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.
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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
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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
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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.
Business Combinations. Business combinations are accounted for using the acquisition method and accordingly, the assets acquired (including identified intangible assets), the liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values. The Company’s acquisition model typically provides for an initial payment at closing and for future additional contingent purchase price obligations. Contingent purchase price obligations are recorded as 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
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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
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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
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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
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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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
5. Revenue - (continued)
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|
|
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, $15,336 upon 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 Agencies reportable 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.
|