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PART IIII |
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PART II |
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PART III |
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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 this 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
Portions of the registrant’s Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on 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 international, national and regional economic 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;
reduction in client spending and changes in client advertising, marketing and corporate communications requirements;
financial failure 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.
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 in the United States of America (“GAAP”). However, the Company has included certain non-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 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 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 330 Hudson Street, 10th Floor, New York, New York 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 marketing and communications network, providing marketing and business solutions that realize the potential of combining data and creativity. Through its network of agencies, MDC delivers a broad range of client services, including (1) global advertising and marketing, (2) data analytics and insights, (3) mobile and technology experiences, (4) media buying, planning and optimization, (5) direct marketing, (6) database and customer relationship management, (7) business consulting, (8) sales promotion, (9) corporate communications, (10) market research, (11) corporate identity, design and branding services, (12) social media strategy and communications, (13) product and service innovation, and (14) e-commerce management. These marketing, communications, and consulting agencies (or “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 Company’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 are as follows:
Global Integrated Agencies - This segment is comprised of the Company’s four global, integrated Partner Firms 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 seven Partner Firms that are national advertising agencies leveraging creative capabilities at their core.
Specialist Communications - This segment is comprised of four 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 one 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, 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, see Note 21 of the Notes to the Consolidated Financial Statements and “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 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, 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.
MDC PARTNERS INC. AND SUBSIDIARIES
SCHEDULE OF ADVERTISING AND COMMUNICATIONS COMPANIES
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| | | | | | |
| | | Year of Initial | | | |
| Company | | Investment | | Locations (City or Country) | Ownership % |
| Consolidated: | | | | | |
| | | | | | |
| 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 | % |
| | | | | | |
| 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 | % |
| | | | | | |
| 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 | % |
| | | | | | |
| Media Services: | | | | | |
| MDC Media Partners | | 2010 | | New York | |
| Attention | | 2009 | | New York, Los Angeles | 100.0 | % |
|
| | | | | | |
| 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 | % |
| | | | | | |
| 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. MDC 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 Partner Firms also face competition from consultancies, tech platforms, media companies and other services firms that 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 innovative marketing solutions that leverage the full power of data, technology, and superior creativity. MDC also benefits from cooperation among its entrepreneurial Partner Firms, which enables MDC to service the full range of global clients’ varied marketing needs through custom integrated solutions. Additionally, MDC’s 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 as 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 are 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 even 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 MDC’s Partner Firms.
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 2019, 2018 and 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 approximately 23% of 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. 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.
Employees
As of December 31, 2019, we employed 5,647 people worldwide. The following table provides a breakdown of full time employees across MDC’s four reportable segments, the All Other category, and Corporate:
|
| | | |
Segment | | Total |
Global Integrated Agencies | | 2,167 |
|
Domestic Creative Agencies | | 1,002 |
|
Specialist Communications | | 695 |
|
Media Services | | 336 |
|
All Other | | 1,381 |
|
Corporate | | 66 |
|
Total | | 5,647 |
|
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.
Seasonality
Historically, with some exceptions, we generate the highest quarterly revenues during the fourth quarter in each year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail-related consumer marketing occur. See Note 22 of the Notes to the Consolidated Financial Statements for information relating to the 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 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 this Annual Report on Form 10-K. The Company’s filings are also available to the public from the SEC’s website at https://www.sec.gov.
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 affect our business, financial condition or results of 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 have a material adverse effect on our revenue, results of operations, cash flows and financial 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. Unfavorable economic and financial conditions in the global economy could increase client financial difficulties resulting in reduced demand for our services, reduced revenues, delayed payments by clients, and increased write offs of accounts receivable.
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 advertising and marketing agencies of varying sizes, with no single advertising and marketing agency or group of agencies 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 an agency’s principal asset is its people, barriers to entry are minimal, and relatively small agencies 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 experience senior management changes. To the extent that the Company fails to maintain existing clients or attract new clients, MDC’s business, financial condition, operating results, and cash flows may be affected in a materially adverse manner.
If our available liquidity is insufficient, our financial condition could be adversely affected and we may be unable to fund contingent deferred acquisition liabilities, and any put options if exercised.
MDC 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 contingent deferred acquisition payments. If credit were unavailable or insufficient under the Credit Agreement, MDC’s liquidity could be adversely 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 could be adversely affected. MDC has made acquisitions for which it has deferred payment of a portion of the purchase price, with the deferred acquisition consideration generally payable based on achievement of certain thresholds of future earnings of the acquired company. In addition, a noncontrolling shareholder in an acquired business often has the right to require MDC 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). 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 by MDC because the actual obligation adjusts based on the performance of the acquired businesses over time. If available liquidity is insufficient, MDC may be unable to fund contingent deferred acquisition 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 and 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 executives 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 materialize.
MDC’s business could be adversely affected if it loses key 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. The loss of one or more clients could materially affect the results of the individual agencies and MDC as a whole.
The loss of several of our largest 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 three-year period ended December 31, 2019. A significant reduction in spending on our services by our largest clients, or the loss of several of our largest clients, could 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 production costs and media purchases and the revenue earned by us can be significant. While MDC takes precautions against default on payment for these services (such as credit analysis, advance billing of 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 right-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 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. If 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 for details on goodwill impairment recorded for the twelve months ended December 31, 2019.
In addition, we have recorded a significant amount of right-of-use assets in our consolidated financial statements in accordance with GAAP as a result of the adoption of Accounting Standards Codification, Leases (“ASC 842”). Upon a triggering event, we test the right-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 could have a material adverse effect on our results of operations and financial position. See Note 10 of the Notes to the 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 trend in the United States for 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. 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 MDC grows. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not successful in defending such claims, we could be required to stop offering these services, pay monetary 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 consumer privacy, use of personal information and digital tracking technologies have been proposed or enacted in the United States and certain international markets (including the European Union’s General Data Protection Regulation, or “GDPR,” the proposed European Union “ePrivacy Regulation” and the recently enacted California Consumer Privacy Act, or “CCPA”). We 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 may impact the efficacy and profitability of certain digital marketing and analytics services we provide to clients, making it difficult to achieve our clients’ goals. These and 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.
Compliance 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 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 opportunities. Increased cybersecurity threats and attacks, which are becoming more sophisticated, pose a risk to our systems and networks. Security breaches, improper use of our systems and unauthorized access to our data and information by 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 use third-party service providers, including cloud providers, to store, transmit and process data. Any breakdown or breach in our systems or data-protection policies, or those of our third-party service providers, could adversely affect our reputation or business.
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 $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 ultimately 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. 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.
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 related purchase agreements, the Company has agreed, 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 15 of the Notes to the Consolidated Financial Statements for more information regarding the Series 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, 2019, MDC had $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. As 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 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. 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 Consolidated 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 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. 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, Boulder, Canada, Sweden, UK, Netherlands, 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, Hong Kong, Singapore, Japan, Germany and Thailand. |
Media Services | | New York, 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
In the ordinary course of business, we are involved in various legal proceedings. We do not presently expect that these proceedings will have a material adverse effect on our results of 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, 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 241 and 87, respectively.
Dividend Practice
The Company has not declared a dividend for the 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
For information on securities authorized for issuance under our equity compensation plans, see Item 12, “Item 1. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which relevant information will be included in our Proxy Statement for the 2020 Annual General Meeting of Stockholders.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
For the twelve months ended December 31, 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 2019, the Company’s employees surrendered Class A shares 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, 2019. The following table details those shares withheld during the fourth quarter of 2019:
|
| | | | | | | | | | | | | |
| 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 Statements and related Notes that are included in this Form 10-K.
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | |
| | (Dollars in Thousands, Except per Share Data) |
| Operating Data | | | | | | | | | |
| Revenues | $ | 1,415,803 |
| | $ | 1,476,203 |
| | $ | 1,513,779 |
| | $ | 1,385,785 |
| | $ | 1,326,256 |
|
| 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 | | | | | | | | | |
| Net income (loss) attributable to MDC Partners Inc. common shareholders | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.72 |
| | $ | (0.89 | ) | | $ | (0.58 | ) |
| Diluted | | | | | | | | | |
| 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 |
| Financial Position Data |
| |
| |
| |
| |
|
| Total assets | $ | 1,839,492 |
| | $ | 1,611,573 |
| | $ | 1,698,892 |
| | $ | 1,577,378 |
| | $ | 1,577,625 |
|
| Total debt | $ | 887,630 |
| | $ | 954,107 |
| | $ | 883,119 |
| | $ | 936,436 |
| | $ | 728,883 |
|
| Redeemable noncontrolling interests | $ | 36,973 |
| | $ | 51,546 |
| | $ | 62,886 |
| | $ | 60,180 |
| | $ | 69,471 |
|
| Deferred acquisition consideration | $ | 75,220 |
| | $ | 83,695 |
| | $ | 122,426 |
| | $ | 229,564 |
| | $ | 347,104 |
|
Effective January 1, 2019, the Company adopted FASB Accounting Standards Codification (or “ASC”), Topic 842 Leases (“ASC 842”). As a result, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 840, Leases. See Note 10 to the Consolidated Financial Statements included herein for further information regarding the adoption of ASC 842.
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 2019 means the period beginning January 1, 2019, and ending December 31, 2019).
The Company reports its financial results in accordance with GAAP. In addition, the Company has included certain non-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 GAAP and should not be construed as an alternative to other titled measures determined in accordance with GAAP.
Two such non-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 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,” which provide marketing and business solutions that realize the potential of combining data and creativity. 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. MDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’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.
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. 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 Partner Firm’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.
The 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 21 of the Notes to the Consolidated Financial Statements included herein for a description of each of our reportable segments and All Other category and further information regarding the reclassification of certain 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 operating segments as 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.
Significant 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. Another factor in a client changing firms is the agency’s campaign or work failing to meet the client’s expected financial or 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.
Seasonality. Historically, the 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. See Note 22 of the Notes to the Consolidated Financial Statements for information relating to the Company’s quarterly results.
Results of 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 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Depreciation and amortization: | (Dollars in Thousands) |
| Global Integrated Agencies | $ | 16,572 |
| | $ | 21,179 |
| | $ | 21,206 |
|
| Domestic Creative Agencies | 4,843 |
| | 5,052 |
| | 5,143 |
|
| Specialist Communications | 2,577 |
| | 4,113 |
| | 4,567 |
|
| Media Services | 3,261 |
| | 2,693 |
| | 3,709 |
|
| All Other | 10,208 |
| | 12,397 |
| | 7,751 |
|
| Corporate | 868 |
| | 762 |
| | 1,098 |
|
| Total | $ | 38,329 |
| | $ | 46,196 |
| | $ | 43,474 |
|
| | | | | | |
| Stock-based compensation: | | | | | |
| Global Integrated Agencies | $ | 26,207 |
| | $ | 8,095 |
| | $ | 14,666 |
|
| Domestic Creative Agencies | 1,532 |
| | 2,623 |
| | 2,301 |
|
| Specialist Communications | 209 |
| | 372 |
| | 2,160 |
|
| Media Services | 20 |
| | 276 |
| | 614 |
|
| All Other | 1,192 |
| | 2,391 |
| | 2,475 |
|
| Corporate | 1,880 |
| | 4,659 |
| | 2,134 |
|
| Total | $ | 31,040 |
| | $ | 18,416 |
| | $ | 24,350 |
|
| | | | | | |
| Capital expenditures: | | | | | |
| Global Integrated Agencies | $ | 8,223 |
| | $ | 8,731 |
| | $ | 18,897 |
|
| Domestic Creative Agencies | 3,044 |
| | 2,692 |
| | 4,695 |
|
| Specialist Communications | 1,166 |
| | 3,553 |
| | 1,181 |
|
| Media Services | 194 |
| | 806 |
| | 3,035 |
|
| All Other | 5,933 |
| | 4,415 |
| | 5,127 |
|
| Corporate | 36 |
| | 67 |
| | 23 |
|
| Total | $ | 18,596 |
| | $ | 20,264 |
| | $ | 32,958 |
|
YEAR ENDED DECEMBER 31, 2019 COMPARED TO YEAR ENDED DECEMBER 31, 2018
Consolidated Results of Operations
Revenues
Revenue 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. 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 a change of $70.5 million. The improvement was driven by a lower impairment charge in 2019 of $7.8 million 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 write-down of goodwill. The decline in revenues was mostly offset by a reduction in expenses.
Interest Expense and Finance Charges, Net
Interest expense and finance charges, net, for the twelve months ended December 31, 2019 was $64.9 million compared to $67.1 million for the twelve months ended December 31, 2018, representing a decrease of $2.2 million, primarily driven by a decline in the average amounts outstanding under the Company’s revolving credit facility in 2019.
Foreign Exchange Transaction Gain (Loss)
The foreign exchange gain for the twelve months ended December 31, 2019 was $8.8 million compared to a loss of $23.3 million for the twelve months ended December 31, 2018. The change in foreign exchange was primarily attributable to the strengthening of the Canadian dollar against the U.S. dollar, in connection with a U.S. dollar denominated indebtedness that is an obligation of our Canadian parent company.
Other, Net
Other, net, for the twelve months ended December 31, 2019 was a loss of $2.4 million compared to income of $0.2 million for the twelve months ended December 31, 2018. In 2019, we recognized a loss of $4.3 million primarily on the sale of Kingsdale Partners LP and 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 effective 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 income 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 twelve months ended December 31, 2018, 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 $132.1 million, or $2.31 per diluted loss per share, for the twelve months ended December 31, 2018.
Advertising and Communications Group
The following discussion provides additional detailed disclosure for each of the Company’s four (4) reportable segments, plus the “All Other” 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 twelve 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 2017.
Interest Expense and Finance Charges, Net
Interest expense and finance charges, net, for the twelve months ended December 31, 2018 was $67.1 million compared to $64.4 million for the twelve months ended December 31, 2017, representing an increase of $2.7 million. The increase was primarily due to higher interest rates in the current year as well as increased borrowings under the Company’s revolving 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 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 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 another reporting unit in the third quarter of 2018.
Other, Net
Other income, net was $0.2 million for the twelve months ended December 31, 2018 compared to $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 the incremental tax benefit associated with the Tax Cuts and Jobs Act of 2017.
Equity in Earnings (Losses) of Non-Consolidated Affiliates
The Company recorded income of $0.1 million for the twelve 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, representing a decrease of $3.6 million. This decrease was attributable 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 $2.31 per diluted share, compared to a net income of $205.6 million, or 3.71 per diluted share reported for the twelve months ended December 31, 2017.
Advertising and Communications Group
The following discussion provides additional detailed disclosure for each of the Company’s four (4) reportable segments, plus the “All Other” category, within the Advertising and Communications Group.
The components of the change in revenues in the Advertising and Communications Group for the twelve months ended December 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 provides 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 twelve months ended December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| 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, 2018 and 2017 was as follows:
|
| | | | | |
| | 2018 | | 2017 |
| United States | 78.1 | % | | 77.5 | % |
| Canada | 8.4 | % | | 8.1 | % |
| Other | 13.5 | % | | 14.4 | % |
The impact of the adoption of ASC 606 decreased revenue in the United States by $20.7 million or 1.8%, and $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 client wins and additional spending by some clients. The United States had organic revenue decline of $12.9 million, or 1.1%. In Canada, organic revenue declined $0.1 million, or 0.1%. Organic revenue growth outside of North America was $13.9 million, or 6.4%, consisting of contributions from existing Partner Firms due to net new client wins.
The change in expenses and operating profit as a percentage of revenue in the Advertising and Communications Group for the years ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | 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, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Advertising and Communications Group | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 213,354 |
| | 14.5 | % | | $ | 260,777 |
| | 17.2 | % | | $ | (47,423 | ) | | (18.2 | )% |
| Staff costs | | 872,459 |
| | 59.1 | % | | 829,568 |
| | 54.8 | % | | 42,891 |
| | 5.2 | % |
| Administrative costs | | 189,063 |
| | 12.8 | % | | 187,687 |
| | 12.4 | % | | 1,376 |
| | 0.7 | % |
| Deferred acquisition consideration | | (457 | ) | | — | % | | (4,898 | ) | | (0.3 | )% | | 4,441 |
| | (90.7 | )% |
| Stock-based compensation | | 13,757 |
| | 0.9 | % | | 22,216 |
| | 1.5 | % | | (8,459 | ) | | (38.1 | )% |
| Depreciation and amortization | | 45,434 |
| | 3.1 | % | | 42,376 |
| | 2.8 | % | | 3,058 |
| | 7.2 | % |
| Goodwill and other asset impairment | | 77,740 |
| | 5.3 | % | | 3,238 |
| | 0.2 | % | | 74,502 |
| | NM |
|
| Total operating expenses | | $ | 1,411,350 |
| | 95.6 | % | | $ | 1,340,964 |
| | 88.6 | % | | $ | 70,386 |
| | 5.2 | % |
The decrease in direct costs was primarily attributable to the adoption of ASC 606 in which various client arrangements of certain Partner Firms previously 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 approximately $62.4 million. This decrease was partially offset by revenue of an acquisition during the year.
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, partially offset by staffing reductions at other Partner Firms.
Deferred acquisition consideration change for the twelve months ended December 31, 2018 and 2017 was primarily due to the aggregate performance of certain Partner Firms in the respective years relative to the previously projected expectations.
Stock-based compensation change for the twelve months ended December 31, 2018 was primarily due to the aggregate performance of certain Partner Firms in 2018 relative to the previously projected expectations.
The goodwill and other asset impairment in 2018 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, 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 2017.
Global Integrated Agencies
The change in revenue and expenses as a percentage of revenue in the Global Integrated Agencies reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Global Integrated Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 610,290 |
| | | | $ | 688,011 |
| | | | $ | (77,721 | ) | | (11.3 | )% |
| Operating expenses | | | | | | | | | |
| |
|
|
| Cost of services sold | | 397,313 |
| | 65.1 | % | | 474,315 |
| | 68.9 | % | | (77,002 | ) | | (16.2 | )% |
| Office and general expenses | | 124,646 |
| | 20.4 | % | | 131,599 |
| | 19.1 | % | | (6,953 | ) | | (5.3 | )% |
| Depreciation and amortization | | 21,179 |
| | 3.5 | % | | 21,206 |
| | 3.1 | % | | (27 | ) | | (0.1 | )% |
| Other asset impairment | | 3,180 |
| | 0.5 | % | | — |
| | — | % | | 3,180 |
| | — | % |
| | | 546,318 |
| | 89.5 | % | | 627,120 |
| | 91.1 | % | | (80,802 | ) | | (12.9 | )% |
| Operating profit | | $ | 63,972 |
| | 10.5 | % | | $ | 60,891 |
| | 8.9 | % | | $ | 3,081 |
| | 5.1 | % |
The impact of the adoption of ASC 606 reduced the Global Integrated Agencies reportable segment revenue by $56.3 million or 8.2%. The other components of the change 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 primarily 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 2017.
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, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Global Integrated Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 33,441 |
| | 5.5 | % | | $ | 98,330 |
| | 14.3 | % | | $ | (64,889 | ) | | (66.0 | )% |
| Staff costs | | 397,666 |
| | 65.2 | % | | 394,947 |
| | 57.4 | % | | 2,719 |
| | 0.7 | % |
| Administrative | | 88,756 |
| | 14.5 | % | | 91,776 |
| | 13.3 | % | | (3,020 | ) | | (3.3 | )% |
| Deferred acquisition consideration | | (5,999 | ) | | (1.0 | )% | | 6,195 |
| | 0.9 | % | | (12,194 | ) | | NM |
|
| Stock-based compensation | | 8,095 |
| | 1.3 | % | | 14,666 |
| | 2.1 | % | | (6,571 | ) | | (44.8 | )% |
| Depreciation and amortization | | 21,179 |
| | 3.5 | % | | 21,206 |
| | 3.1 | % | | (27 | ) | | (0.1 | )% |
| Other asset impairment | | 3,180 |
| | 0.5 | % | | — |
| | — | % | | 3,180 |
| | — | % |
| Total operating expenses | | $ | 546,318 |
| | 89.5 | % | | $ | 627,120 |
| | 91.1 | % | | $ | (80,802 | ) | | (12.9 | )% |
The decrease in direct costs was primarily attributable to the adoption of ASC 606 in which various client arrangements of certain Partner Firms previously 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 $62.4 million.
Deferred acquisition consideration change for the twelve months ended December 31, 2018 was primarily due to the aggregate performance of certain Partner Firms in 2018 relative to the previously projected expectations.
Stock-based compensation change for the twelve months ended December 31, 2018 was primarily due to the aggregate performance of certain Partner Firms in 2018 relative to the previously 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 a no impairment in 2017.
Domestic Creative Agencies
The change in revenue and expenses as a percentage of revenue in the Domestic Creative Agencies reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Domestic Creative Agencies | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 246,642 |
| | | | $ | 277,587 |
| | | | $ | (30,945 | ) | | (11.1 | )% |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 167,346 |
| | 67.8 | % | | 178,425 |
| | 64.3 | % | | (11,079 | ) | | (6.2 | )% |
| Office and general expenses | | 56,365 |
| | 22.9 | % | | 52,560 |
| | 18.9 | % | | 3,805 |
| | 7.2 | % |
| 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 |
|
| | | 246,591 |
| | 100.0 | % | | 239,366 |
| | 86.2 | % | | 7,225 |
| | 3.0 | % |
| Operating profit | | $ | 51 |
| | — | % | | $ | 38,221 |
| | 13.8 | % | | $ | (38,170 | ) | | NM |
|
The impact of the adoption of ASC 606 increased revenue in the Domestic Creative Agencies reportable segment by $2.7 million or 1.0%. In addition, revenue from existing Partner Firms declined $34.3 million or 12.4%.
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 Domestic Creative Agencies reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | % |
The decrease in direct and staff costs was primarily attributable to lower costs to support the decline in revenue of certain Partner Firms.
Specialist Communications
The change in revenue and expenses as a percentage of revenue in the Specialist Communications reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Specialist Communications | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 163,367 |
| | | | $ | 153,506 |
| | | | $ | 9,861 |
| | 6.4 | % |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 111,801 |
| | 68.4 | % | | 103,104 |
| | 67.2 | % | | 8,697 |
| | 8.4 | % |
| Office and general expenses | | 30,137 |
| | 18.4 | % | | 25,857 |
| | 16.8 | % | | 4,280 |
| | 16.6 | % |
| Depreciation and amortization | | 4,113 |
| | 2.5 | % | | 4,567 |
| | 3.0 | % | | (454 | ) | | (9.9 | )% |
| | | 146,051 |
| | 89.4 | % | | 133,528 |
| | 87.0 | % | | 12,523 |
| | 9.4 | % |
| Operating profit | | $ | 17,316 |
| | 10.6 | % | | $ | 19,978 |
| | 13.0 | % | | $ | (2,662 | ) | | (13.3 | )% |
The impact of the adoption of ASC 606 increased revenue in the Specialist Communications reportable segment by $0.8 million or 0.5%. The other components of the change included growth in revenue from 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 operating profit was due to higher operating expenses, partially offset by 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 twelve months ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Specialist Communications | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Direct costs | | $ | 42,144 |
| | 25.8 | % | | $ | 38,656 |
| | 25.2 | % | | $ | 3,488 |
| | 9.0 | % |
| Staff costs | | 77,000 |
| | 47.1 | % | | 69,283 |
| | 45.1 | % | | 7,717 |
| | 11.1 | % |
| Administrative | | 20,557 |
| | 12.6 | % | | 19,633 |
| | 12.8 | % | | 924 |
| | 4.7 | % |
| Deferred acquisition consideration | | 1,865 |
| | 1.1 | % | | (771 | ) | | (0.5 | )% | | 2,636 |
| | NM |
|
| Stock-based compensation | | 372 |
| | 0.2 | % | | 2,160 |
| | 1.4 | % | | (1,788 | ) | | (82.8 | )% |
| Depreciation and amortization | | 4,113 |
| | 2.5 | % | | 4,567 |
| | 3.0 | % | | (454 | ) | | (9.9 | )% |
| Total operating expenses | | $ | 146,051 |
| | 89.4 | % | | $ | 133,528 |
| | 87.0 | % | | $ | 12,523 |
| | 9.4 | % |
The increase in direct and staff costs were primarily attributable to supporting the growth in revenue of certain Partner Firms, and contributions from an acquired Partner Firm.
The change in the deferred acquisition consideration adjustment was due to the aggregate performance of certain Partner Firms in 2018 as compared to their 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
The change in revenues and expenses as a percentage of revenue in the Media Services reportable segment for the twelve months ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Media Services | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 121,859 |
| | | | $ | 150,198 |
| | | | $ | (28,339 | ) | | (18.9 | )% |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 86,975 |
| | 71.4 | % | | 97,881 |
| | 65.2 | % | | (10,906 | ) | | (11.1 | )% |
| Office and general expenses | | 31,319 |
| | 25.7 | % | | 34,708 |
| | 23.1 | % | | (3,389 | ) | | (9.8 | )% |
| Depreciation and amortization | | 2,693 |
| | 2.2 | % | | 3,709 |
| | 2.5 | % | | (1,016 | ) | | (27.4 | )% |
| Goodwill impairment | | 52,041 |
| | 42.7 | % | | — |
| | — | % | | 52,041 |
| | — | % |
| | | 173,028 |
| | 142.0 | % | | 136,298 |
| | 90.7 | % | | 36,730 |
| | 26.9 | % |
| Operating profit (loss) | | $ | (51,169 | ) | | (42.0 | )% | | $ | 13,900 |
| | 9.3 | % | | $ | (65,069 | ) | | NM |
|
The impact of the adoption of ASC 606 increased revenue in the Media Services reportable segment by $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 goodwill impairment. The change in operating profit was also due to a decline in revenue, partially offset by a decrease in 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 twelve months ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 direct 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 declines in revenue and costs incurred in the prior year for a disposed Partner Firm.
The goodwill impairment in 2018 primarily consisted of the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit. For more information see Note 8 of the Notes to the Consolidated Financial Statements included herein.
All Other
The change in revenue and expenses as a percentage of revenue in the All Other category for the years ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| All Other | | $ | | % of
Revenue | | $ | | % of
Revenue | | $ | | % |
| | | (Dollars in Thousands) |
| Revenue | | $ | 334,045 |
| | | | $ | 244,477 |
| | | | $ | 89,568 |
| | 36.6 | % |
| Operating expenses | | | | | | | | | | | | |
| Cost of services sold | | 227,780 |
| | 68.2 | % | | 169,751 |
| | 69.4 | % | | 58,029 |
| | 34.2 | % |
| Office and general expenses | | 54,494 |
| | 16.3 | % | | 27,150 |
| | 11.1 | % | | 27,344 |
| | NM |
|
| Depreciation and amortization | | 12,397 |
| | 3.7 | % | | 7,751 |
| | 3.2 | % | | 4,646 |
| | 59.9 | % |
| Goodwill impairment | | 4,691 |
| | 1.4 | % | | — |
| | — | % | | 4,691 |
| | — | % |
| | | 299,362 |
| | 89.6 | % | | 204,652 |
| | 83.7 | % | | 94,710 |
| | 46.3 | % |
| Operating profit | | $ | 34,683 |
| | 10.4 | % | | $ | 39,825 |
| | 16.3 | % | | $ | (5,142 | ) | | (12.9 | )% |
The impact of the adoption of ASC 606 increased revenue in the All Other category by $1.0 million or 0.4%. The 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 an immaterial negative foreign exchange impact.
These decrease in operating profit was primarily due to higher revenue, being more than offset by an increase in operating expenses, as outlined below. The impact of 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, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 direct and staff costs were primarily due to contributions from an acquired Partner Firm and an expansion in workforce in certain Partner Firms to support revenue growth.
The change in deferred acquisition consideration was primarily due to aggregate higher performance of certain Partner Firms as compared to forecasted expectations in the current period.
The goodwill impairment in 2018 was comprised of a partial impairment relating to a Partner Firm that was classified as Held For Sale as of December 31, 2018. For more information see Note 4 and 8 of the Notes to the Consolidated Financial Statements included herein.
Corporate
The change in operating expenses for Corporate for the twelve months ended December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | Change |
| Corporate | | $ | | $ | | $ | | % |
| | | (Dollars in Thousands) |
Staff costs
| | $ | 30,179 |
| | $ | 20,926 |
| | $ | 9,253 |
| | 44.2 | % |
| Administrative | | 17,240 |
| | 15,521 |
| | 1,719 |
| | 11.1 | % |
| Stock-based compensation | | 4,659 |
| | 2,134 |
| | 2,525 |
| | NM |
|
| Depreciation and amortization | | 762 |
| | 1,098 |
| | (336 | ) | | (30.6 | )% |
| Other asset impairment | | 2,317 |
| | 1,177 |
| | 1,140 |
| | 96.9 | % |
| Total operating expenses | | $ | 55,157 |
| | $ | 40,856 |
| | $ | 14,301 |
| | 35.0 | % |
The increase in staff costs for Corporate was primarily attributable to severance expense related to certain corporate actions taken in 2018 in comparison to 2017.
The increase in administrative costs was primarily related to an increase in professional fees of $5.4 million, primarily related to fees for the implementation of ASC 606, which was adopted effective January 1, 2018.
Liquidity and Capital Resources:
Liquidity
The following table provides summary information about the Company’s liquidity position:
|
| | | | | | | | | | | |
| 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 expects 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, 2019, the Company had no 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 6.50% 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 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 the Company’s 2019 Annual Report on Form 10-K and in the Company’s other SEC 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, 2019, the Company had a working capital deficit of $196.6 million compared to a deficit of $152.7 million at December 31, 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. 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 operating activities for the twelve months ended December 31, 2019 was $86.5 million, primarily driven by cash flows from earnings, accompanied by nominal unfavorable working capital requirements.
Cash flows provided by operating activities for the twelve months ended December 31, 2018 was $17.3 million, primarily reflecting unfavorable working capital requirements, driven by media and other supplier 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 accounts 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, which primarily consisted of proceeds of $23.1 million from the sale of the Company’s equity interest in Kingsdale, partially offset by $18.6 million of capital expenditures and $4.8 million paid for acquisitions.
During the twelve months ended December 31, 2018, cash flows used in investing activities was $50.4 million, primarily consisting of cash paid of $32.7 million for acquisitions and capital expenditures of $20.3 million.
During the twelve months ended December 31, 2017, cash flows used in investing activities was $20.9 million, primarily consisting of capital expenditures of $33.0 million, partially offset by net proceeds from sale of three subsidiaries of $10.6 million.
Financing Activities
During the twelve 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 was $32.6 million, primarily driven by $54.4 million in net repayments under the Credit Agreement, $57.1 million of acquisition related payments and distributions to noncontrolling partners of $8.9 million. These amounts were partially offset by $95.0 million of gross proceeds from the issuance of convertible preference shares.
Total Debt
Debt, inclusive of amounts drawn under the credit facility, net of debt issuance costs, as of December 31, 2019 was $887.6 million as compared to $954.1 million outstanding at December 31, 2018. The decrease of $66.5 million in debt was primarily a result of the Company’s net repayments on the Credit Agreement. See Note 11 of the Notes to the Consolidated Financial Statements for information regarding the Company’s $900 million aggregate principal amount of its 6.50% Notes and $250 million available under the Credit Agreement.
The Company is 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, 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, 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, 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, 2019 will be repaid with new financing, equity offerings, asset sales and/or cash flow from operations:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Contractual Obligations | | Total | | Less than
1 Year | | 1 – 3 Years | | 3 – 5 Years | | After
5 Years |
| | | (Dollars in Thousands) |
Indebtedness (1) | | $ | 900,000 |
| | $ | — |
| | $ | — |
| | $ | 900,000 |
| | $ | — |
|
| Operating lease obligations | | 339,562 |
| | 60,504 |
| | 99,147 |
| | 79,925 |
| | 99,986 |
|
| Interest on debt | | 263,250 |
| | 58,500 |
| | 117,000 |
| | 87,750 |
| | — |
|
Deferred acquisition consideration (2) | | 75,220 |
| | 45,521 |
| | 29,699 |
| | — |
| | — |
|
| Other long-term liabilities | | 2,830 |
| | 782 |
| | 2,048 |
| | — |
| | — |
|
Total contractual obligations (3) | | $ | 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 $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 $3.3 million will be paid in 2020 and $5.3 million will be paid in one to three years.
|
| |
(3)
| Pension obligations of $15.8 million are not included since the timing of payments are not known. |
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 its clients at levels that exceed the revenue from services. Some of our agencies purchase media for clients and act as an agent on behalf of their clients. These commitments are included in Accruals 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
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, 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 Consolidated Financial Statements for additional information regarding contingent deferred acquisition consideration.
The following table presents the changes in the deferred acquisition consideration by segment for the year ended December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
(1)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.
| |
(2)
| Other primarily consists of translation adjustments.
|
Redeemable Noncontrolling Interest
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 balance sheet. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity. See Notes 2 and 13 of the Notes to the Consolidated Financial Statements included herein for further information.
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 a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amounts 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
Our Consolidated Financial Statements have been prepared in accordance with GAAP. Preparation of the Consolidated Financial Statements and related disclosures requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed in the accompanying financial statements and footnotes. Our significant accounting policies are discussed in Note 2 of the Consolidated Financial Statements. Our critical accounting policies are those that are considered by management
to require significant judgment and use of estimates and that could have a significant impact on our financial statements. An understanding of our critical accounting policies is necessary to analyze our financial results.
Our critical accounting policies include our accounting for revenue recognition, business combinations, deferred acquisition consideration, redeemable noncontrolling interests, goodwill and intangible assets, income taxes and stock-based 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 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. See Note 5 of the Notes to the Consolidated Financial Statements included herein for further information.
Business Combinations. The Company has historically made, and may 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.
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 trademarks.
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 consideration liability, 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.
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 fixed amount, but rather is dependent upon various valuation formulas, such as the average earnings of the relevant subsidiary through the 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 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 their 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 earnings (loss) per share if the redemption values are 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. The Company performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes 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.
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 2019 annual impairment test, the Company used an income approach, which incorporates the use of the discounted cash flow (“DCF”) method. 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 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 from the Company’s long-range planning process using projections of operating 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. 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 test are as follows:
|
| |
| October 1, |
| 2019 |
Long-term growth rate | 2.0% |
WACC | 9.91% |
For the 2019 annual goodwill impairment test, the Company had 25 reporting units, all of which were subject to the quantitative goodwill impairment test. The range of the excess of fair value over the carrying amount for the Company’s reporting units was from 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 other reporting unit 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. 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. The Company monitors its reporting units to determine if there is an indicator of potential impairment.
Indefinite-lived intangible assets are primarily evaluated on an annual basis, generally in conjunction with the Company’s evaluation of goodwill balances. See Note 8 of the Notes to the Consolidated Financial Statements for 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.
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. See Note 15 of the Notes to the Consolidated Financial Statements for further information.
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 pronouncements can be found in Note 3 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, foreign currencies and impairment risk.
Debt Instruments: At December 31, 2019, the Company’s debt obligations consisted of amounts outstanding under its Credit Agreement and the 6.50% Notes. The 6.50% Notes bear a fixed 6.50% interest rate. The Credit Agreement bears interest at variable rates based upon the Euro 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 $0.0 million in borrowings under the Credit Agreement as of December 31, 2019, a 1.0% increase or decrease in the weighted average interest rate, which was 4.92% at December 31, 2019, would have no interest 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 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. 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 (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 $3.4 million.
Impairment Risk: At December 31, 2019, the Company had goodwill of $740.7 million and other intangible assets of $54.9 million. 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. See the Critical Accounting Policies and Estimates section above and Note 8 of the Notes to the Consolidated Financial Statements for further information.
Item 8. Financial Statements and Supplementary Data
MDC PARTNERS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Financial Statements: | |
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Financial Statement Schedules: | |
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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, 2019 and 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, 2019, and the related notes and schedules presented in Item 15 (collectively referred to as the consolidated financial 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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's internal control over financial reporting as of December 31, 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 5, 2020 expressed an adverse 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's auditor since 2006.
New York, New York
March 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. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per 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 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 the opinion of management are necessary for a fair presentation, in all material respects, of the information 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 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 in 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 Company. Mark Penn is the CEO and 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.
Use of Estimates. The preparation of consolidated financial statements in conformity with 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, 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. These estimates require the use of assumptions about future performance, which are uncertain at the time of estimation. To the extent actual results differ from the assumptions used, results of operations and cash flows could be materially affected.
Fair Value. The Company applies the fair value measurement guidance 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.
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, 2019 or December 31, 2018. No sales to an individual client or country other than in the United States accounted for more than 10% of revenue for the fiscal years ended December 31, 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, money market instruments and other short-term investments with original maturity dates 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.
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 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. A 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, or other appropriate discount rate.
Equity Method Investments. Equity method investments 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 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, 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.
Other Investments. From time to time, the Company makes investments in start-ups, such as advertising technology 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 carrying amount for these investments, which are included in Other assets within the Consolidated Balance Sheets as of December 31, 2019 and 2018 was $9,854 and $8,072, respectively.
The Company is required to measure these other investments at 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 measure 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 deterioration of earnings or significant change in the industry. If the qualitative assessment indicates an investment is impaired, the Company estimates the fair value and reduces the carrying value of the investment down to its fair value with the loss recorded within net income or loss.
Goodwill and Indefinite Lived Intangibles. Goodwill (the excess of the acquisition cost over the fair value of the net assets acquired) and an indefinite life intangible 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.
For the annual impairment test, 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, an impairment charge is 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 2019 annual impairment test, the Company used an income approach, which incorporates the use of the discounted cash flow (“DCF”) method. 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 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 from the Company’s long-range planning process using projections of operating results and related cash flows based on assumed long-term growth rates, demand trends and appropriate discount rates based on a reporting unit’s WACC as determined by considering the observable WACC of comparable companies and factors specific to the reporting 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. See Note 8 of the Notes to the Consolidated Financial Statements included herein for additional information regarding the Company’s impairment test.
Indefinite-lived intangible assets are primarily evaluated on an annual basis, generally in conjunction with the Company’s evaluation of goodwill balances.
Definite Lived Intangible Assets. Definite 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. 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.
BusinessCombinations. Business combinationsare 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 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 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 assets 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 trademarks.
Deferred Acquisition Consideration. Consistent with 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 are recorded as deferred acquisition consideration liabilities, and are derived from the projected 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. 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.
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. 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 the average earnings of the relevant subsidiary through the 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 by the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity on the Consolidated 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 Common 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. See Note 13 of the Notes to the Consolidated Financial Statements for detail on the impact on the Company’s earnings (loss) per share calculation.
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 Common stock and other paid-in 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.
Revenue Recognition. The Company’s 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. See Note 5 of the Notes to the Consolidated Financial Statements included herein for additional information.
Cost of Services Sold. Cost of services sold primarily consists of staff costs, and does not include depreciation charges for fixed assets.
Interest Expense. 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 Credit Agreement.
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.
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, generally the award’s vesting period. 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. The Company recognizes forfeitures as 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. 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.
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.
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.
Retirement Costs. Several of the Company’s subsidiaries offer employees access to certain defined contribution retirement 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 $11,909, $11,136 and $10,031 for the years ended December 31, 2019, 2018, and 2017, respectively. The Company also has a defined benefit pension plan. See Note 12 of the Notes to the Consolidated Financial Statements included herein for 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. 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
(thousands of United States dollars, except per share amounts, unless otherwise stated)
2. Significant Accounting Policies - (continued)
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.
The Company has 145,000 authorized and issued 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 are outstanding, as shares of convertible preference shares are participating securities due to their dividend rights. See Note 15 of the Notes to the Consolidated Financial Statements included herein for additional 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 functional currency of the Company is the Canadian dollar; 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 Consolidated 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 Accumulated 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 (loss). The balance sheets of non-U.S. dollar based subsidiaries are translated at the period end rate. The Consolidated 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 Accumulated other comprehensive (loss) income.
3. New Accounting Pronouncements
Adopted In The Current Reporting Period
Effective January 1, 2019, the Company adopted ASC 842. As a result, comparative prior periods have not been adjusted and continue to be reported under ASC 840, Leases. With the adoption 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 all 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 remaining lease payments, and a right-of-use lease asset of $254,245 which represents the lease liability, offset by adjustments as appropriate under ASC 842. The adoption of ASC 842 did not have a material impact on the Company’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 aggregate 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 the acquisition date of $801. 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 $6,005. The fair value was measured using a discounted cash flow model. As a result of the transaction, the Company reduced redeemable noncontrolling interests by $5,045. The difference between the purchase price and the redeemable noncontrolling interest of $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 closing cash payment of $3,890 and additional contingent
MDC PARTNERS INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
4. Acquisitions and Dispositions - (continued)
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) Per Common Share
The following table sets forth the computation of basic and diluted income (loss) per common share: |
| | | | | | | | | | | | |
| | | Twelve Months Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | | |
| Net income (loss) attributable to MDC Partners Inc. | | $ | (4,690 | ) | | $ | (123,733 | ) | | $ | 241,848 |
|
| Accretion on convertible preference shares | | (12,304 | ) | | (8,355 | ) | | (6,352 | ) |
| Net income allocated to convertible preference shares | | — |
| | — |
| | (29,902 | ) |
| 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 |
|
| 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 | | 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 |
|
| Diluted weighted average number of common shares outstanding | | 69,132,100 |
| | 57,218,994 |
| | 55,481,786 |
|
| Basic | | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.72 |
|
| Diluted | | $ | (0.25 | ) | | $ | (2.31 | ) | | $ | 3.71 |
|
Anti-dilutive stock awards 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 a cumulative three year earnings target and contingent upon continued employment, are excluded from the computation of diluted income per common share as the contingencies were not satisfied at December 31, 2019, 2018 and 2017, respectively. In addition, there were 145,000, 95,000, and 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, 2019, 2018, and 2017, respectively. These Preference Shares were anti-dilutive for each period presented in the table above and are therefore excluded from the diluted income (loss) per common share calculation.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
7. Fixed Assets
The following is a summary of the Company’s fixed assets as of December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| | Cost | | Accumulated Depreciation | | Net Book Value | | Cost | | Accumulated Depreciation | | Net Book Value |
| Computers, furniture and fixtures | $ | 93,224 |
| | $ | (69,687 | ) | | $ | 23,537 |
| | $ | 100,276 |
| | $ | (73,060 | ) | | $ | 27,216 |
|
| Leasehold improvements | 117,409 |
| | (59,892 | ) | | 57,517 |
| | 116,459 |
| | (55,486 | ) | | 60,973 |
|
| | $ | 210,633 |
| | $ | (129,579 | ) | | $ | 81,054 |
| | $ | 216,735 |
| | $ | (128,546 | ) | | $ | 88,189 |
|
Depreciation expense for the years ended December 31, 2019, 2018, and 2017 was $25,133, $27,111 and $23,873, respectively.
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, 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 |
|
(1)See Note 4 of the Notes to the Consolidated Financial Statements included herein for additional information.
(2)Transfers of goodwill relate to changes in segments.
The Company recognized an impairment of goodwill of $4,099 for the twelve months ended December 31, 2019. The impairment consisted of the write-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.
The Company recognized an impairment of goodwill of $4,415 for the twelve months ended December 31, 2017. The impairment primarily consisted of the write-down of goodwill equal to the excess carrying value above the fair value of two reporting units, one in each of the Global Integrated Agencies reportable segment and the Media Services reportable segment.
The total accumulated goodwill impairment charges as of December 31, 2019 and 2018, were $177,304 and $173,205, respectively.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per 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:
|
| | | | | | | | |
| | | Years Ended December 31, |
| Intangible Assets | | 2019 | | 2018 |
| Trademark (indefinite life) | | $ | 14,600 |
| | $ | 14,600 |
|
| Customer relationships – gross | | $ | 58,211 |
| | $ | 76,365 |
|
| Less accumulated amortization | | (32,671 | ) | | (42,180 | ) |
| Customer relationships – net | | $ | 25,540 |
| | $ | 34,185 |
|
| Other intangibles – gross | | $ | 28,695 |
| | $ | 31,421 |
|
| Less accumulated amortization | | (13,942 | ) | | (12,441 | ) |
| Other intangibles – net | | $ | 14,753 |
| | $ | 18,980 |
|
| Total intangible assets | | $ | 101,506 |
| | $ | 122,386 |
|
| Less accumulated amortization | | (46,613 | ) | | (54,621 | ) |
| Total intangible assets – net | | $ | 54,893 |
| | $ | 67,765 |
|
The weighted average amortization period for customer relationships is seven years and other intangible assets is nine years. In total, the weighted average amortization period is eight years. Amortization expense related to amortizable intangible assets for the years ended December 31, 2019, 2018, and 2017 was $11,828, $17,290, and $17,125, respectively.
The estimated amortization expense for the five succeeding years is as follows:
|
| | | | |
| Year | | Amortization |
| 2020 | | $ | 9,481 |
|
| 2021 | | 8,098 |
|
| 2022 | | 7,547 |
|
| 2023 | | 7,089 |
|
| Thereafter | | 8,078 |
|
9. Deferred Acquisition Consideration
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued 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 contingent 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 required retention period.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
9. Deferred Acquisition Consideration - (continued)
The following table presents changes in contingent deferred acquisition consideration, which is measured at fair value on a recurring 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 are 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 reported under ASC 840. See Note 3 of the Notes to the Consolidated Financial Statements included herein for additional information regarding the Company’s adoption of ASC 842. The policies described herein refer to those in effect as of January 1, 2019.
The Company leases 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 use an underlying asset for the lease 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 lease payments, the Company uses its incremental borrowing rate based on the 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 exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease costs are recognized in the Consolidated Statement of Operations over the lease term on a straight-line basis. 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.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
10. Leases - (continued)
Some of 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 index or rate in effect at the lease commencement date and are 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 is 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 used 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 a term of 12 months or less is immaterial.
Rental expense for the twelve months ended December 31, 2018 and 2017 was $65,093 and $64,086, respectively, offset by $3,671 and $2,797, respectively, in sublease rental income.
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
10. Leases - (continued)
The following table presents minimum future rental payments under the Company’s leases at December 31, 2019 and their reconciliation to the corresponding lease liabilities:
|
| | | |
| | 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 |
|
11. Debt
As of December 31, 2019 and 2018, the Company’s indebtedness was comprised as follows:
|
| | | | | | | |
| 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 was $62,210, $64,420 and $62,001, respectively.
The amortization of deferred finance costs included in interest expense was $3,346, $3,193 and $3,022 for the years ended December 31, 2019, 2018, and 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 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, payable semiannually in arrears on May 1 and November 1, at a rate of 6.50% per annum. The 6.50% Notes mature on May 1, 2024, unless earlier redeemed or repurchased.
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 the timing of the 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, 2019.
Amendment to Credit Agreement
The Company is party to a $250,000 secured revolving credit facility due May 3, 2021.
On March 12, 2019 (the “Amendment Effective Date”), the Company, Maxxcom Inc. (a subsidiary of the Company) (“Maxxcom”) and each of their subsidiaries party thereto entered into an Amendment to the existing senior secured revolving credit facility, dated as of May 3, 2016 (as amended, the “Credit Agreement”), 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.
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 and collateralized by a portion of MDC’s outstanding receivable balance. The Company was in compliance with all of the terms and conditions of its Credit Agreement as of December 31, 2019.
At December 31, 2019 and December 31, 2018, the Company had issued undrawn outstanding letters of credit of $4,836 and $4,701, respectively.
Future Principal Repayments
Future principal repayments on 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 2018 are as follows:
|
| | | | | | | | |
| | 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 | % |
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.
Equity 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 (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, were 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)
|
| | | | | | | | | | | | |
| | | 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 |
|
Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests as of December 31, 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 4 of the Notes to the Consolidated Financial Statements included herein for further information.
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 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, 2019, consists of $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 death and $2,746 representing the initial redemption value (required floor) recorded for certain acquisitions in excess of the amount 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 if 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 calculation.
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 estimated amount of a loss related to such matters. Additionally, 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.
Deferred Acquisition Consideration and Options to Purchase. See Notes 9 and 13 of the Notes to the Consolidated Financial Statements included herein for 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
(thousands of United States dollars, except per share amounts, unless otherwise stated)
14. Commitments, Contingencies, and Guarantees - (continued)
Natural Disasters. Certain of the Company’s operations are located in regions of the 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 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.
Commitments. At December 31, 2019, the Company had $4,836 of undrawn letters of credit.
15. Share Capital
The authorized and outstanding share capital of the Company is as follows:
Series 6 Convertible Preference Shares
On March 14, 2019 (the “Series 6 Issue Date”), the Company entered into a securities purchase agreement with Stagwell Agency Holdings LLC (“Stagwell Holdings”), an affiliate of Stagwell, pursuant to 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 $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, the Company increased the size of its Board and appointed two nominees designated by 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 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, 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 6 Preference Share is $1,000. The initial Conversion Price is $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. During the twelve months ended December 31, 2019, the Series 6 Preference Shares accreted at a monthly rate of $6.96, for total accretion of $3,261, bringing the aggregate liquidation preference to $53,261 as of December 31, 2019. The accretion is considered in the calculation of net 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 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
(thousands of United States dollars, except per share amounts, unless otherwise stated)
15. Share Capital - (continued)
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
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 determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The hierarchy for observable and unobservable inputs used to measure fair value into three broad levels 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.
Financial Liabilities that are not Measured at Fair Value on a Recurring Basis
The following table presents certain information for our financial liability that is not measured at fair value on a recurring basis at December 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 |
| December 31, 2018 |
| | Carrying
Amount |
| Fair Value |
| Carrying
Amount |
| Fair Value |
| Liabilities: | |
|
| |
|
| |
|
| |
|
| 6.50% Senior Notes due 2024 | $ | 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 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
Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period. The estimated liability is determined in accordance with various contractual valuation formulas that may be dependent upon 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). See Note 9 of the Notes to the Consolidated Financial Statements included herein for additional information regarding contingent deferred acquisition consideration.
At December 31, 2019 and 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.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets are measured at fair value on a nonrecurring basis, primarily goodwill, intangible assets (a Level 3 fair value assessment) and right-of-use lease assets (a Level 2 fair value assessment). Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. The Company recognized an impairment of goodwill of $4.1 million for the twelve months ended December 31, 2019 as compared to an impairment of goodwill, intangible assets, and other assets of $80.1 million for the twelve months ended December 31, 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 recognized an impairment charge of $3.7 million to reduce the carrying value of certain right-of-use lease assets and related leasehold improvements in the twelve months ended December 31, 2019. See Note 10 of the Notes to the Consolidated Financial Statements included herein for further information.
20. Related Party Transactions
In the ordinary 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, 2019, $393 was owed to the affiliate.
On February 14, 2020, Sloane sold substantially all its assets and certain liabilities to an affiliate of Stagwell. See Note 1 of the Notes to the Consolidated Financial Statements for information related to this transaction.
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’s Board of Directors. The total future rental income related to the sublease is approximately $350.
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 operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term results of operations for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
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. 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 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.”
The Global Integrated Agencies reportable segment is comprised of the Company’s four global, integrated operating segments (72andSunny, Anomaly, Crispin Porter + Bogusky, and Forsman & Bodenfors) serving multinational clients around the world. 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 seven 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. These operating segments share similar characteristics related to (i) the nature of their 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 results of operations is similar among the operating segments aggregated in the Domestic Creative Agencies reportable segment.
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 four 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. 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 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 results 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, which operates primarily in North America, performs media buying and planning as its core competency across a range of platforms (out-of-home, paid search, social media, lead generation, programmatic, 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 Communications, Concentric Partners, Gale Partners, Kenna, Kingsdale (through the date of sale on March 8, 2019), Instrument, Relevent, Team, Vitro, 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
(thousands of United States dollars, except per share amounts, unless otherwise stated)
21. Segment Information - (continued)
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Revenue: | | | | | | |
| 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 |
|
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)
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Depreciation and amortization: | | | | | | |
| Global Integrated Agencies | | $ | 16,572 |
| | $ | 21,179 |
| | $ | 21,206 |
|
| Domestic Creative Agencies | | 4,843 |
| | 5,052 |
| | 5,143 |
|
| Specialist Communications | | 2,577 |
| | 4,113 |
| | 4,567 |
|
| Media Services | | 3,261 |
| | 2,693 |
| | 3,709 |
|
| All Other | | 10,208 |
| | 12,397 |
| | 7,751 |
|
| Corporate | | 868 |
| | 762 |
| | 1,098 |
|
| Total | | $ | 38,329 |
| | $ | 46,196 |
| | $ | 43,474 |
|
| | | | | | | |
| Stock-based compensation: | | | | | | |
| Global Integrated Agencies | | $ | 26,207 |
| | $ | 8,095 |
| | $ | 14,666 |
|
| Domestic Creative Agencies | | 1,532 |
| | 2,623 |
| | 2,301 |
|
| Specialist Communications | | 209 |
| | 372 |
| | 2,160 |
|
| Media Services | | 20 |
| | 276 |
| | 614 |
|
| All Other | | 1,192 |
| | 2,391 |
| | 2,475 |
|
| Corporate | | 1,880 |
| | 4,659 |
| | 2,134 |
|
| Total | | $ | 31,040 |
| | $ | 18,416 |
| | $ | 24,350 |
|
| | | | | | | |
| Capital expenditures: | | | | | | |
| Global Integrated Agencies | | $ | 8,223 |
| | $ | 8,731 |
| | $ | 18,897 |
|
| Domestic Creative Agencies | | 3,044 |
| | 2,692 |
| | 4,695 |
|
| Specialist Communications | | 1,166 |
| | 3,553 |
| | 1,181 |
|
| Media Services | | 194 |
| | 806 |
| | 3,035 |
|
| All Other | | 5,933 |
| | 4,415 |
| | 5,127 |
|
| Corporate | | 36 |
| | 67 |
| | 23 |
|
| Total | | $ | 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 | | | | | | | |
| 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
(thousands of United States dollars, except per share amounts, unless otherwise stated)
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 |
| 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 |
| | $ | 123,093 |
| | $ | 218,322 |
| | $ | 1,513,779 |
|
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: | | | | | | | |
| 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 | ) |
The above revenue, cost of services sold, and income (loss) have primarily been affected by acquisitions and 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) have been affected as follows:
The fourth quarter of 2019 and 2018 included a foreign exchange gain of $4,349 and a loss of $13,324, respectively.
The fourth quarter of 2019 and 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
(thousands of United States dollars, except per share amounts, unless otherwise stated)
22. Quarterly Results of Operations (Unaudited) - (continued)
The fourth quarter of 2019 included income tax benefit of $2,830 relating to the decrease to the Company’s valuation allowance. The fourth quarter of 2018 included income tax expense related to the increase of the Company’s valuation allowance of $49,447.
Item 9. Changes in and Disagreements with 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”), who is our principal executive officer, and Chief Financial Officer (“CFO”), who is our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives. However, our disclosure controls and procedures are designed to provide reasonable assurances of achieving our control objectives.
We conducted an evaluation, under the supervision and with the participation of our management, including our CEO, CFO and management Disclosure Committee, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(e) and 15(d)-15(e) of the Exchange Act. Based on that evaluation, our CEO and CFO concluded that, as of December 31, 2019, due to the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were ineffective 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 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.
(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, 2019 based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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 preparation and review 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 as of December 31, 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, 2019, that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
(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. (the “Company’s”) and subsidiaries internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 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 as of December 31, 2019 and 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, 2019, and the related notes and schedules presented in Item 15 (collectively referred to as the consolidated financial statements) and our report dated March 5, 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 5, 2020
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
Reference is madeThe names of, and certain information regarding, our current directors are set forth below.
Directors of MDC Partners
| Name | | Age | | Principal Occupation | | Director Since |
| Mark Penn | | 66 | | Chief Executive Officer of MDC; President and Managing Partner of the Stagwell Group. | | 2019 |
| Charlene Barshefsky | | 69 | | Senior International Partner at WilmerHale. | | 2019 |
| Bradley J. Gross | | 47 | | Managing Director at Goldman Sachs & Co. | | 2017 |
| Anne Marie O’Donovan | | 61 | | Director of Indigo Books & Music, Inc., Aviva Canada, Cadillac Fairview, and Investco. | | 2016 |
| Kristen M. O’Hara | | 50 | | Chief Business Officer, Hearst Magazines. | | 2019 |
| Wade Oosterman | | 59 | | Vice Chair of Bell Canada and Group Chair of Bell Media. | | 2020 |
| Desiree Rogers | | 60 | | Chief Executive Officer and Co-Owner of Black Opal Beauty. | | 2018 |
| Irwin D. Simon | | 61 | | Chairman and CEO of Aphria Inc. | | 2013 |
Mark Penn
Mark Penn has been the Chief Executive Officer of MDC Partners since March 18, 2019. He has also been the President and Managing Partner of The Stagwell Group, a private equity fund that invests in digital marketing services companies, since its formation in June 2015. Prior to The Stagwell Group, Mr. Penn served in various senior executive positions at Microsoft. As Executive Vice President and Chief Strategy Officer of Microsoft, he was responsible for working on core strategic issues across the sections captioned “Electioncompany, blending data analytics with creativity. Mr. Penn also has extensive experience growing and managing agencies. As the co-founder and CEO of Directors,”Penn Schoen Berland, a market research firm that he built and “Committeeslater sold to WPP Group, he demonstrated value-creation, serving clients with innovative techniques such as being the first to offer overnight polling and unique ad testing methods now used by politicians and major corporations. At WPP Group, he also became CEO of Burson Marsteller, and managed the two companies to substantial profit growth during that period. A globally recognized strategist, Mr. Penn has advised corporate and political leaders both in the United States and internationally. He served for six years as White House Pollster to President Bill Clinton and was a senior adviser in his 1996 re-election campaign, receiving recognition for his highly effective strategies. Mr. Penn later served as chief strategist to Hillary Clinton in her Senate campaigns and her 2008 Presidential campaign. Internationally, Mr. Penn helped elect more than 25 leaders in Asia, Latin America and Europe, including Tony Blair and Menachem Begin. Penn has extensive leadership experience as a CEO and an agency operator, and his background as an agency founder, executive strategist and marketer, and global thought leader were critical qualifications that led to his appointment as CEO and a member of the Board - Audit Committee”Board. Mr. Penn resides in our Proxy Statement forWashington, D.C. Mr. Penn was nominated by Stagwell Agency Holdings LLC (“Stagwell”) pursuant to its rights as purchaser of the 2020 Annual General Meeting of Stockholders, which sections are incorporated herein by reference.
Class A Subordinate Voting Shares and Series 6 Convertible Preference Shares. Please see Executive Officers of MDC Partners
below.Charlene Barshefsky
Charlene Barshefsky is a Senior International Partner at WilmerHale, a multinational law firm based in Washington, D.C., a position she has held since 2001. Ambassador Barshefsky advises multinational corporations on their market access, regulatory, investment and acquisition strategies in major markets across the globe. Prior to joining WilmerHale, Ambassador Barshefsky was the United States Trade Representative (USTR) and a member of President Clinton’s Cabinet from 1997 to 2001 and Acting and Deputy USTR from 1993 to 1996. As the USTR, she served as chief trade negotiator and principal trade policymaker for the United States and, in both roles, negotiated complex market access, regulatory and investment agreements with virtually every major country in the world. She serves on the boards of directors of the American Express Company and the Estee Lauder Companies and is a member of the board of trustees of the Howard Hughes Medical Institute. She is also a member of the Council on Foreign Relations. Ambassador Barshefsky’s distinguished record as a policymaker and negotiator, ability to assess regulatory risks, as well as exceptional Board director experience for some of the world’s most respected consumer companies across a range of sectors focused on digital innovation are key qualifications for the Board. Ambassador Barshefsky resides in Washington, D.C. Ambassador Barshefsky was nominated by Stagwell pursuant to its rights as the purchaser of the Class A Subordinate Voting Shares and Series 6 Convertible Preference Shares.
Bradley Gross
Bradley Gross is a Managing Director within the Merchant Banking Division (“MBD”) of Goldman, Sachs & Co., a position he has held since 2007. Mr. Gross is focused on US technology, media and telecom investing and serves as a member of the MBD Corporate Investment Committee and MBD Risk Committee. Mr. Gross joined Goldman Sachs in 1995 and rejoined the firm after completing business school in 2000. He became a vice president in 2003 and was named Managing Director in 2007. Mr. Gross serves on the boards of directors of Neovia Logistics Holdings, a provider of logistics solutions, and Proquest Holdings, a leading information services business serving the higher education market. Mr. Gross brings to the board an exceptional risk management track record, extensive public company board experience and technological experience, all of which qualify him for the Board. Mr. Gross resides in New York, New York. Mr. Gross was nominated by Goldman Sachs pursuant to its rights as the purchaser of the Series 4 Convertible Preference Shares.
Anne Marie O’Donovan
Anne Marie O’Donovan is an experienced senior executive, public company board member, and CPA, with over 30 years of Canadian and global financial services industry expertise. She is a member of the board of directors of Indigo Books & Music, a Canadian book and lifestyle company, Aviva Canada, a leading property and casualty insurance company, Cadillac Fairview, an owner/operator/ developer of office, retail and mixed-use properties, and Investco, an investment subsidiary of the Canadian Medical Association. Most recently she served as Executive Vice President at Scotiabank, where she was Chief Administrative Officer for Global Banking and Markets division. Prior to that Ms. O’Donovan had a long, distinguished career at Ernst & Young, a professional services and accounting firm, as Partner. She holds an HBA degree from the Richard Ivey School of Business at the University of Western Ontario and is a Fellow of the Institute of Chartered Accountants of Ontario. Spencer Stuart, a leadership consulting firm that was engaged by the MDC Partners’ board of directors in 2016 to complete an extensive director search, recommended Ms. O’Donovan to the board. Among other qualifications, Ms. O’Donovan brings to the Board an in-depth knowledge in the areas of executive leadership, risk management, regulatory, governance, financial management, technology, operations and internal audit, as well as relevant experience working with international teams across Europe, Asia and Latin America. Ms. O’Donovan resides in Oakville, Ontario.
Kristen M. O’Hara
Kristen M. O’Hara is a strategic marketing and media professional who has worked for several global enterprises. Ms. O’Hara has served as the Chief Business Officer of Hearst Magazines since January 2020. Prior to that she served as VP Business Solutions of Snap Inc. from September 2018 to October 2018, and prior to that, served as Chief Marketing Officer, Global Media for Time Warner Inc. (now Warner Media, LLC), a position she held since May 2011. Earlier executive roles with Time Warner Inc.’s Global Media Group include Senior Vice President and Managing Director, Senior Vice President of Marketing and Client Partnerships, and from 2002 to 2004, Ms. O’Hara was the Vice President of Corporate Marketing and Sales Strategy for the Time Inc. division of Time Warner Inc. From 1993 to 2002, Ms. O’Hara served in several positions at global marketing communications firm Young & Rubicam Inc., driving business development and brand strategy for blue chip advertisers. Ms. O’Hara has served as member of the board of CIIG Merger Corp., a Nasdaq listed company, since December 2019 and Ms. O’Hara has been a member of the board of trustees of the Signature Theatre Company since 2012. She was formerly a member of the boards of directors of Iconix Brand Group, Inc., a Nasdaq-listed company, from September 2016 to January 2018, and the Data & Marketing Association. Ms. O’Hara’s marketing and advertising experience, and high level of expertise in data, social and digital media, offer critical skills and perspectives to the Board. For all of the foregoing reasons, Ms. O’Hara is qualified to serve on the board of directors of MDC Partners. Ms. O’Hara resides in Bronxville, New York. Ms. O’Hara was nominated for election to the MDC Partners board of directors pursuant to a settlement agreement by and between the Company and FrontFour Capital Group LLC.
Wade Oosterman
Wade Oosterman is Vice Chairman of Bell Canada, Canada’s largest telecommunications service provider, a position he has held since 2018. Mr. Oosterman has also been Group President of Bell Media, Canada’s largest media company, since 2015, and has been Chief Brand Officer of Bell Canada and BCE since 2006. Mr. Oosterman served as President of Bell Mobility from 2006 to 2018. Prior to joining Bell Canada, Mr. Oosterman served as Chief Marketing and Brand Officer for TELUS Corp., and Executive Vice President, Sales and Marketing for TELUS Mobility. In 1987, Mr. Oosterman co-founded Clearnet Communications Inc. and served on its board of directors until the successful sale of Clearnet to TELUS Corp. Mr. Oosterman serves on the board of directors of Telephone Data Systems Inc., a telecom operator participating in the US Midwest markets, and Enstream, a joint venture of the three largest Canadian telecom providers engaged in the business of mobile payments and identity verification. He has also served on the boards of directors of Ingram Micro and Virgin Mobile Canada. Among other qualifications, Mr. Oosterman brings to the board financial acumen, risk assessment and mitigation, and exceptional operations experience. His leadership includes extensive experience in both sell-side and buy-side transactions, with a substantial footprint extending beyond Canada to China, Japan,Korea, Europe and the US. Since 2008, during Mr. Oosterman’s tenure, Bell has delivered the highest shareholder returns in North America in the telecom sector. He holds a BA in Economics and Financial Studies from the University of Western Ontario and an MBA from the Ivey School at Western University. Mr. Oosterman resides in Toronto, Ontario.
Desirée Rogers
Desirée Rogers is the Chief Executive Officer and Co-Owner of Black Opal Beauty, LLC, a masstige makeup and skincare company sold in Walmart, CVS and Rite Aid as well as internationally. She served as Chairman of Choose Chicago, the tourism agency for the city of Chicago with over $1 billion in revenue, from 2013 until 2019. At Choose Chicago, Ms. Rogers’ digital marketing leadership resulted in record results of over 57 million visitors in 2018 and 2019. Ms. Rogers was Chief Executive Officer of Johnson Publishing Company, a publishing and cosmetics firm, from 2010 to 2017. During the period of 2009 to 2010, Ms. Rogers was The White House Special Assistant to the President and Social Secretary under the Obama administration. Prior to this post, Ms. Rogers served as the President of Allstate Social Network for Allstate Financial, a personal lines property and casualty insurer. Ms. Rogers is a member of the boards of directors of World Business Chicago, The Economic Club of Chicago, The Conquer Cancer Foundation, Donors Choose and Inspired Entertainment Inc., and is formerly a member of the board of directors of Pinnacle Entertainment, Inc. Ms. Rogers is a results-oriented business leader, and brings to the board strong interpersonal, collaborative and diplomatic skills. For all of the foregoing reasons, Ms. Rogers is qualified to serve on the board of directors of MDC Partners. She has been a member of the MDC Partners Board of Directors since her appointment on April 26, 2018, and currently chairs the Human Resources and Compensation Committee and serves on the Nominating and Corporate Governance Committee. Ms. Rogers resides in Chicago, Illinois.
Irwin D. Simon
Irwin D. Simon is a business executive, who in 1993 founded The Hain Celestial Group, Inc. (NASDAQ: HAIN) which he built into a leading, global organic and natural products company with over $3 billion in net sales and served as President, Chief Executive Officer and Chairman through 2018. Mr. Simon has more than 30 years of business experience spanning many domestic and international leadership and operating roles. Prior to Hain Celestial, he was employed in various marketing and sales positions at The Häagen-Dazs Company, a frozen dessert company, then a division of Grand Metropolitan, a multi-national luxury brands company. Mr. Simon currently serves as Chairman of the Board and Chief Executive Officer of Aphria Inc. (NYSE: APHA), a leading global cannabis company. He also served as a Director of Barnes & Noble, Inc., the largest retail bookseller in the United States. Most recently, Mr. Simon was appointed Executive Chairman of Act II Global Acquisition Corp. (NASDAQ: ACTT), a blank check company he co-founded in the “better-for-you” sector. For all of the foregoing reasons, Mr. Simon is qualified to serve on the board of directors of MDC Partners. He also serves on the board of directors at Tulane University and on the Board of Trustees at Poly Prep Country Day School. Mr. Simon is also the majority owner of the Cape Breton Screaming Eagles, a Quebec Major Junior Hockey League team and co-owner of St. John’s Edge of the National Basketball League of Canada.
Indebtedness of Directors, Executive Officers and Senior Officers
There is currently no indebtedness owed to MDC by any of MDC’s Directors, executive officers or senior officers, and there was no such indebtedness owed to MDC as of December 31, 2019. The Company’s Corporate Governance Guidelines prohibit the Company from making any new personal loans or extensions of credit to Directors or executive officers of the Company.
Insurance
MDC holds directors’ and officers’ liability insurance policies that are designed to protect MDC Partners and its directors and officers against any legal action which may arise due to wrongful acts on the part of directors and/or officers of MDC. The policies are written for a current limit of $70 million, subject to a corporate deductible up to $2,500,000 per indemnifiable claims. In respect of the fiscal year ended December 31, 2019, the cost to MDC of maintaining the policies was $1,013,623. The twelve-month premium cost of the current policy, effective from July 31, 2019 – July 31, 2020, is equal to $1,070,386.
Executive Officers of MDC Partners
The executive officers of MDC Partners as of February 1,April 27, 2020 are:
|
| | | | |
| Name | | Age | | Office |
| Mark Penn | | 66 | | Chief Executive Officer |
| Frank Lanuto | | 57 | | Chief Financial Officer |
Jonathan Mirsky
| | 51 | | General Counsel |
| David C. Ross | | 3940 | | Executive Vice President, Strategy and Corporate Development |
| Vincenzo DiMaggio | | 4546 | | Senior Vice President, Chief Accounting Officer |
There is no family relationship among any of the executive officers or directors.
Mr. Penn joined MDC Partners in March 2019 and currently serves as Chairman and Chief Executive Officer. Mr. Penn has been acting as the Managing Partner and President at the Stagwell Group since 2015. Prior thereto, Mr. Penn served as Microsoft’s Executive Vice President and Chief Strategy Officer and held Chief Executive Officer position in multiple strategic public relation firms.
Mr. Lanuto joined MDC partnersPartners in June 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 spent over 17 years overseeing global financial functions and operations activities in the advertising, marketing and media services industries.
Mr. Mirsky joined MDC partnersPartners in June 2019 as General Counsel. Prior to joining MDC Partners, from 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 acquisitions and preparing and negotiating complex commercial agreements.
Mr. Ross
joinedjoined MDC Partners in 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.Mr. DiMaggio joined MDC Partners in 2018 as Chief Accounting Officer. Prior to joining MDC Partners, he served as the Senior 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 Vice President, Assistant Corporate Controller.
Corporate Governance
Director Independence
The Board has established guidelines for determining director independence, and all current directors, with the exception of Mr. Penn, have been determined by the Board to be independent under applicable Nasdaq rules and the Board’s governance principles, and applicable Canadian securities laws within the meaning of National Instrument 58-101 — Disclosure of Corporate Governance Practices. Mr. Gross was nominated to the Board in 2017 by Broad Street Principal Investments, L.L.C., an affiliate of The Goldman Sachs Group Inc. (“Goldman Sachs”), pursuant to its rights as the purchaser of the Series 4 Convertible Preference Shares. At that time, the Company and the purchaser determined to treat Mr. Gross as ineligible to sit on the Board’s committees, without the Board making an affirmative determination as to his independence. In light of the changes in Board composition during 2019, the Board first evaluated Mr. Gross’s independence in June 2019 and determined him to be independent under applicable Nasdaq rules and the Board’s governance principles.
Procedures for Recommending Nominees to our Board
The Company’s Corporate Governance Guidelines contain a majority voting policy, which requires a director nominee who receives, in an uncontested election, a number of votes “withheld” that is greater than the number of votes cast “for” his or her election to promptly offer to resign from the Board. The Board shall accept the resignation absent exceptional circumstances. Unless the Board decides to reject the offer, the resignation shall become effective 60 days after the date of the election. In making a determination whether to reject the offer or postpone the effective date, the Board of Directors shall consider all factors it considers relevant to the best interests of the Company. A director who tenders a resignation pursuant to the Corporate Governance Guidelines will not participate in any meeting of the Board at which the resignation is considered. The Company will promptly issue a news release with the Board’s decision.
Committees of the Board of Directors
The Board oversees the management of the business and affairs of MDC Partners as required by Canadian law. The Board conducts its business through meetings of the Board and three standing committees: the Audit Committee, the Human Resources & Compensation Committee and the Nominating and Corporate Governance Committee.
Copies of the charters of the Audit Committee, the Human Resources & Compensation Committee and the Nominating and Corporate Governance Committee, as well the Code of Conduct and Corporate Governance Guidelines, are available free of charge at MDC Partners’ website located athttp://www.mdc-partners.com/investors/corporate-governance. Copies are also available to any shareholder upon written request to 330 Hudson, 10th Floor, New York, NY 10013, Attn: Investor Relations.
Additional information about our directorsAudit Committee
The purpose of the Audit Committee is to provide assistance to the Board in fulfilling its fiduciary obligations and executive officers appearsoversight responsibilities with respect to (1) the integrity of the Corporation’s financial statements, (2) the Corporation’s compliance with legal and regulatory requirements, (3) the independent auditor’s qualifications and independence, and (4) the performance of the Corporation’s internal audit function and independent auditors. The Committee will also provide risk oversight, including cybersecurity risks, and prepare the report that SEC rules require to be included in the Corporation's annual proxy statement.
The current members of the Audit Committee are Anne Marie O’Donovan (Chairperson), Charlene Barshefsky and Wade Oosterman. Each of the members of the Audit Committee is “financially literate” as required by applicable Canadian securities laws. The Board has determined that Ms. O’Donovan and Mr. Oosterman each qualify as an “audit committee financial expert” under the captions “ElectionSarbanes-Oxley Act of Directors”2002 and “Executive Compensation”applicable Nasdaq and Securities and Exchange Commission regulations, and each member of the Audit Committee has been determined by the Board to be independent pursuant to Item 407 of Regulation S-K.
Nominating and Corporate Governance Committee
The purpose of the Nominating and Corporate Governance Committee is to (1) identify and to select and recommend to the Board individuals qualified to serve as directors of the Company and on committees of the Board, (2) to advise the Board with respect to the Board composition, procedures and committees, (3) to develop and recommend to the Board a set of corporate governance principles applicable to the Company, (4) and to oversee the evaluation of the Board ensure the committees fulfill their mandates.
The current members of the Nominating & Corporate Governance Committee are Irwin Simon (Chairman), Charlene Barshefsky, Kristen O’Hara, and Desirée Rogers.
Human Resources and Compensation Committee
The purpose of the Human Resources & Compensation Committee is to oversee the Corporation's executive compensation and benefit plans and practices, including its incentive-compensation and equity-based plans, and to review and approve the Corporation’s management succession plans. The Committee also produces a Committee report on executive compensation as required by the Securities and Exchange Commission to be included in the Company’s Proxy Statement forCorporation's annual proxy statement or annual report on Form 10-K filed with the 2020 Annual General Meeting of Stockholders.
SEC.The current members are Desirée Rogers (Chairperson), Bradley J. Gross, Kristen O’Hara and Irwin Simon. All members are independent, non-employee directors.
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 Code of Conduct also satisfies the requirements for a code of ethics, as defined by Item 406 of Regulation S-K promulgated by the SEC. 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
https://www.mdc-partners.comwww.mdc-partners.com/investors/corporate-governance, or by writing to MDC Partners Inc., 330 Hudson Street, 10th Floor, New York, New York 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.Delinquent Section 16(a) Reports
Under Section 16(a) of the Exchange Act, each person serving as a director or executive officer during the last fiscal year and any persons holding 10% or more of the common stock are required to report their ownership of common stock and any changes in that ownership to the SEC within a prescribed period of time and to furnish the Company with copies of such reports. To the Company’s knowledge, based solely upon a review of copies of such reports received by the Company which were filed with the SEC for the fiscal year ended December 31, 2019, and upon written representations from such persons that no other reports were required, the Company has been advised that all reports required to be filed under Section 16(a) have been timely filed with the SEC except for the Form 4 for Clare Copeland filed on February 22, 2019, Form 4’s for David Doft, Mitchell Gendel, Scott Kauffman, and David Ross filed on March 20, 2019, Form 4 for Daniel Goldberg filed on August 2, 2019, Form 3 and Form 4 for Vincenzo DiMaggio filed on April 3, 2020 and the Form 3 for Charlene Barshefsky filed on March 12, 2020.
Item 11. Executive Compensation
MDC PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousandsour executive compensation practices for our named executive officers or “NEOs” in 2019:| MARK PENN | | Chairman & Chief Executive Officer |
| FRANK LANUTO | | Chief Financial Officer |
| JONATHAN MIRSKY | | General Counsel and Corporate Secretary |
| DAVID ROSS | | Executive Vice President, Strategy and Corporate Development |
In addition, two of United States dollars, except per share amounts, unless otherwise stated)
Reference is madeour former executive officers, David Doft, our Former Executive Vice President and Chief Financial Officer, and Mitchell Gendel, our Former Executive Vice President and General Counsel, are also considered in our NEO group for 2019, although each departed the Company in 2019. We are currently eligible to provide disclosure pursuant to the
sections captionedrules applicable to smaller reporting companies. As a smaller reporting company, we are not required to treat Frank Lanuto, our CFO, as a Named Executive Officer. Nonetheless, we have elected to include the same disclosure for Mr. Lanuto as we have provided for our other Named Executive Officers.EXECUTIVE SUMMARY
Engagement of New Senior Leadership Team
2019 was a transformative year for the Company’s senior management team. Mark Penn became Chief Executive Officer of the Company and built out the Company’s senior leadership with a new Chief Financial Officer and new General Counsel. Specifically, during the course of 2019, the Company made the following significant changes to its senior management team:
| · | Effective March 18, 2019, following an extensive search process, and in connection with the investment of Stagwell in the Company, the Company’s Board of Directors appointed Mark Penn as the Chairman & Chief Executive Officer (“CEO”); |
| · | Frank Lanuto, a financial leader with significant advertising holding company experience, joined the Company as Chief Financial Officer (“CFO”) on June 10, 2019; and |
| · | On June 17, 2019, Jonathan Mirsky, an experienced corporate attorney, joined the Company as General Counsel and Corporate Secretary. |
In connection with the changes to our senior management team, we entered into employment agreements with each of Messrs. Penn, Lanuto and Mirsky, each of which reflect our compensation philosophy and are described more fully below. The Company also entered into agreements with two of its departing executive officers, outgoing CFO David Doft and outgoing General Counsel Mitch Gendel, to retain their services for a transitional period and ensure a smooth transition for the new senior management team.
Aligning Pay with Performance
While approving significant changes to our senior management team during 2019, the Human Resources & Compensation Committee (the “Compensation Committee”) remained committed to its compensation strategy of appropriately linking compensation levels with shareholder value creation by:
| · | Aligning pay with financial performance as a meaningful component of total compensation; |
| · | Providing total compensation capable of attracting, motivating and retaining executives of outstanding talent; |
| · | Focusing our executives on achieving key objectives critical to implementing the Company’s business strategy and achieving financial performance goals; and |
| · | Safeguarding the Company’s business interests, including protection from adverse activities by executives. |
In 2019, approximately 83% of the target total compensation (excluding benefits) for our CEO was variable/performance-based pay, while performance-based pay for all other NEOs (other than Messrs. Doft and Gendel) averaged 70% of target total compensation (excluding benefits and one-time signing bonuses). For all of our NEOs, 100% of the annual incentives could be earned only if individual and other pre-established financial performance goals were met, while 100% of long-term incentive awards could be earned only if financial performance goals (except in limited circumstances described herein) were met. In addition, the newly hired NEOs received inducement long-term incentive awards, which took the form of cash- or stock-settled stock appreciation rights (“SARs”) and restricted stock, which are aligned with stockholder interests because they increase in value only with improved stock price performance.
What We Do and What We Do Not Do
Our compensation program is constructed in conformity with prevailing governance standards. The following are some of the key compensation practices we follow to drive performance, as well as some practices we avoid because we do not believe they promote our long-term goal of aligning pay with performance.
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| | What We Do | | | | | | What We Do Not Do | | |
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| ✓ | | Mitigate undue risk in compensation programs | | | | ✗ | | No repricing of underwater stock options | | |
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| ✓ | | Maintain equity ownership guidelines for executives | | | | ✗ | | No tax gross-ups | | |
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| ✓ | | Provide reasonable post-employment and change in control protection to executives | | | | ✗ | | No significant perquisites | | |
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| ✓ | | Use an independent compensation consultant that does not provide other services to the Company | | | | ✗ | | No “single-trigger” change in control cash severance to executives | | |
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| ✓ | | Maintain a compensation committee comprised only of independent, non-employee directors | | | | ✗ | | No hedging or pledging of Company securities by directors and executive officers | | |
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Shareholder Approval of our NEO Compensation
At the Company’s most recent Annual Meeting held on June 4, 2019, the Company submitted its executive compensation program to an advisory vote of its shareholders (also known as the “say-on-pay” vote). This advisory vote received support from approximately 91% of the total votes cast at the annual meeting. Therefore, in considering compensation and long-term incentives in 2019, the Company continued its practice of focusing on pay for performance.
The Company pays careful attention to shareholder feedback, including the say-on-pay vote, and management and the Board have undertaken a concerted effort to focus on shareholder outreach and solicitation of feedback in recent years.
OVERVIEW OF OUR 2019 COMPENSATION PROCESS
Primary Compensation Elements
As summarized in the following table, the Company traditionally uses a mix of short- and long-term and fixed and variable elements in compensating the NEOs: base salary, annual cash bonus incentives and long-term incentive awards. As described in more detail below, the Compensation Committee administers the long-term incentive program for our NEOs with the goal that all long-term equity awards granted to NEOs will either be subject to performance-based vesting requirements or will have value only to the extent that our stock price increases following the grant date, in addition to continued employment conditions. In limited situations only, such as inducement grants, long-term incentive awards may include equity-based awards that vest based solely on continued employment.
Annual Long-term Incentives Pay Element Salary Annual Incentive Performance-Based Cash Awards Performance-Based Equity Awards RECIPIENT All Named Executive Officers FIXED OR VARI-ABLE COMPENSATION Fixed Variable DURATION OF PERFORMANCE Short-term Emphasis Long-term Emphasis PERFORMANCE PERIOD Ongoing 1 year 3 years 1-3 years FORM OF DELIVERY Cash Cash Equity
Process for Determining the Compensation of Our Named Executive Officers
The Company’s executive compensation program is administered and overseen by the Compensation Committee. During 2019, our Compensation Committee was composed of four independent, non-employee directors. The Compensation Committee oversees the Company’s executive compensation and benefit plans and practices, including its incentive compensation and equity-based plans, and reviews and approves the Company’s management succession plans. Specifically, the Compensation Committee determines the salaries or potential salary increases, as applicable, and the performance measures and awards under the annual bonus incentive program for our CEO and other executive officers. The Compensation Committee also determines the amount and form of long-term incentive awards.
Role of Compensation Consultant
In 2017, 2018 and 2019, the Compensation Committee retained Mercer, a compensation consulting firm, to provide objective analysis, advice and information to the Compensation Committee, including competitive market data and recommendations related to our CEO and other executive officer compensation, including recommendations regarding annual and long-term incentive awards. Additionally, in 2019, Mercer provided feedback to the Compensation Committee related to the compensation terms for our employment agreements with the new executives. Mercer reports to the Compensation Committee Chairman and has direct access to Compensation Committee members. In accordance with Nasdaq listing standards and SEC regulations, the Compensation Committee assessed the independence of Mercer and determined that it was independent from management and that Mercer’s work has not raised any conflict of interest.
Mercer has attended Compensation Committee meetings at the Compensation Committee’s request and has also met with the Compensation Committee in executive session without management present. In particular, the Compensation Committee worked with Mercer to structure performance-based annual and long-term incentive programs designed to retain the Company’s senior management team and to motivate them to achieve goals that increase shareholder value. The Compensation Committee sought to ensure that its incentive plans properly align management incentive compensation targets with the performance targets most relevant to shareholders. The Compensation Committee also considered recent trends in executive compensation.
Use of Comparator Companies
In determining compensation opportunities and payments to executives, the Compensation Committee may, from time to time, review competitive opportunities, payments, practices and performance among a comparator group of companies. We engage in formal benchmarking of NEO compensation. We intend that, if our named executive officers achieve individual and financial corporate objectives in a given year, they will earn total direct compensation that compares favorably with the total direct compensation earned by executives performing similar functions at comparator companies. Our Human Resources & Compensation Committee aims to set total target compensation at a level between the 25th and 50th percentiles as compared to our comparator companies.
The comparator group of peer marketing service companies used in 2019 was identified by Mercer and approved by the Chair of the Compensation Committee. The group is comprised of the following publicly-traded companies ranging in size from ~$800 million to $4.5 billion in revenue (or approximately one-half to three-times that of the Company): IAC/InterActiveCorp; Sinclair Broadcast Group; Clear Channel; John Wiley & Sons; Scholastic Corporation; The New York Times Company; Meredith Corporation; Criteo S.A.; TEGNA Inc.; Tribune Media Company; Gray Television, Inc.; Entercom Communications Corp.; The E.W. Scripps Company; and The McClatchy Company. We also consider data regarding Omnicom and The Interpublic Group of Companies for reference purposes, but do not formally include them for benchmarking purposes given their size compared to the Company.
Role of Named Executive Officers in Compensation Decisions
The Compensation Committee considers input from senior management in making determinations regarding the overall executive compensation program and the individual compensation of the NEOs and other executive officers. As part of the Company’s annual planning process, the CEO and EVP, Strategy and Corporate Development develop targets for the Company’s incentive compensation programs and present them to the Compensation Committee. These targets are reviewed by the Compensation Committee to ensure alignment with the Company’s strategic and annual operating plans, taking into account the targeted year-over-year improvement as well as identified opportunities and risks. Based on performance appraisals, including an assessment of the achievement of pre-established financial and individual “key performance indicators,” the CEO recommends to the Compensation Committee cash and long-term incentive award levels for the Company’s other executive officers. Each year, the CEO presents to the Compensation Committee his evaluation of each executive officer’s contribution and performance over the past year, and strengths and development needs and actions for each of the executive officers. The Compensation Committee exercises its discretionary authority and makes the final decisions regarding the form of awards, targets, award opportunities and payout value of awards. No executive officer participates in discussions relating to his or her own compensation.
The following table identifies the roles and responsibilities of the Compensation Committee and management in the oversight of the Company’s executive compensation program:
Compensation Committee | Management |
• Sets policies and gives direction to management on all aspects of the executive compensation program • Engages and oversees the independent compensation consultant, including determining its fees and scope of work • Based upon performance, peer group and general industry market data, evaluates, determines and approves compensation (salary, bonus and equity awards) for each executive officer • Determines the terms and conditions of equity incentive awards for all award recipients • Reviews succession planning to mitigate the risk of executive departure and to help ensure individual development and bench-strength through different tiers of Company leadership • Evaluates and considers regulatory and legal perspectives on compensation matters, rating agency opinions on executive pay, published investor compensation policies and position parameters, and recommendations of major proxy voting advisory firms • Coordinates with the other committees of the Board to identify, evaluate and address potential compensation risks, where they may exist | • Analyzes competitive information supplied by the independent compensation consultant and others in light of the Company’s financial and operational circumstances • Considers how other factors may affect pay decision-making, such as the Company’s targeted earnings, internal pay equity, overall financial performance and the Company’s ability to absorb increases in compensation costs • Uses the data and analysis referenced above to formulate recommendations for the Committee’s review and consideration |
Risk Assessment
The Compensation Committee reviews with management the design and operation of the Company’s compensation practices and policies, including performance goals and metrics used in connection with incentive awards and determined that these policies do not provide the Company’s executive officers or other employees with incentives to engage in behavior that is reasonably likely to have a material adverse effect on the Company. As discussed below in greater detail, the principal measures of our business performance to which NEO compensation is tied are EBITDA (as defined below) and individual key performance criteria.
2019 Principal Pay Element Determinations
2019 Principal Pay Element Determinations and Link to Company Strategy
The following table provides an overview of the principal pay elements provided to our NEOs and material decisions made with respect to these elements in 2019, and explains how each element is linked to our overall business strategy:
| Pay Element | | Description | | 2019 Determinations | | Link To Business & Strategy |
| BASE SALARY | | • Fixed cash compensation recognizing individual performance, role and responsibilities, leadership skills, future potential and internal pay equity considerations • Set upon hiring or promotion, reviewed as necessary based on the facts and circumstances and adjusted when appropriate | | • In connection with their hiring, the Compensation Committee set the base salaries of Messrs. Penn, Lanuto and Mirsky taking into account feedback from Mercer. Base salaries were benchmarked against appropriate comparator companies | | • Competitive base salaries help attract and retain key executive talent • Any material adjustments are based on competitive market considerations, changes in responsibilities and individual performance |
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| ANNUAL INCENTIVES | | • Performance-based cash compensation dependent on performance against annually established financial targets and personal performance | | • The Compensation Committee awarded performance-based cash bonuses to Messrs. Penn, Lanuto, Mirsky and Ross based on the Company’s achievement of its 2019 EBITDA target as well as individual performance and contributions | | • Our annual incentives motivate and reward achievement of annual corporate and personal objectives that build shareholder value |
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| LONG-TERM INCENTIVES | | • Opportunity to earn cash and equity long-term incentive awards, subject to continued employment, if the Company achieves financial performance goals (EBITDA) over a one (1) to three (3) year measurement period following the date of grant | | • The Compensation Committee granted cash and equity long-term incentive awards to Messrs. Penn, Lanuto, Mirsky, and Ross to encourage them to focus on delivering key financial metrics over the next three years | | • Like our annual incentives, our long-term incentives encourage senior leaders to focus on delivering on our key financial metrics, but do not encourage or allow for excessive or unnecessary risk-taking in achieving this aim • The long-term incentives also ensure that executives have compensation that is at risk for longer periods of time and is subject to forfeiture in the event that they terminate their employment • The long-term incentives also motivate executives to remain with the company for long and productive careers built on expertise |
| INDUCEMENT AWARDS/CASH SIGNING BONUSES | | • One-time awards granted to new executives in the form of SARs, restricted stock and/or cash signing bonuses | | • The Compensation Committee granted inducement awards to Messrs. Penn, Lanuto and Mirsky in connection with each joining the Company | | • Attract talented, experienced executives to join and remain with the Company |
New CEO Compensation and Inducement Award
On March 18, 2019, following an extensive search process and concurrent with the investment by Stagwell in the Company, Mr. Penn became CEO and began implementing a turnaround plan to significantly improve the Company’s financial and operational performance. The Compensation Committee consulted with Mercer and utilized benchmarks in negotiating the terms of Mr. Penn’s employment contract, including as to his base salary, incentive compensation targets, and an inducement award in the form of SARs. Specifically, the Compensation Committee established Mr. Penn’s base salary at $750,000, benchmarked in the lower range (<25th percentile) of peer group CEOs and approximately 40% lower than that of the Company’s prior CEO. Mr. Penn’s total direct compensation target, which is more heavily weighted to “at-risk” performance-based awards, was benchmarked at the 50th percentile of peer group CEOs. The Compensation Committee also granted a one-time inducement award of 1,500,000 SARs to Mr. Penn, which vest over three years subject to continued employment. The terms of this inducement award, and other key terms of Mr. Penn’s employment contract, are discussed in detail under the heading “Narrative Disclosure to Summary Compensation Table” below.
Inducement Awards and Signing Bonuses to Other New NEOs in 2019
In June 2019, the Compensation Committee granted inducement awards, including signing bonuses, to each of Messrs. Lanuto and Mirsky. The amounts and terms of these awards are discussed in detail under the heading “Narrative Disclosure to Summary Compensation Table” below.
2019 Incentive Awards: Financial and Individual Performance Metrics
Pay-for-Performance Analysis; Achievement of 2019 Financial Targets. The Company’s compensation program is designed to reward performance relative to corporate financial performance criteria and individual incentive criteria. The Company’s overall financial performance for 2019 exceeded the financial targets established by the Compensation Committee. Specifically, the Company’s 2019 EBITDA performance exceeded the Company’s baseline EBITDA target ($179.7 million). In 2019, EBITDA performance was measured based on the definition of EBITDA contained in the Company’s Credit Agreement. The Compensation Committee also determined that the Company achieved certain other financial and strategic goals in 2019, including reduction of the consolidated compensation-to-revenue ratio, increases in net new business through the year, a significantly improved balance sheet position at year end, portfolio realignment into agency networks, real estate consolidation in New York City and the successful sublet of the Company’s prior headquarters. The Compensation Committee’s executive compensation decisions in 2019 aligned with this exceptional financial and operational performance.
Calculation of 2019 Annual Incentive Awards; Individual Performance Metrics. In 2019, each NEO was eligible to earn an annual bonus in an amount equal to his base salary plus a potential discretionary adjustment for exceptional performance. In determining the 2019 annual incentive awards to be paid to each of the named executive officers, following the conclusion of fiscal 2019, the Compensation Committee reviewed actual financial performance and individual performance relative to individual incentive criteria. The Company does not apply a formula or use a pre-determined weighting when comparing overall performance against the various individual objectives, and no single objective is material in determining individual awards. Rather, the Compensation Committee assessed each executive’s individual performance to determine the actual bonus incentive award payable to each NEO. For NEOs other than the Chief Executive Officer, the Compensation Committee’s assessment was partially based on a performance review by the Chief Executive Officer. On January 23, 2020, the Compensation Committee approved annual incentive awards to the NEOs in the following amounts: Mr. Penn — $750,000; Mr. Ross — $625,000; Mr. Lanuto — $350,000; and Mr. Mirsky — $200,000.
2020 LTIP Awards Issued in 2019. In November 2019, the Compensation Committee granted awards under the Company’s 2014 Long-Term Cash Incentive Plan (the “2014 LTIP Plan”) and 2011 and 2016 Stock Incentive Plans to each of our NEOs as described below, in each case with a performance period commencing January 1, 2020. The Compensation Committee chose EBITDA, as defined in the Company’s Credit Agreement, as the financial performance measure under each of these awards. The Compensation Committee evaluated using additional or alternative performance metrics with respect to these awards, but ultimately determined to use only EBITDA because it is a key measure of the Company’s profitability, as well as availability under existing lines of credit, that generally correlates to our stock price performance. Specifically, the Compensation Committee set the 2020 EBITDA target at $205 million under each award.
2020 Cash LTIP Awards. In November 2019, the Compensation Committee granted awards under the Company’s 2014 LTIP Plan to each of our NEOs in the following target amounts: Mr. Penn — $1,155,000; Mr. Ross — $400,000; Mr. Mirsky — $242,000; and Mr. Lanuto — $198,000. These grants vest at the end of the applicable three-year measurement period (January 1, 2020 – December 31, 2022), subject to achievement of financial performance criteria and continued employment (the “2020 Cash LTIP Awards”). The financial performance criteria are based on three-year cumulative EBITDA as measured against the approved annual EBITDA targets for such period.
A payout of between 75% and 100% of the target opportunity will be made if the Company achieves a three-year cumulative EBITDA amount equal to or greater than 90% but less than 100% of the three-year cumulative EBITDA target, based on a straight-line interpolation for actual cumulative EBITDA between 90% and 100% of the cumulative EBITDA target; a payout at the target opportunity will be made if the Company achieves the three-year cumulative EBITDA target; and a payout of the target opportunity plus an additional amount between 0% and 100% of the target opportunity will be made if the Company exceeds the three-year cumulative EBITDA target based on a straight-line interpolation for actual cumulative EBITDA between 100% and 105% of the cumulative EBITDA target, subject to a cap of two times the target opportunity. No payout would be earned in the event the Company fails to achieve three-year cumulative EBITDA at least equal to or greater than 90% of the cumulative EBITDA target.
These awards vest automatically upon a change in control of the Company (“single-trigger”). Subject to achievement of financial performance targets, these awards vest on a pro rata basis upon termination of the NEO’s employment without cause or by the NEO for good reason.
2020 LTIP Equity Incentive Awards. In November 2019, the Compensation Committee also determined to award each NEO restricted stock grants under the Company’s 2011 and 2016 Stock Incentive Plans. Vesting for these awards is conditioned upon achievement of one (1) year financial performance targets and continued employment pursuant to the terms of an award agreement made under the Plans (the “2020 LTIP Equity Incentive Awards”). Pursuant to the terms of the 2020 LTIP Equity Incentive Awards, the shares of restricted stock granted to our NEOs will vest based upon the Company’s level of achievement of EBITDA over the performance period commencing on January 1, 2020 and ending on December 31, 2020 and the NEO’s continued employment until December 31, 2022.
On November 4, 2019, the Company issued 2020 LTIP Equity Incentive Awards to each of the NEOs in the following amounts: Mr. Penn — 577,500 shares; Mr. Ross — 200,000 shares; Mr. Mirsky — 121,000 shares; and Mr. Lanuto — 99,000 shares. Each of the foregoing 2020 LTIP Equity Incentive Awards will vest on December 31, 2022, based on the Company’s EBITDA as described above. For achievement of an EBITDA amount equal to or greater than 90% of the EBITDA target (the “Minimum EBITDA Amount”) but less than 100% of the EBITDA target, a prorated amount between 75% and 100% of the 2020 LTIP Equity Incentive Award will vest, determined based on straight-line interpolation for EBITDA between the Minimum EBITDA Amount and EBITDA target. For achievement of an EBITDA amount equal to or greater than 100% of the EBITDA target, 100% of each 2020 LTIP Equity Incentive Award will vest. No shares would vest in the event the Company fails to achieve at least 90% of the Minimum EBITDA Amount.
These awards generally do not vest automatically upon a change in control of the Company, except in connection with a termination of the NEO’s employment without cause or by the NEO for good reason (“double-trigger”). Subject to achievement of financial performance targets, these awards vest on a pro rata basis upon termination of the NEO’s employment without cause or by the NEO for good reason.
2018 EVP Awards – Payment and Amendment. In December 2018, the Compensation Committee approved a series of one-time retention/transaction awards (the “2018 EVP Retention Awards”) for five (5) senior executives of the Company, including each of Messrs. Doft, Gendel, and Ross. The amount of each 2018 EVP Retention Award was equal to the applicable NEOs respective base salary or target annual bonus award. Payment of each 2018 EVP Retention Award by the Company was conditioned on continued employment through the successful closing of a “significant transaction” during 2019 as defined in such awards.
In connection with their Separation Agreements, which are summarized in more detail below, in 2019, Messrs. Doft and Gendel each received a 2018 EVP Retention Award payout in the amount of $650,000 pursuant to the terms of such award. Additionally, in June 2019, the Compensation Committee approved an amendment to the 2018 EVP Retention Award of Mr. Ross. The amended terms included a cash payment of $375,000 subject to continued employment until December 31, 2019 and a grant of 137,500 shares of restricted stock, subject to performance vesting upon the Company’s achievement of certain EBITDA targets during calendar years 2019 and 2020.
Other Elements of Compensation
We provide our NEOs with basic health and welfare benefits that are generally the same as those made available to other salaried employees located in the same jurisdiction. The table below highlights certain other compensation components we offer and as a general matter, certain components we have decided not to offer.
| | WHAT WE OFFER | | | | | | WHAT WE DO NOT OFFER | | |
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| ✓ | | Medical and dental insurance | | | | ✗ | | Supplemental or other non-qualified pension plans | | |
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| ✓ | | 401(k) Savings Plan | | | | ✗ | | Post-retirement medical benefits | | |
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| | | | | | ✗ | | Post-retirement life insurance benefits | | |
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| | | | | | ✗ ✗ | | Tax reimbursement or “gross-up” payments Excessive perquisites | | |
Separation and Release Agreements
In connection with their departures, we entered into separation and release agreements with each of Messrs. Doft and Gendel, which we refer to as the “Separation Agreements”. In consideration of their respective agreements to provide transitional support services for an agreed-upon period and their release of claims against the Company, and consistent with the terms of their employment agreements, the Separation Agreements provided for each of Messrs. Doft and Gendel to receive the severance payments and benefits that are set forth in the Summary Compensation Table and described more fully on pages 29-30.
OTHER COMPENSATION-RELATED POLICIES
Stock Ownership Guidelines
The Company’s stock ownership guidelines require that each named executive officer own a significant equity stake in the Company during the period of their employment. The Compensation Committee believes that stock ownership by senior managers strengthens their commitment to the future of the Company and further aligns their interests with those of our shareholders. The Board has adopted the following stock ownership guidelines: our CEO and CFO shall own stock with a value of at least four (4) times his base salary, and each other NEO shall own stock with a value of at least three (3) times their base salary. An executive must reach his target ownership level within four years after becoming subject to the stock ownership guidelines.
Prohibition of Pledging or Hedging of the Company’s Stock
The Board has adopted policies to prohibit any pledge or hedging of the Company’s stock by officers and directors of the Company. Currently, no stock is pledged or hedged by any of the Company’s directors or officers.
Employment Agreements
The Company has employment or services agreements with the CEO and all of the other NEOs. These agreements, which are summarized on pages 21-22, formalize the terms of the employment relationship and assure the executive of fair treatment during employment and in the event of termination while requiring compliance with restrictive covenants. Employment agreements promote complete documentation and understanding of employment terms, including strong protections for our business.
Business Protection Terms
The Company’s NEOs are subject to significant contractual restrictions intended to prevent actions that potentially could harm our business, particularly after termination of employment. These business protections include obligations not to solicit clients or employees, not to disparage us, not to reveal confidential information, and to cooperate with us in litigation. Business protection provisions are included in employment agreements and in connection with compliance with the Company’s Code of Conduct.
Equity Award Grant Policies
The Board of Directors and the Compensation Committee have adopted policies and procedures governing the granting of any equity incentive awards, including the following:
Equity incentive awards granted to executive officers must be approved by the Compensation Committee or the full Board of Directors and must be made at quarterly in-person meetings and not be made via unanimous written consent. An attorney (who may be an employee of the Company) must be present at each Compensation Committee or Board meeting.
If grants are required to be awarded in connection with hiring new employees in between regularly-scheduled Compensation Committee meetings, such grants may be approved at a special meeting, which may be telephonic or in-person.
Options, SARs and other equity incentive awards must be priced at or above the closing price on the date immediately prior to the date of the Compensation Committee meeting at which the grant is approved.
Severance Policies
We provide severance protection to our named executive officers in employment agreements, as detailed below under the caption “Potential Payments upon Termination or Change-In-Control.” This protection is designed to be fair and competitive to aid in attracting and retaining experienced executives. We believe that the protection we provide, including the level of severance payments and post-termination benefits, is appropriate.
Section 162(m)
Pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), publicly-held corporations are prohibited from deducting compensation paid to the named executive officers as of the end of the fiscal year, in excess of $1 million. Although the Compensation Committee considers the impact of Section 162(m) when making its compensation determinations, the Compensation Committee has determined that its need for flexibility in designing an effective compensation plan to meet our objectives and to respond quickly to marketplace needs has outweighed its need to maximize the deductibility of its annual compensation. The Compensation Committee reviews this policy from time to time.
EBITDA
As used in this Form 10-K/A:
“EBITDA” is calculated pursuant to the Company’s Credit Agreement for the incentive awards granted in 2019, and for awards issued in prior years. “EBITDA” is a non-U.S. GAAP measure that represents operating income (loss) plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, distributions from non-consolidated affiliates, and other items, adjusted for certain items at the discretion of the Compensation Committee. A reconciliation of these measures to the U.S. GAAP reported results of operations for the year ended December 31, 2019 is provided in the Company’s Current Report on Form 8-K filed on February 27, 2020.
REPORT OF THE HUMAN RESOURCES & COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Human Resources & Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis that appears above. Based on this review and discussion with management, the Human Resources & Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2020 Proxy Statement and the Company’s Amended 2019 Annual Report on Form 10-K/A for filing with the SEC.
The Human Resources & Compensation Committee
Desirée Rogers (Chair)
Bradley J. Gross
Kristen O’Hara
Irwin Simon
Executive Compensation
This section contains information, both narrative and tabular, regarding the compensation for fiscal years 2019, 2018, and 2017 for our NEOs. As discussed in the CD&A, Messrs. Penn, Lanuto and Mirsky joined the Company in 2019. In addition, Messrs. Doft and Gendel departed the Company in 2019.
SUMMARY COMPENSATION TABLE
| Name and Principal Position | Year | Salary ($) | Bonus ($)(1) | Stock
Awards ($)(2) | Option
Awards ($)(3) | Non-Equity Incentive Plan Compensation ($)(4) | All Other Compensation ($)(5) | Total ($) |
Mark Penn, Chief Executive Officer and Chairman | 2019 | 591,346 | 750,000 | 1,899,975 | 1,600,000 | 0 | 72,084 | 4,913,405(*) |
Frank Lanuto, Chief Financial Officer | 2019 | 252,404 | 450,000 | 325,710 | 519,750 | 0 | 31,050 | 1,578,914 |
Jonathan Mirsky, General Counsel and Corporate Secretary | 2019 | 296,154 | 400,000 | 1,025,590 | 183,333 | 0 | 20,927 | 1,926,004 |
| David Ross, | 2019 | 500,000 | 625,000 | 1,266,725(6) | 0 | 0 | 41,089 | 2,432,814 |
| Executive Vice | 2018 | 500,000 | 0 | 274,500 | 0 | 0 | 21,408 | 795,908 |
President, Strategy and Corporate Development | 2017 | 495,833 | 500,000 | 0 | 101,162 | 117,664 | 22,785 | 1,237,444 |
| David Doft, | 2019 | 396,667 | 0 | 394,550(7) | 0 | 0 | 1,735,843 | 2,527,060 |
| FormerExecutive Vice | 2018 | 650,000 | 0 | 366,000 | 0 | 0 | 51,408 | 1,067,408 |
President and Chief Financial Officer | 2017 | 650,000 | 650,000 | 0 | 117,630 | 117,664 | 52,785 | 1,588,079 |
| Mitchell Gendel, | 2019 | 396,667 | 0 | 354,443(7) | 0 | 0 | 1,629,008 | 2,380,118 |
| Former Executive | 2018 | 633,333 | 0 | 366,000 | 0 | 0 | 48,184 | 1,047,517 |
Vice President and
General Counsel | 2017 | 550,000 | 550,000 | 0 | 117,630 | 117,664 | 50,207 | 1,385,501 |
__________________
| (*) | Excluding Mr. Penn’s inducement award, total compensation would be $3,313,405 (see “New CEO Compensation and Inducement Award” above). |
| (1) | Amounts shown for Messrs. Lanuto and Mirsky reflect signing bonuses of $100,000 and $200,000, respectively. |
| (2) | Reflects the grant date fair value of the equity awards we granted to our NEOs as determined in accordance with FASB Topic 718. For a discussion of the assumptions relating to these valuations, please see “Note 2 — Significant Accounting Policies” set forth in our annual report on Form 10-K for the year ended December 31, 2019. On November 4, 2019, the Company issued 2020 LTIP Equity Incentive Awards to each of the NEOs in the following target amounts: Mr. Penn — 577,500 shares; Mr. Ross — 200,000 shares; Mr. Mirsky — 121,000 shares; and Mr. Lanuto — 99,000 shares. See “Compensation Discussion and Analysis – 2019 Annual Incentive Awards: Financial and Individual Performance Metrics – 2020 LTIP Equity Incentive Awards.” Each of the foregoing restricted stock grants will vest on December 31, 2022 based on the Company’s EBITDA for the period commencing on January 1, 2020 and ending on December 31, 2020. |
| (3) | Amounts shown in the columns for 2017 and 2019 reflect the grant date fair value of the SARs awards we granted to our NEOs as determined in accordance with FASB Topic 718. For a discussion of the assumptions relating to these valuations, please see “Footnote 2 — Significant Accounting Policies” set forth in our annual report on Form 10-K for the year ended December 31, 2019. |
| (4) | Amounts shown in the column for 2017 reflect amounts paid March 2, 2018 in connection with grants made in February 2015 pursuant to the 2014 Cash LTIP Plan, following a determination of the Company’s financial performance over the 3-year period ended December 31, 2017. |
| (5) | The components of “all other compensation” are set forth in the table below. |
| Name | Automobile
Allowance ($) | Health
Benefits ($)* | Long-term Disability Insurance Premiums ($) | Severance ($) | Vacation
Pay Out ($) | Total ($) |
| | | | | | | |
| Mark Penn | 47,500 | 24,584 | — | — | — | 72,084 |
| Frank Lanuto | 14,022 | 16,826 | 202 | — | — | 31,050 |
| Jonathan Mirsky | 13,463 | 7,262 | 202 | — | — | 20,927 |
| David Ross | 20,083 | 20,634 | 372 | — | — | 41,089 |
| David Doft | 18,308 | 20,634 | 233 | 1,655,000 | 41,668 | 1,735,843 |
| Mitchell Gendel | 15,256 | 24,584 | — | 1,550,000 | 39,168 | 1,629,008 |
* The “Health Benefits” provided by the Company are payment of health insurance premiums for the employee and, as applicable, family members eligible for coverage.
| (6) | Reflects the grant date fair value of Mr. Ross’s 2017 LTIP Equity Incentive Award that was approved on January 20, 2017 and was subject to performance conditions. Under FASB ASC Topic 718, this restricted stock award did not have an established grant date fair value until 2019 because the financial performance target, the Cumulative EBITDA Target, had not been established. This award partially vested in February 2020 due to the Company’s partial achievement of the Cumulative EBITDA Target during the period of January 1, 2017 – December 31, 2019. (Specifically, 52,500 shares of Mr. Ross’s grant of 70,000 shares vested on February 26, 2020 based on achievement of at least 90% (but less than 100%) of the minimum cumulative 3-year EBITDA target for the performance period ended December 31, 2019. The remaining award shares were forfeited.) Also reflects the grant date fair value of restricted shares that Mr. Ross received in connection with his 2018 EVP Incentive Award, as amended. See “Compensation Discussion and Analysis — 2019 Annual Incentive Awards: Financial and Individual Performance Metrics — 2018 EVP Awards – Payment and Amendment.” 50% of this award vested in February 2020 due to the Company’s achievement of the EBITDA target for the 1-year period ended December 31, 2019. (Specifically, 68,750 shares of Mr. Ross’s grant of 137,500 shares vested on February 26, 2020, based on achievement of the 2019 EBITDA target. The remaining award shares will vest if the Company achieves the minimum EBITDA threshold for the performance period commencing January 1, 2019 and ending December 31, 2020, as determined by the Compensation Committee on or prior to March 1, 2021.) This table does not reflect 26,738 shares of restricted Class A Shares that were issued on February 28, 2018 and are subject to performance conditions. This award will vest on March 1, 2021, if the Company achieves the Cumulative EBITDA Target during the period of January 1, 2018 – December 31, 2020. Under FASB ASC Topic 718, these restricted stock awards did not yet have an established grant date fair value at December 31, 2019 because the three-year financial performance target was not yet established until the 2020 EBITDA target was determined in the first quarter of 2020. |
| (7) | Reflects the grant date fair value of Messrs. Doft and Gendel’s respective 2017 Equity Incentive Awards that were approved on January 20, 2017 and were subject to performance conditions. Under FASB ASC Topic 718, these restricted stock awards did not have an established grant date fair value until 2019 because the financial performance target, the Cumulative EBITDA Target, had not been established. Under their respective Separation Agreements, Messrs. Doft and Gendel received accelerated vesting of their respective 2017 Equity Incentive Awards. Also reflects the grant date fair value of Messrs. Doft and Gendel’s respective 2018 Equity Incentive Awards that were approved on February 28, 2018 and were subject to performance conditions. Under FASB ASC Topic 718, these restricted stock awards did not have an established grant date fair value until 2019 because the financial performance target, the Cumulative EBITDA Target, had not been established. Under their respective Separation Agreements, Messrs. Doft and Gendel received accelerated vesting of their respective 2018 Equity Incentive Awards. |
Narrative Disclosure to Summary Compensation Table
Consistent with its past practice, the Company entered into employment agreements in connection with the hiring of Messrs. Penn, Lanuto and Mirsky. The compensation terms for each of Messrs. Penn, Lanuto and Mirsky were determined based on feedback from Mercer and were benchmarked against the Company’s comparator companies, as described above. The employment agreements for our NEOs are summarized below. For additional information regarding the compensation arrangements of and compensation decisions relating to our NEOs, see the discussion in our “Compensation Discussion and Analysis,Analysis.”
Mark Penn Employment Agreement
The Company entered into an employment agreement with Mr. Penn, dated March 14, 2019, pursuant to which Mr. Penn is eligible to receive an annualized base salary of $750,000 and an annual discretionary cash bonus in an amount equal to up to 100% of his then-current base salary. He is eligible for potential future grants under the Company’s long-term incentive plans with an annual target equal to 350% of his then-current base salary. On April 5, 2019, Mr. Penn received an inducement grant of 1,500,000 SARs, with an exercise price equal to $2.19 (the average closing price for MDC’s Class A shares for the twenty (20) trading day period beginning March 5, 2019). These SARs will become vested and exercisable in full in three equal installments on each of the first three (3) anniversaries of March 18, 2019, the “Commencement Date”, subject to Mr. Penn’s continued employment with the Company through each vesting date. The SARs will expire on the fifth anniversary of the Commencement Date to the extent not exercised and will be subject to accelerated vesting upon (i) death or disability, (ii) termination of employment without “Cause” or with “Good Reason” (in each case as defined in his employment agreement), or (iii) a change in control of the Company. Mr. Penn is also eligible to receive a monthly $5,000 perquisite allowance to cover automobile expenses, professional dues and other perquisites. He is also entitled to participate in the retirement plans and benefits in accordance with the plans or practices of the Company made available to the senior executives of the Company. Under his employment agreement, Mr. Penn is subject to restrictive covenants during employment and for one (1) year thereafter, including covenants not to solicit clients of the Company, hire or solicit employees or exclusive consultants of the Company, and render services for any client of the type rendered by the Company, subject to specified exceptions. The employment agreement also provides for severance payments if Mr. Penn’s employment is terminated under certain circumstances. The amount and circumstances giving rise to these severance payments are discussed in further detail under the heading “Potential Payments upon Termination or Change in Control.”
Frank Lanuto Employment Agreement
The Company entered into an employment agreement with Mr. Lanuto, dated May 6, 2019, pursuant to which Mr. Lanuto is eligible to receive an annual base salary of $450,000 and an annual discretionary bonus in an amount equal to up to 100% of his base salary. The employment agreement provides that Mr. Lanuto was eligible to receive a signing bonus of $100,000, subject to certain conditions. He is eligible for potential future grants under the Company’s long-term incentive plans with an annual target equal to $450,000. On June 12, 2019, Mr. Lanuto received an inducement grant of (i) 225,000 SARs, with an exercise price equal to $2.91 (the average closing price for MDC’s Class A shares for the ten (10) day trading period beginning May 24, 2019) and (ii) 225,000 SARs, with an exercise price equal to $5.00. These SARs will become vested and exercisable in full in three equal installments on each of the first three (3) anniversaries of June 10, 2019 (the “Commencement Date”), subject to Mr. Lanuto’s continued employment with the Company through each vesting date. The SARs will expire on the fifth anniversary of the Commencement Date to the extent not exercised and will be subject to accelerated vesting upon a change in control of the Company. Mr. Lanuto is also eligible to receive an annual $25,000 perquisite allowance to cover automobile expenses, professional dues and other perquisites. He is also entitled to participate in the retirement plans and benefits in accordance with the plans or practices of the Company made available to the senior executives of the Company. Under his employment agreement, Mr. Lanuto is subject to restrictive covenants during employment and for a period of two (2) years thereafter, including covenants not to solicit clients of the Company, hire or solicit employees or exclusive consultants of the Company, and render services for any client of the type rendered by the Company, subject to specified exceptions. The employment agreement also provides for severance payments if Mr. Lanuto’s employment is terminated under certain circumstances. The amount and circumstances giving rise to these severance payments are discussed in further detail under the heading “Potential Payments upon Termination or Change in Control.”
Jonathan Mirsky Employment Agreement
The Company entered into an employment agreement with Mr. Mirsky, dated May 6, 2019, pursuant to which Mr. Mirsky is eligible to receive an annual base salary of $550,000 and an annual discretionary cash bonus in an amount equal to up to 100% of his base salary. The employment agreement provides that Mr. Mirsky was eligible to receive a one-time bonus of $200,000 payable on or about January 15, 2020, subject to certain conditions. He is eligible for potential future grants under the Company’s long-term incentive plans with an annual target equal to $550,000. On June 26, 2019, Mr. Mirsky received an inducement grant of (i) 250,000 restricted Class A Shares and (ii) 250,000 SARs, with an exercise price equal to $5.00. The restricted Class A Shares and SARs will become vested and exercisable in full in three equal installments on each of the first three (3) anniversaries of June 17, 2019, the “Commencement Date”, subject to Mr. Mirsky’s continued employment with the Company through each vesting date. The SARs will expire on the fifth anniversary of the Commencement Date to the extent not exercised and will be subject to accelerated vesting upon (i) death or disability, (ii) termination of employment without “Cause” or with “Good Reason” (in each case as defined in his employment agreement), or (iii) a change in control of the Company. Mr. Mirsky is also eligible to receive an annual $25,000 perquisite allowance to cover automobile expenses, professional dues and other perquisites. He is also entitled to participate in the retirement plans and benefits in accordance with the plans or practices of the Company made available to the senior executives of the Company. Under his employment agreement, Mr. Mirsky is subject to restrictive covenants during employment and for a period of one (1) year thereafter, including covenants not to solicit clients of the Company, hire or solicit employees or exclusive consultants of the Company, and render services for any client of the type rendered by the Company, subject to specified exceptions. The employment agreement also provides for severance payments if Mr. Mirsky’s employment is terminated under certain circumstances. The amount and circumstances giving rise to these severance payments are discussed in further detail under the heading “Potential Payments upon Termination or Change in Control.”
David Ross Employment Agreement
The Company has an amended and restated employment agreement with Mr. Ross, dated February 27, 2017, pursuant to which Mr. Ross serves as our Executive Vice President, Strategy and Corporate Development. Mr. Ross’s term of employment is for an indefinite term, unless and until either Mr. Ross provides the Company with 30 days’ prior written notice of resignation, or if the Company terminates his employment with or without “Cause” (as defined in his employment agreement). Mr. Ross currently receives an annualized base salary of $500,000 (effective as of January 20, 2017), and he is eligible to receive an annual discretionary bonus in an amount up to 100% of his base salary. He is also eligible for potential future grants under the Company’s long-term incentive plans. Mr. Ross is eligible to participate in any welfare benefit plans and programs including disability, group life (including accidental death and dismemberment), and business travel insurance provided by the Company to its senior executives. Mr. Ross is also eligible to receive an annual $25,000 perquisite allowance to cover automobile expenses, professional dues and other perquisites. He is also entitled to participate in the retirement plans and benefits in accordance with the plans or practices of the Company made available to the senior executives of the Company. Under his employment agreement, Mr. Ross is subject to restrictive covenants during employment and for a period of eighteen (18) months thereafter, including covenants not to solicit clients of the Company, hire or solicit employees or exclusive consultants of the Company, and render services for any client of the type rendered by the Company, subject to specified exceptions. The employment agreement also provides for severance payments if Mr. Ross’s employment is terminated under certain circumstances. The amount and circumstances giving rise to these severance payments are discussed in further detail under the heading “Potential Payments upon Termination or Change in Control.”
OUTSTANDING EQUITY AWARDS AT 2019 FISCAL YEAR-END
| | | Option Awards | | Stock Awards | |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable(1) | | | Option Exercise Price ($) | | | Option Expiration Date | | Number of Shares or Units of Stock that Have Not Vested (#)(2) | | | Market Value of Shares or Units of Stock that Have Not Vested ($) | | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that Have Not Vested (#)(3) | | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that Have Not Vested ($) | |
| (a) | | | (b) | | | | (c) | | | | (e) | | | (f) | | | (g) | | | | (h) | | | | (i) | | | | (j) | |
| Mark Penn | | | | | | | 1,500,000 | | | | 2.19 | | | 3/18/2024 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 577,500 | | | $ | 1,605,450 | |
| Frank Lanuto | | | | | | | 225,000 | | | | 2.91 | | | 6/10/2024 | | | | | | | | | | | | | | | | |
| | | | | | | | 225,000 | | | | 5.00 | | | 6/10/2024 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 99,000 | | | $ | 275,220 | |
| Jonathan Mirsky | | | | | | | 250,000 | | | | 5.00 | | | 6/17/2024 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | 250,000 | | | $ | 695,000 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 121,000 | | | $ | 336,380 | |
| David Ross | | | | | | | 43,000 | | | | 6.60 | | | 2/01/2022 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 200,000 | | | $ | 556,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 137,500 | | | $ | 382,250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 70,000 | | | $ | 194,600 | |
| David Doft | | | 0 | | | | | | | | | | | | | | 0 | | | | | | | | | | | | | |
| Mitchell Gendel | | | 0 | | | | | | | | | | | | | | 0 | | | | | | | | | | | | | |
| (1) | Mr. Penn received 1,500,000 inducement SARs. These SARs will become vested and exercisable in full in three equal installments on each of the first three (3) anniversaries of March 18, 2019, subject to Mr. Penn’s continued employment with the Company through each vesting date. Mr. Lanuto received 450,000 inducement SARs. These SARs will become vested and exercisable in full in three equal installments on each of the first three (3) anniversaries of June 10, 2019, subject to Mr. Lanuto’s continued employment with the Company through each vesting date. Mr. Mirsky received 250,000 inducement SARs. These SARs will become vested and exercisable in full in three equal installments on each of the first three (3) anniversaries of June 17, 2019, subject to Mr. Mirsky’s continued employment with the Company through each vesting date. The 43,000 SARs granted to Mr. Ross vest in full on January 31, 2020. For information regarding vesting in the event of a termination of employment or a change in control, see “Potential Payments upon Termination or Change in Control”. |
| (2) | Mr. Mirsky received 250,000 inducement restricted Class A shares. These restricted Class A shares will become vested in three equal installments on each of the first three (3) anniversaries of June 17, 2019, subject to Mr. Mirsky’s continued employment with the Company through each vesting date. |
| (3) | Mr. Penn’s grant of 577,500 restricted Class A shares, Mr. Lanuto’s grant of 99,000 restricted Class A shares, Mr. Mirsky’s grant of 121,000 restricted Class A shares, and Mr. Ross’s grant of 200,000 restricted Class A shares will vest on December 31, 2022, based upon the Company’s level of achievement of EBITDA over the performance period commencing on January 1, 2020 and ending on December 31, 2020. 68,750 shares of Mr. Ross’s grant of 137,500 shares vested on February 26, 2020, based on achievement of the 2019 EBITDA target. The remaining award shares will vest if the Company achieves the minimum EBITDA threshold for the performance period commencing January 1, 2019 and ending December 31, 2020, as determined by the Compensation Committee on or prior to March 1, 2021. 52,500 shares of Mr. Ross’s grant of 70,000 shares vested on February 26, 2020 based on achievement of at least 90% (but less than 100%) of the minimum cumulative 3-year EBITDA target for the performance period ended December 31, 2019. The remaining award shares were forfeited. This table does not reflect 26,738 shares of restricted Class A Shares that were issued to Mr. Ross on February 28, 2018 and are subject to performance conditions. This award will vest on March 1, 2021, if the Company achieves the Cumulative EBITDA Target during the period of January 1, 2018 – December 31, 2020. Under FASB ASC Topic 718, these restricted stock awards did not yet have an established grant date fair value at December 31, 2019 because the three-year financial performance target was not yet established until the 2020 EBITDA target was determined in the first quarter of 2020. |
The following table sets forth information concerning each exercise of stock options, SARs and similar instruments, and each vesting of stock, including restricted stock, restricted stock units and similar instruments, during 2019 for each NEO on an aggregated basis.
OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2019
| | | Option Awards | | | Stock Awards | |
| | | Number of Shares Acquired on Exercise | | | Value Realized on Exercise | | | Number of Shares Acquired on Vesting | | | Value Realized on Vesting | |
| Name | | (#) | | | ($) | | | (#) | | | ($) | |
| (a) | | (b) | | | (c) | | | (d) | | | (e) | |
| Mark Penn | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Frank Lanuto | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Jonathan Mirsky | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| David Ross | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| David Doft | | | 0 | | | | 0 | | | | 133,476 | | | $ | 321,677 | (1) |
| Mitchell Gendel | | | 0 | | | | 0 | | | | 133,476 | | | $ | 321,677 | (1) |
| (1) | Reflects the value realized on vesting by Messrs. Doft and Gendel of their 2017 and 2018 Equity Incentive Awards. Messrs. Doft and Gendel each received accelerated vesting of such awards under their respective Separation Agreements. |
PENSION BENEFITS IN 2019
We do not provide our NEOs with any defined benefit pension arrangements.
NON-QUALIFIED DEFERRED COMPENSATION IN 2019
We do not maintain any non-qualified deferred compensation plans for our NEOs.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
We have entered into employment agreements with each of our named executive officers. Under these agreements, we are required to pay severance benefits in connection with specified terminations of employment, including specified terminations in connection with a change in control of the Company. No employment agreement for any NEO or other executive officer provides “single-trigger” severance payments in connection with a change in control. All such employment agreements require a “double trigger” for any change in control severance payments in excess of basic severance terms, as applicable. In addition, some of our equity incentive plans provide for the accelerated payment or vesting of awards in connection with specified terminations of employment, certain forms of change in control of the Company, death or disability. The following is a description of the severance, termination and change in control benefits payable to each of our named executive officers pursuant to their respective employment agreements and our equity incentive plans. The equity incentive plans provide for the following benefits in the event of a termination or change in control:
2011 Stock Incentive Plan.The following conditions shall be referred to as the “2011 CIC and Termination Provisions” and shall be applicable with respect to the 2020 LTIP Equity Incentive Awards issued to each of the NEOs on November 4, 2019:
In the event of (i) the death or disability of the executive officer, (ii) termination of the executive officer’s employment without “Cause” or by the executive officer for “Good Reason” within one year following a Change in Control (as defined in the Company’s 2011 Stock Incentive Plan), or (iii) a Change in Control in which the Company’s Class A shares are no longer outstanding and publicly traded immediately following such transaction (each, a “Permitted Acceleration Event”), 100% of award shall vest. In the event that the executive officer is terminated without “Cause” (subject to such termination not otherwise being a Permitted Acceleration Event) or resigns for “Good Reason” a number of restricted shares shall vest, if such termination occurs prior to the Determination Date, on the Determination Date, in an amount equal to the product of (x) the number of restricted shares that would otherwise vest in accordance with the applicable performance conditions, if any, and (y) a fraction, the numerator of which shall be the number of full months of service completed by the executive officer from January 1, 2020 through the termination date, and the denominator of which shall be 36. The “Determination Date” is the date the Company achieves the performance thresholds set forth in the award, as determined by the Compensation Committee on or prior to March 1, 2021.
2016 Stock Incentive Plan.The following conditions shall be referred to as the “2016 CIC and Termination Provisions” and shall be applicable with respect to the 2020 LTIP Equity Incentive Awards issued to each of the NEOs on November 4, 2019:
In the event of (i) the death or disability of the executive officer, (ii) termination of the executive officer’s employment without “Cause” or by the executive officer for “Good Reason” within one year following a Change in Control (as defined in the Company’s 2016 Stock Incentive Plan), or (iii) a Change in Control in which the Company’s Class A shares are no longer outstanding and publicly traded immediately following such transaction, 100% of the award shall vest. In the event that the executive officer is terminated without “Cause” (subject to such termination not otherwise being a Permitted Acceleration Event) or resigns for “Good Reason” a number of restricted shares shall vest, if such termination occurs prior to the Determination Date, on the Determination Date, in an amount equal to the product of (x) the number of restricted shares that would otherwise vest in accordance with the applicable performance conditions, if any, and (y) a fraction, the numerator of which shall be the number of full months of service completed by the executive officer from January 1, 2020 through the termination date, and the denominator of which shall be 36. The “Determination Date” is the date the Company achieves the performance thresholds set forth in the award, as determined by the Compensation Committee on or prior to March 1, 2021.
2020 Cash LTIP Awards.The following conditions shall be referred to as the “2020 Cash LTIP Provisions”:
The 2020 Cash LTIP Award would vest upon (i) the death or disability of the executive officer or (ii) termination of the executive officer’s employment without “Cause” or with “Good Reason” based on the actual performance for the performance period, with the amount of the earned performance-based award (if any) based on a fraction, the numerator of which shall be the number of full months of service completed by the executive officer from January 1, 2020 through the termination date, the denominator of which is 36. Upon a Change in Control (as defined in the Company’s 2014 Long-Term Cash Incentive Compensation Plan) prior to December 31, 2022, the performance-based award will vest in full, with the amount payable determined by using an EBITDA performance multiplier equal to the greater of (a) one (1) and (b) the EBITDA performance multiplier calculated in accordance with the terms of the 2020 Cash LTIP award; provided, however, that if the price per share paid in such Change in Control is equal to or greater than 175% of the average closing trading price of one of the Company’s Class A shares during the twenty (20) days preceding the grant date, then the EBITDA performance multiplier shall be two (2).
Mark Penn
Pursuant to his employment agreement, if MDC terminates Mr. Penn’s employment without “Cause,” or Mr. Penn terminates his employment for “Good Reason” (as defined in his employment agreement), then MDC is required to pay Mr. Penn a lump sum severance payment within 60 days of the date of termination equal to the product of 1.5 times the sum of (i) his then-current base salary plus (ii) the amount of his annual discretionary bonus paid in respect of the year immediately prior to the applicable date of termination. Mr. Penn will also be entitled to a pro-rata portion of his annual discretionary bonus for the year of termination based on actual performance. If Mr. Penn’s employment had terminated under these circumstances on December 31, 2019, the aggregate cash payment due to him under the agreement would have been $1,125,000.
As of December 31, 2019, Mr. Penn had 1,500,000 SARs that would vest upon (i) his death or disability, (ii) termination of his employment without “Cause” or with “Good Reason,” or (iii) a Change in Control (as defined in the Company’s 2016 Stock Incentive Plan). In the event of termination of Mr. Penn’s employment by MDC without “Cause,” or by Mr. Penn for “Good Reason” as of December 31, 2019, a total of 1,500,000 SARs would fully vest, and “Compensationthe value of such SARs would be $885,000.
As of December 31, 2019, Mr. Penn had 577,500 restricted shares under the Company’s 2011 Stock Incentive Plan, with a fair value equal to $1,605,450. Pursuant to the 2011 CIC and Termination Provisions, in the event of termination of Mr. Penn’s employment by MDC without “Cause” (subject to such termination not otherwise being a Permitted Acceleration Event) or by Mr. Penn for “Good Reason” as of December 31, 2019, none of the restricted shares under this award would vest.
Finally, as of December 31, 2019, Mr. Penn had a 2020 Cash LTIP Award in the amount of $1,155,000. According to the 2020 Cash LTIP Provisions, if Mr. Penn had been terminated under such circumstances as of December 31, 2019, no payment would be due. As of December 31, 2019, pursuant to the 2020 Cash LTIP Provisions, the amount that would have been paid to Mr. Penn under this award upon a Change in Control would be $1,155,000.
Frank Lanuto
Pursuant to his employment agreement, if MDC terminates Mr. Lanuto’s employment without “Cause,” or Mr. Lanuto terminates his employment for “Good Reason” (as defined in his employment agreement), then MDC is required to pay Mr. Lanuto a lump sum severance payment within 60 days of the date of termination equal to six (6) months’ base salary. If Mr. Lanuto’s employment had terminated under these circumstances on December 31, 2019, the aggregate cash payment due to him under the agreement would have been $225,000.
If Mr. Lanuto’s employment is terminated within one year following the closing of a change in control by the company without “Cause,” or by Mr. Lanuto for “Good Reason,” then MDC is required to pay Mr. Lanuto a lump sum severance payment within 60 days of the date of termination equal to nine (9) months’ base salary. If Mr. Lanuto’s employment had terminated under these circumstances on December 31, 2019, the aggregate cash payment due to him under the agreement would have been $337,500.
As of December 31, 2019, Mr. Lanuto had 450,000 SARs that would vest upon termination of employment by the company without “Cause,” or by Mr. Lanuto for “Good Reason,” or a Change in Control (as defined in the Company’s 2016 Stock Incentive Plan). Based on the closing price of the Company’s Class A shares as of December 31, 2019, this award would have had no value.
As of December 31, 2019, Mr. Lanuto had 99,000 restricted shares under the Company’s 2016 Stock Incentive Plan, with a fair value equal to $275,220. Pursuant to the 2016 CIC and Termination Provisions, in the event of termination of Mr. Lanuto’s employment by MDC without “Cause” (subject to such termination not otherwise being a Permitted Acceleration Event) or by Mr. Lanuto for “Good Reason” as of December 31, 2019, none of the restricted shares under this award would vest.
Finally, as of December 31, 2019, Mr. Lanuto had a 2020 Cash LTIP Award in the amount of $198,000. According to the 2020 Cash LTIP Provisions, if Mr. Lanuto had been terminated as of December 31, 2019, no payment would be due. As of December 31, 2019, pursuant to the 2020 Cash LTIP Provisions, the amount that would have been paid to Mr. Lanuto under this award upon a Change in Control would be $198,000.
Jonathan Mirsky
Pursuant to his employment agreement, if MDC terminates Mr. Mirsky’s employment without “Cause,” or Mr. Mirsky terminates his employment for “Good Reason” (as defined in his employment agreement), then MDC is required to pay Mr. Mirsky a lump sum severance payment within 60 days of the date of termination equal to six (6) months’ base salary. If Mr. Mirsky’s employment had terminated under these circumstances on December 31, 2019, the aggregate cash payment due to him under the agreement would have been $275,000.
If Mr. Mirsky’s employment is terminated within one year following the closing of a Change in Control by the company without “Cause,” or by Mr. Mirsky for “Good Reason,” then MDC is required to pay Mr. Mirsky a lump sum severance payment within 60 days of the date of termination equal to nine (9) months’ base salary. If Mr. Mirsky’s employment had terminated under these circumstances on December 31, 2019, the aggregate cash payment due to him under the agreement would have been $412,500.
As of December 31, 2019, under his inducement awards, Mr. Mirsky had 250,000 restricted shares and 250,000 SARs that would vest upon (i) his death or disability, (ii) termination of his employment without “Cause” or with “Good Reason,” or (iii) a Change in Control (as defined in the Company’s 2016 Stock Incentive Plan). In the event of termination of Mr. Mirsky’s employment by MDC without “Cause,” or by Mr. Mirsky for “Good Reason” as of December 31, 2019, a total of 250,000 restricted shares and 250,000 SARs would fully vest, with a fair value equal to $695,000.
As of December 31, 2019, Mr. Mirsky also had 121,000 restricted shares under the Company’s 2016 Stock Incentive Plan, with a fair value equal to $336,380. Pursuant to the 2016 CIC and Termination Provisions, in the event of termination of Mr. Mirsky’s employment by MDC without “Cause” (subject to such termination not otherwise being a Permitted Acceleration Event) or by Mr. Mirsky for “Good Reason” as of December 31, 2019, none of the restricted shares would vest under this award.
Finally, as of December 31, 2019, Mr. Mirsky had a 2020 Cash LTIP Award in the amount of $242,000. According to the 2020 Cash LTIP Provisions, if Mr. Mirsky had been terminated as of December 31, 2019, no payment would be due. As of December 31, 2019, pursuant to the 2020 Cash LTIP Provisions, the amount that would have been paid to Mr. Mirsky under this award upon a Change in Control would be $242,000.
David Ross
Pursuant to his employment agreement, if MDC terminates Mr. Ross’s employment without “cause,” or Mr. Ross terminates his employment for “good reason,” then MDC is required to pay Mr. Ross a severance payment within 10 days of the date of termination of one (1) times Mr. Ross’s total remuneration. Total remuneration means the sum of his then-current base salary plus the highest annual discretionary cash bonus he earned in the three years ending December 31 of the year immediately preceding the date of termination. He will also be eligible to receive a pro-rata portion of his annual discretionary cash bonus for the year in which his employment terminates. If Mr. Ross’s employment had terminated under these circumstances on December 31, 2019, the aggregate cash payment due to him under the agreement would have been $1,000,000.
Furthermore, Mr. Ross will also be allowed to continue participating for one year after termination on the same basis as before he was terminated in all benefit plans and, to the extent permitted under law, also in all retirement plans, provided, however, that if Mr. Ross becomes entitled to receive coverage and benefits in the same type of plan from another employer, he will no longer be able to participate in these benefit and retirement plans. MDC will be obligated to pay Mr. Ross the economic equivalent of the benefits in these plans if he is unable to participate in the plans. The aggregate amount of this benefit would have been approximately $21,006 if Mr. Ross’s employment had terminated as of December 31, 2019.
If Mr. Ross’s employment is terminated by the Company without cause, or by Mr. Ross for good reason, within one year following the closing of a change in control, then Mr. Ross will be entitled to a payment of two (2) times his total remuneration. He will also be eligible to receive a pro-rata portion of his annual discretionary cash bonus for the year in which his employment terminates. If there had been a change in control of MDC Partners on December 31, 2019 and Mr. Ross’s employment terminated in connection with that change in control, the aggregate cash severance payment MDC would have paid him under the contract would be $2,000,000. Furthermore, Mr. Ross will also be allowed to continue participating for one year after termination on the same basis as before he was terminated in all benefit plans. MDC will be obligated to pay Mr. Ross the economic equivalent of the benefits in these plans if he is unable to participate in the plans. The aggregate amount of this benefit would have been approximately $21,006 if Mr. Ross’s employment had terminated as of December 31, 2019.
As of December 31, 2019, Mr. Ross had 43,000 SARs that would vest upon (i) termination of his employment without “Cause” or with “Good Reason,” or (ii) a Change in Control (as defined in the Company’s 2011 Stock Incentive Plan). In the event of termination of Mr. Ross’s employment by MDC without “Cause,” or by Mr. Ross for “Good Reason” as of December 31, 2019, a total of 43,000 SARs would fully vest. Based on the closing price of the Company’s Class A shares on that date, this award had no value.
As of December 31, 2019, Mr. Ross also had 200,000 restricted shares granted on November 4, 2019 that would vest in the event of (i) his death or disability, (ii) termination of his employment without “Cause” or by Mr. Ross for “Good Reason” within one year following a Change in Control (as defined in the Company’s 2011 Stock Incentive Plan), or (iii) a Change in Control in which the Company’s Class A shares are no longer outstanding and publicly traded immediately following such transaction, with a fair value equal to $556,000. In the event that Mr. Ross is terminated without “Cause” (subject to such termination not otherwise being a Permitted Acceleration Event) or resigns for “Good Reason” a number of restricted shares shall vest, if such termination occurs prior to the Determination Date, on the Determination Date, in an amount equal to the product of (x) the number of restricted shares that would otherwise vest in accordance with the applicable performance conditions, if any, and (y) a fraction, the numerator of which shall be the number of full months of service completed by Mr. Ross from January 1, 2020 through the termination date, and the denominator of which shall be 36. The “Determination Date” is the date the Company achieves the performance thresholds set forth in the award, as determined by the Compensation Committee on or prior to March 1, 2021. Accordingly, in the event of termination of Mr. Ross’s employment by MDC without “Cause” (subject to such termination not otherwise being a Permitted Acceleration Event) or by Mr. Ross for “Good Reason” as of December 31, 2019, none of the restricted shares under this award would vest.
As of December 31, 2019, Mr. Ross had 26,738 restricted shares awarded in February 2018 that that would vest in the event of (i) his death, (ii) termination of his employment without “Cause” or by Mr. Ross for “Good Reason” within one year following a Change in Control (as defined in the Company’s 2016 Stock Incentive Plan), or (iii) a Change in Control in which the Company’s Class A shares are no longer outstanding and publicly traded immediately following such transaction, with a fair value equal to $74,332. In the event that Mr. Ross (i) is terminated by the Company without “Cause” or resigns for “Good Reason”, the number of restricted shares that shall vest on any “Vesting Date” is the product of (a) the number of restricted shares that would otherwise vest in accordance with the applicable performance conditions, if any, and (b) a fraction, the numerator of which shall be the number of full months of service completed by Mr. Ross prior to his termination without “Cause” or resignation for “Good Reason,” as applicable and after the Grant Date, and the denominator of which shall be the number of months within the performance period commencing on January 1, 2018 and ending on December 31, 2020. The “Vesting Date” is the date that the Company achieves the minimum EBITDA threshold, as determined by the Compensation Committee on or prior to March 1, 2021. In the event of the termination of Mr. Ross’s employment by the Company without “Cause” or his resignation for “Good Reason” as of December 31, 2019, none of the restricted shares under this award would vest.
As of December 31, 2019, Mr. Ross also had 70,000 restricted shares awarded in January 2017 that would vest in the event of (i) his death, (ii) termination of his employment without “Cause” or by Mr. Ross for “Good Reason” within one year following a Change in Control (as defined in the Company’s 2016 Stock Incentive Plan), or (iii) a Change in Control in which the Company’s Class A shares are no longer outstanding and publicly traded immediately following such transaction, with a fair value equal to $194,600. In the event that Mr. Ross (i) is terminated by the Company without “Cause” or resigns for “Good Reason”, the number of restricted shares that shall vest on any “Vesting Date” is the product of (a) the number of restricted shares that would otherwise vest in accordance with the applicable performance conditions, if any, and (b) a fraction, the numerator of which shall be the number of full months of service completed by Mr. Ross prior to his termination without “Cause” or resignation for “Good Reason,” as applicable and after the Grant Date, and the denominator of which shall be the number of months within the performance period commencing on January 1, 2017 and ending on December 31, 2019. The “Vesting Date” is the date that the Company achieves the minimum EBITDA threshold, as determined by the Compensation Committee on or prior to March 1, 2020. In the event of the termination of Mr. Ross’s employment by the Company without “Cause” or his resignation for “Good Reason” as of December 31, 2019, a total of 52,500 restricted shares under this award would fully vest, with a fair value equal to $145,950. (52,500 shares of Mr. Ross’s grant of 70,000 shares vested on February 26, 2020 based on achievement of at least 90% (but less than 100%) of the minimum cumulative 3-year EBITDA target for the performance period ended December 31, 2019. The remaining award shares were forfeited.)
Additionally, as of December 31, 2019, Mr. Ross had 137,500 restricted shares granted in June 2019 that would vest upon (i) his death or disability, (ii) termination of his employment without “Cause” or with “Good Reason,” or (iii) a Change in Control (as defined in the Company’s 2016 Stock Incentive Plan), with a fair value equal to $382,250. (68,750 shares of Mr. Ross’s grant of 137,500 shares vested on February 26, 2020, based on achievement of the 2019 EBITDA target. The remaining award shares will vest if the Company achieves the minimum EBITDA threshold for the performance period commencing January 1, 2019 and ending December 31, 2020, as determined by the Compensation Committee on or prior to March 1, 2021.)
As of December 31, 2019, Mr. Ross also had a 2020 Cash LTIP Award in the amount of $400,000. According to the 2020 Cash LTIP Provisions, if Mr. Ross had been terminated as of December 31, 2019, no payment would be due. As of December 31, 2019, pursuant to the 2020 Cash LTIP Provisions, the amount that would have been paid to Mr. Ross under this award upon a Change in Control would be $400,000.
Finally, Mr. Ross has a 2018 LTIP cash award comprised of a $125,000 EBITDA performance-based award and a $125,000 total shareholder return (“TSR”) performance-based award. Upon termination of his employment without “Cause” or with “Good Reason,” these awards would pro rata vest based on actual performance up to and including the last day of the completed fiscal year immediately preceding such termination. Accordingly, if Mr. Ross had been terminated under such circumstances as of December 31, 2019, no payment would be due. Upon a Change in Control (as defined in the 2014 Long-Term Cash Incentive Plan), (i) the EBITDA performance-based award will vest, with the amount payable determined using the greater of (a) an EBITDA performance multiplier of one (1) and (b) the EBITDA performance multiplier that would apply based on actual cumulative EBITDA for the period ended as of the Change in Control; and (ii) the TSR performance-based award will vest, with an amount payable determined using the greater of (x) a TSR performance multiplier of one (1) and (y) the TSR performance multiplier that would apply based on the Company’s relative TSR determined by using the price per share paid in such Change in Control and comparing it to the average Trading Price of the companies in the peer group for the twenty (20) trading days preceding such Change in Control; provided that if the price per share paid in such Change in Control is equal to or greater than 150% of the average trading price of a Class A share during such twenty (20) day period, the TSR performance multiplier will be three (3). As of December 31, 2019, the amount that would have been paid to Mr. Ross under this award upon a Change in Control would be $250,000.
David Doft
On May 9, 2019, the Company entered into a Separation Agreement with Mr. Doft, the Company’s former Executive Vice President and Chief Financial Officer. Mr. Doft resigned from his position as Executive Vice President and Chief Financial Officer of the Company on August 7, 2019. In accordance with the terms of the Separation Agreement, Mr. Doft was entitled to receive, subject to his execution and non-revocation of a customary release of claims, (i) a cash payment of $650,000 pursuant to his retention bonus letter agreement dated December 21, 2018, (ii) a cash separation payment equal to $1,655,000 pursuant to his employment agreement, and (iii) continued participation in the Company’s health benefit plans for a period of up to one year following his termination date. In addition, effective on the Termination Date, all of Mr. Doft’s unvested and outstanding restricted shares of MDC Class A stock previously granted to him by MDC were deemed fully vested and Mr. Doft remained eligible to receive a cash payment pursuant to the terms and conditions of his LTIP Award Agreement dated as of February 23, 2018.
Mitchell Gendel
On May 6, 2019, the Company entered into a Separation Agreement with Mr. Gendel, the Company’s former Executive Vice President and General Counsel. Mr. Gendel resigned from his position as Executive Vice President and General Counsel of the Company on August 7, 2019. In accordance with the terms of the Separation Agreement, Mr. Gendel was entitled to receive, subject to his execution and non-revocation of a customary release of claims, (i) a cash payment of $650,000 pursuant to his retention bonus letter agreement dated December 21, 2018, (ii) a cash separation payment equal to $1,550,000 pursuant to his employment agreement, and (iii) continued participation in the Company’s health benefit plans for a period of up to one year following his termination date. In addition, effective on the Termination Date, all of Mr. Gendel’s unvested and outstanding restricted shares of MDC Class A stock previously granted to him by MDC were deemed fully vested and Mr. Gendel remained eligible to receive a cash payment pursuant to the terms and conditions of his LTIP Award Agreement dated as of February 23, 2018.
Compensation of Directors
The Compensation Committee is responsible for evaluating and recommending compensation programs for the Company’s non-employee directors to the Board for approval. In April 2019, the Compensation Committee approved a one-time cash award in lieu of the annual award of restricted stock that has been customarily granted to non-employee directors in the past. The grant of any annual stock award had been deferred during the pendency of the Company’s strategic review process, which culminated in the Stagwell investment and Mr. Penn becoming Chairman and CEO of the Company in March 2019. The Compensation Committee ultimately determined, on a one-time basis, to award the non-employee directors (other than Brad Gross) cash rather than stock due to the perceived dislocation of the Company’s stock price at the time, as well as to preserve availability under then-existing equity incentive plans to facilitate Mr. Penn’s rebuilding of the Company’s management team as described in more detail herein. The Compensation Committee intends to reevaluate the form of this award in 2020.
The elements of compensation paid to the Company’s non-employee directors in fiscal year 2019 were as follows:
| · | an annual cash retainer of $70,000; |
| · | a meeting fee of $2,000 for each Board or committee meeting attended (limited to two meetings per day); and |
| · | a one-time cash award of $100,000. |
The Company pays additional fees for certain positions held by a director as follows:
| o | $75,000 for the Presiding Director; |
| o | $20,000 for the Audit Committee Chair; |
| o | $5,000 for the Audit Committee financial expert; and |
| o | $15,000 for other Committee Chairs. |
In 2019, Mr. Penn was not entitled to receive any separate or additional compensation in connection with his services on the Board. Mr. Gross also did not receive any compensation for his services on the Board, in accordance with the terms of the purchase agreement with Goldman Sachs.
The following table sets forth the compensation paid to or earned during fiscal year 2019 by our non-management directors:
DIRECTOR COMPENSATION FOR FISCAL YEAR 2019
| Non-Management Director | | Fees Earned or Paid in Cash
($) | | | Stock Awards
($) | | | Option Awards
($) | | | All Other Compensation
($) | | | Total
($) | |
| Charlene Barshefsky | | | 134,500 | | | | — | | | | — | | | | — | | | | 134,500 | (1) |
| Clare R. Copeland | | | 161,000 | | | | — | | | | — | | | | — | | | | 161,000 | (2) |
| Daniel S. Goldberg | | | 212,000 | | | | — | | | | — | | | | — | | | | 212,000 | (3) |
| Bradley J. Gross | | | 0 | | | | — | | | | — | | | | — | | | | 0 | |
| Scott Kauffman | | | 151,000 | | | | — | | | | — | | | | — | | | | 151,000 | (4) |
| Lawrence S. Kramer | | | 186,500 | | | | — | | | | — | | | | — | | | | 186,500 | (5) |
| Anne Marie O’Donovan | | | 265,000 | | | | — | | | | — | | | | — | | | | 265,000 | |
| Kristen O’Hara | | | 123,333 | | | | — | | | | — | | | | — | | | | 123,333 | (6) |
| Wade Oosterman | | | — | | | | — | | | | — | | | | — | | | | — | (7) |
| Desirée Rogers | | | 233,500 | | | | — | | | | — | | | | — | | | | 233,500 | |
| Irwin D. Simon | | | 352,000 | | | | — | | | | — | | | | — | | | | 352,000 | |
__________________
| (1) | Ms. Barshefsky was appointed to the Board on April 8, 2019 and thus received a prorated annual cash retainer. Ms. Barshefsky received a one-time cash award of $50,000 rather than $100,000. |
| (2) | Mr. Copeland did not stand for re-election at our 2019 Annual Meeting and thus received a prorated annual cash retainer. Mr. Copeland also received a one-time cash award of $100,000. |
| (3) | Mr. Goldberg resigned from the Board on January 21, 2020. In 2019, Mr. Goldberg received his annual cash retainer, in full, as well as a one-time cash award of $100,000. |
| (4) | Mr. Kauffman did not stand for re-election at our 2019 Annual Meeting and thus received a prorated annual cash retainer. Mr. Kauffman also received a one-time cash award of $100,000. |
| (5) | Mr. Kramer did not stand for re-election at our 2019 Annual Meeting and thus received a prorated annual cash retainer. Mr. Kramer also received a one-time cash award of $100,000. |
| (6) | Ms. O’Hara was elected to the Board at our 2019 Annual Meeting and thus received a prorated annual cash retainer. Ms. O’Hara received a one-time cash award of $58,333 rather than $100,000. |
| (7) | Mr. Oosterman was appointed to the Board on January 23, 2020 and was not paid any compensation in 2019. |
No equity awards were granted to our non-employee directors in 2019. The aggregate number of restricted shares or restricted stock units outstanding as of December 31, 2019 for our non-employee directors was as follows: 0 shares for Ms. Barshefsky; 0 shares for Mr. Copeland; 26,990 restricted stock units for Mr. Goldberg; 0 shares for Mr. Gross; 0 shares for Mr. Kramer; 26,990 restricted stock units for Ms. O’Donovan; 0 shares for Ms. O’Hara; 9,990 shares for Ms. Rogers; 26,990 shares for Mr. Simon; and 428,342 shares for Mr. Kauffman. Mr. Kauffman is a former chief executive officer of the Company; the vesting terms for the 428,342 shares of restricted stock held by him as of December 31, 2019, are governed by that certain Succession Agreement between the Company and Mr. Kauffman, which was filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 12, 2018.
Compensation Committee Interlocks and Insider Participation” inParticipation
Desiree Rogers, Bradley J. Gross, Kristen O’Hara and Irwin Simon served on the Compensation Committee of the Board of Directors during 2019. Larry Kramer and Clare Copeland also served on the Compensation Committee during 2019, but did not stand for re-election at the Company’s Proxy Statement for the 20202019 Annual General Meeting of Stockholders, whichShareholders. None of the persons who served on the Compensation Committee at the time of such service are, incorporated herein by reference.or have been, an employee or officer of the Company or had any relationship requiring disclosure under Item 404 of Regulation S-K. In addition, none of the Company’s executive officers serves, or has served during the last completed fiscal year, as a member of the board of directors or compensation committee of any other entity that has or has had one or more of its executive officers serving as a member of the Company’s Board of Directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
MattersMatters.The following table sets forth certain information regarding the beneficial ownership of the Class A Shares of MDC outstanding as of March 31, 2020 by each beneficial owner of more than five percent of such shares, by each of the directors and named executive officers of MDC and the current nominees for Board election and by all current directors and executive officers of MDC as a group. The address for persons for which an address is not otherwise provided in the footnotes below is c/o MDC Partners Inc., 330 Hudson Street, 10th Floor, New York, NY 10013.
| | | Number of Voting Shares Beneficially Owned, or Over Which Control or Direction is Exercised(1) | | | Approximate Percentage of Class(5) | |
| Name | | Type of Shareholding | | Class A Subordinate Voting Shares(2) | | | Class A Shares Underlying Options, Warrants or Similar Right Exercisable Currently or Within 60 Days(3) | | | Class A Shares Underlying All Options, Warrants or Similar Right(4) | | | Class A Shares | |
| Mark J. Penn | | Direct | | | 602,500 | (6) | | | 500,000 | | | | 1,500,000 | | | | 1.5 | % |
| | | Indirect | | | 14,335,714 | (7) | | | 10,865,213 | | | | 10,865,213 | (7) | | | 29.4 | % |
| Charlene Barshefsky | | Direct | | | 50,000 | | | | | | | | | | | | * | |
| Bradley J. Gross | | Direct | | | | | | | | | | | | | | | * | |
| Anne Marie O’Donovan | | Direct | | | 31,990 | (6) | | | | | | | | | | | * | |
| | | Indirect | | | 17,832 | | | | | | | | | | | | * | |
| Kristen M. O’Hara | | Direct | | | - | | | | | | | | | | | | * | |
| Desirée Rogers | | Direct | | | 48,962 | (6) | | | | | | | | | | | * | |
| Irwin D. Simon | | Direct | | | 64,955 | (6) | | | | | | | | | | | * | |
| Jonathan B. Mirsky | | Direct | | | 371,000 | (6) | | | | | | | 250,000 | | | | * | |
| Frank P. Lanuto | | Direct | | | 124,000 | (6) | | | | | | | 450,000 | | | | * | |
| David C. Ross | | Direct | | | 442,190 | (6) | | | 43,000 | | | | 43,000 | | | | * | |
| Vincenzo DiMaggio | | Direct | | | 78,333 | (6) | | | | | | | | | | | * | |
| Wade Oosterman | | Direct | | | 35,000 | | | | | | | | | | | | * | |
| David Doft | | Direct | | | 177,729 | | | | | | | | | | | | * | |
| Mitchell Gendel | | Direct | | | 228,354 | | | | | | | | | | | | * | |
| All directors and officers of MDC as a group of 12 persons | | | | | 16,202,476 | | | | 11,408,213 | | | | 13,108,213 | | | | 32.0 | % |
| Stagwell Agency Holdings LLC(8)(9) | | | | | 14,335,714 | (7)(9) | | | 10,865,213 | | | | 10,865,213 | (7) | | | 29.4 | % |
| Goldman Sachs(8) | | | | | 7,625 | | | | 16,324,198 | | | | 16,324,198 | (10) | | | 17.9 | % |
| Hotchkis and Wiley Capital Management LLC(8) | | | | | 8,962,457 | (11) | | | | | | | | | | | 12.0 | % |
| Indaba Capital Fund, L.P.(8) | | | | | 7,181,301 | (12) | | | | | | | | | | | 9.6 | % |
________________
| * | The percentage of shares beneficially owned does not exceed one percent of the outstanding shares. |
(1) Unless otherwise noted, MDC Partners believes that all persons named in the table above have sole voting power and dispositive power with respect to all shares beneficially owned by them.
(2) This column includes Class A Shares owned directly or indirectly, but does not include Class A Shares subject to options, warrants or similar rights.
(3) This column includes Class A Shares subject to options, warrants or similar rights that are currently exercisable or will become exercisable within 60 days after March 31, 2020.
(4) This column includes Class A Shares subject to all outstanding options, stock appreciation rights, warrants or similar rights, whether or not such options, warrants or similar rights are currently exercisable or will become exercisable within 60 days after March 31, 2020.
(5) For purposes of computing the percentage of outstanding shares held by each person or group named above, we have included restricted shares in the number of shares of the Company outstanding as of March 31, 2020. In addition, for purposes of computing the percentage of outstanding shares held by each person or group named above, any shares which that person or persons has or have the right to acquire within 60 days of March 31, 2020, is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Those Class A Shares issuable upon conversion of the Series 4 Convertible Preference Shares or Series 6 Convertible Preference Shares are also not deemed to be outstanding for purposes of computing the percentage ownership of any other person.
(6) Includes shares of restricted stock or restricted stock units (that may be settled in shares) that have not yet vested, but with respect to which the director or executive, as the case may be, has the ability to vote.
(7) Mr. Penn, our Chairman and CEO, is also manager of The information requiredStagwell Group LLC, an affiliate of Stagwell Agency Holdings LLC. Amounts shown include 14,285,714 Class A Shares held by this item will beStagwell Agency Holdings LLC, 50,000 shares held by The Stagwell Group LLC (and reported in the table as included in the sections captioned “Security Ownershipamounts reported by Stagwell Agency Holdings LLC) and an additional 10,865,213 Class A Shares issuable upon conversion of Certain Beneficial Owners50,000 Series 6 Convertible Preference Shares owned by Stagwell Agency Holdings LLC. The number of Class A Shares issuable upon conversion of the Series 6 Convertible Preference Shares from time to time is described in more detail in Note 15 to our consolidated financial statements.
(8) Stock ownership of these entities is based solely on a Schedule 13D, 13D/A, 13G or 13G/A filed by each such entity and, Management”with respect to Stagwell Agency Holdings LLC and “SecuritiesThe Stagwell Group LLC, any subsequently filed Form 4. The address of Stagwell Agency Holdings LLC is c/o The Stagwell Group LLC, 1808 I Street, NW, Sixth Floor, Washington, DC 20006, and its most recent Schedule 13D was filed on March 25, 2019. The address of each of The Goldman Sachs Group, Inc., Goldman, Sachs & Co., Broad Street Principal Investments, L.L.C., StoneBridge 2017, L.P., StoneBridge 2017 Offshore, L.P., and Bridge Street Opportunity Advisors, L.L.C. (collectively, “Goldman Sachs”) is 200 West Street, New York, NY 10282, and Goldman Sachs’ most recent Schedule 13G/A, filed on behalf of itself and the members of the group, was filed on March 28, 2018. The address of each of Indaba Capital Management, L.P., IC GP, LLC and Derek C. Schrier (collectively, “Indaba”) is One Letterman Drive, Building D, Suite DM700, San Francisco, CA 94129, and its most recent Schedule 13G was filed on February 14, 2020. The address of Hotchkis and Wiley Capital Management, LLC is 725 S. Figueroa Street, 39th Fl, Los Angeles, CA 90017, and its most recent Schedule 13G was filed on February 14, 2020.
(9) The Schedule 13D filed with the SEC on March 25, 2019 by Stagwell Agency Holdings LLC, The Stagwell Group LLC, and Mark Penn together with the Form 4 filed with the SEC on March 26, 2020, by Mark Penn reports the number of shares as to which each of Stagwell Agency Holdings LLC and The Stagwell Group LLC have the sole power to vote or to direct the vote is 14,335,714 shares and the number of shares as to which each of the foregoing has the sole power to dispose or direct the disposition is 14,335,714 shares. This report reflects 14,335,714 Class A Shares beneficially owned by Stagwell Agency Holdings LLC and The Stagwell Group LLC as well as an additional 10,865,213 Class A Shares issuable upon conversion of 50,000 Series 6 Convertible Preference Shares owned by Stagwell Agency Holdings LLC.
(10) The Schedule 13D/A filed with the SEC on March 19, 2019 by Goldman Sachs reports that the number of shares to which The Goldman Sachs Group, Inc. and Goldman Sachs & Co. have the shared power to vote or to direct the vote is 14,786,448 and the number of shares to which The Goldman Sachs Group, Inc. and Goldman Sachs & Co. have the shared power to dispose or direct the disposition is 14,786,448 shares. The number of shares to which Goldman Sachs has the shared power to vote and the shared power to dispose or direct the disposition is 14,786,448. This report reflects 7,625 Class A Shares beneficially owned by The Goldman Sachs Group, Inc. and Goldman Sachs & Co., as well as an additional 14,778,823 Class A Shares issuable upon the conversion of 95,000 Series 4 Convertible Preference Shares of the Company also owned by Goldman Sachs. The number of Class A Shares issuable upon conversion of the Series 4 Convertible Preference Shares from time to time is described in more detail in Note 15 to our consolidated financial statements.
(11) The Schedule 13G filed with the SEC on February 13, 2020 by Hotchkis and Wiley Capital Management, LLC (“HWCM”) reported sole voting power over 7,050,657 shares and sole dispositive power over 8,962,457 shares. Hotchkis and Wiley Small Cap Value Fund reported sole voting power and sole dispositive power over 3,976,000 shares, which were included in HWCM’s reported amounts. The Schedule 13G provides that certain of HWCM’s clients have retained voting power over the Class A Subordinate Voting Shares that they beneficially own. Accordingly, HWCM has the power to dispose of more Class A Subordinate Voting Shares than it can vote.
(12) The Schedule 13G jointly filed with the SEC on February 14, 2020 by Indaba Capital Management, L.P., IC GP LLC, and Derek C. Scheier sets forth that Indaba Capital Management, L.P., IC GP LLC, and Derek C. Scheier have shared voting and dispositive power over 7,181,301 shares. The Schedule 13G provides that the shares are directly held by Indaba Capital Fund, L.P., and voting and investment power over the shares has been delegated to Indaba Capital Management, L.P.
Changes in Control
To our knowledge, there are no present arrangements or pledges of the Company’s securities that may result in a change in control of the Company.
Securities Authorized for Issuance under Equity Compensation Plans”Plans
As of December 31, 2019, the Company had reserved 280,656 Class A Shares in order to meet its obligations under various conversion rights, warrants and employee share related plans approved by stockholders comprised of 125,800 shares reserved for exercises of SARs, 111,866 shares reserved for exercises of options, and 42,990 shares reserved for conversion of restricted stock units upon vesting. There were 1,815,302 shares remaining available for future issuance under compensation plans approved by stockholders. In addition, we had 2,200,000 SARs outstanding at December 31, 2019 that could be exercised into Class A Shares related to inducement awards to our NEOs, which were not required to be approved by stockholders; none of such SARs were vested or exercisable at December 31, 2019.
The following table sets out as at December 31, 2019 the Company’s next Proxy Statementnumber of securities to be issued upon exercise of outstanding options and rights, the weighted average exercise price of outstanding options and rights and the number of securities remaining available for the 2020 Annual General Meeting of Stockholders and is incorporated herein by reference.future issuance under equity compensation plans.
| | 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 Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
| | (a) | | (b) | | (c) |
| Equity compensation plans approved by stockholders:(1) | | 280,656(2) | | 5.78(3) | | 1,772,312 |
| | | | | | |
| Equity compensation plans not approved by stockholders: | | 2,200,000(4) | | 2.87 | | |
________________
| (1) | The Company currently grants equity awards under the 2011 Stock Incentive Plan and 2016 Stock Incentive Plan. No further grants are being made under the Company’s prior Amended and Restated Stock Appreciation Rights Plan, 2008 Key Partner Incentive Plan, or the Amended 2005 Stock Incentive Plan. |
| (2) | As of December 31, 2019, the aggregate number of securities to be issued upon exercise of outstanding options, warrants and rights under equity compensation plans approved by stockholders was 125,800 and 111,866 for SARs and options, respectively. In addition, 42,990 shares were reserved at December 31, 2019 for conversion of restricted stock units upon vesting. |
| (3) | As of December 31, 2019, the weighted average exercise price of the 125,800 outstanding SARs was $6.60, and the weighted average exercise price of the 111,866 outstanding share options was $4.85. The calculation of the weighted average exercise price does not include the restricted stock units because they may be exchanged for shares upon vesting for no consideration. |
| (4) | Reflects inducement grants of SARs to Messrs. Penn, Lanuto, and Mirsky. For a description of the material terms of these inducement grants, see “Compensation Discussion and Analysis — 2019 Annual Incentive Awards: Financial and Individual Performance Metrics — 2019 Inducement Awards”, “Compensation Discussion and Analysis — and the related agreements filed as Exhibits 10.1, 10.2, 10.3, and 10.4 to this Form 10-K/A. |
Item 13. Certain Relationships and Related Transactions and Director Independence
Reference is madeReview and Approval of Related Party Transactions
Related Party Transactions Policy
The Board has adopted a written Related Party Transactions Policy to Note 20assist it in reviewing, approving and ratifying related party transactions. The Related Party Transactions Policy provides that all related party transactions covered by the policy must be approved in advance by the Audit Committee, except that any ordinary course transaction in which an operating subsidiary of the NotesCompany derives revenue from a related party may be approved on an annual basis by the Audit Committee. To facilitate compliance with this policy, Directors and executive officers of the Company must notify the Company’s General Counsel and CFO as soon as reasonably practicable about any potential related party transaction. If the Company’s General Counsel and CFO determine that the transaction constitutes a related party transaction, the transaction will be referred to the Consolidated Financial Statements included in Item 8Audit Committee for its consideration.
In reviewing related party transactions, the Audit Committee will be provided with full details of this Form 10-Kthe proposed related party transaction and will consider all relevant facts and circumstances, including, among others:
The benefits of the transaction to “Related Party Transactions”the Company;
The terms of the transaction and “Director Independence”whether they are fair (arm’s-length) and in the ordinary course of the Company’s Proxy Statementbusiness;
The size and expected term of the transaction; and
Other facts and circumstances that bear on the materiality of the Related Party Transaction.
Generally, the Related Party Transactions Policy applies to any transaction that would be required by the SEC to be disclosed in which the Company was or is proposed to be, a participant and in which a “Related Party” had, has or will have a direct or indirect material interest. The policy also applies to any amendment or modification to an existing Related Party Transaction, regardless of whether such transaction has previously been approved.
Stagwell Review Guidelines
The Audit Committee has adopted a policy, the Stagwell Review Guidelines, with respect to ordinary course transactions of its operating subsidiaries with affiliates of the Stagwell Group LLC. These Stagwell Review Guidelines supersede certain pre-approval standards in the Related Party Transactions Policy with respect to such transactions.
Stagwell Agency Holdings LLC, an entity affiliated with the Stagwell Group LLC, is an investor in the Company and the Chief Executive Officer of the Company, Mark Penn, is the manager of The Stagwell Group LLC. Stagwell is an investment firm that owns digital marketing, research, communications and other related companies (each, a “Stagwell Affiliate”) complementary to the Company’s business. The Company believes that collaboration among the Company’s Partner Firms and Stagwell Affiliates can present significant opportunities for the Company’s Partner Firms to increase revenues, reduce costs, and deliver better services to our clients. The Company seeks to encourage those agency collaborations when appropriate. Because Stagwell and Mark Penn are each a related party, the Audit Committee has established the Stagwell Review Guidelines to ensure the fairness to the Company of transactions, agreements, arrangements, and other matters between Partner Firms and Stagwell Affiliates.
The Company requires the Partner Firms to identify and describe, no less frequently than on a quarterly basis, any ordinary course transactions, agreements, and arrangements with a Stagwell Affiliate. The Partner Firm, prior to entering into any transaction, agreement, or arrangement with a Stagwell Affiliate, must determine that the transaction, agreement, or arrangement has a valid business purpose and that the pricing, terms and conditions of such transaction, agreement, or arrangement are reasonable under the circumstances. The Partner Firms are required to notify and obtain the advance written consent of both the Company’s General Counsel and its EVP, Strategy and Corporate Development prior to such Partner Firm entering into, or modifying or amending, any ordinary course transaction, agreement, or arrangement with a Stagwell Affiliate involving amounts exceeding $250,000 but less than $1,000,000.
Any transaction between a Partner Firm and a Stagwell Affiliate involving amounts exceeding $1,000,000 must be reviewed and approved by the Audit Committee in advance.
The Audit Committee reviews, at least quarterly, all transactions, agreements, and arrangements undertaken during the past quarter pursuant to the Stagwell Review Guidelines in order to determine that each ordinary course transaction, agreement, or arrangement with a Stagwell Affiliate has a valid business purpose and that the pricing, terms and conditions of such transaction, agreement, or arrangement are reasonable under the circumstances.
Transactions with Related Persons
The Company engaged in the following related party transactions since January 1, 2019, which were reviewed and approved by the Audit Committee in accordance with the Related Party Transactions Policy described above:
CEO and Director Affiliation
An affiliate of the Stagwell Group LLC 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 the manager of the Stagwell Group LLC.
Related Party Transactions with Stagwell Affiliates
The Company and its Partner Firms engaged in the following related party transactions with Stagwell Affiliates.
In October 2019, a Partner Firm of the Company entered into an arrangement with a Stagwell Affiliate, in which the Stagwell Affiliate and the Partner Firm will collaborate to provide various services to a client of the Partner Firm. The Partner Firm and the Stagwell Affiliate had pitched and won this business together, with the client ultimately determining the general scope of work for each agency. Under the arrangement, which was structured as a sub-contract due to client preference, the Partner Firm is expected to pay the Stagwell Affiliate, for services provided by the Stagwell Affiliate in connection with serving the client, approximately $655,000.
In January 2020, Annual General Meetinga Partner Firm of Stockholders, whichthe Company entered into an arrangement with a Stagwell Affiliate to develop advertising technology for the Partner Firm. Under the arrangement the Partner Firm is incorporated hereinexpected to pay the Stagwell Affiliate approximately $460,000.
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 a Stagwell Affiliate, 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.
Some of our Partner Firms from time-to-time enter into transactions and arrangements with Stagwell Affiliates on an ordinary course and regular basis pursuant to the Stagwell Review Guidelines. These include our Partner Firms providing or receiving advertising and marketing agency services. None of these transactions or arrangements involves amounts exceeding $120,000.
Other Related Party Transactions
The Company entered into an agreement commencing on January 1, 2020 to sublease office space through July 2021 to a company whose chairman Irwin Simon is a member of the Company’s Board of Directors. The total future rental income related to the sublease is approximately $350,000.
Director Independence
The Board has established guidelines for determining director independence, and all current directors, with the exception of Mr. Penn, have been determined by reference.
the Board to be independent under applicable Nasdaq rules and the Board’s governance principles, and applicable Canadian securities laws within the meaning of National Instrument 58-101 — Disclosure of Corporate Governance Practices. Mr. Gross was nominated to the Board in 2017 by Goldman Sachs pursuant to its rights as the purchaser of the Series 4 Convertible Preference Shares. At that time, the Company and the purchaser determined to treat Mr. Gross as ineligible to sit on the Board’s committees, without the Board making an affirmative determination as to his independence. In light of the changes in Board composition during 2019, the Board re-evaluated Mr. Gross’s independence in June 2019 and determined him to be independent under applicable Nasdaq rules and the Board’s governance principles.
Item 14. Principal Accounting Fees and Services
Reference is madeThe Company retained BDO USA, LLP to audit the Company’s consolidated financial statements for 2018 and 2019. The Company also retained BDO USA, LLP to provide non-audit services in 2019. The following table sets forth the aggregate fees billed to the section captioned “Audit Fees”Company by BDO USA, LLP for professional services in the Company’s Proxy Statementfiscal years 2018 and 2019:
BDO USA, LLP
| | | 2018 | | | 2019 | |
| Audit Fees(1) | | $ | 2,648,866 | | | $ | 2,527,838 | |
| | | | | | | | | |
| Tax Fees(2) | | | | | | $ | 38,000 | |
| Audit Related Fees | | | | | | | | |
| All Other Fees | | | | | | | | |
| Total | | $ | 2,648,866 | | | $ | 2,565,838 | |
(1) Fees primarily for the 2020 Annual General Meetingannual financial statement audit, including internal control assessment related fees, quarterly financial statement reviews and regulatory comment letters.
(2) Fees for services rendered for analysis of Stockholders, which is incorporated hereinNOL utilization.
All fees listed above have been pre-approved by reference.the Audit Committee. The Audit Committee has, however, delegated to the Chairman of the Audit Committee the authority to pre-approve permitted non-audit services (as such services are defined by the Sarbanes-Oxley Act of 2002) provided that (i) the aggregate estimated amount of such fees will not exceed $25,000 and (ii) the Chairman of the Audit Committee reports any pre-approval so granted at the next scheduled meeting of the Audit Committee.
The Audit Committee Charter provides for the Audit Committee to establish the auditors’ fees. Such fees have been based upon the complexity of the matters in question and the time incurred by the auditors.
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statement 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 Index 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 |
| 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 |
| 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 |
|
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 |
| Description | | 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 |
|
The exhibits listed on the accompanying Exhibits Index are filed as a part of this report.
Item 16. Form 10-K Summary
None.
|
| | |
| 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 CreditStock Appreciation Rights 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,April 5, 2019. |
| 10.2 | | Stock Appreciation Rights Agreement 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,June 12, 2019. |
| 10.3 | | Stock Appreciation Rights Agreement by and between the Company and Frank Lanuto, dated as of June 12, 2019. |
| 10.4 | | Stock Appreciation Rights Agreement 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);dated as of June 26, 2019 |
| |
|
| | 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's Form 10-K filed on February 26, 2016); |
|
| | |
| | Succession Agreement between the Company and Scott Kauffman, dated as of September 9, 2018 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on 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'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 Form 10-Q filed on May 2, 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); |
| | Separation and Release Agreement, dated as of May 6, 2019, by and between the Company and Mitchell Gendel (incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q filed on May 9, 2019);
|
| | Amended and Restated Employment Agreement between the Company and Stephanie Nerlich, dated as of November 1, 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,Jonathan Mirsky, 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);26, 2019. |
| | Amended and Restated Stock Appreciation Rights Plan, as adopted by the shareholdersCertification 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 amended June 6, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on 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); |
| | Amended Form of Senior Executive Retention Award (December 2018) (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on December 27, 2018); |
| | Form of Financial Performance-Based Restricted Stock Agreement (2019) (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q filed on 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*;Rule 13a-14(a). |
| |
Rule 13a-14(a). |
| | Certification by Chief Executive Officer pursuant to 18 USC Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*;38 | |
|
| | |
| | Certification by Chief Financial Officer pursuant to 18 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.
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MDC PARTNERS INC. |
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/s/ Frank Lanuto |
Frank Lanuto |
Chief Financial Officer and Authorized Signatory |
March 5, 2020 |
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/s/ Mark Penn |
Mark Penn |
Chairman of the Board, Chief Executive Officer |
March 5, 2020
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/s/ Vincenzo DiMaggio |
Vincenzo DiMaggio |
Chief Accounting Officer |
March 5, 2020
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/s/ Desirée Rogers |
Desirée Rogers |
Director |
March 5, 2020
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/s/ Anne Marie O’Donovan |
Anne Marie O’Donovan |
Director |
March 5, 2020
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/s/ Ambassador Charlene Barshefsky |
Ambassador Charlene Barshefsky |
Director |
March 5, 2020
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/s/ Wade Oosterman |
Wade Oosterman |
Director |
March 5, 2020
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/s/ Irwin D. Simon |
Irwin D. Simon |
Presiding Director |
March 5, 2020
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/s/ Kristen O’Hara |
Kristen O’Hara |
Director |
March 5, 2020
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| | April 29, 2020 |
/s/ Bradley Gross |
Bradley Gross |
Director |
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March 5, 2020