale or upon complete, or substantially complete, liquidation of the Company’s net investment in the foreign operation. Translation of current intercompany balances are included in net earnings.earnings (loss). The balance sheets of non-U.S. dollar based subsidiaries are translated at the period end rate. The income statementsConsolidated Statements of Operation of the Company and its non-U.S. dollar based subsidiaries are translated at average exchange rates for the period.
Gains and losses arising from the Company’s foreign currency transactions are reflected in net earnings. Unrealized gains or losses arising on the translation of certain intercompany foreign currency transactions that are of a long-term nature (that is settlement is not planned or anticipated in the future) are included as cumulative translation adjustments in accumulatedAccumulated other comprehensive loss.(loss) income.
Derivative Financial Instruments.3. New Accounting Pronouncements
Adopted In The Current Reporting Period
Effective January 1, 2019, the Company followsadopted ASC 842. As a result, comparative prior periods have not been adjusted and continue to be reported under ASC 840, Leases. With the Accountingadoption of ASC 842, the Company has elected to apply the package of practical expedients: (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. Additionally, the Company elected the practical expedient to not separate non-lease components from lease components for Derivative Instruments and Hedging Activities topicall operating leases.
The adoption of ASC 842 had a material impact on the Company’s Consolidated Balance Sheets, resulting in the recognition, on January 1, 2019, of a lease liability of $299,243 which represents the present value of the FASBremaining lease payments, and a right-of-use lease asset of $254,245 which represents the lease liability, offset by adjustments as appropriate under ASC which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts and debt instruments) be recorded842. The adoption of ASC 842 did not have a material impact on the balance sheet as eitherCompany’s other Consolidated Financial Statements.
4. Acquisitions and Dispositions
2019 Acquisition
On November 15, 2019, the Company acquired the remaining 35% ownership interest of Laird + Partners it did not own for an asset or liability measuredaggregate purchase price of $2,389, comprised of a closing cash payment of $1,588 and contingent deferred acquisition payments with an estimated present value at its fair value.the acquisition date of $801. The accounting forcontingent deferred payments are based on the changefinancial results of the underlying business from 2018 to 2020 with final payment due in 2021. As of the acquisition date, the fair value of the derivative depends on whether the instrument qualifies for and has been designated asadditional interest acquired was $6,005. The fair value was measured using a hedging relationship and on the type of hedging relationship. There are three types of hedging relationships: (i) adiscounted cash flow hedge, (ii)model. As a fair value hedge,result of the transaction, the Company reduced redeemable noncontrolling interests by $5,045. The difference between the purchase price and (iii) a hedgethe redeemable noncontrolling interest of foreign currency exposure$2,656 was recorded in common stock and other paid-in capital in the Consolidated Balance Sheets.
Effective April 1, 2019, the Company acquired the remaining 35% ownership interest of HPR Partners LLC (Hunter) it did not own for an aggregate purchase price of $10,234, comprised of a net investment in a foreign operation. The designation is based upon the exposure being hedged. Derivatives that are not hedges, or become ineffective hedges, must be adjusted to fair value through earnings.closing cash payment of $3,890 and additional contingent
MDC PARTNERS INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
4. Acquisitions and Dispositions - (continued)
3.deferred acquisition payments with an estimated present value at the acquisition date of $6,344. The contingent deferred payments are based on the financial results of the underlying business from 2018 to 2020 with final payment due in 2021. As of the acquisition date, the fair value of the additional interest acquired was $20,178. The fair value was measured using a discounted cash flow model. As a result of the transaction, the Company reduced redeemable noncontrolling interests by $9,486. The difference between the purchase price and the noncontrolling interest of $745 was recorded in common stock and other paid-in capital in the Consolidated Balance Sheets.
2019 Disposition
On March 8, 2019, the Company consummated the sale of Kingsdale, an operating segment with operations in Toronto and New York City that provides shareholder advisory services. As consideration for the sale, the Company received cash plus the assumption of certain liabilities totaling approximately $50 million in the aggregate. The sale resulted in a loss of approximately $3 million, which was included in Other, net within the Condensed Consolidated Statement of Operations.
Assets and Liabilities Held for Sale - Change in Plan to Sell
In the fourth quarter of 2018, the Company initiated a process to sell its ownership interest in a foreign office within the Global Integrated Agencies reportable segment. The assets and liabilities of the entity were classified as Assets and Liabilities held for sale, at their fair value less cost to sell, within the Consolidated Balance Sheet as of December 31, 2018. In the second quarter of 2019, following the appointment of Mark Penn as CEO, management changed its strategy and plan to sell the foreign office. In the second quarter of 2019, in connection with management’s decision, the amounts classified within assets and liabilities held for sale were reclassified into the respective line items within the Consolidated Balance Sheets.
2018 Acquisitions
In 2018, the Company entered into various transactions in connection with certain of its majority-owned entities. These transactions were for an aggregate purchase price of $56,463, resulting in an increase in contingent deferred consideration liabilities as of the acquisition dates of $16,174, reduced redeemable noncontrolling interests of $9,790, a net increase in noncontrolling interests equity of $15,411, increased additional paid-in capital of $4,975, and the issuance of 1,011,561 shares of the Company’s Class A subordinate voting stock.
5. Revenue
The Company’s revenue recognition policies are established in accordance with ASC 606, and accordingly, revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The MDC network provides an extensive range of services to our clients offering a variety of marketing and communication capabilities including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast), public relations services including strategy, editorial, crisis support or issues management, media training, influencer engagement and events management. We also provide media buying and planning across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, television broadcast), experiential marketing and application/website design and development.
The primary source of the Company’s revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses, depending on the terms of the client contract. In all circumstances, revenue is only recognized when collection is reasonably assured. Certain of the Company’s contractual arrangements have more than one performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its relative stand-alone selling price. Stand-alone selling prices are determined based on the prices charged to clients or using expected cost plus margin.
The determination of our performance obligations is specific to the services included within each contract. Based on a client’s requirements within the contract, and how these services are provided, multiple services could represent separate performance obligations or be combined and considered one performance obligation. Contracts that contain services that are not significantly integrated or interdependent, and that do not significantly modify or customize each other, are considered separate performance obligations. Typically, we consider media planning, media buying, creative (or strategy), production and experiential marketing services to be separate performance obligations if included in the same contract as each of these services can be provided on a stand-alone basis, and do not significantly modify or customize each other. Public relations services and application/website design
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
5. Revenue - (continued)
and development are typically each considered one performance obligation as there is a significant integration of these services into a combined output.
We typically satisfy our performance obligations over time, as services are performed. Fees for services are typically recognized using input methods (direct labor hours, materials and third-party costs) that correspond with efforts incurred to date in relation to total estimated efforts to complete the contract. Point in time recognition primarily relates to certain commission-based contracts, which are recognized upon the placement of advertisements in various media when the Company has no further performance obligation.
Revenue is recognized net of sales and other taxes due to be collected and remitted to governmental authorities. The Company’s contracts typically provide for termination by either party within 30 to 90 days. Although payment terms vary by client, they are typically within 30 to 60 days. In addition, the Company generally has the right to payment for all services provided through the end of the contract or termination date.
Within each contract, we identify whether the Company is principal or agent at the performance obligation level. In arrangements where the Company has substantive control over the service before transferring it to the client, and is primarily responsible for integrating the services into the final deliverables, we act as principal. In these arrangements, revenue is recorded at the gross amount billed. Accordingly, for these contracts the Company has included reimbursed expenses in revenue. In other arrangements where a third-party supplier, rather than the Company, is primarily responsible for the integration of services into the final deliverables, and thus the Company is solely arranging for the third-party supplier to provide these services to our client, we generally act as agent and record revenue equal to the net amount retained, when the fee or commission is earned. The role of MDC’s agencies under a production services agreement is to facilitate a client’s purchasing of production capabilities from a third-party production company in accordance with the client’s strategy and guidelines. The obligation of MDC’s agencies under media buying services is to negotiate and purchase advertising media from a third-party media vendor on behalf of a client to execute its media plan. We do not obtain control prior to transferring these services to our clients; therefore, we primarily act as agent for production and media buying services.
A small portion of the Company’s contractual arrangements with clients include performance incentive provisions, which allow the Company to earn additional revenues as a result of its performance relative to both quantitative and qualitative goals. Incentive compensation is primarily estimated using the most likely amount method and is included in revenue up to the amount that is not expected to result in a reversal of a significant amount of cumulative revenue recognized. We recognize revenue related to performance incentives as we satisfy the performance obligation to which the performance incentives are related.
Disaggregated Revenue Data
The Company provides a broad range of services to a large base of clients across the full spectrum of industry verticals on a global basis. The primary source of revenue is from agency arrangements in the form of fees for services performed, commissions, and from performance incentives or bonuses. Certain clients may engage with the Company in various geographic locations, across multiple disciplines, and through multiple Partner Firms. Representation of a client rarely means that MDC handles marketing communications for all brands or product lines of the client in every geographical location. The Company’s Partner firms often cooperate with one another through referrals and the sharing of both services and expertise, which enables MDC to service clients’ varied marketing needs by crafting custom integrated solutions. Additionally, the Company maintains separate, independent operating companies to enable it to effectively manage potential conflicts of interest by representing competing clients across the MDC network.
The following table presents revenue disaggregated by client industry vertical for the twelve months ended December 31, 2019, 2018 and 2017:
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
5. Revenue - (continued)
|
| | | | | | | | | | | | | |
| | | | Twelve Months Ended December 31, |
| Industry | Reportable Segment | | 2019 | | 2018 | | 2017 |
| Food & Beverage | All | | $ | 280,094 |
| | $ | 313,368 |
| | $ | 313,786 |
|
| Retail | All | | 148,851 |
| | 152,552 |
| | 178,152 |
|
| Consumer Products | All | | 167,324 |
| | 162,524 |
| | 162,307 |
|
| Communications | All | | 184,870 |
| | 178,410 |
| | 208,701 |
|
| Automotive | All | | 78,985 |
| | 88,807 |
| | 127,023 |
|
| Technology | All | | 118,169 |
| | 104,479 |
| | 99,325 |
|
| Healthcare | All | | 102,221 |
| | 127,547 |
| | 124,261 |
|
| Financials | All | | 112,351 |
| | 110,069 |
| | 104,713 |
|
| Transportation and Travel/Lodging | All | | 88,958 |
| | 86,419 |
| | 56,955 |
|
| Other | All | | 133,980 |
| | 152,028 |
| | 138,556 |
|
| | | | $ | 1,415,803 |
| | $ | 1,476,203 |
| | $ | 1,513,779 |
|
MDC has historically largely focused where the Company was founded in North America, the largest market for its services in the world. The Company has expanded its global footprint to support clients looking for help to grow their businesses in new markets. MDC’s Partner Firms are located in the United States, Canada, and an additional twelve countries around the world. In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which included discretionary components that are easier to reduce in the short term than other operating expenses.
The following table presents revenue disaggregated by geography for the twelve months ended December 31, 2019, 2018 and 2017: |
| | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
| Geographic Location | Reportable Segment | | 2019 | | 2018 | | 2017 |
| United States | All | | $ | 1,116,045 |
| | $ | 1,153,191 |
| | $ | 1,172,364 |
|
| Canada | All, excluding Media Services | | 105,067 |
| | 124,001 |
| | 123,093 |
|
| Other | All, excluding Media Services and Domestic Creative | | 194,691 |
| | 199,011 |
| | 218,322 |
|
| | | | $ | 1,415,803 |
| | $ | 1,476,203 |
| | $ | 1,513,779 |
|
Contract assets and liabilities
Contract assets consist of fees and reimbursable outside vendor costs incurred on behalf of clients when providing advertising, marketing and corporate communications services that have not yet been invoiced to clients. Unbilled service fees were $66,119 and $64,362 at December 31, 2019 and December 31, 2018, respectively, and are included as a component of accounts receivable on the Consolidated Balance Sheets. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were $30,133 and $42,369 at December 31, 2019 and December 31, 2018, respectively, and are included on the Consolidated Balance Sheets as expenditures billable to clients. Such amounts are invoiced to clients at various times over the course of providing services.
Contract liabilities consist of fees billed to clients in excess of fees recognized as revenue and are classified as advance billings on the Company’s Consolidated Balance Sheets. Advance billings at December 31, 2019 and December 31, 2018 were $171,742 and $138,505, respectively. The increase in the advance billings balance of $33,237 for the twelve months ended December 31, 2019 was primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $121,659 of revenues recognized that were included in the advance billings balances as of December 31, 2018 and reductions due to the incurrence of third-party costs.
Changes in the contract asset and liability balances during the twelve months ended December 31, 2019 and December 31, 2018 were not materially impacted by write offs, impairment losses or any other factors.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
5. Revenue - (continued)
Practical Expedients
As part of the adoption of ASC 606, the Company applied the practical expedient to not disclose information about remaining performance obligations that have original expected durations of one year or less. The majority of our contracts are for periods of one year or less. For those contracts with a term of more than one year, we had approximately $49,013 of unsatisfied performance obligations as of December 31, 2019, of which we expect to recognize approximately 42% in 2020 and 58% in 2021.
6. Income (Loss) perPer Common Share
The following table sets forth the computation of basic and diluted income (loss) per common share from continuing operations for the years ended December 31:
| | | | | | | | | | | Twelve Months Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Numerator: | |
| | |
| | |
| | | | | | |
| Income (loss) from continuing operations | $ | 257,223 |
| | $ | (40,621 | ) | | $ | (20,119 | ) | |
| Net income attributable to the noncontrolling interests | (15,375 | ) | | (5,218 | ) | | (9,054 | ) | |
| Net income (loss) from continuing operations attributable to MDC Partners Inc. | $ | 241,848 |
| | $ | (45,839 | ) | | $ | (29,173 | ) | |
| Net income (loss) attributable to MDC Partners Inc. | | | $ | (4,690 | ) | | $ | (123,733 | ) | | $ | 241,848 |
|
| Accretion on convertible preference shares | (6,352 | ) | | — |
| | — |
| | (12,304 | ) | | (8,355 | ) | | (6,352 | ) |
| Net income allocated to convertible preference shares | (29,902 | ) | | — |
| | — |
| | — |
| | — |
| | (29,902 | ) |
| Net income (loss) from continuing operations attributable to MDC Partners Inc. common shareholders | 205,594 |
| | (45,839 | ) | | (29,173 | ) | |
| Effect of dilutive securities: | | | | | | |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | | | $ | (16,994 | ) | | $ | (132,088 | ) | | $ | 205,594 |
|
| | | | | | | | |
| Adjustment to net income allocated to convertible preference shares | 106 |
| | — |
| | — |
| | — |
| | — |
| | 106 |
|
| Net income (loss) from continuing operations attributable to MDC Partners Inc. common shareholders | $ | 205,700 |
| | $ | (45,839 | ) | | $ | (29,173 | ) | |
| Numerator for dilutive income (loss) per common share: | | | | | | | |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | | | $ | (16,994 | ) | | $ | (132,088 | ) | | $ | 205,700 |
|
| Denominator: | |
| | |
| | |
| | | | | | |
| Basic weighted average number of common shares outstanding | 55,255,797 |
| | 51,345,807 |
| | 49,875,282 |
| | 69,132,100 |
| | 57,218,994 |
| | 55,255,797 |
|
| Effect of dilutive securities: | | | | | | | | | | | |
| Impact of stock options and non-vested stock under employee stock incentive plans | 225,989 |
| | — |
| | — |
| | — |
| | — |
| | 225,989 |
|
| Diluted weighted average number of common shares outstanding | 55,481,786 |
| | 51,345,807 |
| | 49,875,282 |
| | 69,132,100 |
| | 57,218,994 |
| | 55,481,786 |
|
| Net income (loss) from continuing operations attributable to MDC Partners Inc common shareholders per common share: | | | | | | |
| Basic | $ | 3.72 |
| | $ | (0.89 | ) | | $ | (0.58 | ) | | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.72 |
|
| Diluted | $ | 3.71 |
| | $ | (0.89 | ) | | $ | (0.58 | ) | | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.71 |
|
At December 31, 2017, 2016 and 2015, options and other rights to purchase 886,596, 1,391,456 and 947,465 shares of commonAnti-dilutive stock respectively, were not included in the computation of diluted loss per common share because doing so would have had an anti-dilutive effect. Additionally, 1,433,921 shares of non-vested restrictedawards 5,450,426 1,442,518 0
Restricted stock and restricted stock unit awards of 135,386, 1,012,637 and 1,443,921 as of December 31, 2019, 2018 and 2017 respectively, which are contingent upon the Company meeting an undefineda cumulative three year earnings target and contingent upon continued employment, are excluded from the computation of diluted income per common share as the contingency hascontingencies were not been satisfied at December 31, 2017. Lastly,2019, 2018 and 2017, respectively. In addition, there were 145,000, 95,000, shares ofand 95,000 Preference Shares outstanding which were convertible into 26,656,285, 10,970,714, and 10,135,244 Class A common shares at December 31, 2017.2019, 2018, and 2017, respectively. These Preference Shares were anti-dilutive for year ended December 31, 2017each period presented in the table above and are therefore excluded from the diluted income (loss) per common share calculation for the period.calculation.
4. Acquisitions and DispositionsValuations of acquired companies are based on a number of factors, including specialized know-how, reputation, competitive position and service offerings. The Company’s acquisition strategy has been focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of its various strategic business platforms to better serve the Company’s clients. The Company’s strategy includes acquiring ownership stakes in well-managed businesses with strong reputations in the industry. The Company’s model of “Perpetual Partnership” often involves acquiring a majority interest rather than a 100% interest and leaving management owners with a significant financial interest in the performance of the acquired entity for a minimum period of time, typically not less than five years. The Company’s acquisition model in this scenario typically provides for (i) an initial payment at the time of closing, (ii) additional contingent purchase price obligations based on the future performance of the acquired entity, and (iii) an option by the Company to purchase (and in some instances a requirement to so purchase) the remaining interest of the acquired entity under a predetermined formula.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)
4. Acquisitions and Dispositions – (continued)share amounts, unless otherwise stated)
Contingent purchase price obligations. The Company’s contingent purchase price obligations are generally payable within a five year period following the acquisition date, and are based on (i) the achievement of specific thresholds of future earnings, and (ii) in certain cases, the growth rate of those earnings. Contingent purchase price obligations are recorded as deferred acquisition consideration on the balance sheet at the acquisition date fair value and adjusted at each reporting period through operating income or net interest expense, depending on the nature of the arrangement. On occasion, the Company may initiate a renegotiation of previously acquired ownership interests and any resulting change in the estimated amount of consideration to be paid is adjusted in the reporting period through operating income or net interest expense, depending on the nature of the arrangement. See Note 13 of the Notes to the Consolidated Financial Statements included herein for additional information on deferred acquisition consideration.
Options to purchase. When acquiring less than 100% ownership, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the Company’s balance sheet. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity at their estimated acquisition date redemption value and adjusted at each reporting period for changes to their estimated redemption value through additional paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. On occasion, the Company may initiate a renegotiation to acquire an incremental ownership interest and the amount of consideration paid may differ materially from the balance sheet amounts. See Note 17 of the Notes to the Consolidated Financial Statements included herein for additional information on redeemable noncontrolling interests.
Employment conditions. From time to time, specifically when the projected success of an acquisition is deemed to be dependent on retention of specific personnel, such acquisition may include deferred payments that are contingent upon employment terms as well as financial performance. The Company accounts for those payments through operating income as stock-based compensation over the required retention period. For the years ended December 31, 2017, 2016 and 2015, stock-based compensation included $13,079, $10,341, and $9,359, respectively, of expense relating to those payments.
Distributions to noncontrolling shareholders. If noncontrolling shareholders have the right to receive distributions based on the profitability of an acquired entity, the amount is recorded as income attributable to noncontrolling interests. However, there are circumstances when the Company acquires a majority interest and the selling shareholders waive their right to receive distributions with respect to their retained interest for a period of time, typically not less than five years. Under this model, the right to receive such distributions typically begins concurrently with the purchase option period and, therefore, if such option is exercised at the first available date the Company may not record any noncontrolling interest over the entire period from the initial acquisition date through the acquisition date of the remaining interests.
2017 Acquisitions
In 2017, the Company entered into various non-material transactions in connection with certain of its majority-owned entities. As a result of the foregoing, the Company made total cash closing payments of $3,858, increased fixed deferred consideration liability by $7,208, reduced redeemable noncontrolling interests by $816, reduced noncontrolling interests equity by $11,965, reduced noncontrolling interest payable by $397, and increased additional paid-in capital by $2,315. In addition, a stock-based compensation charge of $996 has been recognized representing the consideration paid in excess of the fair value of the interest acquired.
2017 Dispositions
During 2017, the Company sold all of its ownership interests in three subsidiaries resulting in recognition of a net loss on sale of business of $1,732. The net assets reflected in the calculation of the net loss on sale was inclusive of goodwill of $17,593. Goodwill was allocated to the subsidiaries based on the relative fair value of the sold subsidiaries compared to the fair value of the respective reporting units. See Note 1 of the Notes to the Consolidated Financial Statements included herein for further information. Additionally, the Company recorded a reduction in noncontrolling interests of $10,657.
In addition, the Company sold a non-controlling ownership interest in two subsidiaries during 2017. The Company recorded $6,961 of non-controlling interest equity and $1,690 of redeemable non-controlling interest, representing the fair value of the disposed ownership interest at the time of execution. Additionally, stock-based compensation of $2,473 was recognized, representing the excess in the proportionate fair value over the total consideration received.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
4. Acquisitions and Dispositions – (continued)
2016 Acquisitions
Effective July 1, 2016, the Company acquired 100% of the equity interests of Forsman & Bodenfors AB (“F&B”), an advertising agency based in Sweden, for an estimated aggregate purchase price at acquisition date of $49,837, consisting of a closing payment of 1,900,000 MDC Class A subordinate voting shares with an acquisition date fair value of $34,219, plus additional deferred acquisition payments with an estimated present value at acquisition date of $15,618. The amount of additional payments are based on the financial results of the acquired business for 2015 and 2016 as well as for the value of the Company’s shares from July 1, 2016 up to and including the close of business on November 2, 2016. During the three months ended June 30, 2017, the Company paid cash of $3,055 and issued an additional 2,450,000 MDC Class A subordinate voting shares with a fair value of $20,800 as a settlement of deferred acquisition consideration.
An allocation of excess purchase price consideration of this acquisition to the fair value of the net assets acquired resulted in identifiable intangibles of $36,698, consisting primarily of customer lists, trade names and covenants not to compete, and goodwill of $24,778, including the value of the assembled workforce. The identified assets have a weighted average useful life of approximately 10.8 years and will be amortized in a manner represented by the pattern in which the economic benefits of such assets are expected to be realized. In addition, the Company has recorded $2,275 as the present value of redeemable noncontrolling interests and $5,514 as the present value of noncontrolling interests both relating to the noncontrolling interest of F&B’s subsidiaries. None of the intangibles and goodwill are tax deductible and the Company recorded a deferred tax liability of $8,074 related to the intangibles. F&B’s results are included in the Global Integrated Agencies segment.
During the six months ended June 30, 2017, F&B earned revenue of $43,535 and incurred a net loss of $4,460, which is included in our consolidated results for the year ended December 31, 2017. The net loss was attributable to an increase in the deferred acquisition payment liability related to such acquisition, driven by the decrease in the future market performance of the Company’s stock price and the amortization of the intangibles identified in the allocation of the purchase price consideration.
Effective April 1, 2016, the Company acquired the remaining 40% ownership interests of Luntz Global Partners LLC. In 2016, the Company also entered into various non-material transactions in connection with other majority-owned entities. As a result of the foregoing, the Company made total cash closing payments of $1,581, eliminated the contingent deferred acquisition payments of $4,052 and fixed deferred acquisition payments of $467 related to certain initial acquisition of the equity interests, reduced other assets by $428, reduced redeemable noncontrolling interests by $1,005, reduced noncontrolling interests by $19,354, increased accruals and other liabilities by $94, and increased additional paid-in capital by $22,775. Additional deferred payments with an estimated present value at acquisition date of $2,393 that are contingent upon service conditions have been excluded from deferred acquisition consideration and will be expensed as stock-based compensation over the required service period.
2015 Acquisitions
Effective May 1, 2015, the Company acquired a majority of the equity interests of Y Media Labs LLC, such that following the transaction, the Company’s effective ownership was 60%. Effective October 31, 2015, the Company acquired substantially 100% of the assets of Unique Influence, LLC (and certain other affiliated entities). The aggregate purchase price of these acquisitions had an estimated present value at acquisition date of $55,279 and consisted of total closing cash payments of $23,000 and additional deferred acquisition payments that will be based on the future financial results of the underlying businesses from 2015 to 2020 with final payments due in 2022. These additional deferred payments have an estimated present value at acquisition date of $32,279. An allocation of excess purchase price consideration of these acquisitions to the fair value of the net assets acquired resulted in identifiable intangibles of $16,721, consisting primarily of customer lists, trade names and covenants not to compete, and goodwill of $43,654, including the value of the assembled workforce. The identified assets have a weighted average useful life of approximately 6.3 years and will be amortized in a manner represented by the pattern in which the economic benefits of such assets are expected to be realized. In addition, the Company has recorded $1,999 as the present value of redeemable noncontrolling interests. The Company expects intangibles and goodwill of $9,720 to be tax deductible.
In 2015, the Company acquired incremental ownership interests of Sloane & Company LLC, Anomaly Partners LLC, Allison & Partners LLC, Relevent Partners LLC, Kenna Communications LP and 72andSunny Partners LLC. In addition, the Company also entered into various non-material transactions in connection with other majority owned entities.
The aggregate purchase price for these 2015 acquisitions of incremental ownership interests had an estimated present value at transaction date of $200,822 and consisted of total closing cash payments of $37,467 and additional deferred acquisition payments that are both fixed and based on the future financial results of the underlying businesses from 2015 to 2021 with final payments due in 2022. These additional deferred payments had an estimated present value at acquisition date of $163,355. The Company
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
4. Acquisitions and Dispositions – (continued)
reduced redeemable noncontrolling interests by $149,335 and noncontrolling interests by $8,708. The difference between the purchase price and the noncontrolling interests of $42,780 was recorded in additional paid-in capital.
2015 Dispositions
Effective May 31, 2015, the Company completed the sale of Accent for an aggregate selling price of $17,102, net of transaction expenses. Included in discontinued operations in the Company’s consolidated statements of operations for the year ended December 31, 2015:
|
| | | |
| | 2015 |
| Revenue | $ | 27,025 |
|
| Operating loss | (322 | ) |
| Other expense | (752 | ) |
| Loss on disposal | (5,207 | ) |
| Loss from discontinued operations attributable to MDC Partners Inc., net of taxes | $ | (6,281 | ) |
Noncontrolling Interests
Changes in the Company’s ownership interests in our less than 100% owned subsidiaries during the three years ended December 31, were as follows:
Net Income (Loss) Attributable to MDC Partners Inc. and
Transfers (to) from the Noncontrolling Interests
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) attributable to MDC Partners Inc. | $ | 241,848 |
| | $ | (45,839 | ) | | $ | (35,454 | ) |
| Transfers (to) from the noncontrolling interests | |
| | |
| | |
|
| Increase (decrease) in MDC Partners Inc. paid-in capital for purchase of equity interests in excess of noncontrolling interests and redeemable noncontrolling interests | 2,315 |
| | 22,776 |
| | (42,780 | ) |
| Net transfers (to) from noncontrolling interests | $ | 2,315 |
| | $ | 22,776 |
| | $ | (42,780 | ) |
| Change from net income (loss) attributable to MDC Partners Inc. and transfers (to) from noncontrolling interests | $ | 244,163 |
| | $ | (23,063 | ) | | $ | (78,234 | ) |
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
5.7. Fixed Assets
The following is a summary of the Company’s fixed assets as of December 31:
| | | | 2017 | | 2016 | 2019 | | 2018 |
| | Cost | | Accumulated Depreciation | | Net Book Value | | Cost | | Accumulated Depreciation | | Net Book Value | Cost | | Accumulated Depreciation | | Net Book Value | | Cost | | Accumulated Depreciation | | Net Book Value |
| Computers, furniture and fixtures | $ | 101,806 |
| | $ | (74,429 | ) | | $ | 27,377 |
| | $ | 91,909 |
| | $ | (64,030 | ) | | $ | 27,879 |
| $ | 93,224 |
| | $ | (69,687 | ) | | $ | 23,537 |
| | $ | 100,276 |
| | $ | (73,060 | ) | | $ | 27,216 |
|
| Leasehold improvements | 112,099 |
| | (49,170 | ) | | 62,929 |
| | 91,601 |
| | (41,103 | ) | | 50,498 |
| 117,409 |
| | (59,892 | ) | | 57,517 |
| | 116,459 |
| | (55,486 | ) | | 60,973 |
|
| | $ | 213,905 |
| | $ | (123,599 | ) | | $ | 90,306 |
| | $ | 183,510 |
| | $ | (105,133 | ) | | $ | 78,377 |
| $ | 210,633 |
| | $ | (129,579 | ) | | $ | 81,054 |
| | $ | 216,735 |
| | $ | (128,546 | ) | | $ | 88,189 |
|
At December 31, 2017 and 2016, included in fixed assets are assets under capital lease obligations with a cost of $1,903 and $1,967, respectively, and accumulated depreciation of $1,176 and $1,316, respectively. Depreciation expense for the years ended December 31, 2019, 2018, and 2017 2016,was $25,133, $27,111 and 2015 was $23,873, $22,293 and $18,871, respectively.
6. Accruals8. Goodwill and Other LiabilitiesIntangible Assets
AtAs of December 31, 2017 and 2016, accruals and other liabilities included accrued media of $207,482 and $201,872, respectively; and included amounts due to noncontrolling interest holders for their share of profits, which will be distributed within the next twelve months, of $11,030 and $4,154, respectively.
Changes in noncontrolling interest amounts included in accrued and other liabilities for the three years ended December 31, weregoodwill was as follows:
|
| | | |
| | Noncontrolling Interests |
| Balance at December 31, 2014 | $ | 6,014 |
|
| Income attributable to noncontrolling interests | 9,054 |
|
| Distributions made | (9,503 | ) |
Other(1) | (92 | ) |
| Balance at December 31, 2015 | $ | 5,473 |
|
| Income attributable to noncontrolling interests | 5,218 |
|
| Distributions made | (7,772 | ) |
Other(1) | 1,235 |
|
| Balance at December 31, 2016 | $ | 4,154 |
|
| Income attributable to noncontrolling interests | 15,375 |
|
| Distributions made | (8,865 | ) |
Other(1) | 366 |
|
| Balance at December 31, 2017 | $ | 11,030 |
|
| |
(1) | Other consists primarily of business acquisitions, sale of a business, step-up transactions, and cumulative translation adjustments. |
At December 31, 2017 and December 31, 2016, accounts payable included $41,989 and $80,193 of outstanding checks, respectively. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | Global Integrated Agencies | | Domestic Creative Agencies | | Specialist Communications | | Media Services | | All Other | | Total |
| Balance at December 31, 2017 | $ | 359,071 |
| | $ | 36,980 |
| | $ | 78,706 |
| | $ | 160,057 |
| | $ | 201,121 |
| | $ | 835,935 |
|
| Acquired goodwill | — |
| | — |
| | 4,816 |
| | — |
| | 32,776 |
| | 37,592 |
|
| Impairment loss recognized | (17,828 | ) | | — |
| | — |
| | (52,041 | ) | | (4,691 | ) | | (74,560 | ) |
Transfer of goodwill between segments
| 17,081 |
| | 2,066 |
| | — |
| | 3,773 |
| | (22,920 | ) | | — |
|
Transfer of goodwill to asset held for sale (1) | — |
| | — |
| | — |
| | — |
| | (45,224 | ) | | (45,224 | ) |
| Foreign currency translation | (5,169 | ) | | (266 | ) | | (19 | ) | | (443 | ) | | (6,891 | ) | | (12,788 | ) |
| Balance at December 31, 2018 | $ | 353,155 |
| | $ | 38,780 |
| | $ | 83,503 |
| | $ | 111,346 |
| | $ | 154,171 |
| | $ | 740,955 |
|
| Acquired goodwill | — |
| | — |
| | — |
| | — |
| | 1,025 |
| | 1,025 |
|
| Impairment loss recognized | — |
| | — |
| | — |
| | — |
| | (4,099 | ) | | (4,099 | ) |
Transfer of goodwill between segments (2) | (85,766 | ) | | 119,097 |
| | (5,006 | ) | | (24,119 | ) | | (4,206 | ) | | — |
|
| Transfer of goodwill to asset held for sale | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Foreign currency translation | 775 |
| | 402 |
| | 176 |
| | — |
| | 1,440 |
| | 2,793 |
|
| Balance at December 31, 2019 | $ | 268,164 |
| | $ | 158,279 |
| | $ | 78,673 |
| | $ | 87,227 |
| | $ | 148,331 |
| | $ | 740,674 |
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
7. Financial Instruments
Financial assets, which include cash and cash equivalents and accounts receivable, have carrying values which approximate fair value due to the short-term nature of these assets. Financial liabilities with carrying values approximating fair value due to short-term maturities include accounts payable. Deferred acquisition consideration is recorded at fair value. The revolving credit agreement is a variable rate debt, the carrying value of which approximates fair value. The Company’s notes are a fixed rate debt instrument recorded at the carrying value. (1)See Note 134 of the Notes to the Consolidated Financial Statements included herein for the fair value. The fair value of financial commitments, guarantees and letters of credit, are based on the stated value of the underlying instruments. Guarantees have been issued in conjunction with the disposition of businesses in 2001 and 2003 and letters of credit have been issued in the normal course of business.
8. Goodwill and Intangible Assets
As of December 31, goodwill was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | Global Integrated Agencies | | Domestic Creative Agencies | | Specialist Communications | | Media Services | | All Other | | Total |
| Balance at December 31, 2015 | $ | 364,159 |
| | $ | 36,671 |
| | $ | 97,578 |
| | $ | 142,286 |
| | $ | 229,607 |
| | $ | 870,301 |
|
| Acquired goodwill | 24,778 |
| | — |
| | — |
| | — |
| | — |
| | 24,778 |
|
| Disposition | — |
| | — |
| | — |
| | — |
| | (764 | ) | | (764 | ) |
| Impairment loss recognized | — |
| | — |
| | (18,893 | ) | | — |
| | (29,631 | ) | | (48,524 | ) |
Transfer of goodwill between segments (1)
| (34,400 | ) | | — |
| | — |
| | 34,400 |
| | — |
| | — |
|
| Foreign currency translation | (3,821 | ) | | 91 |
| | 6 |
| | — |
| | 2,692 |
| | (1,032 | ) |
| Balance at December 31, 2016 | $ | 350,716 |
| | $ | 36,762 |
| | $ | 78,691 |
| | $ | 176,686 |
| | $ | 201,904 |
| | $ | 844,759 |
|
| Acquired goodwill | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Disposition | (964 | ) | | — |
| | — |
| | (16,629 | ) | | — |
| | (17,593 | ) |
| Impairment loss recognized | — |
| | — |
| | — |
| | — |
| | (3,238 | ) | | (3,238 | ) |
Transfer of goodwill between segments (1) | 3,630 |
| | — |
| | — |
| | — |
| | (3,630 | ) | | — |
|
| Foreign currency translation | 5,689 |
| | 218 |
| | 15 |
| | — |
| | 6,085 |
| | 12,007 |
|
| Balance at December 31, 2017 | $ | 359,071 |
| | $ | 36,980 |
| | $ | 78,706 |
| | $ | 160,057 |
| | $ | 201,121 |
| | $ | 835,935 |
|
(1) (2)DuringTransfers of goodwill relate to changes in segments.
The Company recognized an impairment of goodwill of $4,099 for the yeartwelve months ended December 31, 2017 and 2016,2019. The impairment consisted of the Company transferred a componentwrite-down of goodwill equal to the excess carrying value above the fair value of one reporting unit within the All Other category.
The Company recognized an impairment of goodwill and other assets of $80,057 for the twelve months ended December 31, 2018. The impairment primarily consisted of the write-down of goodwill equal to the excess carrying value above the fair value of three reporting units, one in each of the Global Integrated Agencies reportable segment, the Media Services reportable segment and within the All Other category. In 2018, the Company also recognized the full write-down of a trademark totaling $3,180 for a reporting unit within the Global Integrated Agencies reportable segment. The trademark is no longer in active use given its merger with another reporting unit. An interim impairment analysis was performed both before and after the transfer, noting no impairment indicators were present.
As a result of the annual impairment test performed as of October 1, 2017, theThe Company recognized a partialan impairment of goodwill of $3,238 relating to two$4,415 for the twelve months ended December 31, 2017. The impairment primarily consisted of the Company’swrite-down of goodwill equal to the excess carrying value above the fair value of two reporting units. See Note 2units, one in each of the Notes toGlobal Integrated Agencies reportable segment and the Consolidated Financial Statements herein for further information. Additionally, during 2017, the Company wrote off goodwill of $17,593 related to the sale of certain subsidiaries. This write off is included in other income (expense).
During the third quarter of 2016, there was a change to the Company’s reporting units. This change, coupled with a decline in operating performance required the Company to perform interim goodwill testing on one of its experiential reporting units. Additionally, a triggering event occurred during the third quarter of 2016 that required the Company to perform interim goodwill testing on one non-material reporting unit. This interim impairment analysis resulted in a partial impairment of goodwill of $27,893 and $1,738 relating to the experiential reporting unit and non-material reporting unit, respectively.
For the 2016 annual impairment test, a partial impairment of goodwill of $18,893 in one of the Company’s strategic communications reporting units. The fair value for all other reporting units were in excess of their respective carrying amounts and as a result there was no additional impairment of goodwill. Additionally, in the third quarter of 2016, the Company sold its ownership interests in a subsidiary to the noncontrolling shareholders, resulting in a write off of goodwill of $764.Media Services reportable segment.
The total accumulated goodwill impairment charges are $98,645 throughas of December 31, 2017.2019 and 2018, were $177,304 and $173,205, respectively.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Except Share anddollars, except per Share Amounts)share amounts, unless otherwise stated)
8. Goodwill and Intangible Assets - (continued)
As of December 31, the gross and net amounts of acquired intangible assets other than goodwill were as follows:
| | | | | For the Year Ended December 31, | | Years Ended December 31, |
| Intangible Assets | | 2017 | | 2016 | | 2019 | | 2018 |
| Trademarks (indefinite life) | | $ | 17,780 |
| | $ | 17,780 |
| |
| Trademark (indefinite life) | | | $ | 14,600 |
| | $ | 14,600 |
|
| Customer relationships – gross | | $ | 102,325 |
| | $ | 121,408 |
| | $ | 58,211 |
| | $ | 76,365 |
|
| Less accumulated amortization | | (73,767 | ) | | (80,432 | ) | | (32,671 | ) | | (42,180 | ) |
| Customer relationships – net | | $ | 28,558 |
| | $ | 40,976 |
| | $ | 25,540 |
| | $ | 34,185 |
|
| Other intangibles – gross | | $ | 37,273 |
| | $ | 43,656 |
| | $ | 28,695 |
| | $ | 31,421 |
|
| Less accumulated amortization | | (13,006 | ) | | (17,341 | ) | | (13,942 | ) | | (12,441 | ) |
| Other intangibles – net | | $ | 24,267 |
| | $ | 26,315 |
| | $ | 14,753 |
| | $ | 18,980 |
|
| Total intangible assets | | $ | 157,378 |
| | $ | 182,844 |
| | $ | 101,506 |
| | $ | 122,386 |
|
| Less accumulated amortization | | (86,773 | ) | | (97,773 | ) | | (46,613 | ) | | (54,621 | ) |
| Total intangible assets – net | | $ | 70,605 |
| | $ | 85,071 |
| | $ | 54,893 |
| | $ | 67,765 |
|
The weighted average amortization periodsperiod for customer relationships are sixis seven years and other intangible assets areis nine years. In total, the weighted average amortization period is seveneight years. Amortization expense related to amortizable intangible assets for the years ended December 31, 2019, 2018, and 2017 2016,was $11,828, $17,290, and 2015 was $17,125, $21,726, and $30,024, respectively.
The estimated amortization expense for the five succeeding years is as follows:
| | | Year | | Amortization | | Amortization |
| 2018 | | $ | 13,051 |
| |
| 2019 | | 8,832 |
| |
| 2020 | | 6,619 |
| | $ | 9,481 |
|
| 2021 | | 5,038 |
| | 8,098 |
|
| 2022 | | 4,520 |
| | 7,547 |
|
| 2023 | | | 7,089 |
|
| Thereafter | | | 8,078 |
|
9. Income TaxesDeferred Acquisition Consideration
On December 22, 2017,Deferred acquisition consideration on the U.S. government enacted comprehensive legislation commonly referredbalance sheet consists of deferred obligations related to as the Tax Cutscontingent and Jobs Act of 2017 (the “Tax Act”). The Tax Act makes broadfixed purchase price payments, and complex changes to the U.S. tax code including but not limited to a reduction in U.S. federal corporate tax rate from 35%lesser extent, contingent and fixed retention payments tied to 21%, effectivecontinued employment of specific personnel. Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period through operating income, for tax years beginning after December 31, 2017 and a one-time transition tax oncontingent purchase price payments, or net interest expense, for fixed purchase price payments. The Company accounts for retention payments through operating income as stock-based compensation over the mandatory deemed repatriationrequired retention period.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. To the extent that a company’s accounting for certain income tax effects of those aspects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
As a result of the initial analysis of the impact of the Tax Act, the Company recorded a net expense of $26,674 related to the re-measurement of deferred tax assets and liabilities resulting in a change in the corporate tax rate from 35% to 21%. This amount was offset in part by the release of a valuation allowance of $60,772 related to the re-measurement required by the rate change. It was also offset by $66,373 due to changes under the Tax Act, which resulted in significant additional positive evidence, in the form of future taxable income, that impacted management's assessment of the amount of the Company's deferred tax assets that would be realized going forward. Additionally, the Company recorded no tax expense as a result of the transition tax. The combined effect of the changes from the Tax Act resulted in a tax benefit of $100,472. While the Company has made a reasonable estimate of the impact of the reduction in the corporate rate and transition tax, it continues to gather additional information and awaits further interpretive guidance from the tax authorities to more precisely calculate amounts.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
9. Income TaxesDeferred Acquisition Consideration - (continued)
The Act createdfollowing table presents changes in contingent deferred acquisition consideration, which is measured at fair value on a new requirementrecurring basis using significant unobservable inputs, and a reconciliation to the amounts reported on the balance sheets as of December 31, 2019 and December 31, 2018.
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Beginning balance of contingent payments | $ | 82,598 |
| | $ | 119,086 |
|
| Payments | (30,719 | ) | | (54,947 | ) |
Redemption value adjustments (1) | 15,451 |
| | 3,512 |
|
| Additions - acquisitions and step-up transactions | 7,145 |
| | 14,943 |
|
Other (2) | 196 |
| | 4 |
|
| Ending balance of contingent payments | $ | 74,671 |
| | $ | 82,598 |
|
| Fixed payments | 549 |
| | 1,097 |
|
| | $ | 75,220 |
| | $ | 83,695 |
|
(1) Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments and stock-based compensation charges relating to acquisition payments that Global Intangible Low-Taxed Income (i.e., GILTI) earned by controlled foreign corporations (CFCs) mustare tied to continued employment. Redemption value adjustments are recorded within cost of services sold and office and general expenses on the Consolidated Statements of Operations.
(2) Other primarily consists of translation adjustments.
The following table presents the impact to the Company’s statement of operations due to the redemption value adjustments for the contingent deferred acquisition consideration for the twelve months ended December 31, 2019 and 2018:
|
| | | | | | | | |
| | | 2019 | | 2018 |
| (Income) loss attributable to fair value adjustments | | $ | 5,403 |
| | $ | (3,679 | ) |
| Stock-based compensation | | 10,048 |
| | 7,191 |
|
| Redemption value adjustments | | $ | 15,451 |
| | $ | 3,512 |
|
10. Leases
Effective January 1, 2019, the Company adopted ASC 842. As a result, comparative prior periods have not been adjusted and continue to be included currently in the gross incomereported under ASC 840. See Note 3 of the CFCs’ U.S. shareholder. GILTI isNotes to the excessConsolidated Financial Statements included herein for additional information regarding the Company’s adoption of the shareholder’s “net CFC tested income” over the net deemed tangible income return (the “routine return”), which is definedASC 842. The policies described herein refer to those in effect as the excess of (1) 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment (QBAI) of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. A deduction is permitted to a domestic corporation in an amount up to 50% of the sum of the GILTI inclusion and the amount treated as a dividend because the corporation has claimed a foreign tax credit (FTC) as a result of the inclusion of the GILTI amount in income.January 1, 2019.
The Company continuesleases office space in North America, Europe, Asia, South America, and Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. These leases are classified as operating leases and expire between years 2020 through 2032. The Company’s finance leases are immaterial.
The Company’s leasing policies are established in accordance with ASC 842, and accordingly, the Company recognizes on the balance sheet at the time of lease commencement a right-of-use lease asset and a lease liability, initially measured at the present value of the lease payments. Right-of-use lease assets represent the Company’s right to assessuse an underlying asset for the impactlease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. All right-of-use lease assets are reviewed for impairment. As the Company’s implicit rate in its leases is not readily determinable, in determining the present value of GILTI provisionslease payments, the Company uses its incremental borrowing rate based on its financial statements and whetherthe information available at the commencement date. Lease payments included in the measurement of the lease liability are comprised of noncancelable lease payments, payments based upon an index or rate, payments for optional renewal periods where it is reasonably certain the renewal period will be subject to U.S. GILTI inclusionexercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease costs are recognized in future years. As such, the Company has not madeConsolidated Statement of Operations over the lease term on a policy electionstraight-line basis. Leasehold improvements are depreciated on whether to record tax effects of GILTI when paid as a period expense or to record deferred tax assets and liabilities onstraight-line basis differences that are expected to affectover the amount of GILTI inclusion.
The componentslesser of the Company’s income (loss) from continuing operations before income taxes and equity in earningsterm of non-consolidated affiliates by taxing jurisdiction for the years ended December 31, were:related lease or the estimated useful life of the asset.
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Income (Loss): | |
| | |
| | |
|
| U.S. | $ | 48,053 |
| | $ | (16,661 | ) | | $ | 23,180 |
|
| Non-U.S. | 39,025 |
| | (33,055 | ) | | (40,596 | ) |
| | $ | 87,078 |
| | $ | (49,716 | ) | | $ | (17,416 | ) |
The provision (benefit) for income taxes by taxing jurisdiction for the years ended December 31, were:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Current tax provision | |
| | |
| | |
|
| U.S. federal | $ | (1,657 | ) | | $ | — |
| | $ | — |
|
| U.S. state and local | 98 |
| | (1,520 | ) | | 1,375 |
|
| Non-U.S. | 6,514 |
| | 2,154 |
| | 2,465 |
|
| | 4,955 |
| | 634 |
| | 3,840 |
|
| Deferred tax provision (benefit): | |
| | |
| | |
|
| U.S. federal | (172,873 | ) | | 5,785 |
| | 5,359 |
|
| U.S. state and local | (7,775 | ) | | (3,550 | ) | | 2,877 |
|
| Non-U.S. | 7,629 |
| | (12,273 | ) | | (8,315 | ) |
| | (173,019 | ) | | (10,038 | ) | | (79 | ) |
| Income tax provision (benefit) | $ | (168,064 | ) | | $ | (9,404 | ) | | $ | 3,761 |
|
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
9. Income Taxes10. Leases - (continued)
A reconciliationSome of income tax expense (benefit)the Company’s leases contain variable lease payments, including payments based upon an index or rate. Variable lease payments based upon an index or rate are initially measured using the statutory Canadian federalindex or rate in effect at the lease commencement date and provincialare included within the lease liabilities. Lease liabilities are not remeasured as a result of changes in the index or rate, rather changes in these types of payments are recognized in the period in which the obligation for those payments is incurred. In addition, some of our leases contain variable payments for utilities, insurance, real estate tax, repairs and maintenance, and other variable operating expenses. Such amounts are not included in the measurement of the lease liability and are recognized in the period when the facts and circumstances on which the variable lease payments are based upon occur.
The Company’s leases include options to extend or renew the lease through 2040. The renewal and extension options are not included in the lease term as the Company is not reasonably certain that it will exercise its option.
From time to time, the Company enters into sublease arrangements both with unrelated third-parties and with our partner agencies. These leases are classified as operating leases and expire between 2020 through 2032. Sublease income taxis recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America, Europe and Australia.
As of December 31, 2019, the Company has entered into five operating leases for which the commencement date has not yet occurred as the space is being prepared for occupancy by the landlord. Accordingly, these leases represent an obligation of the Company that is not on the Consolidated Balance Sheet as of December 31, 2019. The aggregate future liability related to these leases is approximately $13.9 million.
The discount rate comparedused for leases accounted for under ASC 842 is the Company’s collateralized credit adjusted borrowing rate.
The following table presents lease costs and other quantitative information for the twelve months ended December 31, 2019:
|
| | | | |
| | | Twelve Months Ended December 31, |
| | | 2019 |
| Lease Cost: | | |
| Operating lease cost | | $ | 67,044 |
|
| Variable lease cost | | 18,879 |
|
| Sublease rental income | | (8,965 | ) |
| Total lease cost | | $ | 76,958 |
|
| Additional information: | | |
| Cash paid for amounts included in the measurement of lease liabilities for operating leases | |
|
| Operating cash flows | | $ | 69,735 |
|
| | | |
| Right-of-use assets obtained in exchange for operating lease liabilities | | $ | 269,801 |
|
| Weighted average remaining lease term (in years) - Operating leases | | 5.3 |
|
| Weighted average discount rate - Operating leases | | 8.6 |
|
In the twelve months ended December 31, 2019, the Company recorded an impairment charge of $3.7 million to reduce the carrying value of four of its right-of-use lease assets and related leasehold improvements. These right-of-use assets were within the Global Integrated Agencies and Media Services segments as well as at Corporate. The Company evaluated the facts and circumstances related to the use of the assets which indicated that they may not be recoverable. Using adjusted quoted market prices to develop expected future cash flows, it was determined that the fair value of the assets were less than their carrying value. This impairment charge is included in Goodwill and other asset impairment within the Consolidated Statement of Operations.
Operating lease expense is included in office and general expenses in the Consolidated Statement of Operations. The Company’s lease expense for leases with actual income taxa term of 12 months or less is immaterial.
Rental expense for the yearstwelve months ended December 31, is as follows:2018 and 2017 was $65,093 and $64,086, respectively, offset by $3,671 and $2,797, respectively, in sublease rental income.
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Income (loss) from continuing operations before income taxes, equity in non-consolidated affiliates and noncontrolling interest | $ | 87,078 |
| | $ | (49,716 | ) | | $ | (17,416 | ) |
| Statutory income tax rate | 26.5 | % | | 26.5 | % | | 26.5 | % |
| Tax expense (benefit) using statutory income tax rate | 23,076 |
| | (13,175 | ) | | (4,615 | ) |
| State and foreign taxes | 8,863 |
| | (94 | ) | | 3,524 |
|
| Non-deductible stock-based compensation | 1,441 |
| | 1,123 |
| | 665 |
|
| Other non-deductible expense | (220 | ) | | 1,848 |
| | 163 |
|
| Change to valuation allowance | (103,212 | ) | | 6,605 |
| | 3,565 |
|
| Effect of the difference in Canadian and local statutory rates | 4,463 |
| | (4,579 | ) | | 1,906 |
|
| Impact of tax reform | (100,472 | ) | | — |
|
| — |
|
| Noncontrolling interests | (4,413 | ) | | (1,287 | ) | | (2,399 | ) |
| Impact of foreign operations | (2,453 | ) | | — |
| | — |
|
| Other, net | 4,863 |
| | 155 |
| | 952 |
|
| Income tax expense (benefit) | $ | (168,064 | ) | | $ | (9,404 | ) | | $ | 3,761 |
|
| Effective income tax rate | (193.0 | )% | | 18.9 | % | | (21.6 | )% |
Income taxes receivable were $4,582 and $1,506 at December 31, 2017 and 2016, respectively, and were included in other current assets on the balance sheet. Income taxes payable were $3,810 and $4,547 at December 31, 2017 and 2016, respectively, and were included in accrued and other liabilities on the balance sheet. It is the Company’s policy to classify interest and penalties arising in connection with the under payment of income taxes as a component of income tax expense.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
9. Income Taxes10. Leases - (continued)
The tax effects of significant temporary differences representing deferred tax assets and liabilitiesfollowing table presents minimum future rental payments under the Company’s leases at December 31, were as follows:2019 and their reconciliation to the corresponding lease liabilities:
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred tax assets: | |
| | |
|
| Capital assets and other | $ | 5,059 |
| | $ | 6,758 |
|
| Net operating loss carry forwards | 49,318 |
| | 44,305 |
|
| Interest deductions | 2,026 |
| | 12,146 |
|
| Refinancing charge | 5,578 |
| | 7,413 |
|
| Goodwill and intangibles | 129,455 |
| | 179,029 |
|
| Stock compensation | 1,208 |
| | 2,581 |
|
| Pension plan | 4,165 |
| | 5,095 |
|
| Unrealized foreign exchange | 8,653 |
| | 15,237 |
|
| Capital loss carry forwards | 11,450 |
| | 10,957 |
|
| Accounting reserves | 412 |
| | 7,138 |
|
| Gross deferred tax asset | 217,324 |
| | 290,659 |
|
| Less: valuation allowance | (19,032 | ) | | (248,866 | ) |
| Net deferred tax assets | 198,292 |
| | 41,793 |
|
| Deferred tax liabilities: | |
| | |
|
| Deferred finance charges | — |
| | (333 | ) |
| Capital assets and other | — |
| | (388 | ) |
| Goodwill amortization | (89,727 | ) | | (109,638 | ) |
| Total deferred tax liabilities | (89,727 | ) | | (110,359 | ) |
| Net deferred tax asset (liability) | $ | 108,565 |
| | $ | (68,566 | ) |
| Disclosed as: | |
| | |
|
| Deferred tax assets | $ | 115,325 |
| | $ | 41,793 |
|
| Deferred tax liabilities | (6,760 | ) | | (110,359 | ) |
| | $ | 108,565 |
| | $ | (68,566 | ) |
|
| | | |
| | Maturity Analysis |
| 2020 | $ | 69,563 |
|
| 2021 | 59,216 |
|
| 2022 | 48,593 |
|
| 2023 | 43,878 |
|
| 2024 | 37,260 |
|
| 2025 and thereafter | 102,552 |
|
| Total | 361,062 |
|
| Less: Present value discount | (93,240 | ) |
| Lease liability | $ | 267,822 |
|
The Company has U.S. federal net operating loss carry forwards of $29,723 and non-U.S. net operating loss carry forwards of $116,536. These carry forwards expire in years 2017 through 2032. The Company also has total indefinite loss carry forwards of $96,063. These indefinite loss carry forwards consist of $9,646 relating to the U.S. and $86,417 which are related to capital losses from the Canadian operations. In addition, the Company has net operating loss carry forwards for various state taxing jurisdictions of approximately $119,188.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 evaluates all positive and negative evidence and considers factors such as the reversal of taxable temporary differences, future taxable income, and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.11. Debt
As of December 31, 2016, the Company maintained valuation allowance against its world-wide net deferred tax asset of $248,866 as it believed it was more likely than not that some or all of the deferred tax assets would not be realized. This assessment was based on the Company’s historical losses2019 and uncertainties as to the amount of future taxable income.
As of December 31, 2017, the Company evaluated positive and negative evidence in determining the likelihood that it will be able to realize all or some portion of its deferred tax assets prior to their expiration. As of September 30, 2017, the Company’s three-year cumulative pre-tax income had declined compared to the period ended December 31, 2016. As of December 31, 2017 the three-year cumulative pre-tax income had increased substantially, consistent with the Company’s history of strong fourth quarter performance, which provided significant positive evidence. Upon completion of this evaluation, the Company concluded
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
9. Income Taxes - (continued)
that in part, as a result of cumulative pretax income, there is sufficient positive evidence that the Company will more likely than not realize its U.S. deferred tax assets. Therefore, the Company reduced its valuation allowance by $105,486. In addition, because of the Tax Act, the Company remeasured its existing deferred tax assets and reduced its valuation allowance by $127,146, as described above. The related effect on the accompanying consolidated statements of operations and comprehensive income or loss resulted in the Company recording a U.S. income tax benefit of $232,632 for the year ended December 31, 2017.
Deferred taxes are not provided for temporary differences representing earnings change of subsidiaries that are intended to be permanently reinvested. The potential deferred tax liability associated with these undistributed earnings is not material.
As of December 31, 2017 and 2016, the Company recorded a liability for unrecognized tax benefits as well as applicable penalties and interest in the amount of $1,556 and $1,543, respectively. As of December 31, 2017 and 2016, accrued penalties and interest included in unrecognized tax benefits were approximately $123 and $78, respectively. The Company identified an uncertainty relating to the future tax deductibility of certain intercompany fees. To the extent that such future benefit will be established, the resolution of this position will have no effect with respect to the financial statements. If these unrecognized tax benefits were to be recognized, it would affect the Company’s effective tax rate.
|
| | | |
| Changes in the Company’s reserve is as follows: | |
| Balance at December 31, 2014 | $ | 3,073 |
|
| Charges to income tax expense | 960 |
|
| Settlement of uncertainty | (428 | ) |
| Balance at December 31, 2015 | 3,605 |
|
| Charges to income tax expense | (1,261 | ) |
| Settlement of uncertainty | (879 | ) |
| Balance at December 31, 2016 | 1,465 |
|
| Charges to income tax expense | (32 | ) |
| Balance at December 31, 2017 | $ | 1,433 |
|
The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.
The Company has completed U.S. federal tax audits through 2013 and has completed a non-U.S. tax audit through 2009.
10. Debt
As of December 31,2018, the Company’s indebtedness was comprised as follows:
|
| | | | | | | |
| | 2017 | | 2016 |
| Revolving credit agreement | $ | — |
| | $ | 54,425 |
|
| 6.50% Notes due 2024 | 900,000 |
| | 900,000 |
|
| Debt issuance costs | (17,587 | ) | | (18,420 | ) |
| | 882,413 |
| | 936,005 |
|
| Obligations under capital leases | 706 |
| | 431 |
|
| | 883,119 |
| | 936,436 |
|
| Less: Current portion of long-term debt | 313 |
| | 228 |
|
| | $ | 882,806 |
| | $ | 936,208 |
|
|
| | | | | | | |
| December 31, 2019 |
| December 31, 2018 |
| Revolving credit agreement | $ | — |
| | $ | 68,143 |
|
| 6.50% Senior Notes due 2024 | 900,000 |
| | 900,000 |
|
| Debt issuance costs | (12,370 | ) | | (14,036 | ) |
| | $ | 887,630 |
| | $ | 954,107 |
|
Interest expense related to long-term debt for the years ended December 31, 2019, 2018, and 2017 2016,was $62,210, $64,420 and 2015 was $62,001, $56,468 and $53,090, respectively. For the year ended December 31, 2016, the Company recorded a charge for the loss on redemption of the 6.75% Notes of $33,298, which included accrued interest, related premiums, fees and expenses, write offs of unamortized original issue premium, and unamortized debt issuance costs. For the years ended December 31 2016, and 2015, interest expense included income of $312, $1,178, related to the amortization of the original issue premium. For the years ended December 31, 2017, 2016, and 2015, interest expense included $100, $255 and $2,543, respectively, of present value adjustments for fixed deferred acquisition payments.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
10. Debt – (continued)
The amortization of deferred finance costs included in interest expense werewas $3,346, $3,193 and $3,022 $3,022 and $3,448 for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively.
6.50% Notes
On March 23, 2016, MDC entered into an indenture (the “Indenture”) among MDC, its existing and future restricted subsidiaries that guarantee, are co-borrowers under, or grant liens to secure, the Credit Agreement, as guarantors (the “Guarantors”) and The Bank of New York Mellon, as trustee, relating to the issuance by MDC of $900,000 aggregate principal amount of the 6.50% Notes.senior notes due 2024 (the “6.50% Notes”). The 6.50% Notes were sold in a private placement in reliance on exceptions from registration under the Securities Act of 1933. The 6.50% Notes bear interest, at a rate of 6.50% per annum, accruing from March 23, 2016. Interest is payable semiannually in arrears on May 1 and November 1, at a rate of each year, beginning November 1, 2016.6.50% per annum. The 6.50% Notes mature on May 1, 2024, unless earlier redeemed or repurchased. The Company received net proceeds from the offering of the 6.50% Notes equal to approximately $880,000. The Company used the net proceeds to redeem all of its existing 6.75% Notes, together with accrued interest, related premiums, fees and expenses and recorded a charge for the loss on redemption of such notes of $33,298, including write offs of unamortized original issue premium and debt issuance costs. Remaining proceeds were used for general corporate purposes, including funding of deferred acquisition consideration.
The 6.50% Notes are guaranteed on a senior unsecured basis by all of MDC’s existing and future restricted subsidiaries that guarantee, are co-borrowers under, or grant liens to secure, the Credit Agreement. The 6.50% 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 6.50% Notes in whole at any time or in part from time to time, at varying prices based on and after May 1, 2019 (i) at a redemption price of 104.875%the timing of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2019, (ii) at a redemption price of 103.250% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2020, (iii) at a redemption price of 101.625% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2021, and (iv) at a redemption price of 100% of the principal amount thereof if redeemed on May 1, 2022 and thereafter.
Prior to May 1, 2019, MDC may, at its option, redeem some or all of the 6.50% Notes at a price equal to 100% of the principal amount of the 6.50% Notes plus a “make whole” premium and accrued and unpaid interest. MDC may also redeem, at its option, prior to May 1, 2019, up to 35% of the 6.50% Notes with the proceeds from one or more equity offerings at a redemption price of 106.50% of the principal amount thereof.redemption.
If MDC experiences certain kinds of changes of control (as defined in the Indenture), holders of the 6.50% Notes may require MDC to repurchase any 6.50% Notes held by them at a price equal to 101% of the principal amount of the 6.50% Notes plus
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
11. Debt - (continued)
accrued and unpaid interest. In addition, if MDC sells assets under certain circumstances, it must apply the proceeds from such sale and offer to repurchase the 6.50% Notes at a price equal to 100% of the principal amount 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 6.50% Notes are also subject to customary events of default, including a cross-payment default and cross-acceleration provision. The Company was in compliance with all covenants at December 31, 2017.2019.
Redemption of 6.75% NotesAmendment to Credit Agreement
The Company is party to a $250,000 secured revolving credit facility due May 3, 2021.
On March 23, 2016,12, 2019 (the “Amendment Effective Date”), the Company, redeemed the 6.75% Notes in whole at a redemption price of 103.375% of the principal amount thereof with the proceeds from the issuance of the 6.50% Notes.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
10. Debt – (continued)
Credit Agreement
On March 20, 2013, MDC, Maxxcom Inc. (a subsidiary of MDC)the Company) (“Maxxcom”) and each of their subsidiaries party thereto entered into an amended and restated, $225,000Amendment to the existing senior secured revolving credit agreement due 2018 (thefacility, dated as of May 3, 2016 (as amended, the “Credit Agreement”) with, among the Company, Maxxcom, each of their subsidiaries party thereto, Wells Fargo Capital Finance, LLC, as agent (“Wells Fargo”), and the lenders from time to time party thereto. Advances under the Credit Agreement are to 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.
Effective October 23, 2014, MDC and its subsidiaries entered into an amendment to its Credit Agreement. The amendment: (i) expanded the commitments under the facility by $100,000, from $225,000 to $325,000; (ii) extended the date by an additional eighteen months to September 30, 2019; (iii) reduced the base borrowing interest rate by 25 basis points (the applicable margin for borrowing is 1.00% in the case of Base Rate Loans and 1.75% in the case of LIBOR Rate Loans); and (iv) modified certain covenants to provide the Company with increased flexibility to fund its continued growth and other general corporate purposes.
Effective May 3, 2016, MDC and its subsidiaries entered into an additional amendment to its Credit Agreement. The amendment: (i) extended the date by an additional nineteen months to May 3, 2021; (ii) reduced the base borrowing interest rate by 25 basis points; (iii) provided the Company the ability to borrow in foreign currencies; and (iv) certain other modifications which provided additional flexibility in operating the Company’s business.
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 0.75% in the case of Base Rate Loans and 1.50% 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 Amendment provides financial covenant relief by increasing the total leverage ratio applicable on each testing date after the Amendment Effective Date through the period ending December 31, 2020 from 5.5:1.0 to 6.25:1.0. The total leverage ratio applicable on each testing date after December 31, 2020 will revert to 5.5:1.0.
In connection with the Amendment, the Company reduced the aggregate maximum amount of revolving commitments provided by the lenders under the Credit Agreement to $250 million from $325 million.
The Credit Agreement, which includes financial and non-financial covenants, 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 abilityexceptions 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 allcollateralized by a portion 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.
outstanding receivable balance. The Company is currentlywas 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. Atas of December 31, 2017, there were no borrowings under the Credit Agreement.2019.
At December 31, 2017,2019 and December 31, 2018, the Company had issued $5,056 of undrawn outstanding letters of credit.
At December 31, 2017credit of $4,836 and 2016, accounts payable included $41,989 and $80,193, respectively, of outstanding checks.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
10. Debt – (continued)
$4,701, respectively.
Future Principal Repayments
Future principal repayments including capital leaseon the 6.50% Notes in the aggregate principal amount of $900 million are due in 2024.
12. Employee Benefit Plans
A subsidiary of the Company, sponsors a defined benefit plan with benefits based on each employee’s years of service and compensation. The benefits under the defined benefit pension plan are frozen.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
12. Employee Benefit Plans - (continued)
Net Periodic Pension Cost and Pension Benefit Obligation
Net periodic pension cost consists of the following components for the years ended December 31:
|
| | | | | | | | | | | |
| | Pension Benefits |
| | 2019 | | 2018 | | 2017 |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost on benefit obligation | 1,640 |
| | 1,641 |
| | 1,725 |
|
| Expected return on plan assets | (1,604 | ) | | (1,948 | ) | | (1,830 | ) |
| Curtailment and settlements | 626 |
| | 1,039 |
| | — |
|
| Amortization of actuarial (gains) losses | 266 |
| | 258 |
| | 222 |
|
| Net periodic benefit cost | $ | 928 |
| | $ | 990 |
| | $ | 117 |
|
The above costs are included within Other, net on the Consolidated Statements of Operations.
The following weighted average assumptions were used to determine net periodic costs at December 31:
|
| | | | | | | | |
| | Pension Benefits |
| | 2019 | | 2018 | | 2017 |
| Discount rate | 4.42 | % | | 3.83 | % | | 4.32 | % |
| Expected return on plan assets | 7.00 | % | | 7.00 | % | | 7.40 | % |
| Rate of compensation increase | N/A |
| | N/A |
| | N/A |
|
The expected return on plan assets is a long-term assumption established by considering historical and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes.
Other changes in plan assets and benefit obligation recognized in Other comprehensive income (loss) consist of the following components for the years ended December 31:
|
| | | | | | | | | | | |
| | Pension Benefits |
| | 2019 | | 2018 | | 2017 |
| Current year actuarial (gain) loss | $ | 2,917 |
| | $ | (520 | ) | | $ | 1,558 |
|
| Amortization of actuarial loss | (266 | ) | | (258 | ) | | (222 | ) |
| Total recognized in other comprehensive (income) loss | 2,651 |
| | (778 | ) | | 1,336 |
|
| Total recognized in net periodic benefit cost and other comprehensive loss | $ | 3,579 |
| | $ | 212 |
| | $ | 1,453 |
|
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
12. Employee Benefit Plans - (continued)
The following table summarizes the change in benefit obligations and fair values of plan assets for the years ended December 31:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Change in benefit obligation: | |
| | |
| | |
| Benefit obligation, Beginning balance | $ | 37,938 |
| | $ | 43,750 |
| | $ | 40,722 |
|
| Interest Cost | 1,640 |
| | 1,641 |
| | 1,725 |
|
| Actuarial (gains) losses | 6,127 |
| | (3,522 | ) | | 3,088 |
|
| Benefits paid | (2,693 | ) | | (3,931 | ) | | (1,785 | ) |
| Benefit obligation, Ending balance | 43,012 |
| | 37,938 |
| | 43,750 |
|
| Change in plan assets: | |
| | |
| |
|
|
| Fair value of plan assets, Beginning balance | 23,181 |
| | 27,977 |
| | 24,482 |
|
| Actual return on plan assets | 4,188 |
| | (2,093 | ) | | 3,360 |
|
| Employer contributions | 2,530 |
| | 1,228 |
| | 1,920 |
|
| Benefits paid | (2,693 | ) | | (3,931 | ) | | (1,785 | ) |
| Fair value of plan assets, Ending balance | 27,206 |
| | 23,181 |
| | 27,977 |
|
| Unfunded status | $ | 15,806 |
| | $ | 14,757 |
| | $ | 15,773 |
|
Amounts recognized in the balance sheet at December 31 consist of the following:
|
| | | | | | | |
| | Pension Benefits |
| | 2019 | | 2018 |
| Non-current liability | $ | 15,806 |
| | $ | 14,757 |
|
| Net amount recognized | $ | 15,806 |
| | $ | 14,757 |
|
Amounts recognized in Accumulated Other Comprehensive Loss before income taxes consists of the following components for the years ended December 31:
|
| | | | | | | |
| | Pension Benefits |
| | 2019 | | 2018 |
| Accumulated net actuarial losses | $ | 15,530 |
| | $ | 12,878 |
|
| Amount recognized | $ | 15,530 |
| | $ | 12,878 |
|
In 2020, the Company estimates that it will recognize $340 of amortization of net actuarial losses from accumulated other comprehensive loss, net into net periodic cost related to the pension plan.
The following weighted average assumptions were used to determine benefit obligations as of December 31:
|
| | | | | |
| | Pension Benefits |
| | 2019 | | 2018 |
| Discount rate | 3.39 | % | | 4.42 | % |
| Rate of compensation increase | N/A |
| | N/A |
|
The discount rate assumptions at December 31, 2019 and 2018 were determined independently. The discount rate was derived from the effective interest rate of a hypothetical portfolio of high-quality bonds, whose cash flows match the expected future benefit payments from the plan as of the measurement date.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
12. Employee Benefit Plans - (continued)
Fair Value of Plan Assets and Investment Strategy
The fair value of the plan assets as of December 31, is as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 | | Level 1 | | Level 2 | | Level 3 |
| Asset Category: | |
| | |
| | |
| | |
|
| Money market fund – Short term investments | $ | 1,275 |
| | $ | 1,275 |
| | $ | — |
| | $ | — |
|
| Mutual funds | 25,931 |
| | 25,931 |
| | — |
| | — |
|
| Total | $ | 27,206 |
| | $ | 27,206 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | Level 1 | | Level 2 | | Level 3 |
| Asset Category: | |
| | |
| | |
| | |
|
| Money market fund – Short term investments | $ | 1,736 |
| | $ | 1,736 |
| | $ | — |
| | $ | — |
|
| Mutual funds | 21,445 |
| | 21,445 |
| | — |
| | — |
|
| Total | $ | 23,181 |
| | $ | 23,181 |
| | $ | — |
| | $ | — |
|
The pension plans weighted-average asset allocation for the years ended December 31, 2019 and in aggregate,2018 are as follows:
|
| | | | |
| | | |
| Period | | Amount |
| 2018 | | $ | 313 |
|
| 2019 | | 320 |
|
| 2020 | | 68 |
|
| 2021 | | 5 |
|
| 2022 | | — |
|
| 2023 and thereafter | | 900,000 |
|
| | | $ | 900,706 |
|
|
| | | | | | | | |
| | Target Allocation | | Actual Allocation |
| | 2019 | | 2019 | | 2018 |
| Asset Category: | |
| | |
| | |
|
| Equity securities | 65.0 | % | | 66.7 | % | | 67.0 | % |
| Debt securities | 30.0 | % | | 28.6 | % | | 25.5 | % |
| Cash/cash equivalents and Short term investments | 5.0 | % | | 4.7 | % | | 7.5 | % |
| | 100.0 | % | | 100.0 | % | | 100.0 | % |
Capital LeasesThe goals of the pension plan investment program are to fully fund the obligation to pay retirement benefits in accordance with the plan documents and to provide returns that, along with appropriate funding from the Company, maintain an asset/liability ratio that is in compliance with all applicable laws and regulations and assures timely payment of retirement benefits.
Future minimumEquity securities primarily include investments in large-cap and mid-cap companies located in the United States. Debt securities are diversified across different asset types with bonds issued in the United States as well as outside the United States. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the preceding tables.
Cash Flows
The pension plan contributions are deposited into a trust, and the pension plan benefit payments are made from trust assets. During 2019, the Company contributed $2,530 to the pension plan. The Company estimates that it will make approximately $2,344 in contributions to the pension plan in 2020. Fluctuations in actual market returns as well as changes in general interest rates will result in changes in the market value of plan assets and may result in increased or decreased retirement benefit costs and contributions in future periods.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
12. Employee Benefit Plans - (continued)
The following estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years ending December 31:
|
| | | | |
| Period | | Amount |
| 2020 | | $ | 1,885 |
|
| 2021 | | 1,885 |
|
| 2022 | | 1,924 |
|
| 2023 | | 2,198 |
|
| 2024 | | 2,323 |
|
| Thereafter | | 11,396 |
|
13. Noncontrolling and Redeemable Noncontrolling Interests
When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the Company’s Consolidated Balance Sheets. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity at their estimated acquisition date redemption value and adjusted at each reporting period for changes to their estimated redemption value through common stock and other paid-in capital lease payments(but not less than their initial redemption value), except for foreign currency translation adjustments. On occasion, the Company may initiate a renegotiation to acquire an incremental ownership interest and the amount of consideration paid may differ materially from the amounts recorded in the Company’s Consolidated Balance Sheets.
Noncontrolling Interests
Changes in amounts due to noncontrolling interest holders included in Accruals and other liabilities on the Consolidated Balance Sheets for the twelve months ended December 31, 2019 and 2018 were as follows:
|
| | | |
| | Noncontrolling
Interests |
| Balance, December 31, 2017 | $ | 11,030 |
|
| Income attributable to noncontrolling interests | 11,785 |
|
| Distributions made | (13,419 | ) |
Other (1) | (118 | ) |
| Balance, December 31, 2018 | $ | 9,278 |
|
| Income attributable to noncontrolling interests | 16,156 |
|
| Distributions made | (11,392 | ) |
Other (1) | (14 | ) |
| Balance, December 31, 2019 | $ | 14,028 |
|
(1)Other primarily consists of cumulative translation adjustments.
Changes in the Company’s ownership interests in our less than 100% owned subsidiaries during the three years ended December 31, and in aggregate, arewere as follows:
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
13. Noncontrolling & Redeemable Noncontrolling Interests - (continued)
|
| | | | |
| Period | | Amount |
| 2018 | | $ | 313 |
|
| 2019 | | 320 |
|
| 2020 | | 68 |
|
| 2021 | | 5 |
|
| 2022 | | — |
|
| 2023 and thereafter | | — |
|
| | | 706 |
|
| Less: imputed interest | | (59 | ) |
| | | 647 |
|
| Less: current portion | | (313 | ) |
| | | $ | 334 |
|
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Net income (loss) attributable to MDC Partners Inc. | | $ | (4,690 | ) | | $ | (123,733 | ) | | $ | 241,848 |
|
| Transfers from the noncontrolling interest: | | | | | |
|
|
| Increase (decrease) in MDC Partners Inc. paid-in capital for purchase of redeemable noncontrolling interests and noncontrolling interests | | 1,911 |
| | 10,140 |
| | 2,315 |
|
| Net transfers from noncontrolling interests | | $ | 1,911 |
| | $ | 10,140 |
| | $ | 2,315 |
|
| Change from net income (loss) attributable to MDC Partners Inc. and transfers to noncontrolling interests | | $ | (2,779 | ) | | $ | (113,593 | ) | | $ | 244,163 |
|
11. Share CapitalRedeemable Noncontrolling Interests
The authorized share capital of the Company is as follows:
(a) Authorized Share Capital
Series 4 Convertible Preference Shares
A total of 95,000, non-voting convertible preference shares, all of which were issued and outstandingfollowing table presents changes in redeemable noncontrolling interests as of December 31, 2017.2019 and 2018:
|
| | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
| Beginning Balance | $ | 51,546 |
| | $ | 62,886 |
|
| Redemptions | (14,530 | ) | | (11,943 | ) |
| Granted | — |
| | — |
|
| Changes in redemption value | (3,163 | ) | | 1,067 |
|
| Currency translation adjustments | 3 |
| | (464 | ) |
Other (1) | 3,117 |
| | — |
|
| Ending Balance | $ | 36,973 |
| | $ | 51,546 |
|
(1)Other primarily consists of the redeemable noncontrolling interest balance related to a foreign entity that was classified as held for sale as of December 31, 2018 and reclassified in 2019. See Note 124 of the Notes to the Consolidated Financial Statements included herein for further information. There were no
The noncontrolling shareholders’ ability to exercise any such shares issuedoption right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise and outstandingspecific employment termination conditions. 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 2019 to 2024. 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 redeemable noncontrolling interest of $36,973 as of December 31, 2016.
Class A Shares
An unlimited number2019, consists of subordinate voting shares, carrying one vote each, entitled to dividends equal to$18,891 assuming that the subsidiaries perform over the relevant future periods at their discounted cash flows earnings level and such rights are exercised, $15,336upon termination of such owner’s employment with the applicable subsidiary or greater than Class B shares, convertible atdeath and $2,746 representing the optioninitial redemption value (required floor) recorded for certain acquisitions in excess of the holder into one Class Bamount the Company would have to pay should the Company acquire the remaining ownership interests for such subsidiaries.
These adjustments will not impact the calculation of earnings (loss) per share for each Class Aif the redemption values are less than the estimated fair values. For the twelve months ended December 31, 2019, 2018, and 2017, there was a $0 related impact on the Company’s loss per share aftercalculation.
14. Commitments, Contingencies, and Guarantees
Legal Proceedings. The Company’s operating entities are involved in legal proceedings of various types. Significant judgment is required to determine both likelihood of there being and the occurrenceestimated amount of certain eventsa loss related to such matters. Additionally, while any litigation contains an offerelement of uncertainty, the Company has no reason to purchase all Class B shares.
Class B Shares
An unlimited number, carrying 20 votes each, convertible at any time atbelieve that the optionoutcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the holder into one Class A shareCompany.
Deferred Acquisition Consideration and Options to Purchase. See Notes 9 and 13 of the Notes to the Consolidated Financial Statements included herein for each Class B share.information regarding potential payments associated with deferred acquisition consideration and the acquisition of noncontrolling shareholders’ ownership interest in subsidiaries.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
11. Share Capital –14. Commitments, Contingencies, and Guarantees - (continued)
Preferred A Shares
An unlimited number, non-voting, issuable in series.
(b) Employee Stock Incentive Plan
On May 26, 2005,Natural Disasters. Certain of the Company’s shareholders approvedoperations are located in regions of the Company’s 2005 Stock Incentive Plan (the “2005 Incentive Plan”)United States which typically are subject to hurricanes. During the twelve months ended December 31, 2019, 2018, and 2017 these operations did not incur any material costs related to damages resulting from hurricanes.
Guarantees. Generally, the Company has indemnified the purchasers of certain assets 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 2005 Incentive Plan authorizesCompany continues to monitor the issuanceconditions 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.
Commitments. At December 31, 2019, the Company had $4,836 of awards to employees, officers, directorsundrawn letters of credit.
15. Share Capital
The authorized and consultantsoutstanding share capital of the Company with respect to 3,000,000 shares of MDC Partners’ Class A Subordinate Voting Shares or any other security into which such shares shall be exchanged. On June 1, 2007 and on June 2, 2009, the Company’s shareholders approved a total additional authorized Class A Shares of 3,750,000 to be added to the 2005 Incentive Plan for a total of 6,750,000 authorized Class A Shares. In addition, the plan was amended to allow shares under this plan to be used to satisfy share obligations under the Stock Appreciation Rights Plan (the “SARS” Plan”). On May 30, 2008, the Company’s shareholders approved the 2008 Key Partner Incentive Plan, which provides for the issuance of 900,000 Class A Shares. On June 1, 2011, the Company’s shareholders approved the 2011 Stock Incentive Plan, which provides for the issuance of up to 3,000,000 Class A Shares. In June 2013, the Company’s shareholders approved an amendment to the SARS Plan to permit the Company to issue shares authorized under the SARS Plan to satisfy the grant and vesting awards under the 2011 Stock Incentive Plan. On June 1, 2016, the Company’s shareholders approved the 2016 Stock Incentive Plan, which provides for the issuance of up to 1,500,000 Class A shares.
The following table summarizes information about time based and financial performance-based restricted stock and restricted stock unit awards granted under the 2005 Incentive Plan, 2008 Key Partner Incentive Plan, 2011 Stock Incentive Plan and 2016 Stock Incentive Plan:
|
| | | | | | | | | | | | | |
| | Performance Based Awards | | Time Based Awards |
| | Shares | | Weighted Average Grant Date Fair
Value | | Shares | | Weighted Average
Grant Date
Fair Value |
| Balance at December 31, 2014 | 86,030 |
| | $ | 23.14 |
| | 916,141 |
| | $ | 16.36 |
|
| Granted | 80,000 |
| | 21.76 |
| | 191,155 |
| | 20.42 |
|
| Vested | (68,067 | ) | | 25.21 |
| | (297,794 | ) | | 12.35 |
|
| Forfeited | — |
| | — |
| | (35,000 | ) | | 21.69 |
|
| Balance at December 31, 2015 | 97,963 |
| | $ | 19.61 |
| | 774,502 |
| | $ | 18.71 |
|
| Granted | 10,000 |
| | 14.00 |
| | 392,500 |
| | 12.53 |
|
| Vested | (17,963 | ) | | 10.02 |
| | (380,367 | ) | | 16.02 |
|
| Forfeited | — |
| | — |
| | (46,000 | ) | | 20.39 |
|
| Balance at December 31, 2016 | 90,000 |
| | $ | 20.90 |
| | 740,635 |
| | $ | 16.71 |
|
| Granted | — |
| | — |
| | 358,000 |
| | 8.98 |
|
| Vested | (90,000 | ) | | 20.90 |
| | (277,050 | ) | | 19.62 |
|
| Forfeited | — |
| | — |
| | (36,500 | ) | | 14.15 |
|
| Balance at December 31, 2017 | — |
| | $ | — |
| | 785,085 |
| | $ | 12.28 |
|
The total fair value of restricted stock and restricted stock unit awards, which vested during the years ended December 31, 2017, 2016 and 2015 was $7,316, $6,272 and $5,394, respectively. In connection with the vesting of these awards, the Company included in the taxable loss the amounts of $3,500, $5,429 and $4,678 in 2017, 2016 and 2015, respectively. At December 31, 2017, the weighted average remaining contractual life for time based awards was 1.62 years. At December 31, 2017, the fair value of all restricted stock and restricted stock unit awards was $7,655. The term of these awards is three years with vesting up to three years. At December 31, 2017, the unrecognized compensation expense for these awards was $4,696 and will be recognized through 2019. At December 31, 2017, there were 579,748 awards available to grant under all equity plans.
In addition, the Company awarded restricted stock and restricted stock unit awards of which 1,433,921 awarded shares were outstanding as of December 31, 2017. The vesting of these awards is contingent upon the Company meeting a cumulative three year earnings target and continued employment through the vesting date. Once the Company defines the earnings target, the grant date is established and the Company will record the compensation expense over the vesting period.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Share Capital – (continued)
Prior to adoption of the 2005 Incentive Plan, the Company’s Prior 2003 Plan provided for grants of up to 2,836,179 options to employees, officers, directors and consultants of the Company. All the options granted were for a term of five years from the date of the grant and vest 20% on the date of grant and a further 20% on each anniversary date. In addition, the Company granted 802,440 options, on the privatization of Maxxcom, with a term of no more than 10 years from initial date of grant by Maxxcom and vest 20% in each of the first two years with the balance vesting on the third anniversary of the initial grant.
Information related to share option transactions grant under all plans over the past three years is summarized as follows:
|
| | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable | | Non Vested Options |
| | Number Outstanding | | Weighted Average
Price per
Share | | Number Outstanding | | Weighted Average
Price per
Share | | |
| Balance at December 31, 2014 | 112,500 |
| | $ | 5.70 |
| | 112,500 |
| | $ | 5.70 |
| | — |
|
| Vested | — |
| | — |
| | — |
| | — |
| | — |
|
| Granted | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercised | 37,500 |
| | 4.72 |
| | — |
| | — |
| | — |
|
| Expired and canceled | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2015 | 75,000 |
| | $ | 5.28 |
| | 75,000 |
| | $ | 5.28 |
| | — |
|
| Vested | — |
| | — |
| | — |
| | — |
| | — |
|
| Granted | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercised | 37,500 |
| | 5.97 |
| | — |
| | — |
| | — |
|
| Expired and canceled | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2016 | 37,500 |
| | $ | 5.83 |
| | 37,500 |
| | $ | 5.83 |
| | — |
|
| Vested | — |
| | — |
| | — |
| | — |
| | — |
|
| Granted | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercised | 37,500 |
| | 5.83 |
| | — |
| | — |
| | — |
|
| Expired and canceled | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2017 | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
|
For options exercised during 2017, 2016 and 2015, the Company received cash proceeds of nil, nil and $224, respectively. The Company did not receive any windfall tax benefits. The intrinsic value of options exercised during 2017, 2016 and 2015 was $125, $471 and $471, respectively. At December 31, 2017, the unrecognized compensation expense of all options was nil.
(c) Stock Appreciation Rights
During 2017, the Compensation Committee of the Board of Directors approved a SAR’s compensation program for senior officers and directors of the Company. SAR’s granted in 2017 have a term of up to five years. Awards vest on the third anniverary of the grant date. SAR’s granted and outstanding are as follows:
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Share Capital – (continued)
|
| | | | | | | | | | | | | | | | | |
| | SARs Outstanding | | SARs Exercisable | | Non Vested SARs |
| | Number Outstanding | | Weighted Average
Price per
Share | | Number Outstanding | | Weighted Average
Price per
Share | | |
| Balance at December 31, 2016 | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
|
| Vested | — |
| | — |
| | — |
| | — |
| | — |
|
| Granted | 327,500 |
| | 6.60 |
| | — |
| | — |
| | 327,500 |
|
| Exercised | — |
| | — |
| | — |
| | — |
| | — |
|
| Expired and canceled | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2017 | 327,500 |
| | $ | 6.60 |
| | — |
| | $ | — |
| | 327,500 |
|
At December 31, 2017, the unrecognized compensation expense of all SARs was $535.
The Company has reserved a total of 3,126,254 Class A shares in order to meet its obligations under various conversion rights, warrants and employee share related plans. At December 31, 2017 there were 579,748 shares available for future option and similar grants.
12.Series 6 Convertible Preference Shares
On March 7, 201714, 2019 (the “Issue“Series 6 Issue Date”), the Company issued 95,000 newly created Preference Shares to affiliatesentered into a securities purchase agreement with Stagwell Agency Holdings LLC (“Stagwell Holdings”), an affiliate of The Goldman Sachs Group, Inc. (collectively, the “Purchaser”)Stagwell, pursuant to a $95,000 private placement.which Stagwell Holdings agreed to purchase (i) 14,285,714 newly authorized Class A shares (the “Stagwell Class A Shares”) for an aggregate contractual purchase price of $50,000 and (ii) 50,000 newly authorized Series 6 convertible preference shares (“Series 6 Preference Shares”) for an aggregate contractual purchase price of $50,000. The Company received proceeds of approximately $90,220,$98,620, net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. The proceeds allocated to the Stagwell Class A Shares were $35,997 and to Series 6 Preference Shares were $62,623 based on their relative fair value calculated by utilizing a Monte Carlo Simulation model. In connection with the closing of the transaction, effective March 7, 2017, the Company increased the size of its Board of Directors (the “Board”) to seven members and appointed one nomineetwo nominees designated by the Purchaser.Stagwell Holdings. Except as required by law, the Series 6 Preference Shares do not have voting rights and are not redeemable at the option of the Purchaser.Stagwell Holdings.
The holders of the Series 6 Preference Shares have the right to convert their Series 6 Preference Shares in whole at any time and from time to time, and in part at any time and from time to time, after the ninetieth day following the original issuance date of the Preference Shares, into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation preference per share preference of each Series 6 Preference Share is $1,000. The initial Conversion Price is $10.00$5.00 per Series 6 Preference Share, subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities.
The Series 6 Preference Shares’ liquidation preference accretes at 8.0% per annum, compounded quarterly until the five-year anniversary of the Series 6 Issue Date. ForDuring the yeartwelve months ended December 31, 2017,2019, the Series 6 Preference Shares accreted at a monthly rate of approximately $6.97 per Preference Share,$6.96, for total accretion of $6,352,$3,261, bringing the aggregate liquidation preference to 101,352$53,261 as of December 31, 2017.2019. The accretion is considered in the calculation of net income (loss)loss attributable to MDC Partners Inc. common shareholders. See Notes 2 and 3Note 6 of the Notes to the Consolidated Financial Statements included herein for further information.information regarding the Series 6 Preference Shares.
Holders of the Series 6 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 6 Preference Shares. The Series 6 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Series 6 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least 125% of the Conversion Price or (ii) after the fifth anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 6 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at 7%), and (ii) the Company will have a right to redeem the Series 6 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per share amounts, unless otherwise stated)
15. Share Amounts)Capital - (continued)
13.Effective March 18, 2019, the Company’s Board appointed Mark Penn as the Chief Executive Officer (“CEO”) and as a director of the Board. Mr. Penn is manager of Stagwell. Effective April 18, 2019, Mr. Penn was also appointed as Chairman of the Board.
Series 4 Convertible Preference Shares
On March 7, 2017 (the “Series 4 Issue Date”), the Company issued 95,000 newly created Preference Shares (“Series 4 Preference Shares”) to affiliates of The Goldman Sachs Group, Inc. (collectively, the “Purchaser”) pursuant to a $95,000 private placement. The Company received proceeds of approximately $90,123, net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. In connection with the closing of the transaction, the Company increased the size of its Board and appointed one nominee designated by the Purchaser. Except as required by law, the Series 4 Preference Shares do not have voting rights and are not redeemable at the option of the Purchaser.
Subsequent to the ninetieth day following the Series 4 Issue Date, the holders of the Series 4 Preference Shares have the right to convert their Series 4 Preference Shares in whole at any time and from time to time and in part at any time and from time to time into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation preference per share of each Series 4 Preference Share is $1,000. The Conversion Price of a Series 4 Preference Share is subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities. In connection with the anti-dilution protection provision triggered by the issuance of equity securities to Stagwell Holdings, the Conversion Price per Series 4 Preference Share was reduced to $7.42 from the initial Conversion Price of $10.00.
The Series 4 Preference Shares’ liquidation preference accretes at 8.0% per annum, compounded quarterly until the five-year anniversary of the Series 4 Issue Date. During the twelve months ended December 31, 2019 and 2018, the Series 4 Preference Shares accreted at a monthly rate of approximately $8.17 and $7.55 per Series 4 Preference Share, for total accretion of $9,043 and $8,355, respectively, bringing the aggregate liquidation preference to $118,751 as of December 31, 2019. The accretion is considered in the calculation of net income (loss) attributable to MDC Partners Inc. common shareholders. See Note 6 of the Notes to the Consolidated Financial Statements included herein for further information regarding the Series 4 Preference Shares.
Holders of the Series 4 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 4 Preference Shares. The Series 4 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least 125% of the Conversion Price or (ii) after the fifth anniversary of the Series 4 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 4 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at 7%), and (ii) the Company will have a right to redeem the Series 4 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
Class A Common Shares (“Class A Shares”)
These are an unlimited number of subordinate voting shares, carrying one vote each, with a par value of $0, entitled to dividends equal to or greater than Class B Shares, convertible at the option of the holder into one Class B Share for each Class A Share after the occurrence of certain events related to an offer to purchase all Class B shares. There were 72,150,854 (including the Class A Shares issued to Stagwell) and 57,517,568 Class A Shares issued and outstanding as of December 31, 2019 and 2018, respectively.
Class B Common Shares (“Class B Shares”)
These are an unlimited number of voting shares, carrying twenty votes each, with a par value of $0, convertible at any time at the option of the holder into one Class A share for each Class B share. There were 3,749 and 3,755 Class B Shares issued and outstanding as of December 31, 2019 and 2018, respectively.
Employee Stock Incentive Plan
As of December 31, 2019, a total of 15,650,000 shares have been authorized under our employee stock incentive plan.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
15. Share Capital - (continued)
The following table summarizes information about financial performance based and time based restricted stock and restricted stock unit awards:
|
| | | | | | | | | | | | | |
| | Performance Based Awards | | Time Based Awards |
| | Shares | | Weighted Average Grant Date Fair
Value | | Shares | | Weighted Average
Grant Date
Fair Value |
| Balance at December 31, 2018 | 452,912 |
| | $ | 9.15 |
| | 626,940 |
| | $ | 9.83 |
|
| Granted | 2,738,141 |
| | 3.08 |
| | 490,000 |
| | 2.54 |
|
| Vested | (276,952 | ) | | 3.03 |
| | (294,980 | ) | | 12.46 |
|
| Forfeited | (470,300 | ) | | 8.79 |
| | (253,000 | ) | | 3.38 |
|
| Balance at December 31, 2019 | 2,443,801 |
| | $ | 3.11 |
| | 568,960 |
| | $ | 5.53 |
|
Performance based and time-based awards granted in the twelve months ended December 31, 2018 had a weighted average grant date fair value of $9.17 and $7.38, respectively. Time-based awards granted in the twelve months ended December 31, 2017 had a weighted average grant date fair value of $8.98. No performance based awards were granted in 2017. The vesting of the performance based awards is contingent upon the Company meeting cumulative earnings targets over one to three years and continued employment through the vesting date. The term of the time based awards is generally three years with vesting up to generally three years. The vesting period of the time-based and performance awards is generally commensurate with the requisite service period.
The total fair value of restricted stock and restricted stock unit awards, which vested during the years ended December 31, 2019, 2018 and 2017 was $4,517, $3,583 and $7,316, respectively. At December 31, 2019, the weighted average remaining contractual life for time based and performance based awards was 1.93 and 2.10 years, respectively.
At December 31, 2019, the unrecognized compensation expense for performance based awards was $5,341 to be recognized over a weighted average period of 2.10 years. At December 31, 2019, the unrecognized compensation expense for time based awards was $919 to be recognized over a weighted average period of 1.93 years.
The following table summarizes information about share option awards:
|
| | | | | | | | | | |
| | Share Option Awards |
| | Shares | | Weighted Average
Grant Date Fair Value | | Weighted Average Exercise Price |
| Balance at December 31, 2018 | 111,866 |
| | $ | 2.23 |
| | $ | 4.85 |
|
| Granted | — |
| | — |
| | — |
|
| Vested | — |
| | — |
| | — |
|
| Forfeited | — |
| | — |
| | — |
|
| Exercised | — |
| | — |
| | — |
|
| Balance at December 31, 2019 | 111,866 |
| | $ | 2.23 |
| | $ | 4.85 |
|
We use the Black-Scholes option-pricing model to estimate the fair value of options granted. No options were granted in 2019.
The grant date fair value of the options granted in 2018 was determined to be $2.23. The assumptions for the model were as follows: expected life of 4.9 years, risk free interest rate of 2.9%, expected volatility of 52.9% and dividend yield of 0%. Options granted in 2018 vest in three years. The term of these awards is 5 years. The vesting period of these awards is generally commensurate with the requisite service period. At December 31, 2019, the weighted average remaining contractual life for these awards was 2 years. No options were granted in 2017.
No options were exercised during 2019 and 2018. The intrinsic value of options exercised during 2017 was $125. The aggregate intrinsic value of options outstanding as of December 31, 2019 is nil. As of December 31, 2019, no options were exercisable. No options vested in 2018 and 2017.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
15. Share Capital - (continued)
At December 31, 2019, the unrecognized compensation expense for these awards was $150 to be recognized over a weighted average period of 2 years. The cash received from the stock options exercised in 2017 was nil.
The following table summarizes information about stock appreciation rights (“SAR”) awards:
|
| | | | | | | | | | |
| | SAR Awards |
| | Shares | | Weighted Average
Grant Date Fair Value | | Weighted Average Exercise Price |
| Balance at December 31, 2018 | 250,800 |
| | $ | 2.35 |
| | $ | 6.60 |
|
| Granted | 2,425,000 |
| | 1.04 |
| | 3.07 |
|
| Vested | — |
| | — |
| | — |
|
| Forfeited | (350,000 | ) | | 1.31 |
| | 5.57 |
|
| Exercised | — |
| | — |
| | — |
|
| Balance at December 31, 2019 | 2,325,800 |
| | $ | 1.14 |
| | $ | 3.07 |
|
We use the Black-Scholes option-pricing model to estimate the fair value of the SAR awards. SAR awards granted in 2019 vest in equal installments on each of the first three anniversaries of the grant date and have grant date fair values ranging from $0.68 to $1.41. The assumptions for the model were as follows: expected life of 3 to 4 years, risk free interest rate of 1.8% to 2.3%, expected volatility of 62.5% to 67.1% and dividend yield of 0%. The term of these awards is 5 years. The vesting period of awards granted is generally commensurate with the requisite service period.
No SAR awards were granted in 2018.
SAR awards granted in 2017 vest on the third anniversary of the grant date and have a grant date fair value of $2.35. The assumptions for the model were as follows: expected life of 4 years, risk free interest rate of 1.7%, expected volatility of 46.2% and dividend yield of 0%. The term of these awards is 5 years. The vesting period of awards granted is generally commensurate with the requisite service period.
As of December 31, 2019, no SAR awards were exercisable. As of December 31, 2019, there were no SAR awards that were vested. The aggregate intrinsic value of the SAR awards outstanding as of December 31, 2019 is $885. No SAR awards were exercised during 2019 and 2018. No SAR awards vested in 2018 and 2017. At December 31, 2019, the weighted average remaining contractual life for the SAR awards was 1.22 years.
At December 31, 2019, the unrecognized compensation expense for these awards was $1,298 to be recognized over a weighted average period of 1.22 years.
For the years ended December 31, 2019, 2018 and 2017, $2,460, $5,892, and $5,335 was recognized in stock compensation related to all stock compensation awards, respectively. The related income tax benefit for the years ended December 31, 2019, 2018 and 2017 was $643, $472, and $1,401, respectively.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
16. Changes in Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) for the twelve months ended December 31, were: |
| | | | | | | | | | | |
| | Defined
Benefit
Pension | | Foreign Currency Translation | | Total |
| Balance December 31, 2017 | $ | (13,656 | ) | | $ | 11,702 |
| | $ | (1,954 | ) |
| Other comprehensive income before reclassifications | — |
| | 6,119 |
| | 6,119 |
|
| Amounts reclassified from accumulated other comprehensive income (net of tax expense of $223) | 555 |
| | — |
| | 555 |
|
| Other comprehensive income | 555 |
| | 6,119 |
| | 6,674 |
|
| Balance December 31, 2018 | $ | (13,101 | ) | | $ | 17,821 |
| | $ | 4,720 |
|
| Other comprehensive loss before reclassifications | — |
| | (7,078 | ) | | (7,078 | ) |
| Amounts reclassified from accumulated other comprehensive loss (net of tax benefit of $740) | (1,911 | ) | | — |
| | (1,911 | ) |
| Other comprehensive loss | (1,911 | ) | | (7,078 | ) | | (8,989 | ) |
| Balance December 31, 2019 | $ | (15,012 | ) | | $ | 10,743 |
| | $ | (4,269 | ) |
17. Income Taxes
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code including but not limited to a reduction in the U.S. federal corporate tax rate from 35.0% to 21.0%, effective for tax years beginning after December 31, 2017 and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings.
The components of the Company’s income (loss) before income taxes and equity in earnings of non-consolidated affiliates by taxing jurisdiction for the years ended December 31, were:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Income (Loss): | |
| | |
| | |
|
| U.S. | $ | (16,711 | ) | | $ | (68,698 | ) | | $ | 48,053 |
|
| Non-U.S. | 38,358 |
| | (11,709 | ) | | 39,025 |
|
| | $ | 21,647 |
| | $ | (80,407 | ) | | $ | 87,078 |
|
The provision (benefit) for income taxes by taxing jurisdiction for the years ended December 31, were:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Current tax provision | |
| | |
| | |
|
| U.S. federal | $ | 2,638 |
| | $ | 444 |
| | $ | (1,657 | ) |
| U.S. state and local | 12 |
| | 2 |
| | 98 |
|
| Non-U.S. | 2,875 |
| | 7,584 |
| | 6,514 |
|
| | 5,525 |
| | 8,030 |
| | 4,955 |
|
| Deferred tax provision (benefit): | |
| | |
| | |
|
| U.S. federal | 4,799 |
| | (9,315 | ) | | (172,873 | ) |
| U.S. state and local | 1,183 |
| | (2,990 | ) | | (7,775 | ) |
| Non-U.S. | (974 | ) | | 35,878 |
| | 7,629 |
|
| | 5,008 |
| | 23,573 |
| | (173,019 | ) |
| Income tax expense (benefit) | $ | 10,533 |
| | $ | 31,603 |
| | $ | (168,064 | ) |
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
17. Income Taxes - (continued)
A reconciliation of income tax expense (benefit) using the U.S. federal income tax rate compared with actual income tax expense for the years ended December 31, is as follows:
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Income (loss) before income taxes, equity in non-consolidated affiliates and noncontrolling interest | $ | 21,647 |
| | $ | (80,407 | ) | | $ | 87,078 |
|
| Statutory income tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
| Tax expense (benefit) using U.S. statutory income tax rate | 4,546 |
| | (16,886 | ) | | 30,477 |
|
| State and foreign taxes | 1,194 |
| | (2,988 | ) | | 8,863 |
|
| Non-deductible stock-based compensation | 3,823 |
| | 1,512 |
| | 1,441 |
|
| Other non-deductible expense | 709 |
| | 10,091 |
| | (220 | ) |
| Change to valuation allowance | (2,830 | ) | | 49,482 |
| | (103,212 | ) |
| Effect of the difference in U.S. federal and local statutory rates | 1,422 |
| | (152 | ) | | (2,939 | ) |
| Impact of tax reform | — |
| | — |
| | (100,472 | ) |
| Noncontrolling interests | (3,566 | ) | | (2,674 | ) | | (4,413 | ) |
| Impact of foreign operations | 3,646 |
| | 1,711 |
| | (2,453 | ) |
| Adjustment to deferred tax balances | — |
| | (8,865 | ) | | — |
|
| Other, net | 1,589 |
| | 372 |
| | 4,864 |
|
| Income tax expense (benefit) | $10,533 | | $31,603 | | $(168,064) |
| Effective income tax rate | 48.7% | | (39.3)% | | (193.0)% |
The Company has evaluated the usefulness of our rate reconciliation presented in prior periods which utilized the Canadian statutory tax rate of 26.5%. As the majority of our business operations and shareholders are located in the U.S., we believe using the U.S. statutory rate is more informative. The period 2017 in the table above has been conformed to reflect the U.S. statutory rate.
Income tax expense for the twelve months ended December 31, 2019 was $10,533 (associated with a pretax income of $21,647) compared to an income tax expense of $31,603 (associated with pretax loss of $80,407) for the twelve months ended December 31, 2018. Income tax expense in 2019 included the impact of reducing a valuation allowance primarily associated with Canadian deferred tax assets. Income tax expense in 2018 included the impact of increasing a valuation allowance primarily associated with Canadian deferred tax assets.
Income taxes receivable were $5,025 and $4,388 at December 31, 2019 and 2018, respectively, and were included in other current assets on the balance sheet. Income taxes payable were $11,722 and $10,045 at December 31, 2019 and 2018, respectively, and were included in accrued and other liabilities on the balance sheet. It is the Company’s policy to classify interest and penalties arising in connection with unrecognized tax benefits as a component of income tax expense.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
17. Income Taxes - (continued)
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, were as follows:
|
| | | | | | | |
| | 2019 | | 2018 |
| Deferred tax assets: | |
| | |
|
| Capital assets and other | $ | — |
| | $ | 905 |
|
| Net operating loss carry forwards | 73,852 |
| | 70,646 |
|
| Interest deductions | 16,797 |
| | 8,911 |
|
| Refinancing charge | 669 |
| | 2,926 |
|
| Goodwill and intangibles | 114,922 |
| | 123,504 |
|
| Stock compensation | 1,736 |
| | 2,101 |
|
| Pension plan | 4,414 |
| | 3,872 |
|
| Unrealized foreign exchange | 11,373 |
| | 14,645 |
|
| Capital loss carry forwards | 13,081 |
| | 11,827 |
|
| Right-of-use assets and accounting reserves | 77,824 |
| | 8,280 |
|
| Gross deferred tax asset | 314,668 |
| | 247,617 |
|
| Less: valuation allowance | (65,649 | ) | | (68,479 | ) |
| Net deferred tax assets | 249,019 |
| | 179,138 |
|
| Deferred tax liabilities: | |
| | |
|
| Lease liabilities | $ | (67,613 | ) | | $ | — |
|
| Withholding taxes | (546 | ) | | — |
|
| Capital assets | (382 | ) | | — |
|
| Goodwill amortization | (98,677 | ) | | (91,726 | ) |
| Total deferred tax liabilities | (167,218 | ) | | (91,726 | ) |
| Net deferred tax asset (liability) | $ | 81,801 |
| | $ | 87,412 |
|
| Disclosed as: | |
| | |
|
| Deferred tax assets | $ | 85,988 |
| | $ | 92,741 |
|
| Deferred tax liabilities | (4,187 | ) | | (5,329 | ) |
| | $ | 81,801 |
| | $ | 87,412 |
|
The Company has U.S. federal net operating loss carry forwards of $45,094 and non-U.S. net operating loss carry forwards of $146,037, which expire in years 2020 through 2039. The Company also has total indefinite loss carry forwards of $205,050. These indefinite loss carry forwards consist of $106,329 relating to the U.S. and $98,721 related to capital losses from the Canadian operations. In addition, the Company has net operating loss carry forwards for various state taxing jurisdictions of approximately $176,174.
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 evaluates all positive and negative evidence and considers factors such as the reversal of taxable temporary differences, future taxable income, and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.
As of December 31, 2018, the Company maintained a valuation allowance against foreign net deferred tax assets of $68,479 as it believed it was more likely than not that some or all of the deferred tax assets would not be realized. This assessment was based on the Company’s historical losses and uncertainties as to the amount of future taxable income.
As of December 31, 2019, the Company evaluated positive and negative evidence in determining the likelihood that it will be able to realize all or some portion of its deferred tax assets prior to their expiration. As of December 31, 2019, the Company’s Canadian three-year cumulative pre-tax income increased compared to the period ended December 31, 2018 and the Company decreased its overall valuation allowance by $2,830. The related effect on the accompanying consolidated statements of operations
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
17. Income Taxes - (continued)
and comprehensive income or loss resulted in the Company recording a U.S. income tax benefit of $2,830 for the year ended December 31, 2019.
The Company has historically asserted that its unremitted foreign earnings are permanently reinvested, and therefore has not recorded income taxes on such amounts. The Company reevaluated its global cash needs and as a result determined that approximately $5,462 of undistributed foreign earnings from certain international entities are no longer subject to the permanent reinvestment assertion. We recorded a tax expense of $546 representing our estimate of the tax costs associated with this change to our assertion. We have not changed our permanent reinvestment assertion with respect to any other international entities as we intend to use the related historical earnings and profits to fund international operations and investments.
As of December 31, 2019 and 2018, the Company recorded a liability for unrecognized tax benefits as well as applicable penalties and interest in the amount of $1,107 and $973, respectively. As of December 31, 2019 and 2018, accrued penalties and interest included in unrecognized tax benefits were approximately $111 and $87, respectively. The Company identified an uncertainty relating to the future tax deductibility of certain intercompany fees. To the extent that such future benefit will be established, the resolution of this position will have no effect with respect to the consolidated financial statements. If these unrecognized tax benefits were to be recognized, it would affect the Company’s effective tax rate.
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| A reconciliation of the change in unrecognized tax benefits is as follows: | | | | | |
| Unrecognized tax benefit - Beginning Balance | $ | 887 |
| | $ | 1,433 |
| | $ | 1,465 |
|
| Current year positions | 275 |
| | — |
| | 489 |
|
| Prior period positions | — |
| | 7 |
| | (436 | ) |
| Settlements | — |
| | (314 | ) | | — |
|
| Lapse of statute of limitations | (166 | ) | | (239 | ) | | (85 | ) |
| Unrecognized tax benefits - Ending Balance | $ | 996 |
| | $ | 887 |
| | $ | 1,433 |
|
It is reasonably possible that the amount of unrecognized tax benefits could decrease by a range of $200 to $300 in the next twelve months as a result of expiration of certain statute of limitations.
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal Revenue Service (“IRS”) concluded its review of the 2016 tax year and all years prior to 2016 are closed. The statute of limitations has also expired in non-U.S. jurisdictions through 2014.
18. Financial Instruments
Financial assets, which include cash and cash equivalents and accounts receivable, have carrying values which approximate fair value due to the short-term nature of these assets. Financial liabilities with carrying values approximating fair value due to short-term maturities include accounts payable. Deferred acquisition consideration is recorded at fair value. The revolving credit agreement is a variable rate debt, the carrying value of which approximates fair value. The Company’s notes are a fixed rate debt instrument recorded at carrying value. See Note 19 of the Notes to the Consolidated Financial Statements included herein for additional information on the fair value. The fair value of financial commitments and letters of credit are based on the stated value of the underlying instruments, if any.
19. Fair Value Measurements
Authoritative guidance for fair value establishes a framework for measuring fair value. 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 indetermining fair value, measurements, the guidance establishes aCompany 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. The 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.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
19. Fair Value Measurements - (continued)
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 techniquesFinancial Liabilities 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.
Financial Liabilitiesare not Measured at Fair Value on a Non-RecurringRecurring Basis
The following table presents certain information for our financial liability that is not measured at fair value on a non-recurringrecurring basis at December 31:31, 2019 and 2018:
| | | | 2017 | | 2016 | December 31, 2019 |
| December 31, 2018 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | Carrying
Amount |
| Fair Value |
| Carrying
Amount |
| Fair Value |
| Liabilities: | |
| | |
| | |
| | |
| |
|
| |
|
| |
|
| |
|
| 6.50% Senior Notes due 2024 | 900,000 |
| | 904,500 |
| | 900,000 |
| | 812,250 |
| $ | 900,000 |
| | $ | 812,250 |
| | $ | 900,000 |
| | $ | 834,750 |
|
Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices.prices in markets that are not active. Therefore, this debt is classified as Level 2 within the fair value hierarchy.
Financial Liabilities Measured at Fair Value on a Recurring Basis
The following table presents changes inContingent deferred acquisition consideration which is measured at fair value on recurring basis for the years ended December 31:
|
| | | | | | | |
| | Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3) |
| | 2017 | | 2016 |
| Beginning balance of contingent payments | $ | 224,754 |
| | $ | 306,734 |
|
Payments (1) | (110,234 | ) | | (105,169 | ) |
Additions (2) | — |
| | 16,132 |
|
Redemption value adjustments (3) | 3,273 |
| | 13,930 |
|
Other (4) | — |
| | (6,412 | ) |
| Foreign translation adjustment | 1,293 |
| | (461 | ) |
| Ending balance of contingent payments | $ | 119,086 |
| | $ | 224,754 |
|
| |
(1) | For the year ended December 31, 2017 and 2016, payments include $28,727 and $10,458 , respectively, of deferred acquisition consideration settled through the issuance of 3,353,939 and 691,559, respectively, MDC Class A subordinate voting shares in lieu of cash. |
| |
(2) | Additions are the initial estimated deferred acquisition payments of new acquisitions and step-up transactions completed within that fiscal period. |
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
13. Fair Value Measurements - (continued)
| |
(3) | 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. |
| |
(4) | Other is comprised of (i) $2,360 transferred to shares to be issued related to 100,000 MDC Class A subordinate voting shares to be issued contingent on specific thresholds of future earnings that management expects to be attained; and, (ii) $4,052 of contingent payments eliminated through the acquisition of incremental ownership interests. See Note 4 of the Notes to the Consolidated Financial Statements included herein for further information. |
In addition to the above amounts, there are fixed payments of $3,340 and $4,810 for total deferred acquisition consideration of $122,426 and $229,564, which reconciles to the consolidated balance sheets at December 31, 2017 and 2016, 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. The FASB recently issued new guidance regarding the classification of cash flows for contingent consideration that is effective January 1, 2018. See Note 18 of the Notes to the Consolidated Financial Statements included herein for further information.
Level 3 payments relate to payments made for deferred acquisition consideration. Level 3 grants relate to contingent purchase price obligations related to acquisitions and are recorded on the balance sheet at the acquisition date fair value.value and adjusted at each reporting period. The estimated liability is determined in accordance with various contractual valuation formulas that may be dependent onupon 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 as of the date of payment. Level 3 redemption value adjustments relatepayment (Level 3). See Note 9 of the Notes to the remeasurement and change in these various contractual valuation formulas as well as adjustments of present value.Consolidated Financial Statements included herein for additional information regarding contingent deferred acquisition consideration.
At December 31, 20172019 and 2016,2018, 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. The Company does not disclose the fair value for equity method investments or investments held at cost as it is not practical to estimate fair value since there is no readily available market data.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
OnCertain non-financial assets are measured at fair value on a nonrecurring basis, the Company usesprimarily goodwill, intangible assets (a Level 3 fair value measures when analyzing asset impairment. Long-livedassessment) and right-of-use lease assets and certain identifiable intangible(a Level 2 fair value assessment). Accordingly, these assets are reviewednot measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. The Company recognized an impairment whenever events or changes in circumstances indicate thatof goodwill of $4.1 million for the carrying amounttwelve months ended December 31, 2019 as compared to an impairment 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 performedother assets of $80.1 million 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.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Other Income
|
| | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 |
| Other income (expense) | $ | 162 |
| | $ | 417 |
|
Gain (loss) on sale of business (1) | (1,732 | ) | | (940 | ) |
Gain (loss) on sale of investments (2) | 2,083 |
| | 1,932 |
|
| Gain (loss) on investments | 833 |
| | (995 | ) |
| Other Income, net | 1,346 |
| | 414 |
|
| Foreign currency transaction gain (loss) | 18,137 |
| | (213 | ) |
| | $ | 19,483 |
| | $ | 201 |
|
(1) During the yeartwelve months ended December 31, 2017,2018. See Note 2 and 8 of the Notes to the Consolidated Financial Statements for information related to the measurement of the fair value of goodwill. In addition, the Company sold allrecognized an impairment charge of its ownership interests$3.7 million to reduce the carrying value of certain right-of-use lease assets and related leasehold improvements in three subsidiaries resulting in recognition of a net loss on sale of business of $1,732.the twelve months ended December 31, 2019. See Note 410 of the Notes to the Consolidated Financial Statements included herein for further information.
(2) During20. Related Party Transactions
In the year endedordinary course of business, the Company enters into transactions with related parties, including Stagwell and its affiliates. The transactions may range in the nature and value of services underlying the arrangements. Below are the related party transactions that are significant in nature:
In October 2019, a Partner Firm of the Company entered into an arrangement with an affiliate of Stagwell, in which the affiliate and the Partner Firm will collaborate to provide various services to a client of the Partner Firm. Under the arrangement the Partner Firm will pay the affiliate, for services provided by the affiliate, approximately $655 which is expected to be recognized through the end of 2020. As of December 31, 2017, the Company sold its ownership in three cost method investments for an aggregate purchase price of $3,557 and recognized a gain of $3,018 in Other income. In addition, the Company recognized a loss of $935 pertaining2019, $393 was owed to the dissolutionaffiliate.
On February 14, 2020, Sloane sold substantially all its assets and certain liabilities to an affiliate of five cost method investments.Stagwell. See Note 1 of the Notes to the Consolidated Financial Statements for information related to this transaction.
Effective September 30, 2016,The Company entered into an agreement commencing on January 1, 2020 to sublease office space through July 2021 to a company whose chairman is a member of the Company sold allCompany’s Board of its ownership interests in Bryan MillsDirectors. The total future rental income related to the noncontrolling shareholders and recognized a loss of $800.sublease is approximately $350.
15.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
21. Segment Information
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”) to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of its operating segments is consistent with the principles detailed in ASC 280.applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitabilityresults of operations for each operating segment, together with ana qualitative assessment to determine if operating segments have similar operating characteristics.
Due to changes in the composition of certain businesses and the qualitative characteristics set forthCompany’s internal management and reporting structure during 2019, reportable segment results for the 2018 and 2017 periods presented have been recast to reflect the reclassification of certain businesses between segments. The changes were as follows:
Doner, previously within the Global Integrated Agencies reportable segment is now included within the Domestic Creative Agencies reportable segment.
HL Group Partners, previously within the Specialist Communications reportable segment, and Redscout, previously within the All Other category, are now included in ASC Topic 280-10-50.the Yes & Company operating segment. The Yes & Company operating segment previously within the Media Services reportable segment is now included within the Domestic Creative Agencies reportable segment.
Attention, previously within the Forsman & Bodenfors operating segment, has operationally merged into MDC Media Partners, which is included within the Media Services reportable segment.
Varick Media, previously within the Yes & Company operating segment, is now included within MDC Media Partners, which is included within the Media Services reportable segment.
The four reportable segments that result from applying the aggregation criteria are as follows: “Global Integrated Agencies”; “Domestic Creative Agencies”; “Specialist Communications”; and “Media Services.” In addition, the Company combines and discloses those operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described in Note 1 and 2 of the Notes to the Consolidated Financial Statements included herein, respectively.
The Global Integrated Agencies reportable segment is comprised of the Company’s sixfour global, integrated operating segments with broad marketing communication capabilities, including advertising, branding, digital, social media, design(72andSunny, Anomaly, Crispin Porter + Bogusky, and production services,Forsman & Bodenfors) serving multinational clients around the world. The Global Integrated Agencies reportable segment includes 72andSunny, Anomaly, Crispin Porter + Bogusky, Doner, Forsman & Bodenfors, and kbs+. These operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of global clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments compete with each other for new business and from time to time have business move between them. The Company believes the historic and expected average long-term profitability is similar among the operating segments aggregated in the Global Integrated Agencies reportable segment.
The operating segments within the Global Integrated Agenciesreportable segment provides a range of different services for its clients, including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast).
The Domestic Creative Agencies reportable segment is comprised of fourseven operating segments that are primarily national advertising agencies (Colle McVoy, Doner, Laird + Partners, Mono Advertising, Union, Yamamoto, and Yes & Company) leveraging creative capabilities at their core. The Domestic Creative Agencies reportable segment includes Colle + McVoy, Laird+Partners, Mono Advertising and Union. These operating segments share similar characteristics related to (i) the nature of their creative advertising services; (ii) the type of domestic client accounts and the methods used to provide services; and (iii) the extent to which they may be impacted by domestic economic and policy factors within North America. In addition, these operating segments compete with each other for new business and from time to time have business move between them. The Company believes the historic and expected average long-term profitabilityresults of operations is similar among the operating segments aggregated in the Domestic Creative Agencies reportable segment.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
15. Segment Information – (continued)
The operating segments within the Domestic Creative Agencies reportable segment provide similar services as the Global Integrated Agencies.
The Specialist Communications reportable segment is comprised of sevenfour operating segments that are each communications agencies (Allison & Partners, Hunter, KWT Global, and Veritas) with core service offerings in public relations and related communications services. The Specialist Communications reportable segment includes Allison & Partners, Hunter PR, HL Group Partners, Kwittken, Luntz Global, Sloane & Company and Veritas. These operating segments share similar characteristics related to (i) the
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
21. Segment Information - (continued)
nature of their public relations and communication services, including content creation, social media and influencer marketing;services; (ii) the type of client accounts and the methods used to provide services; (iii) the extent to which they may be impacted by domestic economic and policy factors within North America; and (iv) the regulatory environment regarding public relations and social media. In addition, these operating segments compete with each other for new business and from time to time have business move between them. The Company believes the historic and expected average long-term profitabilityresults of operations is similar among the operating segments aggregated in the Specialist Communications reportable segment.
The operating segments within the Specialist Communications reportable segment provide public relations and communications services including strategy, editorial, crisis support or issues management, media training, influencer engagement, and events management.
The Media Services reportable segment is comprised of a single operating segment known as MDC Media Partners. MDC Media Partners, is comprised of the Company’s network of stand-alone agencies withwhich operates primarily in North America, performs media buying and planning as theirits core competency including the integrated platform Assembly. The agencies within this single operating segment shareacross a Chief Executive Officer and Chief Financial Officer, who have operational oversightrange of these agencies. These agencies provide other services, including influencer marketing, content, insights & analytics, out-of-home,platforms (out-of-home, paid search, social media, lead generation, programmatic, artificial intelligence, and corporate barter. MDC Media Partners operates primarily in North America.television broadcast).
All Other consists of the Company’s remaining operating segments that provide a range of diverse marketing communication services, but generally do not have similar services offerings or financial characteristics as those aggregated in the reportable segments. The All Other category includes 6Degrees Bruce Mau Design,Communications, Concentric Partners, Civilian, Gale Partners, Hello Design, Kenna, Kingsdale Northstar Research Partners, Redscout,(through the date of sale on March 8, 2019), Instrument, Relevent, Source Marketing, Team, Vitro, Yamamoto and Y Media Labs. The nature of the specialist services provided by these operating segments vary among each other and from those operating segments aggregated into the reportable segments. This results in these operating segments having current and long-term performance expectations inconsistent with those operating segments aggregated in the reportable segments. The operating segments within All Other provide a range of diverse marketing communication services, including application and website design and development, data and analytics, experiential marketing, customer research management, creative services, and branding.
Corporate consists of corporate office expenses incurred in connection with the strategic resources provided to the operating segments, as well as certain other centrally managed expenses that are not fully allocated to the operating segments. These office and general expenses include (i) salaries and related expenses for corporate office employees, including employees dedicated to supporting the operating segments, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the corporate office. Additional expenses managed by the corporate office that are directly related to the operating segments are allocated to the appropriate reportable segment and the All Other category.
See Note 1 of the Notes to the Consolidated Financial statements for information regarding our assessment of changes to our reportable segments in our fiscal year 2020.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
15.21. Segment Information –- (continued)
| | | | Years Ended December 31, | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Revenue: | | | | | | | | | | | |
| Global Integrated Agencies | $ | 786,644 |
| | $ | 696,410 |
| | $ | 652,987 |
| | $ | 598,184 |
| | $ | 610,290 |
| | $ | 688,011 |
|
| Domestic Creative Agencies | 90,663 |
| | 85,953 |
| | 91,658 |
| | 230,718 |
| | 246,642 |
| | 277,587 |
|
| Specialist Communications | 172,565 |
| | 170,285 |
| | 153,920 |
| | 180,591 |
| | 163,367 |
| | 153,506 |
|
| Media Services | 142,387 |
| | 131,498 |
| | 132,419 |
| | 97,825 |
| | 121,859 |
| | 150,198 |
|
| All Other | 321,520 |
| | 301,639 |
| | 295,272 |
| | 308,485 |
| | 334,045 |
| | 244,477 |
|
| Total | $ | 1,513,779 |
| | $ | 1,385,785 |
| | $ | 1,326,256 |
| | $ | 1,415,803 |
| | $ | 1,476,203 |
| | $ | 1,513,779 |
|
| | | | | | | | | | | | |
| Segment operating income (loss): | | | | | | | | | | | |
| Global Integrated Agencies | $ | 74,902 |
| | $ | 58,505 |
| | $ | 66,161 |
| | $ | 58,933 |
| | $ | 63,972 |
| | $ | 60,891 |
|
| Domestic Creative Agencies | 16,977 |
| | 16,583 |
| | 17,535 |
| | 28,254 |
| | 51 |
| | 38,221 |
|
| Specialist Communications | 20,714 |
| | 1,939 |
| | 18,047 |
| | 23,822 |
| | 17,316 |
| | 19,978 |
|
| Media Services | 12,963 |
| | 6,154 |
| | 20,116 |
| | (5,398 | ) | | (51,169 | ) | | 13,900 |
|
| All Other | 47,259 |
| | 9,368 |
| | 15,423 |
| | 20,397 |
| | 34,683 |
| | 39,825 |
|
| Corporate | (40,856 | ) | | (44,118 | ) | | (65,172 | ) | | (45,768 | ) | | (55,157 | ) | | (40,856 | ) |
| Total | $ | 131,959 |
| | $ | 48,431 |
| | $ | 72,110 |
| | $ | 80,240 |
| | $ | 9,696 |
| | $ | 131,959 |
|
| | | | | | | | | | | | |
| Other Income (Expense): | | | | | | |
| Other income, net | 1,346 |
| | 414 |
| | 7,238 |
| |
| Other Income (expense): | | | | | | | |
| Interest expense and finance charges, net | | | $ | (64,942 | ) | | $ | (67,075 | ) | | $ | (64,364 | ) |
| Foreign exchange gain (loss) | 18,137 |
| | (213 | ) | | (39,328 | ) | | 8,750 |
| | (23,258 | ) | | 18,137 |
|
| Interest expense and finance charges, net | (64,364 | ) | | (65,858 | ) | | (57,436 | ) | |
| Loss on redemption of Notes | — |
| | (33,298 | ) | | — |
| |
| Income (loss) from continuing operations before income taxes and equity in earnings of non-consolidated affiliates | 87,078 |
| | (49,716 | ) | | (17,416 | ) | |
| Other, net | | | (2,401 | ) | | 230 |
| | 1,346 |
|
| Income (loss) before income taxes and equity in earnings of non-consolidated affiliates | | | 21,647 |
| | (80,407 | ) | | 87,078 |
|
| Income tax expense (benefit) | (168,064 | ) | | (9,404 | ) | | 3,761 |
| | 10,533 |
| | 31,603 |
| | (168,064 | ) |
| Income (loss) from continuing operations before equity in earnings of non-consolidated affiliates | 255,142 |
| | (40,312 | ) | | (21,177 | ) | |
| Equity in earnings (loss) of non-consolidated affiliates | 2,081 |
| | (309 | ) | | 1,058 |
| |
| Income (loss) from continuing operations | 257,223 |
| | (40,621 | ) | | (20,119 | ) | |
| Income (loss) from discontinued operations attributable to MDC Partners Inc., net of taxes | — |
| | — |
| | (6,281 | ) | |
| Income (loss) before equity in earnings of non-consolidated affiliates | | | 11,114 |
| | (112,010 | ) | | 255,142 |
|
| Equity in earnings of non-consolidated affiliates | | | 352 |
| | 62 |
| | 2,081 |
|
| Net income (loss) | 257,223 |
| | (40,621 | ) | | (26,400 | ) | | 11,466 |
| | (111,948 | ) | | 257,223 |
|
| Net income attributable to the noncontrolling interest | (15,375 | ) | | (5,218 | ) | | (9,054 | ) | | (16,156 | ) | | (11,785 | ) | | (15,375 | ) |
| Net income (loss) attributable to MDC Partners Inc. | $ | 241,848 |
| | $ | (45,839 | ) | | $ | (35,454 | ) | | $ | (4,690 | ) | | $ | (123,733 | ) | | $ | 241,848 |
|
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
15.21. Segment Information –- (continued)
| | | | Years Ended December 31, | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Depreciation and amortization: | | | | | | | | | | | |
| Global Integrated Agencies | $ | 23,800 |
| | $ | 21,447 |
| | $ | 20,599 |
| | $ | 16,572 |
| | $ | 21,179 |
| | $ | 21,206 |
|
| Domestic Creative Agencies | 1,434 |
| | 1,653 |
| | 1,855 |
| | 4,843 |
| | 5,052 |
| | 5,143 |
|
| Specialist Communications | 4,714 |
| | 6,637 |
| | 11,201 |
| | 2,577 |
| | 4,113 |
| | 4,567 |
|
| Media Services | 3,629 |
| | 5,718 |
| | 4,660 |
| | 3,261 |
| | 2,693 |
| | 3,709 |
|
| All Other | 8,799 |
| | 9,406 |
| | 12,134 |
| | 10,208 |
| | 12,397 |
| | 7,751 |
|
| Corporate | 1,098 |
| | 1,585 |
| | 1,774 |
| | 868 |
| | 762 |
| | 1,098 |
|
| Total | $ | 43,474 |
| | $ | 46,446 |
| | $ | 52,223 |
| | $ | 38,329 |
| | $ | 46,196 |
| | $ | 43,474 |
|
| | | | | | | | | | | | |
| Stock-based compensation: | | | | | | | | | | | |
| Global Integrated Agencies | $ | 15,203 |
| | $ | 12,141 |
| | $ | 6,981 |
| | $ | 26,207 |
| | $ | 8,095 |
| | $ | 14,666 |
|
| Domestic Creative Agencies | 845 |
| | 634 |
| | 644 |
| | 1,532 |
| | 2,623 |
| | 2,301 |
|
| Specialist Communications | 2,954 |
| | 3,629 |
| | 1,510 |
| | 209 |
| | 372 |
| | 2,160 |
|
| Media Services | 614 |
| | 301 |
| | 471 |
| | 20 |
| | 276 |
| | 614 |
|
| All Other | 2,600 |
| | 1,773 |
| | 5,450 |
| | 1,192 |
| | 2,391 |
| | 2,475 |
|
| Corporate | 2,134 |
| | 2,525 |
| | 2,740 |
| | 1,880 |
| | 4,659 |
| | 2,134 |
|
| Total | $ | 24,350 |
| | $ | 21,003 |
| | $ | 17,796 |
| | $ | 31,040 |
| | $ | 18,416 |
| | $ | 24,350 |
|
| | | | | | | | | | | | |
| Capital expenditures: | | | | | | | | | | | |
| Global Integrated Agencies | $ | 20,748 |
| | $ | 16,439 |
| | $ | 17,043 |
| | $ | 8,223 |
| | $ | 8,731 |
| | $ | 18,897 |
|
| Domestic Creative Agencies | 1,032 |
| | 1,055 |
| | 1,321 |
| | 3,044 |
| | 2,692 |
| | 4,695 |
|
| Specialist Communications | 1,288 |
| | 2,741 |
| | 1,311 |
| | 1,166 |
| | 3,553 |
| | 1,181 |
|
| Media Services | 3,035 |
| | 5,110 |
| | 825 |
| | 194 |
| | 806 |
| | 3,035 |
|
| All Other | 6,832 |
| | 4,054 |
| | 2,704 |
| | 5,933 |
| | 4,415 |
| | 5,127 |
|
| Corporate | 23 |
| | 33 |
| | 371 |
| | 36 |
| | 67 |
| | 23 |
|
| Total | $ | 32,958 |
| | $ | 29,432 |
| | $ | 23,575 |
| | $ | 18,596 |
| | $ | 20,264 |
| | $ | 32,958 |
|
A summary of the Company’s long-lived assets, comprised of fixed assets, goodwill and intangibles, net, by geographic region at December 31, is set forth in the following table.
|
| | | | | | | | | | | | | | | |
| | United States | | Canada | | Other | | Total |
| Long-lived Assets | |
| | |
| | |
| | |
|
| 2017 | $ | 77,163 |
| | $ | 5,638 |
| | $ | 7,505 |
| | $ | 90,306 |
|
| 2016 | $ | 67,617 |
| | $ | 5,887 |
| | $ | 4,873 |
| | $ | 78,377 |
|
| Goodwill and Intangible Assets | |
| | |
| | |
| | |
|
| 2017 | $ | 706,241 |
| | $ | 127,014 |
| | $ | 73,285 |
| | $ | 906,540 |
|
| 2016 | $ | 736,334 |
| | $ | 121,987 |
| | $ | 71,509 |
| | $ | 929,830 |
|
|
| | | | | | | | | | | | | | | | |
| | United States | | Canada | | Other | | Total |
| Long-lived Assets | | | | | | | |
| 2019 |
| $ | 68,497 |
| | $ | 4,475 |
| | $ | 8,082 |
| | $ | 81,054 |
|
| 2018 |
| $ | 76,781 |
| | $ | 4,779 |
| | $ | 6,629 |
| | $ | 88,189 |
|
| | | | | | | | |
| Goodwill and Intangible Assets | | | | | | | |
| 2019 |
| $ | 668,567 |
| | $ | 64,842 |
| | $ | 62,158 |
| | $ | 795,567 |
|
| 2018 |
| $ | 679,344 |
| | $ | 61,748 |
| | $ | 67,628 |
| | $ | 808,720 |
|
The Company’s CODM does not use segment assets to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
15.21. Segment Information –- (continued)
A summary of the Company’s revenue by geographic region at December 31 is set forth in the following table.
| | | | United States | | Canada | | Other | | Total | United States | | Canada | | Other | | Total |
| Revenue: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| 2019 | | $ | 1,116,045 |
| | $ | 105,067 |
| | $ | 194,691 |
| | $ | 1,415,803 |
|
| 2018 | | $ | 1,153,191 |
| | $ | 124,001 |
| | $ | 199,011 |
| | $ | 1,476,203 |
|
| 2017 | $ | 1,172,364 |
| | $ | 123,092 |
| | $ | 218,323 |
| | $ | 1,513,779 |
| $ | 1,172,364 |
| | $ | 123,093 |
| | $ | 218,322 |
| | $ | 1,513,779 |
|
| 2016 | $ | 1,103,714 |
| | $ | 124,101 |
| | $ | 157,970 |
| | $ | 1,385,785 |
| |
| 2015 | $ | 1,085,051 |
| | $ | 129,039 |
| | $ | 112,166 |
| | $ | 1,326,256 |
| |
16. Related Party Transaction
Scott L. Kauffman is Chairman and Chief Executive Officer of the Company. His daughter, Sarah Kauffman, has been employed by Partner Firm kbs since July 2011, and currently acts as Director of Operations, Attention Partners. In 2017 and 2016, her total compensation, including salary, bonus and other benefits, totaled approximately $155 and $145, respectively. Her compensation is commensurate with that of her peers.
17. 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.
Options to Purchase. Noncontrolling shareholders in certain subsidiaries have the right in certain circumstances to require the Company to acquire the remaining ownership interests held by them. The noncontrolling shareholders’ ability to exercise any such option right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise and specific employment termination conditions. 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 2017 to 2023. 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 December 31, 2017 perform over the relevant future periods at their trailing twelve-month earnings levels, that these rights, if all exercised, could require the Company to pay an aggregate amount of approximately $15,864 to the owners of such rights in future periods to acquire such ownership interests in the relevant subsidiaries. Of this amount, the Company is entitled, at its option, to fund approximately $184 by the issuance of share capital.
In addition, the Company is obligated under similar put option rights to pay an aggregate amount of approximately $41,748 only upon termination of such owner’s employment with the applicable subsidiary or death.
The amount the Company would be required to pay to the noncontrolling interest holders should the Company acquire the remaining ownership interests is $5,272 less than the initial redemption value recorded in redeemable noncontrolling interests.
Included in redeemable noncontrolling interests at December 31, 2017 was $62,886 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 which typically are subject to hurricanes. During the years ended December 31, 2017, 2016, and 2015, these operations did not incur any material costs related to damages resulting from hurricanes.
Guarantees. Generally, the Company has indemnified the purchasers of certain assets 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
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
17. Commitments, Contingencies and Guarantees – (continued)
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. Among the legal proceedings in which the Company is involved are the class action suits as described below.
MDC Partners remains committed to the highest standards of corporate governance and transparency in its reporting practices. In April 2015, the Company announced it was actively cooperating in connection with an SEC investigation of the Company. On January 18, 2017, the Company announced that it reached a final settlement agreement with the Philadelphia Regional Office of the SEC, and that the SEC entered an administrative Order concluding its investigation of the Company.
Under the Order, without admitting or denying liability, the Company agreed that it will not in the future violate Section 17(a)(2) of the Securities Act of 1933 and Sections 13(a), 13(b) and 14(a) of the Securities Exchange Act of 1934 and related rules requiring that periodic filings be accurate; that accurate books and records and a system of internal accounting controls be maintained; and that solicitations of proxies comply with the securities laws. In addition, the Company agreed to comply with all requirements under Regulation G relating to the disclosure and reconciliation of non-GAAP financial measures. Pursuant to the Order, and based upon the Company’s full cooperation with the investigation, the SEC imposed a civil penalty of $1,500 on the Company to resolve all potential claims against the Company relating to these matters. In 2016, the Company recorded a charge of $1,500 related to such penalty. There will be no restatement of any of the Company’s previously-filed financial statements.
On July 31, 2015, North Collier Fire Control and Rescue District Firefighter Pension Plan (“North Collier”) filed a putative class action suit in the Southern District of New York, naming as defendants MDC, CFO David Doft, former CEO Miles Nadal, and former CAO Mike Sabatino. On December 11, 2015, North Collier and co-lead plaintiff Plymouth County Retirement Association filed an amended complaint, adding two additional defendants, Mitchell Gendel and Michael Kirby, a former member of MDC’s Board of Directors. The plaintiff alleges in the amended complaint violations of § 10(b), Rule 10b-5, and § 20 of the Securities Exchange Act of 1934, based on allegedly materially false and misleading statements in the Company’s SEC filings and other public statements regarding executive compensation, goodwill accounting, and the Company’s internal controls. The Company filed a motion to dismiss the amended complaint on February 9, 2016, the lead plaintiffs filed an opposition to that motion on April 8, 2016, and the Company filed a reply brief on May 9, 2016. By order granted on September 30, 2016, the U.S. District Court presiding over the case granted the Company’s motion to dismiss the plaintiffs’ amended complaint in its entirety with prejudice. On November 2, 2016, the lead plaintiffs filed a notice to appeal the U.S. District Court’s ruling to the U.S. Court of Appeals for the Second Circuit. On February 21, 2017, the lead plaintiffs voluntarily dismissed their appeal.
On August 7, 2015, Roberto Paniccia issued a Statement of Claim in the Ontario Superior Court of Justice in the City of Brantford, Ontario seeking to certify a class action suit naming the following as defendants: MDC, former CEO Miles S. Nadal, former CAO Michael C. Sabatino, CFO David Doft and BDO U.S.A. LLP. The Plaintiff alleges violations of section 138.1 of the Ontario Securities Act (and equivalent legislation in other Canadian provinces and territories) as well as common law misrepresentation based on allegedly materially false and misleading statements in the Company’s public statements, as well as omitting to disclose material facts with respect to the SEC investigation. The Company intends to continue to vigorously defend this suit. The plaintiff has served his material for leave to proceed under the Ontario Securities Act and that motion is currently scheduled to be heard in April 2018. A motion by the Company and other defendants to address the scope of the proposed class definition was dismissed and the Company is appealing that decision.
In June 2016, one of the Company’s subsidiaries received a subpoena from the U.S. Department of Justice Antitrust Division concerning the Division’s ongoing investigation of production practices in the advertising industry. The Company and its subsidiary are continuing to fully cooperate with this confidential investigation.
Commitments. At December 31, 2017, the Company had $5,056 of undrawn letters of credit. In addition, the Company has commitments to fund investments in an aggregate amount of $148.
Leases. The Company and its subsidiaries lease certain facilities and equipment. For the years ended December 31, 2017, 2016, and 2015, gross premises rental expense amounted to $64,086, $56,725, and $47,583, respectively, which was reduced by sublease income of $2,797, $3,027, and $1,739, respectively. Where leases contain escalation clauses or other concessions, the impact of such adjustments is recognized on a straight-line basis over the minimum lease period.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
17. Commitments, Contingencies and Guarantees – (continued)
Minimum rental commitments for the rental of office and production premises and equipment under non-cancellable leases net of sublease income, some of which provide for rental adjustments due to increased property taxes and operating costs, for the years ending December 31, 2018 and thereafter, are as follows:
|
| | | | |
| Period | | Amount |
| 2018 | | $ | 58,172 |
|
| 2019 | | 56,751 |
|
| 2020 | | 55,065 |
|
| 2021 | | 41,830 |
|
| 2022 | | 32,595 |
|
| 2023 and thereafter | | 122,947 |
|
| | | $ | 367,360 |
|
At December 31, 2017, the total future cash to be received on sublease income is $17,369.
18. New Accounting Pronouncements
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace all existing revenue guidance under U.S GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 provides for one of two methods of transition: (i) retrospective application to each prior period presented (Full Retrospective); or (ii) recognition of the cumulative effect of retrospective application of the new standard as of the beginning of the period of initial application (Modified Retrospective).
The Company will adopt ASU 2014-09 on the effective date of January 1, 2018, and will apply the Modified Retrospective method. The cumulative effect of the initial adoption is recognized as an adjustment to opening retained earnings at January 1, 2018. The Company is in the process of calculating this adjustment, however has not completed the calculation as of the filing date of this Form 10-K. As a result, the adjustment will be reflected and disclosed in its financial statements included within its Quarterly Report on Form 10-Q for the three months ending March 31, 2018. Effective January 1, 2018, the Company has implemented new policies and procedures to ensure the appropriate application of the new standard during the first quarter of 2018.
The Company’s assessment of the impact of adopting the new standard on its accounting policies is essentially complete. The greatest impact the standard will have is on the timing in which revenue is recognized. There are several areas where the Company’s revenue recognition is expected to change as compared with historical GAAP. The more significant of these areas are as follows:
| |
i. | The standard will result in an increase in the number of performance obligations within certain of our contractual arrangements, whereby most of our contractual arrangements will have more than one performance obligation. |
| |
ii. | Under the guidance in effect through December 31, 2017, performance incentives are recognized in revenue when specific quantitative goals are achieved, or when the Company’s performance against qualitative goals is determined by the client. Under the new standard, the Company will be required to estimate the amount of the incentive that will be earned at the inception of the contract and recognize such incentive over the term of the contract. This will result in an acceleration of revenue recognition for certain contract incentives compared to the current method. |
| |
iii. | Under the guidance in effect through December 31, 2017, non-refundable retainer fees are generally recognized on a straight-line basis over the term of the specific customer arrangement. Under the new standard, an input method will be used to measure progress and record revenue for these types of arrangements. Based on the Company’s assessment, an input measure such as cost-to-cost or labor hours will be an appropriate measure of progress in the majority of situations for which over time revenue recognition is applied. The change is expected to either defer or accelerate revenue recognition in certain instances. Revenue recognition for commission-based arrangements will continue to be recognized point-in-time. |
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
18. New Accounting Pronouncements – (continued)
In certain businesses, the Company records revenue as a principal and includes within revenue certain third-party-pass-through and out-of-pocket costs, which are billed to clients in connection with the services provided. In other businesses, the Company acts as an agent within our arrangements and records revenue equal to the net amount retained. In March 2016, the FASB issued further guidance on principal versus agent considerations; however, our assessments indicate that such change is not expected to have a material effect on the Company’s results of operations.
Other
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Cuts and Jobs Act (the “Act”). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. The Company continues to assess the impact of GILTI provisions on its financial statements and whether it will be subject to U.S. GILTI inclusion in future years. As such, the Company has not made a policy election on whether to record tax effects of GILTI when paid as a period expense or to record deferred tax assets and liabilities on basis differences that are expected to affect the amount of GILTI inclusion.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting, which provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. Amendments in this ASU will be applied prospectively to any award modified on or after the adoption date. The Company does not expect the application of this guidance to have a significant impact on its consolidated financial position or results of operations.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits, which requires the presentation of the service cost component of the net periodic pension and postretirement benefits costs in the same line item in the statement of operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of the net periodic pension and postretirement benefits costs are required to be presented as non-operating expenses in the statement of operations. This guidance is effective for annual periods beginning after December 15, 2017 and early adoption is permitted. The Company does not expect the application of this guidance to have a significant impact on its consolidated financial position or results of operations.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates step two from the two-step goodwill impairment test. Under the new guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. The Company early adopted this guidance for its impairment test performed during 2017. The application of this guidance did not have a significant impact on its consolidated financial position or results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows. This new guidance is intended to reduce diversity in practice regarding the classification of certain transactions in the statement of cash flows. This guidance is effective January 1, 2018 and requires a retrospective transition method. Early adoption is permitted. The Company currently classifies all cash outflows for contingent consideration as a financing activity. Upon adoption the Company is required to classify only the original estimated liability as a financing activity and any changes as an operating activity.
In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases. Topic 842 will require lessees to recognize right-to-use assets and lease liabilities for those leases classified as operating leases under previous U.S. GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. While not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on its total assets and liabilities with a minimal impact on equity.
In January 2016, the FASB issued ASU 2016-01,Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities, which will require equity investments, except equity method investments, to be measured at fair value and any changes in fair value will be recognized in results of operations. This guidance is effective for annual and interim periods beginning after December 15, 2017 and early application is not permitted. Additionally, this guidance provides for the recognition
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
18. New Accounting Pronouncements – (continued)
of the cumulative effect of retrospective application of the new standard in the period of initial application. The Company does not expect the application of this guidance to have a significant impact on its consolidated financial position or results of operations.
19. Employee Benefit Plans
A subsidiary acquired in 2012 sponsors a defined benefit plan. The benefits under the defined benefit plan are based on each employee’s years of service and compensation. Effective March 1, 2006, the plan was frozen to all new employees. The Company’s policy is to contribute the minimum amount required by the Employee Retirement Income Security Act of 1974 (ERISA), as amended. The assets of the plan are invested in an investment trust fund and consist of investments in money market funds, bonds and common stock, mutual funds, preferred stock, and partnership interests.
Net periodic pension cost consists of the following components for the years ended December 31:
|
| | | | | | | |
| | Pension
Benefits | | Pension
Benefits |
| | 2017 | | 2016 |
| Service cost | $ | — |
| | $ | — |
|
| Interest cost on benefit obligation | 1,725 |
| | 1,855 |
|
| Expected return on plan assets | (1,830 | ) | | (1,863 | ) |
| Curtailment and settlements | — |
| | 929 |
|
| Amortization of actuarial losses | 222 |
| | 137 |
|
| Net periodic benefit cost | $ | 117 |
| | $ | 1,058 |
|
ASC 715-30-25 requires an employer to recognize the funded status of its defined pension benefit plan as a net asset or liability in its statement of financial position with an offsetting amount in accumulated other comprehensive income, and to recognize changes in that funded status in the year in which changes occur through comprehensive income.
Other changes in plan assets and benefit obligation recognized in Other Comprehensive Loss consist of the following components for the years ended December 31:
|
| | | | | | | |
| | Pension
Benefits | | Pension
Benefits |
| | 2017 | | 2016 |
| Curtailment/settlement | $ | — |
| | $ | — |
|
| Current year actuarial (gain) loss | 1,558 |
| | 3,238 |
|
| Amortization of actuarial gain (loss) | (222 | ) | | (137 | ) |
| Total recognized in other comprehensive (income) loss | $ | 1,336 |
| | $ | 3,101 |
|
| Total recognized in net periodic benefit cost and other comprehensive (income) loss | $ | 1,453 |
| | $ | 4,159 |
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
19. Employee Benefit Plans (continued)
The following table summarizes the change in benefit obligations and fair values of plan assets for the years ended December 31:
|
| | | | | | | |
| | 2017 | | 2016 |
| Change in benefit obligation: | |
| | |
|
| Benefit obligation, Beginning balance | $ | 40,722 |
| | $ | 40,296 |
|
| Interest Cost | 1,725 |
| | 1,855 |
|
| Actuarial losses | 3,088 |
| | 2,502 |
|
| Benefits paid | (1,785 | ) | | (3,931 | ) |
| Benefit obligation, Ending balance | 43,750 |
| | 40,722 |
|
| Change in plan assets: | |
| | |
|
| Fair value of plan assets, Beginning balance | 24,482 |
| | 25,190 |
|
| Actual return on plan assets | 3,360 |
| | 198 |
|
| Employer contributions | 1,920 |
| | 3,025 |
|
| Benefits paid | (1,785 | ) | | (3,931 | ) |
| Fair value of plan assets, Ending balance | 27,977 |
| | 24,482 |
|
| Unfunded status | $ | 15,773 |
| | $ | 16,240 |
|
Accumulated benefit obligation generally measures the value of benefits earned to date. Projected benefit obligation also includes the effect of assumed future compensation increases for plans in which benefits for prior service are affected by compensation changes. This pension plan has asset values less than these measures. Plan funding amounts are calculated pursuant to ERISA and Internal Revenue Code rules.
Amounts recognized in the balance sheet at December 31 consist of the following:
|
| | | | | | | |
| | Pension
Benefits | | Pension
Benefits |
| | 2017 | | 2016 |
| Non-current liability | $ | 15,773 |
| | $ | 16,240 |
|
| Net amount recognized | $ | 15,773 |
| | $ | 16,240 |
|
Amounts recognized, net of tax, in Accumulated Other Comprehensive Loss consists of the following components for the years ended December 31:
|
| | | | | | | |
| | Pension
Benefits | | Pension
Benefits |
| | 2017 | | 2016 |
| Accumulated net actuarial losses | $ | 13,656 |
| | $ | 12,320 |
|
| Amount recognized, net of tax | $ | 13,656 |
| | $ | 12,320 |
|
The following weighted average assumptions were used to determine benefit obligations as of December 31:
|
| | | | | |
| | Pension
Benefits | | Pension
Benefits |
| | 2017 | | 2016 |
| Discount rate | 3.83 | % | | 4.32 | % |
| Rate of compensation increase | N/A |
| | N/A |
|
The discount rate assumptions at December 31, 2017 and 2016 were determined independently. A yield curve was produced for a universe containing the majority of U.S.-issued AA-graded corporate bonds, all of which were non-callable (or callable with
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
19. Employee Benefit Plans (continued)
make-whole provisions). The discount rate was developed as the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.
The following weighted average assumptions were used to determine net periodic costs at December 31:
|
| | | | | |
| | Pension
Benefits | | Pension
Benefits |
| | 2017 | | 2016 |
| Discount rate | 4.32 | % | | 4.69 | % |
| Expected return on plan assets | 7.40 | % | | 7.40 | % |
| Rate of compensation increase | N/A |
| | N/A |
|
The expected return on plan assets is a long-term assumption established by considering historical and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes.
Fair Value of Plan Assets
The Defined Benefit plan assets fall into any of three fair value classifications as defined in the FASB ASC Topic 820, Fair Value Measurements. There are no Level 3 assets held by the plan. The fair value of the plan assets as of December 31 is as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | Level 1 | | Level 2 | | Level 3 |
| Asset Category: | |
| | |
| | |
| | |
|
| Money Market Fund – Short Term Investments | $ | 1,695 |
| | $ | 1,695 |
| | $ | — |
| | $ | — |
|
| Mutual Funds | 26,282 |
| | 26,282 |
| | — |
| | — |
|
| Total | $ | 27,977 |
| | $ | 27,977 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | Level 1 | | Level 2 | | Level 3 |
| Asset Category: | |
| | |
| | |
| | |
|
| Money Market Fund – Short Term Investments | $ | 1,687 |
| | $ | 1,687 |
| | $ | — |
| | $ | — |
|
| Mutual Funds | 22,795 |
| | 22,795 |
| | — |
| | — |
|
| Total | $ | 24,482 |
| | $ | 24,482 |
| | $ | — |
| | $ | — |
|
The pension plans weighted-average asset allocation for the years ended December 31, 2017, and 2016 are as follows:
|
| | | | | | | | |
| | Target Allocation | | Actual Allocation | | Actual Allocation |
| | 2017 | | 2017 | | 2016 |
| Asset Category: | |
| | |
| | |
|
| Equity Securities | 68.0 | % | | 68.9 | % | | 65.5 | % |
| Debt Securities | 31.0 | % | | 25.0 | % | | 27.6 | % |
| Cash/Cash Equivalents and Short Term Investments | 1.0 | % | | 6.1 | % | | 6.9 | % |
| | 100 | % | | 100 | % | | 100 | % |
The investment policy for the plans is formulated by the Company’s Pension Plan Committee (the “Committee”). The Committee is responsible for adopting and maintaining the investment policy, managing the investment of plan assets and ensuring that the plans’ investment program is in compliance with all provisions of ERISA, as well as the appointment of any investment manager who is responsible for implementing the plans’ investment process.
The goals of the pension plan investment program are to fully fund the obligation to pay retirement benefits in accordance with the plan documents and to provide returns that, along with appropriate funding from the Company, maintain an asset/liability ratio that is in compliance with all applicable laws and regulations and assures timely payment of retirement benefits.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
19. Employee Benefit Plans (continued)
The Company’s overall investment strategy is to achieve a mix of approximately 50% of investments for long-term growth and 50% for near-term benefit payments with a wide diversification of asset types and fund strategies.
Equity securities primarily include investments in large-cap and mid-cap companies primarily located in the United States, as well as a smaller percentage invested in large-cap and mid-cap companies located outside of the United States. Fixed income securities are diversified across different asset types with bonds issued in the United States as well as outside the United States.
The target allocation of plan assets is 50% equity securities and 50% corporate bonds and U.S. Treasury securities.
The Plan invests in various investment securities. These investments are primarily in corporate equity and bond securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the preceding tables.
The above tables present information about the pension plan assets measured at fair value at December 31, 2017 and the valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Plan has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each plan asset.
The net of investment manager fee asset return objective is to achieve a return earned by passively managed market index funds, weighted in the proportions identified in the strategic asset allocation matrix. Each investment manager is expected to perform in the top one-third of funds having similar objectives over a full market cycle.
The investment policy is reviewed by the Committee at least annually and confirmed or amended as needed. Under ASC 715-30-25, the transition obligation, prior service costs, and actuarial (gains)/losses are recognized in Accumulated Other Comprehensive Income each December 31 or any interim measurement date, while amortization of these amounts through net periodic benefit cost will occur in accordance with ASC 715-30 and ASC 715-60. The estimated amounts that will be amortized in 2018 are as follows:
|
| | | | |
| | | Pension
Benefits |
| Estimated Amortization: | | 2018 |
| Net loss amortization | | 258 |
|
| Total | | $ | 258 |
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
19. Employee Benefit Plans (continued)
The following estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years ending December 31:
|
| | | | |
| Period | | Amount |
| 2018 | | $ | 1,806 |
|
| 2019 | | 1,903 |
|
| 2020 | | 2,090 |
|
| 2021 | | 2,077 |
|
| 2022 | | 2,109 |
|
| 2023 – 2027 | | 12,010 |
|
The pension plan contributions are deposited into a trust, and the pension plan benefit payments are made from trust assets.
20. Changes in Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) for the year ended December 31 were:
|
| | | | | | | | | | | |
| | Defined
Benefit
Pension | | Foreign Currency Translation | | Total |
| Balance December 31, 2015 | $ | (9,219 | ) | | $ | 15,476 |
| | $ | 6,257 |
|
| Other comprehensive income before reclassifications | — |
| | (4,980 | ) | | (4,980 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | (3,101 | ) | | — |
| | (3,101 | ) |
| Other comprehensive income (loss) | $ | (3,101 | ) | | $ | (4,980 | ) | | $ | (8,081 | ) |
| Balance December 31, 2016 | $ | (12,320 | ) | | $ | 10,496 |
| | $ | (1,824 | ) |
| Other comprehensive income before reclassifications | $ | — |
| | $ | 1,206 |
| | $ | 1,206 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) (net of tax benefit of $528) | (1,336 | ) | | — |
| | (1,336 | ) |
| Other comprehensive income (loss) | (1,336 | ) | | 1,206 |
| | (130 | ) |
| Balance December 31, 2017 | $ | (13,656 | ) | | $ | 11,702 |
| | $ | (1,954 | ) |
Reclassifications for the years ended December 31, net of tax, were as follows:
|
| | | | | | | |
| | 2017 | | 2016 |
| Current year actuarial (gain) loss | $ | 1,558 |
| | $ | 3,238 |
|
| Amortization of actuarial gain (loss) | (222 | ) | | (137 | ) |
| Total amount reclassified from accumulated other comprehensive income (loss), net of tax | $ | 1,336 |
| | $ | 3,101 |
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
21.22. Quarterly Results of Operations (Unaudited)
The following table sets forth a summary of the Company’s consolidated unaudited quarterly results of operations for the years ended December 31, in thousands of dollars, except per share amounts.
|
| | | | | | | | | | | | | | | | |
| | Quarters | |
| | First | | Second | | Third | | Fourth | |
| Revenue: | | | | | | | | |
| 2017 | $ | 344,700 |
| | $ | 390,532 |
| | $ | 375,800 |
| | $ | 402,747 |
| |
| 2016 | $ | 309,042 |
| | $ | 337,047 |
| | $ | 349,254 |
| | $ | 390,442 |
| |
| Cost of services sold: | | | | | | | | |
| 2017 | $ | 237,563 |
| | $ | 267,822 |
| | $ | 249,418 |
| | $ | 268,673 |
| |
| 2016 | $ | 211,446 |
| | $ | 228,835 |
| | $ | 235,659 |
| | $ | 260,193 |
| |
| Income (loss) from continuing operations: | | | | | | | | |
| 2017 | $ | (9,683 | ) | | $ | 13,467 |
| | $ | 21,984 |
| | $ | 231,455 |
| |
| 2016 | $ | (22,773 | ) | | $ | 2,089 |
| | $ | (31,081 | ) | | $ | 11,144 |
| |
| Net income (loss) attributable to MDC Partners Inc.: | | | | | | | | |
| 2017 | $ | (10,566 | ) | | $ | 11,253 |
| | $ | 18,493 |
| | $ | 222,668 |
| |
| 2016 | $ | (23,632 | ) | | $ | 835 |
| | $ | (32,140 | ) | | $ | 9,098 |
| |
| Income (loss) per common share: | | | | | | | | |
| Basic | | | | | | | | |
| Continuing operations: | | | | | | | | |
| 2017 | $ | (0.21 | ) | | $ | 0.14 |
| | $ | 0.25 |
| | $ | 3.33 |
| |
| 2016 | $ | (0.47 | ) | | $ | 0.02 |
| | $ | (0.62 | ) | | $ | 0.17 |
| |
| Net income (loss): | | | | | | | | |
| 2017 | $ | (0.21 | ) | | $ | 0.14 |
| | $ | 0.25 |
| | $ | 3.33 |
| |
| 2016 | $ | (0.47 | ) | | $ | 0.02 |
| | $ | (0.62 | ) | | $ | 0.17 |
| |
| Diluted | | | | | | | | |
| Continuing operations: | | | | | | | | |
| 2017 | $ | (0.21 | ) | | $ | 0.14 |
| | $ | 0.24 |
| | $ | 3.30 |
| |
| 2016 | $ | (0.47 | ) | | $ | 0.02 |
| | $ | (0.62 | ) | | $ | 0.17 |
| (1) |
| Net income (loss): | | | | | | | | |
| 2017 | $ | (0.21 | ) | | $ | 0.14 |
| | $ | 0.24 |
| | $ | 3.30 |
| |
| 2016 | $ | (0.47 | ) | | $ | 0.02 |
| | $ | (0.62 | ) | | $ | 0.17 |
| (1) |
|
| | | | | | | | | | | | | | | |
| | Quarters |
| | First | | Second | | Third | | Fourth |
| Revenue: | | | | | | | |
| 2019 | $ | 328,791 |
| | $ | 362,130 |
| | $ | 342,907 |
| | $ | 381,975 |
|
| 2018 | $ | 326,968 |
| | $ | 379,743 |
| | $ | 375,830 |
| | $ | 393,662 |
|
| Cost of services sold: | | | | | | | |
| 2019 | $ | 237,154 |
| | $ | 240,749 |
| | $ | 222,448 |
| | $ | 260,725 |
|
| 2018 | $ | 243,030 |
| | $ | 253,390 |
| | $ | 238,690 |
| | $ | 256,088 |
|
| Net Income (loss): | | | | | | | |
| 2019 | $ | 316 |
| | $ | 7,333 |
| | $ | 5,513 |
| | $ | (1,696 | ) |
| 2018 | $ | (28,519 | ) | | $ | 5,951 |
| | $ | (13,667 | ) | | $ | (75,713 | ) |
| Net income (loss) attributable to MDC Partners Inc.: | | | | | | | |
| 2019 | $ | (113 | ) | | $ | 4,290 |
| | $ | (1,752 | ) | | $ | (7,115 | ) |
| 2018 | $ | (29,416 | ) | | $ | 3,406 |
| | $ | (16,125 | ) | | $ | (81,598 | ) |
| Income (loss) per common share: | | | | | | | |
| Basic | | | | | | | |
| 2019 | $ | (0.04 | ) | | $ | 0.01 |
| | $ | (0.07 | ) | | $ | (0.15 | ) |
| 2018 | $ | (0.56 | ) | | $ | 0.02 |
| | $ | (0.32 | ) | | $ | (1.46 | ) |
| Diluted | | | | | | | |
| 2019 | $ | (0.04 | ) | | $ | 0.01 |
| | $ | (0.07 | ) | | $ | (0.15 | ) |
| 2018 | $ | (0.56 | ) | | $ | 0.02 |
| | $ | (0.32 | ) | | $ | (1.46 | ) |
| |
(1) | The diluted income per share calculation for the fourth quarter of 2016 excludes the Company’s option to settle the deferred acquisition consideration in shares related to F&B. If such shares were included, the diluted income per common share would be $0.14. |
The above revenue, cost of services sold, and income (loss) from continuing operations have primarily been affected by acquisitions divestitures and discontinued operations.divestitures.
Historically, with some exceptions, the Company’s fourth quarter generates the highest quarterly revenues in a 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.
Income (loss) from continuing operations and net loss have been affected as follows:
The fourth quarter of 20172019 and 20162018 included a foreign exchange gain of $4,349 and a loss of $659$13,324, respectively.
The fourth quarter of 2019 and $10,081,2018 included stock-based compensation charges of $18,408 and $1,534, respectively.
The fourth quarter of 2019 and 2018 included changes in deferred acquisition resulting in income of $9,030 and $8,979, respectively.
The fourth quarter of 2019 and 2018 included goodwill, right-of-use assets and related leasehold improvement impairment charges of $5,875 and goodwill and other asset impairment charges of $56,732, respectively.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthousands of United States Dollars, Unless Otherwise Stated Exceptdollars, except per Share Amounts)share amounts, unless otherwise stated)
21.22. Quarterly Results of Operations (Unaudited) - (continued)
The fourth quarter of 2017 and 20162019 included stock-based compensation chargesincome tax benefit of $7,480 and $5,560, respectively.
$2,830 relating to the decrease to the Company’s valuation allowance. The fourth quarter of 2017 and 2016 included changes in deferred acquisition resulting in income of $18,173 and $9,211, respectively.
The fourth quarter of 2017 included goodwill and other asset impairment charges of $4,415 and the third and fourth quarter of 2016 included goodwill impairment charges of $29,631 and $18,893, respectively.
The fourth quarter of 20172018 included income tax benefitexpense related to the releaseincrease of the Company’s valuation allowance of $226,466. The fourth quarter of 2016 included income tax expense of $925 relating to the increase to the valuation allowance.$49,447.
Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosures
Not Applicable.
Item 9A. Controls and Procedures
(a) 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)(“CEO”), who is our principal executive officer, and our Chief Financial Officer (CFO)(“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 provide only reasonable assurance of achieving their control objectives. However, our disclosure controls and procedures are designed to provide reasonable assurance, but not absolute assurance,assurances of achieving theirour 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(b)13a-15(e) and 15(d)-15(e) of the Exchange Act. Based on that evaluation, theour CEO and CFO concluded that, as of December 31, 2019, due to the Company’smaterial weakness in our internal control over financial reporting described below, our disclosure controls and procedures were effective atineffective 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 Annual Report on Form 10-K for the year ended December 31, 2019 is appropriate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such time atthat there is a reasonable possibility that a material misstatement of the reasonable assurance level.company's annual or interim financial statements will not be prevented or detected on a timely basis.
(b) Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management (with the participation of our CEO and CFO) conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172019 based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this evaluation,Management has identified a material weakness over the accounting for income taxes as of December 31, 2019, principally related to the deferred tax accounts (liabilities, assets, and provision). We have determined that management's review controls over income taxes are not operating effectively to detect a material misstatement in the financial statements related to the completeness, accuracy, and presentation of the aforementioned areas of income taxes. Given the material weakness, we have concluded that internal control over financial reporting was ineffective as of December 31, 2019.
Remediation Efforts with Respect to Material Weakness
We have developed a remediation plan to address the material weakness described above. The plan includes enhancing our CEOpreparation and CFO concluded thatreview procedures regarding our accounting for income taxes. Specifically, management plans to reassess the scope of work of our outside tax advisors, perform a full diagnostic of our schedules utilized to calculate the tax provision, and enhance our analytics for tax accounts.
The effectiveness of our internal control over financial reporting was effective as of December 31, 2017.2019 has been audited by BDO USA LLP, an independent registered public accounting firm, as stated in their report, which expressed an adverse opinion, which is included herein.
(c) Changes in Internal Control Over Financial Reporting
Our management, including our CEO and CFO, believes there have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2017,2019, that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been independently audited by BDO USA LLP, an independent registered public accounting firm, as stated in their report which is included herein.
(c)(d) Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
MDC Partners Inc.
New York, New York
Opinion on Internal Control over Financial Reporting
We have audited MDC Partners Inc.’s (the “Company’s”) and subsidiaries internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 20172019 and 2016, and2018, the related consolidated statements of operations, and comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and schedules presented in Item 15 (collectively referred to as the consolidated financial statements) and our report dated March 1, 20185, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to maintain controls over the preparation and review of the annual income tax provision has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 financial statements, and this report does not affect our report dated March 5, 2020 on those financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
New York, New York
March 1, 2018
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Reference is made to the sections captioned “Nomination“Election of Directors,” “Information Concerning Nominees for Election as Directors,” “Information Concerning Executive Officers,” “Audit Committee,” “Ethical Conduct” and “Compliance with Section 16(a)“Committees of the Exchange Act”Board - Audit Committee” in our Proxy Statement for the 20182020 Annual General Meeting of Stockholders, which will be filed with the Commission within 120 days of the close of our fiscal year ended December 31, 2017, which sections are incorporated herein by reference.
Executive Officers of MDC Partners
The executive officers of MDC Partners as of MarchFebruary 1, 20182020 are:
|
| | | | |
| Name | | Age | | Office |
Scott L. Kauffman(1)
Mark Penn | | 6266 | | Chairman of the Board and Chief Executive Officer |
David B. DoftFrank Lanuto | | 4657 | | Chief Financial Officer |
Mitchell S. GendelJonathan Mirsky
| | 5251 | | Executive Vice President, General Counsel and Corporate Secretary |
Bob Kantor | | 60 | | Executive Vice President, Global Chief Marketing Officer |
Stephanie Nerlich | | 48 | | Executive Vice President, Partner Development & Talent
|
| David C. Ross | | 3739 | | Executive Vice President, Strategy and Corporate Development |
Alexandra Delanghe EwingVincenzo DiMaggio | | 3845 | | Senior Vice President, Chief CommunicationsAccounting Officer |
____________
| |
(1) | Also a member of MDC’s Board of Directors. |
There is no family relationship among any of the executive officers or directors.
Mr. KauffmanPenn joined MDC Partners in April 2006March 2019 and currently serves as a director on the board of directors and, effective July 20, 2015, assumed the role of Chairman and Chief Executive Officer of MDC Partners. From April 2013 until May 2014,Officer. Mr. KauffmanPenn has been acting as the Managing Partner and President at the Stagwell Group since 2015. Prior thereto, Mr. Penn served as theMicrosoft’s Executive Vice President and Chief ExecutiveStrategy Officer and a member of the Board of Directors, of New Engineering University. From April 2011 until January 2013, Mr. Kauffman was a Board member and then Chairman of LookSmart, Ltd, a publicly-traded, syndicated pay-per-click search network. From January 2009 to August 2010, Mr. Kauffman was President andheld Chief Executive Officer and a member of the board, of GeekNet, Inc., a publicly-traded open source software application developer and e-commerce website operator.position in multiple strategic public relation firms.
Mr. DoftLanuto joined MDC Partnerspartners in August 2007June 2019 as Chief Financial Officer. Prior to joining MDC Partners, Mr. Lanuto served as Vice President, Corporate Controller at Movado Group, Inc. since August 2015. Before Movado Group, he oversaw mediaspent over 17 years overseeing global financial functions and Internet investments at Cobalt Capital Management Inc. from July 2005 to July 2007. Prior thereto, he worked at Level Global Investors from October 2003 to March 2005 investingoperations activities in media and Internet companies. Before that, Mr. Doft was a sell side analyst for ten years predominately researching the advertising, marketing and marketingmedia services sector for CIBC World Markets where he served as Executive Director and ABN AMRO/ING Barings Furman Selz where he was a Managing Director.industries.
Mr. GendelMirsky joined MDC Partnerspartners in November 2004,June 2019 as General Counsel and Corporate Secretary.Counsel. Prior to joining MDC Partners, he served as Vice Presidentfrom January 2001 through June 2019, Mr. Mirsky was a partner at the Washington law firm Harris, Wiltshire & Grannis LLP, where his practice focused on mergers and Assistant General Counsel at The Interpublic Group of Companies, Inc. from December 1999 until September 2004.
Mr. Kantor joined MDC Partners in May 2009,acquisitions and currently serves as Global Chief Marketing Officer. Prior to joining MDC Partners, he served as CEO of Publicis NYpreparing and President of Lowe & Partners NA, and also founded and built Rotter Kantor, an integrated communications company, as well as Hanger Network, the country’s largest green-marketing platform.
Ms. Nerlich joined MDC Partners in April 2016, and currently serves as Executive Vice President, Partner Development & Talent. Prior to joining MDC Partners, Ms. Nerlich served as CEO of Grey Canada and President of Lowe Roche, and also as EVP, Executive Managing Director of BBDO, where she spent 12 years servicing the agencies’ largest clients.negotiating complex commercial agreements.
Mr. Rossjoined MDC Partners in March 2010 and currently serves as Executive Vice President, Strategy and Corporate Development. Prior to joining MDC Partners, Mr. Ross was an attorney at Skadden Arps LLP where he represented global clients in a wide range of capital markets offerings, M&A transactions, and general corporate matters.
Ms. EwingMr. DiMaggio joined MDC Partners in January 2012, and currently serves2018 as Chief CommunicationsAccounting Officer. Prior to joining MDC Partners, Ms. Ewinghe served as U.S. Director of Communications for DDB, managing national communications efforts on behalf of the networkSenior Vice President, Global Controller & Chief Accounting Officer at Endeavor, from 2017 to 2018. Prior thereto, he worked at Viacom Inc. from 2012 to 2017 as Senior Vice President, Deputy Controller and at the New York Times Company from 1999 to 2012 ultimately serving as its agencies.
Vice President, Assistant Corporate Controller.
Additional information about our directors and executive officers appears under the captions “Election of Directors” and “Executive Compensation” in the Company’s Proxy Statement for the 20182020 Annual General Meeting of Stockholders.
Code of Conduct
The Company has adopted a Code of Conduct, which applies to all directors, officers (including the Company’s Chief Executive Officer and Chief Financial Officer) and employees of the Company and its subsidiaries. The Company’s policy is to not permit any waiver of the Code of Conduct for any director or executive officer, except in extremely limited circumstances. Any waiver of this Code of Conduct for directors or officers of the Company must be approved by the Company’s Board of Directors. Amendments to and waivers of the Code of Conduct will be publicly disclosed as required by applicable laws, rules and regulations. The Code of Conduct is available free of charge on the Company’s website at http:https://www.mdc-partners.com, or by writing to MDC Partners Inc., 745 Fifth Avenue, 19th330 Hudson Street, 10th Floor, New York, New York 10151,10013, Attention: Investor Relations. The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, certain provisions of the Code of Conduct that apply to its principal executive officer, principal financial officer and principal accounting officer by posting such information on its website, at the address and location specified above.
Item 11. Executive Compensation
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
Reference is made to the sections captioned “Compensation of Directors”Directors,” “Compensation Discussion and “Executive Compensation”Analysis,” and “Compensation Committee Interlocks and Insider Participation” in the Company’s next Proxy Statement for the 20182020 Annual General Meeting of Stockholders, which are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Reference is made to Item 5 ofThe information required by this Form 10-K and toitem will be included in the sections captioned “Section 16 (a)“Security Ownership of Certain Beneficial Ownership Reporting Compliance”Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” in the Company’s next Proxy Statement for the 20182020 Annual General Meeting of Stockholders which areand is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
Reference is made to the Note 16 in20 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K and to “Certain Relationships“Related Party Transactions” and Related Transactions”“Director Independence” in the Company’s Proxy Statement for the 20182020 Annual General Meeting of Stockholders, which is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Reference is made to the section captioned “Appointment of Auditors”“Audit Fees” in the Company’s Proxy Statement for the 20182020 Annual General Meeting of Stockholders, which is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements andStatement Schedules
The Financial Statements and Schedules listed in the accompanying Index to the Consolidated Financial Statements in Item 8 are filed as part of this report. Schedules not included in the indexIndex have been omitted because they are not applicable.
Schedule II — 1 of 2
MDC PARTNERS INC. & SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 31,
(Dollars in Thousands)
| | | Column A | | Column B | | Column C | | Column D | | Column E | | Column F | | Column B | | Column C | | Column D | | Column E | | Column F |
| Description | | Balance at
Beginning
of Period | | Charged to
Costs and
Expenses | | Removal of Uncollectible Receivables | | Translation Adjustments
Increase
(Decrease) | | Balance at
the End of
Period | | Balance at
Beginning
of Period | | Charged to
Costs and
Expenses | | Removal of Uncollectible Receivables | | Translation Adjustments
Increase
(Decrease) | | Balance at
the End of
Period |
| Valuation accounts deducted from assets to which they apply – allowance for doubtful accounts: | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | $ | 1,879 |
| | $ | 2,996 |
| | $ | (1,377 | ) | | $ | (194 | ) | | $ | 3,304 |
|
| December 31, 2018 | | | $ | 2,453 |
| | $ | 1,538 |
| | $ | (1,795 | ) | | $ | (317 | ) | | $ | 1,879 |
|
| December 31, 2017 | | $ | 1,523 |
| | $ | 1,989 |
| | $ | (924 | ) | | $ | (135 | ) | | $ | 2,453 |
| | $ | 1,523 |
| | $ | 1,989 |
| | $ | (924 | ) | | $ | (135 | ) | | $ | 2,453 |
|
| December 31, 2016 | | $ | 1,306 |
| | $ | 1,053 |
| | $ | (830 | ) | | $ | (6 | ) | | $ | 1,523 |
| |
| December 31, 2015 | | $ | 1,409 |
| | $ | 750 |
| | $ | (799 | ) | | $ | (54 | ) | | $ | 1,306 |
| |
Schedule II — 2 of 2
MDC PARTNERS INC. & SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 31,
(Dollars in Thousands)
| | | Column A | | Column B | | Column C | | Column D | | Column E | | Column F | | Column B | | Column C | | Column D | | Column E | | Column F |
| Description | | Balance at
Beginning
of Period | | Charged to
Costs and
Expenses | | Other(1) | | Translation Adjustments
Increase
(Decrease) | | Balance at
the End of
Period | | Balance at
Beginning
of Period | | Charged to
Costs and
Expenses | | Other | | Translation Adjustments
Increase
(Decrease) | | Balance at
the End of
Period |
| Valuation accounts deducted from assets to which they apply – valuation allowance for deferred income taxes: | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | $ | 68,479 |
| | $ | (2,830 | ) | | $ | — |
| | $ | — |
| | $ | 65,649 |
|
| December 31, 2018 | | | $ | 19,032 |
| | $ | 49,447 |
| | $ | — |
| | $ | — |
| | $ | 68,479 |
|
| December 31, 2017 | | $ | 248,867 |
| | $ | (230,358 | ) | | $ | 4,108 |
| | $ | (3,585 | ) | | $ | 19,032 |
| | $ | 248,867 |
| | $ | (230,358 | ) | | $ | 4,108 |
| | $ | (3,585 | ) | | $ | 19,032 |
|
| December 31, 2016 | | $ | 247,967 |
| | $ | 6,605 |
| | $ | (6,032 | ) | | $ | 327 |
| | $ | 248,867 |
| |
| December 31, 2015 | | $ | 175,218 |
| | $ | 3,565 |
| | $ | 73,390 |
| | $ | (4,206 | ) | | $ | 247,967 |
| |
____________
| |
(1) | Adjustment to reconcile actual net operating loss carry forwards to prior year tax accrued, utilization of net operating loss carry forwards, which were fully reserved, adjustment for net operating loss relating to sale of business and pension plan adjustment. |
(b) Exhibits
The exhibits listed on the accompanying Exhibits Index are filed as a part of this report.
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) 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.
By:
MDC PARTNERS INC.
|
| | | |
Date: | March 1, 2018 | | /s/ Scott L. Kauffman |
| | | Name: Scott L. Kauffman
Title: Chairman and Chief Executive Officer
|
|
| | | | |
Signature | | Title | | Date |
/s/ Scott L. Kauffman | | Chairman and Chief Executive Officer | | March 1, 2018 |
Scott L. Kauffman | | | | |
/s/ David Doft | | Chief Financial Officer (Principal Accounting Officer) | | March 1, 2018 |
David Doft | | | | |
/s/ Clare Copeland | | Director | | March 1, 2018 |
Clare Copeland | | | | |
/s/ Daniel Goldberg | | Director | | March 1, 2018 |
Daniel Goldberg | | | | |
/s/ Bradley Gross | | Director | | March 1, 2018 |
Bradley Gross | | | | |
/s/ Lawrence S. Kramer | | Director | | March 1, 2018 |
Lawrence S. Kramer
| | | | |
/s/ Anne Marie O'Donovan | | Director | | March 1, 2018 |
Anne Marie O'Donovan
| | | | |
/s/ Irwin D. Simon | | Director | | March 1, 2018 |
Irwin D. Simon | | | | |
Table of Contents
EXHIBIT INDEX
|
| | |
| Exhibit No. | | Description |
| | Articles of Amalgamation, dated January 1, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed on May 10, 2004); |
| | Articles of Continuance, dated June 28, 2004 (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q filed on August 4, 2004); |
| | Articles of Amalgamation, dated July 1, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed on July 30, 2010); |
| | Articles of Amalgamation, dated May 1, 2011 (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed on May 2, 2011); |
| | Articles of Amalgamation, dated January 1, 2013 (incorporated by reference to Exhibit 3.1.4 to the Company’s Form 10-K filed on March 10, 2014); |
| | Articles of Amalgamation, dated April 1, 2013 (incorporated by reference to Exhibit 3.1.5 to the Company’s Form 10-K filed on March 10, 2014); |
| | Articles of Amalgamation, dated July 1, 2013 (incorporated by reference to Exhibit 3.1.6 to the Company’s Form 10-K filed on March 10, 2014); |
| | Articles of Amendment, dated March 7, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on March 7, 2016);
|
| | Articles of Amendment, dated March 14, 2019 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed on March 15, 2019); |
| | General By-law No. 1, as amended on April 29, 2005 (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K filed on March 16, 2007); |
| | Indenture, dated as of March 23, 2016, among the Company, the Guarantors and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on March 23, 2016); |
| | 6.50% Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on March 23, 2016); |
| | Description of Securities*; |
| | Second Amended and Restated Credit Agreement, dated as of May 3, 2016, among the Company, Maxxcom Inc., a Delaware corporation, each of their subsidiaries party thereto, Wells Fargo Capital Finance, LLC, as agent, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 4, 2016); |
| | Consent and First Amendment to the Second Amended and Restated Credit Agreement, dated as of May 3, 2016, among the Company, Maxxcom Inc., a Delaware corporation, each of their subsidiaries party thereto, Wells Fargo Bank, N.A., as agent, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on March 15, 2019); |
| | Securities Purchase Agreement, by and between MDC Partners Inc. and Broad Street Principal Investments, L.L.C., dated as of February 14, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 15, 2016); |
| | Securities Purchase Agreement, by and between MDC Partners Inc. and Stagwell Agency Holdings LLC, dated as of March 14, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 15, 2019); |
| | Employment Agreement, effective March 18, 2019, by and between the Company and Mark Penn (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on March 15, 2019);
|
| | Employment Agreement dated as of May 6, 2019, by and between the Company and Frank Lanuto (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on May 8, 2019); |
| | Employment Agreement dated as of May 6, 2019, by and between the Company and Jonathan Mirsky (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed on May 8, 2019); |
| | Second Amended and Restated Employment Agreement between the Company and David Ross, dated as of February 27, 2017 (incorporated by reference to Exhibit 10.7 to the Company’s Form10-K filed on March 1, 2017);
|
| | Employment Agreement between the Company and Vincenzo DiMaggio, dated as of May 8, 2018 (incorporated by reference to Exhibit 10.8 to the Company's 10-K filed on March 18, 2019);
|
| | Employment Agreement between the Company and Scott Kauffman, dated as of August 6, 2015 (incorporated by reference to Exhibit 10.2 to the Company’sCompany's Form 10-K filed on February 26, 2016); |
|
| | |
| | SeparationSuccession Agreement by and amongbetween the Company Nadal Management Limited, Nadal Financial Corporation and Miles Nadal,Scott Kauffman, dated as of July 20, 2015September 9, 2018 (incorporated by reference to Exhibit 10.1 to the Company’sCompany's Form 8-K filed on July 20, 2015)September 12, 2018); |
| | Amended and Restated Employment Agreement between the Company and David Doft, dated as of July 19, 2007 (effective August 10, 2007) (incorporated by reference to Exhibit 10.7 to the Company’sCompany's Form 10-Q filed on August 7, 2007); |
| | Amendment No. 1 dated March 7, 2011, to the Amended and Restated Employment Agreement made as of July 19, 2007, by and between the Company and David Doft (incorporated by reference to Exhibit 10.2 to the Company’sCompany Form 10-Q filed on May 2, 2011)2011; |
| | Separation and Release Agreement, dated as of May 8, 2019, by and between the Company and David Doft (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q filed on May 9, 2019); |
| | Amended and Restated Employment Agreement between the Company and Mitchell Gendel, dated as of July 6, 2007 (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q filed on August 7, 2007); |
| | Amendment No. 1 dated March 7, 2011, to the Amended and Restated Employment Agreement made as of July 6, 2007, by and between the Company and Mitchell Gendel (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed on May 2, 2011); |
| | AmendedSeparation and Restated EmploymentRelease Agreement, dated as of May 6, 2019, by and between the Company and Robert Kantor, dated as of May 5, 2014Mitchell Gendel (incorporated by reference to Exhibit 10.210.6 to the Company’sCompany's Form 10-Q filed on May 4, 2016)9, 2019);
|
| | Second Amended and Restated Employment Agreement between the Company and David Ross, dated as of February 27, 2017 (incorporated by reference to Exhibit 10.7 to the Company’s 10-K filed on March 1, 2017); |
| | Amended and Restated Employment Agreement between the Company and Stephanie Nerlich, dated as of November 1, 2017*2017 (incorporated by reference to Exhibit 10.9 to the Company’s Form 10-K filed on March 1, 2018); |
| | Agreement of Settlement and Release, dated as of June 3, 2019, by and between the Company and Stephanie Nerlich (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on June 6, 2019); |
| | Amended and Restated Stock Appreciation Rights Plan, as adopted by the shareholders of the Company at the 2009 Annual and Special Meeting of Shareholders on June 2, 2009 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on June 5, 2009); |
| | Amended 2005 Stock Incentive Plan of the Company, as approved and adopted by the shareholders of the Company at the 2009 Annual and Special Meeting of Shareholders on June 2, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s 8-K filed on June 5, 2009); |
|
| | |
| | 2008 Key Partner Incentive Plan, as approved and adopted by the shareholders of the Company at the 2008 Annual and Special Meeting of Shareholders on May 30, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed on July 31, 2008); |
| | 2011 Stock Incentive Plan of the Company, as approved and adopted by the shareholders of the Company on June 1, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 1, 2011); |
| | Form of Incentive/Retention Payment letter agreement (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 1, 2011); |
| | MDC Partners Inc. 2014 Long Term Cash Incentive Compensation Plan, as adopted March 6, 2014, including forms of 2014 Award Agreement (incorporated by reference to Exhibit 10.12 to the Company’s Form 10-K filed on March 10, 2014); |
| | 2016 Stock Incentive Plan, as adopted by the shareholders of the Company at the 2016 Annual and Special Meeting of Shareholders onamended June 1, 20166, 2018 (incorporated by reference to Exhibit 10.1410.1 to the Company’s 10-KForm 8-K filed on March 1, 2017)June 7, 2018); |
| | Form of Financial-Performance Based Restricted Stock Grant Agreement (2017) under the 2016 Stock Incentive Plan (incorporated by reference to Exhibit 10.14.1 to the Company’s 10-K filed on March 1, 2017); |
| | StatementAmended Form of computation of ratio of earnings to fixed charges*; |
| | Code of Conduct of MDC Partners Inc. (as amended, February 2016)Senior Executive Retention Award (December 2018) (incorporated by reference to Exhibit 1410.1 to the Company’sCompany's Form 10-K8-K filed on February 26, 2016)December 27, 2018); |
| | MDC Partners’ Corporate Governance Guidelines (as amended, February 2016)Form of Financial Performance-Based Restricted Stock Agreement (2019) (incorporated by reference to Exhibit 14.110.1 to the Company’sCompany's Form 10-K10-Q filed on February 26, 2016)November 6, 2019); |
| | Form of Long-Term Cash Incentive Compensation Plan 2019 Award Agreement (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q filed on November 6, 2019); |
| | Subsidiaries of Registrant*; |
| | Consent of Independent Registered Public Accounting Firm BDO USA LLP*; |
| | 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*; |
| | 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*;
|
| | Certification by Chief Executive Officer pursuant to 18 USC.USC Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*; |
|
| | |
| | Certification by Chief Financial Officer pursuant to 18 USC.USC Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*. |
___________
* Filed electronically herewith.
† Indicates management contract or compensatory plan
SIGNATURES
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/ Frank Lanuto |
| Frank Lanuto |
| Chief Financial Officer and Authorized Signatory |
| March 5, 2020 |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark Penn and Frank Lanuto, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| |
| MDC PARTNERS INC. |
|
| /s/ Frank Lanuto |
| Frank Lanuto |
| Chief Financial Officer and Authorized Signatory |
| March 5, 2020 |
|
| /s/ Mark Penn |
| Mark Penn |
| Chairman of the Board, Chief Executive Officer |
March 5, 2020
|
|
| /s/ Vincenzo DiMaggio |
| Vincenzo DiMaggio |
| Chief Accounting Officer |
March 5, 2020
|
|
| /s/ Desirée Rogers |
| Desirée Rogers |
| Director |
March 5, 2020
|
|
| /s/ Anne Marie O’Donovan |
| Anne Marie O’Donovan |
| Director |
March 5, 2020
|
|
| |
|
| /s/ Ambassador Charlene Barshefsky |
| Ambassador Charlene Barshefsky |
| Director |
March 5, 2020
|
|
| /s/ Wade Oosterman |
| Wade Oosterman |
| Director |
March 5, 2020
|
|
| /s/ Irwin D. Simon |
| Irwin D. Simon |
| Presiding Director |
March 5, 2020
|
|
| /s/ Kristen O’Hara |
| Kristen O’Hara |
| Director |
March 5, 2020
|
| |
| /s/ Bradley Gross |
| Bradley Gross |
| Director |
March 5, 2020
|
| |