NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Except per Share Amounts)
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. 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 generally accepted accounting principles of the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting financial information on Form 10-K.
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 primarily in the U.S., Canada, Europe, Asia, and Latin America.
Recent Developments
Strategic Review Process and Successor CEO Search
On September 20, 2018, the Company announced its evaluation of potential strategic alternatives, which included, among other things, the possible sale of the Company. On September 12, 2018, the Company announced that Scott Kauffman’s employment as the Company’s Chief Executive Officer would terminate, which it did effective December 31, 2018. The strategic review process proceeded in parallel with the Company’s search to identify a successor CEO.
During the interim period in which the Company was evaluating strategic alternatives and assessing potential new CEO candidates, the Board of Directors has established an executive committee comprised of David Doft (EVP, Chief Financial Officer), Mitchell Gendel (EVP, General Counsel), Stephanie Nerlich (EVP, Partner Development and Talent), and David Ross (EVP, Strategy & Corporate Development) (collectively, the “Executive Committee”). Effective January 1, 2019, the Executive Committee assumed the role and responsibilities of the Chief Executive Officer until the appointment of a successor. The Board of Directors’ Strategic Alternatives Committee, comprised of three independent directors of the Board (Irwin Simon, Larry Kramer and Anne Marie O’Donovan), have provided oversight for the Executive Committee during the interim period.
The Company has completed the strategic review process and search for a new CEO. On March 14, 2019, the Company entered into a securities purchase agreement with Stagwell Agency Holdings LLC (“Stagwell Holdings”), an affiliate of Stagwell Group LLC (“Stagwell”), pursuant to which Stagwell Holdings agreed to purchase, (i)
14,285,714
newly authorized Class A shares for
$3.50
per share for an aggregate purchase price of
$50 million
and (ii)
50,000
newly authorized Series 6 convertible preference shares for an aggregate purchase price of
$50 million
. See Note 23 of the Notes to the Consolidated Financial Statements included herein for additional information.
Effective March 18, 2019, the Company’s Board of the Directors appointed Mark Penn as the Chief Executive Officer (succeeding the Executive Committee) and as a director of the Board. Mr. Penn is manager of Stagwell.
Amendment to Credit Agreement
On March 12, 2019 , the Company, Maxxcom Inc. (a subsidiary of the Company) (“Maxxcom”) and each of their subsidiaries party thereto entered into an amendment (the “Amendment”) to the existing senior secured revolving credit facility, dated as of May 3, 2016 (as amended, the “Credit Agreement”), among the Company, Maxxcom Inc., a Delaware corporation, each of their subsidiaries party thereto, Wells Fargo Capital Finance, LLC, as agent (“Wells Fargo”), and the lenders from time to time party thereto. See Note 12 of the Notes to the Consolidated Financial Statements included herein for additional information regarding the amendments to the Credit Agreement.
Sale of Kingsdale
On March 8, 2019, the Company consummated the sale of its Kingsdale business, including operations in Toronto and New York City, back to the Kingsdale Founder and CEO. As consideration for the sale, the Company was paid cash plus the assumption of certain liabilities totaling approximately
$50 million
in the aggregate.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
2
. Significant Accounting Policies
The Company’s significant accounting policies are summarized as follows:
Principles of Consolidation
. The accompanying consolidated financial statements include the accounts of MDC Partners Inc. and its domestic and international controlled subsidiaries that are not considered variable interest entities, and variable interest entities for which the Company is the primary beneficiary. Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications.
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation. Additionally, certain changes to presentation have been made. The Company changed its presentation of net income allocated to convertible preference shareholders. In the Company’s Form 10-K for the year ended December 31, 2017, this amount was presented in the Income (Loss) per Common Share footnote
and not on the Consolidated Statements of Operations. In connection with the presentation of the Form 10-K for the year ended December 31, 2018, the Company changed the 2017 Consolidated Statement of Operations to include the net income allocated to convertible preference shares, which was previously disclosed in footnote 3 of the December 31, 2017 financial statements.
Use of Estimates
. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including goodwill, intangible assets, contingent deferred acquisition consideration, 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 15 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,
2018
and
2017
. No sales to an individual client or country other than the United States accounted for more than
10%
of revenue for the fiscal years ended December 31, 2018, 2017, or 2016. 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, and 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.
Cash in Trust.
A subsidiary of the Company holds restricted cash in trust accounts related to funds received on behalf of clients. Such amounts are held in escrow under depositary service agreements and distributed at the direction of the clients. The funds are presented as a corresponding liability on the balance sheet. As of December 31, 2018, cash held in trusts and the trust liability totaling
$3,976
were classified within assets and liabilities held for sale within the Consolidated Balance Sheet. Refer to Note 5 in the Notes to Consolidated Financial Statements included herein for further information regarding the sale of this subsidiary.
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.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
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.
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.
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,
2018
and
2017
was
$8,072
and
$9,527
, 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 effective January 1, 2018. 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 tradename) 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.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
If the Company elects to perform the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is more than its carrying amount, then goodwill is not considered impaired and the quantitative impairment test is not necessary. For reporting units for which the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount and for reporting units for which the qualitative assessment is not performed, the Company will perform the quantitative impairment test, which compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not considered impaired. 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 2018 annual impairment test, the Company used an income approach, which incorporates the use of the discounted cash flow (“DCF”) method. The income approach requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.
The DCF estimates incorporate expected cash flows that represent a spectrum of the amount and timing of possible cash flows of each reporting unit from a market participant perspective. The expected cash flows are developed from the Company’s long-range planning process using projections of operating results and related cash flows based on assumed long-term growth rates and demand trends and appropriate discount rates based on a reporting units WACC as determined by considering the observable WACC of comparable companies and factors specific to the reporting unit. The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and the Company’s expectations. We performed the quantitative impairment test in 2018. See Note 10 for additional information regarding the Company’s impairment test and impairment charges recognized.
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 10 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 trade names. In executing the Company’s overall acquisition strategy, one of the primary drivers in identifying and executing a specific transaction is the existence of, or the ability to, expand the existing client relationships. The expected benefits of the Company’s acquisitions are typically shared across multiple agencies and regions.
Deferred Acquisition Consideration
. Consistent with our acquisition strategy and past practice of acquiring a majority ownership position, most acquisitions include an initial payment at the time of closing and provide for future additional contingent purchase price payments. Contingent purchase price obligations for these transactions is recorded as a deferred acquisition consideration liability and are derived from the performance of the acquired entity and are based on predetermined formulas. These various contractual valuation formulas may be dependent on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period. 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
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
estimated liability. In addition, changes in various contractual valuation formulas as well as adjustments to present value impact quarterly adjustments. These adjustments are recorded in results of operations.
Redeemable Noncontrolling Interests
. Many of the Company’s acquisitions include contractual arrangements where the noncontrolling shareholders have an option to purchase, or may require the Company to purchase, such noncontrolling shareholders’ incremental ownership interests under certain circumstances and the Company has similar call options under the same contractual terms. The amount of consideration under these contractual arrangements is not a fixed amount, but rather is dependent upon various valuation formulas, such as the average earnings of the relevant subsidiary through the date of exercise or the growth rate of the earnings of the relevant subsidiary during that period. In the event that an incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity on the balance sheet at their acquisition date fair value and adjusted for changes to their estimated redemption value through additional paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. There was
no
impact on the Company’s earnings (loss) per share calculation in any period.
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 additional paid-in capital. 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
. Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (the “FASB”) ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). 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 3 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.
See Note 11 of the Notes to the Consolidated Financial Statements included herein for information related to the 2017 Tax Cuts and Jobs Act (the “Tax Act”) enacted into law on December 22, 2017, and Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”) issued by the SEC in December 2017.
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 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.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
2. Significant Accounting Policies – (continued)
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 U.S. and Canadian 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
$9,810
,
$10,124
and
$10,026
for the years ended December 31,
2018
,
2017
, and
2016
, respectively. The Company also has a defined benefit pension plan. See Note 20 of the Notes to the Consolidated Financial Statements included herein for additional information.
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 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
95,000
authorized and issued Series 4 Convertible Preference Shares (the “Preference Shares”) sold in a private placement in 2017. 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 14 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 income (loss). 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 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. The balance sheets of non-U.S. dollar based subsidiaries are translated at the period end rate. The Consolidated Statements of Operating 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 income (loss).
3. Revenue
Effective January 1, 2018, the Company adopted ASC Topic 606. ASC 606 was applied using the modified retrospective method, with the cumulative effect of the initial adoption being recognized as an adjustment to opening retained earnings at January 1, 2018. As a result, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition (“ASC 605”). See Note 19 of the Notes to the Consolidated Financial Statements included herein for additional information surrounding the Company’s adoption of ASC 606.
The Company’s revenue recognition policies are established in accordance with the Revenue Recognition topics of 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
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
3. Revenue - (continued)
(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 nor interdependent, nor that 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 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’
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
3. Revenue - (continued)
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, 2018, 2017, and 2016 and the impact of adoption of ASC 606:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Industry
|
Reportable Segment
|
|
As reported
|
|
Adjustment to exclude impact of Adoption of ASC 606
|
|
Adjusted
|
|
|
|
|
Food & Beverage
|
All
|
|
$
|
313,368
|
|
|
$
|
7,064
|
|
|
$
|
320,432
|
|
|
$
|
313,786
|
|
|
$
|
266,600
|
|
Retail
|
All
|
|
152,552
|
|
|
(2,683
|
)
|
|
149,869
|
|
|
178,152
|
|
|
182,428
|
|
Consumer Products
|
All
|
|
162,524
|
|
|
585
|
|
|
163,109
|
|
|
162,307
|
|
|
147,849
|
|
Communications
|
All
|
|
178,410
|
|
|
25,957
|
|
|
204,367
|
|
|
208,701
|
|
|
160,064
|
|
Automotive
|
All
|
|
88,807
|
|
|
8,587
|
|
|
97,394
|
|
|
127,023
|
|
|
129,352
|
|
Technology
|
All
|
|
104,479
|
|
|
38
|
|
|
104,517
|
|
|
99,325
|
|
|
109,309
|
|
Healthcare
|
All
|
|
127,547
|
|
|
507
|
|
|
128,054
|
|
|
124,261
|
|
|
115,159
|
|
Financials
|
All
|
|
110,069
|
|
|
146
|
|
|
110,215
|
|
|
104,713
|
|
|
85,480
|
|
Transportation and Travel/Lodging
|
All
|
|
86,419
|
|
|
2,461
|
|
|
88,880
|
|
|
56,955
|
|
|
58,298
|
|
Other
|
All
|
|
152,028
|
|
|
8,974
|
|
|
161,002
|
|
|
138,556
|
|
|
131,246
|
|
|
|
|
$
|
1,476,203
|
|
|
$
|
51,636
|
|
|
$
|
1,527,839
|
|
|
$
|
1,513,779
|
|
|
$
|
1,385,785
|
|
MDC has historically largely focused where the Company was founded in North America, the largest market for its services in the world. In recent years the Company has expanded its global footprint to support clients looking for help to grow their businesses in new markets. Today, MDC’s Partner Firms are located in the United States, Canada, and an additional thirteen 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, 2018, 2017, and 2016 and the impact of adoption of ASC 606:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Geographic Location
|
Reportable Segment
|
|
As reported
|
|
Adjustment to exclude impact of Adoption of ASC 606
|
|
Adjusted
|
|
|
|
|
United States
|
All
|
|
$
|
1,153,192
|
|
|
$
|
20,699
|
|
|
$
|
1,173,891
|
|
|
$
|
1,172,364
|
|
|
$
|
1,103,714
|
|
Canada
|
All
|
|
124,000
|
|
|
(1,288
|
)
|
|
122,712
|
|
|
123,092
|
|
|
124,101
|
|
Other
|
All, Excluding Domestic Creative Agencies
|
|
199,011
|
|
|
32,225
|
|
|
231,236
|
|
|
218,323
|
|
|
157,970
|
|
|
|
|
$
|
1,476,203
|
|
|
$
|
51,636
|
|
|
$
|
1,527,839
|
|
|
$
|
1,513,779
|
|
|
$
|
1,385,785
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
3. Revenue - (continued)
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
$64,362
and
$54,177
at
December 31, 2018
and
December 31, 2017
, 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 $
42,369
and
$31,146
at
December 31, 2018
and
December 31, 2017
, 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, 2018
and
December 31, 2017
were
$138,505
and
$148,133
, respectively. The decrease in the advance billings balance of
$9,628
for the twelve months ended
December 31, 2018
is primarily driven by
$135,573
of revenues recognized that were included in the advance billings balances as of December 31, 2017 and reductions due to the incurrence of third-party costs, offset by cash payments received or due in advance of satisfying our performance obligations.
Changes in the contract asset and liability balances during the
twelve months ended December 31,
2018 and
December 31, 2017
were not materially impacted by write offs, impairment losses or any other factors.
Practical Expedients
In adopting 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. Amounts related to those performance obligations with expected durations of more than one year are immaterial.
4
. Income (Loss) per Common Share
The following table sets forth the computation of basic and diluted income (loss) per common share for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
(123,733
|
)
|
|
$
|
241,848
|
|
|
$
|
(45,839
|
)
|
Accretion on convertible preference shares
|
(8,355
|
)
|
|
(6,352
|
)
|
|
—
|
|
Net income allocated to convertible preference shares
|
—
|
|
|
(29,902
|
)
|
|
—
|
|
Net income (loss) attributable to MDC Partners Inc. common shareholders
|
(132,088
|
)
|
|
205,594
|
|
|
(45,839
|
)
|
|
|
|
|
|
|
Adjustment to net income allocated to convertible preference shares
|
—
|
|
|
106
|
|
|
—
|
|
Net income (loss) attributable to MDC Partners Inc. common shareholders
|
$
|
(132,088
|
)
|
|
$
|
205,700
|
|
|
$
|
(45,839
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
57,218,994
|
|
|
55,255,797
|
|
|
51,345,807
|
|
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
|
57,218,994
|
|
|
55,481,786
|
|
|
51,345,807
|
|
Net income (loss) attributable to MDC Partners Inc. common shareholders per common share:
|
|
|
|
|
|
Basic
|
$
|
(2.31
|
)
|
|
$
|
3.72
|
|
|
$
|
(0.89
|
)
|
Diluted
|
$
|
(2.31
|
)
|
|
$
|
3.71
|
|
|
$
|
(0.89
|
)
|
Anti-dilutive stock awards
1,442,518
-
1,391,456
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
Restricted stock and restricted stock unit awards of
1,012,637
,
1,443,921
, and
503,321
for the twelve months ended December 31, 2018, 2017, and 2016, respectively, which are contingent upon the Company meeting a cumulative three year earnings target (2018, 2019, and 2020) 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, 2018, 2017, and 2016, respectively. In addition, there were
95,000
shares of Preference Shares outstanding which were convertible into
10,970,714
and
10,135,244
Class A common shares at December 31, 2018 and 2017, respectively. These Preference Shares were anti-dilutive for the twelve months ended December 31, 2018 and 2017 and are therefore excluded from the diluted income (loss) per common share calculation.
5. Acquisitions and Dispositions
2018 Acquisitions
On September 7, 2018, a subsidiary of the Company purchased
100%
interests of OneChocolate Communications Limited and OneChocolate Communications LLC, PR (“OneChocolate”) a digital marketing consultancy headquartered in London, UK, for an aggregate purchase price of
$3,231
, working capital payment of
$966
and additional deferred acquisition payments with an estimated present value of
$2,146
. OneChocolate’s results are reflected in the Allison & Partners operating segment which is included in the Specialist Communications reportable segment which had an immaterial impact on our results.
On July 1, 2018, the Company acquired the remaining
14.87%
and
3%
of membership interests of Doner Partners, LLC and Source Marketing LLC respectively for an aggregate purchase price of
$7,618
, comprised of a closing cash payment of
$3,279
and additional deferred acquisition payments with an estimated present value of
$4,305
as of December 31, 2018. As of the acquisition date, the fair value of the additional interests acquired was
$16,361
for Doner Partners LLC. The fair values were measured using a discounted cash flow model. As a result of the transaction, the Company reduced noncontrolling interest by
$11,946
and redeemable noncontrolling interest by
$933
.
On April 2, 2018, the Company purchased
51%
of the membership interests of Instrument LLC (“Instrument”), a digital creative agency based in Portland, Oregon, for an aggregate purchase price of
$35,591
. The acquisition is expected to facilitate the Company’s growth and help to build its portfolio of modern, innovative and digital-first agencies. The purchase price consisted of a cash payment of
$28,561
and the issuance of
1,011,561
shares of the Company’s Class A subordinate voting stock with an acquisition date fair value of
$7,030
. The Company issued these shares in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) of the Securities Act.
The purchase price allocation for Instrument resulted in tangible assets of
$10,304
, identifiable intangibles of
$23,130
, consisting primarily of customer lists and a trade name, and goodwill of
$32,776
. In addition, the Company has recorded
$27,357
as the fair value of noncontrolling interests, which was derived from the Company’s purchase price less a discount related to the noncontrolling parties’ lack of control. The identified assets have a weighted average useful life of approximately six years and will be amortized in a manner represented by the pattern in which the economic benefits of such assets are expected to be realized. The goodwill is tax deductible. Instruments’ results are included in the All Other category from a segment reporting perspective. The Company has a controlling financial interest in Instrument through its majority voting interest, and as such, has aggregated the acquired Partner Firm’s financial data into the Company’s consolidated financial statements. The operating results of Instrument in the current year is not material.
Effective January 1, 2018, the Company acquired the remaining
24.5%
ownership interest of Allison & Partners LLC for an aggregate purchase price of
$10,023
, comprised of a closing cash payment of
$300
and additional deferred acquisition payments with an estimated present value at the acquisition date of
$9,723
. The deferred payments are based on the future financial results of the underlying business from 2017 to 2020 with final payments due in 2021. As of the acquisition date, the fair value of the additional interest acquired was
$20,096
. The fair value was measured using a discounted cash flow model. As a result of the transaction, the Company reduced redeemable noncontrolling interests by
$8,857
. The difference between the purchase price and the noncontrolling interest of
$1,166
was recorded in additional paid-in capital.
Assets and Liabilities Held for Sale
The Company has initiated a process to sell its ownership interest in Kingsdale, an operating segment that provides shareholder services, and a foreign office within the Global Integrated Agencies reportable segment. The assets and liabilities of both entities 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. The significant assets classified as held for sale were accounts receivable and goodwill and significant liabilities were accounts payable and accrued liabilities. This also resulted in a write down of goodwill of Kingsdale totaling
$4,691
. This charge is included in Goodwill and other asset impairment within the Consolidated Statement of Operations for the year
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
5. Acquisitions and Dispositions - (continued)
ended December 31, 2018. The sale of Kingsdale was consummated on March 8, 2019. See Note 1 of the Notes to the Consolidated Financial Statements for additional information. The sale of the foreign office is expected to be completed within the next twelve months.
2017 Acquisitions
In 2017, the Company entered into various non-material transactions in connection with certain of its majority-owned entities. As a result of the foregoing, the Company made total cash closing payments of
$3,858
, increased fixed deferred consideration liability by
$7,208
, reduced redeemable noncontrolling interests by
$816
, reduced noncontrolling interests equity by
$11,965
, reduced noncontrolling interest payable by
$397
, and increased additional paid-in capital by
$2,315
. In addition, a stock-based compensation charge of
$996
has been recognized representing the consideration paid in excess of the fair value of the interest acquired.
2017 Dispositions
During 2017, the Company sold all of its ownership interests in three subsidiaries resulting in recognition of a net loss on sale of business of
$1,732
. The net assets reflected in the calculation of the net loss on sale was inclusive of goodwill of
$17,593
. Goodwill was allocated to the subsidiaries based on the relative fair value of the sold subsidiaries compared to the fair value of the respective reporting units. Additionally, the Company recorded a reduction in noncontrolling interests of
$10,657
.
In addition, the Company sold a noncontrolling ownership interest in two subsidiaries during 2017. The Company recorded
$6,961
of noncontrolling interest equity and
$1,690
of redeemable noncontrolling interest, representing the fair value of the disposed ownership interest at the time of execution. Additionally, stock-based compensation of
$2,473
was recognized, representing the excess in the proportionate fair value over the total consideration received.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
6. Deferred Acquisition Considerations
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 are 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.
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, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Beginning balance of contingent payments
|
$
|
119,086
|
|
|
$
|
224,754
|
|
Payments
(1)
|
(54,947
|
)
|
|
(110,234
|
)
|
Additions - acquisition and step-up transactions
|
14,943
|
|
|
—
|
|
Redemption value adjustments
(2)
|
3,512
|
|
|
3,273
|
|
Foreign translation adjustment
|
4
|
|
|
1,293
|
|
Ending balance of contingent payments
|
$
|
82,598
|
|
|
$
|
119,086
|
|
Fixed payments
(3)
|
1,097
|
|
|
3,340
|
|
|
$
|
83,695
|
|
|
$
|
122,426
|
|
|
|
(1)
|
For the
twelve months ended December 31,
2017
, payments include
$28,727
of deferred acquisition consideration settled through the issuance of
3,353,939
MDC Class A subordinate voting shares in lieu of cash.
|
|
|
(2)
|
Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments, including the accretion of present value and stock-based compensation charges relating to acquisition payments that are tied to continued employment. Redemption value adjustments are recorded within cost of services sold and office and general expenses on the Consolidated Statements of Operations.
|
|
|
(3)
|
The Company made
$6,366
in fixed payments for the
twelve months ended December 31,
2018
.
|
The following table presents the impact to the Company’s statement of operations due to redemption value adjustments for the twelve months ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Income attributable to fair value adjustments
|
$
|
(3,679
|
)
|
|
$
|
(6,021
|
)
|
Stock-based compensation expense
|
7,191
|
|
|
9,294
|
|
Redemption value adjustments
|
$
|
3,512
|
|
|
$
|
3,273
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
7. Fixed Assets
The following is a summary of the Company’s fixed assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
Computers, furniture and fixtures
|
$
|
100,276
|
|
|
$
|
(73,060
|
)
|
|
$
|
27,216
|
|
|
$
|
101,806
|
|
|
$
|
(74,429
|
)
|
|
$
|
27,377
|
|
Leasehold improvements
|
116,459
|
|
|
(55,486
|
)
|
|
60,973
|
|
|
112,099
|
|
|
(49,170
|
)
|
|
62,929
|
|
|
$
|
216,735
|
|
|
$
|
(128,546
|
)
|
|
$
|
88,189
|
|
|
$
|
213,905
|
|
|
$
|
(123,599
|
)
|
|
$
|
90,306
|
|
At December 31,
2018
and
2017
, included in fixed assets are assets under capital lease obligations with a cost of
$1,447
and
$1,903
, respectively, and accumulated depreciation of
$780
and
$1,176
, respectively. Depreciation expense for the years ended December 31,
2018
,
2017
, and
2016
was
$27,111
,
$23,873
and
$22,293
, respectively.
8. 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 additional paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. On occasion, the Company may initiate a renegotiation to acquire an incremental ownership interest and the amount of consideration paid may differ materially from the 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, 2018 and 2017 were as follows:
|
|
|
|
|
|
Noncontrolling Interests
|
Balance, December 31, 2016
|
$
|
4,154
|
|
Income attributable to noncontrolling interests
|
15,375
|
|
Distributions made
|
(8,865
|
)
|
Other
(1)
|
366
|
|
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
|
|
(1)
Other consists of cumulative translation adjustments.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
8. Noncontrolling and Redeemable Noncontrolling Interests - (continued)
Changes in the Company’s ownership interests in our less than
100%
owned subsidiaries during the three years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
(123,733
|
)
|
|
$
|
241,848
|
|
|
$
|
(45,839
|
)
|
Transfers from the noncontrolling interests
|
|
|
|
|
|
|
|
|
Increase in MDC Partners Inc. paid-in capital for purchase of equity interests in excess of noncontrolling interests and redeemable noncontrolling interests
|
10,140
|
|
|
2,315
|
|
|
22,776
|
|
Net transfers from noncontrolling interests
|
$
|
10,140
|
|
|
$
|
2,315
|
|
|
$
|
22,776
|
|
Change from net income (loss) attributable to MDC Partners Inc. and transfers (to) from noncontrolling interests
|
$
|
(113,593
|
)
|
|
$
|
244,163
|
|
|
$
|
(23,063
|
)
|
Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Beginning Balance
|
$
|
62,886
|
|
|
$
|
60,180
|
|
Redemptions
|
(11,943
|
)
|
|
(910
|
)
|
Granted
|
—
|
|
|
1,666
|
|
Changes in redemption value
|
1,067
|
|
|
1,498
|
|
Currency translation adjustments
|
(464
|
)
|
|
452
|
|
Ending balance
|
$
|
51,546
|
|
|
$
|
62,886
|
|
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 $
51,546
as of
December 31, 2018
, consists of
$17,373
assuming that the subsidiaries perform over the relevant future periods at their discounted cash flows earnings level and such rights are exercised,
$31,567
upon termination of such owner’s employment with the applicable subsidiary or death and
$2,606
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. There was no related impact on the Company’s income (loss) per share calculations.
9. 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 15 of the Notes to the Consolidated Financial Statements included herein for additional information for the fair value. The fair value of financial commitments, guarantees and letters of credit, are based on the stated value of the underlying instruments, if any.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
10. 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, 2016
|
$
|
350,716
|
|
|
$
|
36,762
|
|
|
$
|
78,691
|
|
|
$
|
176,686
|
|
|
$
|
201,904
|
|
|
$
|
844,759
|
|
Acquired goodwill
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Disposition
|
(964
|
)
|
|
—
|
|
|
—
|
|
|
(16,629
|
)
|
|
—
|
|
|
(17,593
|
)
|
Impairment loss recognized
|
(2,741
|
)
|
|
—
|
|
|
—
|
|
|
(497
|
)
|
|
—
|
|
|
(3,238
|
)
|
Transfer of goodwill between segments
|
6,371
|
|
|
—
|
|
|
—
|
|
|
497
|
|
|
(6,868
|
)
|
|
—
|
|
Foreign currency translation
|
5,689
|
|
|
218
|
|
|
15
|
|
|
—
|
|
|
6,085
|
|
|
12,007
|
|
Balance at December 31, 2017
|
$
|
359,071
|
|
|
$
|
36,980
|
|
|
$
|
78,706
|
|
|
$
|
160,057
|
|
|
$
|
201,121
|
|
|
$
|
835,935
|
|
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
|
|
(1)
See Note 5 of the Notes to the Consolidated Financial Statements included herein for additional information.
The Company recognized an impairment of goodwill and other assets of
$80,057
for the
twelve months ended December 31,
2018
. The impairment primarily consists 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. The impairment of goodwill was in connection with the Company’s interim and annual impairment tests performed in 2018. See below for information regarding an impairment of a tradename.
The Company recognized an impairment of goodwill and other assets of
$4,415
for the
twelve months ended December 31,
2017. The impairment primarily consists 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 impairment of goodwill was in connection with the Company’s annual impairment test performed in 2017.
The Company recognized an impairment of goodwill of
$48,524
for the
twelve months ended December 31,
2016. The impairment was recognized at
three
reporting units, the Specialist Communications reportable segment, Media Services reportable segment and All Other reportable segment. The impairment of goodwill was in connection with the Company’s interim and annual impairment tests performed in 2016.
The total accumulated goodwill impairment charges are
$173,205
through December 31,
2018
.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
10. Goodwill and Intangible Assets - (continued)
As of December 31, the gross and net amounts of acquired intangible assets other than goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
Intangible Assets
|
|
2018
|
|
2017
|
Trademarks (indefinite life)
|
|
$
|
14,600
|
|
|
$
|
17,780
|
|
Customer relationships – gross
|
|
$
|
93,296
|
|
|
$
|
102,325
|
|
Less accumulated amortization
|
|
(59,144
|
)
|
|
(73,767
|
)
|
Customer relationships – net
|
|
$
|
34,152
|
|
|
$
|
28,558
|
|
Other intangibles – gross
|
|
$
|
40,803
|
|
|
$
|
37,273
|
|
Less accumulated amortization
|
|
(21,790
|
)
|
|
(13,006
|
)
|
Other intangibles – net
|
|
$
|
19,013
|
|
|
$
|
24,267
|
|
Total intangible assets
|
|
$
|
148,699
|
|
|
$
|
157,378
|
|
Less accumulated amortization
|
|
(80,934
|
)
|
|
(86,773
|
)
|
Total intangible assets – net
|
|
$
|
67,765
|
|
|
$
|
70,605
|
|
In 2018, the Company recognized the full write-down of a trademark totaling
$3,180
for a reporting unit within the Global Integrated Agencies reportable segment. The tradename is no longer in active use given its merger with another reporting unit. See Note 16 of the Notes to the Consolidated Financial Statements for information related to the merger.
The weighted average amortization period for customer relationships is
six years
and other intangible assets is
eight years
. In total, the weighted average amortization period is
seven years
. Amortization expense related to amortizable intangible assets for the years ended December 31,
2018
,
2017
, and
2016
was
$17,290
,
$17,125
, and
$21,726
, respectively.
The estimated amortization expense for the five succeeding years is as follows:
|
|
|
|
|
|
Year
|
|
Amortization
|
2019
|
|
$
|
12,257
|
|
2020
|
|
9,601
|
|
2021
|
|
8,220
|
|
2022
|
|
7,666
|
|
2023 and thereafter
|
|
15,421
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. 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 U.S. federal corporate tax rate from 35% to 21%, 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 SEC issued SAB 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. The Company has completed its accounting for the provisions of the Act in accordance with SAB 118. As of December 31, 2017 the Company recorded a provisional amount of
$26,674
related to the re-measurement of its deferred tax assets and liabilities resulting from the change in the corporate tax rate from 35% to 21% and has not adjusted the amount when completing its analysis.
The Tax Act created a new requirement that Global Intangible Low-Taxed Income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. A deduction is permitted to a domestic corporation in an amount up to 50% of the sum of the GILTI inclusion and the amount treated as a dividend because the corporation has claimed a foreign tax credit (FTC) as a result of the inclusion of the GILTI amount in income. The Company has made a policy election to record tax effects of GILTI as a period expense when incurred.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Income (Loss):
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
(68,698
|
)
|
|
$
|
48,053
|
|
|
$
|
(16,661
|
)
|
Non-U.S.
|
(11,709
|
)
|
|
39,025
|
|
|
(33,055
|
)
|
|
$
|
(80,407
|
)
|
|
$
|
87,078
|
|
|
$
|
(49,716
|
)
|
The provision (benefit) for income taxes by taxing jurisdiction for the years ended December 31, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current tax provision
|
|
|
|
|
|
|
|
|
U.S. federal
|
$
|
444
|
|
|
$
|
(1,657
|
)
|
|
$
|
—
|
|
U.S. state and local
|
2
|
|
|
98
|
|
|
(1,520
|
)
|
Non-U.S.
|
7,584
|
|
|
6,514
|
|
|
2,154
|
|
|
8,030
|
|
|
4,955
|
|
|
634
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
U.S. federal
|
(9,315
|
)
|
|
(172,873
|
)
|
|
5,785
|
|
U.S. state and local
|
(2,990
|
)
|
|
(7,775
|
)
|
|
(3,550
|
)
|
Non-U.S.
|
35,878
|
|
|
7,629
|
|
|
(12,273
|
)
|
|
23,573
|
|
|
(173,019
|
)
|
|
(10,038
|
)
|
Income tax provision (benefit)
|
$
|
31,603
|
|
|
$
|
(168,064
|
)
|
|
$
|
(9,404
|
)
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Income (loss) before income taxes, equity in non-consolidated affiliates and noncontrolling interest
|
$
|
(80,407
|
)
|
|
$
|
87,078
|
|
|
$
|
(49,716
|
)
|
Statutory income tax rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Tax expense (benefit) using statutory income tax rate
|
(16,886
|
)
|
|
30,477
|
|
|
(17,401
|
)
|
State and foreign taxes
|
(2,988
|
)
|
|
8,863
|
|
|
(94
|
)
|
Non-deductible stock-based compensation
|
1,512
|
|
|
1,441
|
|
|
1,123
|
|
Other non-deductible expense
|
10,091
|
|
|
(220
|
)
|
|
1,848
|
|
Change to valuation allowance
|
49,482
|
|
|
(103,212
|
)
|
|
6,605
|
|
Effect of the difference in U.S. federal and local statutory rates
|
(152
|
)
|
|
(2,939
|
)
|
|
(353
|
)
|
Impact of tax reform
|
—
|
|
|
(100,472
|
)
|
|
—
|
|
Noncontrolling interests
|
(2,674
|
)
|
|
(4,413
|
)
|
|
(1,287
|
)
|
Impact of foreign operations
|
1,711
|
|
|
(2,453
|
)
|
|
—
|
|
Adjustment to deferred tax balances
|
(8,865
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
372
|
|
|
4,864
|
|
|
155
|
|
Income tax expense (benefit)
|
$
|
31,603
|
|
|
$
|
(168,064
|
)
|
|
$
|
(9,404
|
)
|
Effective income tax rate
|
(39.3
|
)%
|
|
(193.0
|
)%
|
|
18.9
|
%
|
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 periods 2017 and 2016 in the table above have been conformed to reflect the U.S. statutory rate.
Income tax expense for the
twelve months ended December 31,
2018
was $
31,603
(associated with a pretax loss of
$80,407
) compared to an income tax benefit of
$168,064
(associated with pretax income of
$87,078
) for the
twelve months ended December 31,
2017
. Income tax expense in 2018 included the impact of establishing a valuation allowance primarily associated with Canadian deferred tax assets and the income tax benefit in 2017 included the impact of a release of a valuation allowance in certain jurisdictions as well as the incremental tax benefit associated with the Tax Act.
Income taxes receivable were
$4,388
and
$4,582
at December 31,
2018
and
2017
, respectively, and were included in other current assets on the balance sheet. Income taxes payable were
$10,045
and
$3,810
at December 31,
2018
and
2017
, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Income Taxes - (continued)
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
Capital assets and other
|
$
|
905
|
|
|
$
|
5,059
|
|
Net operating loss carry forwards
|
70,646
|
|
|
49,318
|
|
Interest deductions
|
8,911
|
|
|
2,026
|
|
Refinancing charge
|
2,926
|
|
|
5,578
|
|
Goodwill and intangibles
|
123,504
|
|
|
129,455
|
|
Stock compensation
|
2,101
|
|
|
1,208
|
|
Pension plan
|
3,872
|
|
|
4,165
|
|
Unrealized foreign exchange
|
14,645
|
|
|
8,653
|
|
Capital loss carry forwards
|
11,827
|
|
|
11,450
|
|
Accounting reserves
|
8,280
|
|
|
412
|
|
Gross deferred tax asset
|
247,617
|
|
|
217,324
|
|
Less: valuation allowance
|
(68,479
|
)
|
|
(19,032
|
)
|
Net deferred tax assets
|
179,138
|
|
|
198,292
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Goodwill amortization
|
(91,726
|
)
|
|
(89,727
|
)
|
Total deferred tax liabilities
|
(91,726
|
)
|
|
(89,727
|
)
|
Net deferred tax asset (liability)
|
$
|
87,412
|
|
|
$
|
108,565
|
|
Disclosed as:
|
|
|
|
|
|
Deferred tax assets
|
$
|
92,741
|
|
|
$
|
115,325
|
|
Deferred tax liabilities
|
(5,329
|
)
|
|
(6,760
|
)
|
|
$
|
87,412
|
|
|
$
|
108,565
|
|
The Company has U.S. federal net operating loss carry forwards of
$68,325
and non-U.S. net operating loss carry forwards of
$153,021
. These carry forwards expire in years
2017 through 2032
. The Company also has total indefinite loss carry forwards of
$122,830
. These indefinite loss carry forwards consist of
$33,572
relating to the U.S. and
$89,258
which are related to capital losses from the Canadian operations. In addition, the Company has net operating loss carry forwards for various state taxing jurisdictions of approximately
$118,575
.
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, 2017, the Company maintained valuation allowance against foreign net deferred tax assets of
$19,032
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, 2018, 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, 2018, the Company’s Canadian three-year cumulative pre-tax income declined compared to the period ended December 31, 2017 and the Company recorded a valuation allowance of
$49,447
. The related effect on the accompanying consolidated statements of operations and comprehensive income or loss resulted in the Company recording a U.S. income tax expense of
$49,447
for the year ended December 31, 2018.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
11. Income Taxes - (continued)
The Company is permanently reinvested with respect to its foreign earnings in certain jurisdictions, and no deferred taxes have been recorded related to such earnings as the determination of the amount is not practicable. The Company currently does not intend to distribute previously taxed income under the Tax Act. Upon distribution in the future, the Company may incur state and foreign withholding taxes on such income, the amount of which is not practicable to compute.
As of December 31,
2018
and
2017
, the Company recorded a liability for unrecognized tax benefits as well as applicable penalties and interest in the amount of
$973
and
$1,556
, respectively. As of
December 31, 2018
and
2017
, accrued penalties and interest included in unrecognized tax benefits were approximately
$87
and
$123
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
A reconciliation of the change in unrecognized tax benefits is as follows:
|
|
|
|
|
|
Unrecognized tax benefit - Beginning Balance
|
$
|
1,433
|
|
|
$
|
1,465
|
|
|
$
|
3,605
|
|
Current year positions
|
—
|
|
|
489
|
|
|
—
|
|
Prior period positions
|
7
|
|
|
(436
|
)
|
|
(134
|
)
|
Settlements
|
(314
|
)
|
|
—
|
|
|
(1,374
|
)
|
Lapse of statute of limitations
|
(239
|
)
|
|
(85
|
)
|
|
(632
|
)
|
Unrecognized tax benefits - Ending Balance
|
$
|
887
|
|
|
$
|
1,433
|
|
|
$
|
1,465
|
|
It is reasonably possible that the amount of unrecognized tax benefits could decrease by a range of
$400
to
$500
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 2013 tax year and all years prior to 2015 are closed. The statute of limitations has also expired in non-U.S. jurisdictions through 2013.
12. Debt
As of December 31, the Company’s indebtedness was comprised as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Revolving credit agreement
|
$
|
68,143
|
|
|
$
|
—
|
|
6.50% Notes due 2024
|
900,000
|
|
|
900,000
|
|
Debt issuance costs
|
(14,036
|
)
|
|
(17,587
|
)
|
|
954,107
|
|
|
882,413
|
|
Obligations under capital leases
|
478
|
|
|
706
|
|
|
954,585
|
|
|
883,119
|
|
Less: Current portion of long-term debt
|
(356
|
)
|
|
(313
|
)
|
|
$
|
954,229
|
|
|
$
|
882,806
|
|
Interest expense related to long-term debt for the years ended December 31,
2018
,
2017
, and
2016
was
$64,420
,
$62,001
and
$56,468
, respectively. For the
twelve months ended December 31,
2016
, the Company recorded a charge for the loss on redemption of the
6.75%
Notes of
$33,298
, which included accrued interest, related premiums, fees and expenses, write offs of unamortized original issue premium, and unamortized debt issuance costs. For the year ended December 31,
2016
, interest expense included income of
$312
, related to the amortization of the original issue premium. For the years ended December 31,
2018
,
2017
, and
2016
, interest expense included
$87
,
$100
and
$255
, respectively, of present value adjustments for fixed deferred acquisition payments.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Debt – (continued)
The amortization of deferred finance costs included in interest expense were
$3,193
,
$3,022
and
$3,022
for the years ended December 31,
2018
,
2017
, and
2016
, 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 unsecured 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, on and after
May 1, 2019
, 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 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, 2018.
Redemption of 6.75% Notes
On March 23, 2016, the Company redeemed the
6.75%
Notes in whole at a redemption price of
103.375%
of the principal amount thereof with the proceeds from the issuance of the
6.50%
Notes.
Credit Agreement
On May 3, 2016 MDC, Maxxcom Inc. (a subsidiary of MDC) and each of their subsidiaries party thereto entered into a second amended and restated,
$325,000
senior secured revolving credit agreement due May 3, 2021 (as amended, the “Credit Agreement”) with Wells Fargo Capital Finance, LLC, as agent, and the lenders from time to time party thereto. Advances under the Credit Agreement are to be used for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement. Capitalized terms used in this section and not otherwise defined have the meanings set forth in the Credit Agreement.
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 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, subject to customary exceptions and collateralized by a portion of MDC
’
s outstanding receivable balance. The Credit Agreement includes covenants that, among other things, restrict MDC’s
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Debt – (continued)
ability and the ability of its subsidiaries to incur or guarantee additional indebtedness; pay dividends on or redeem or repurchase the capital stock of MDC; make certain types of investments; impose limitations on dividends or other amounts from MDC’s subsidiaries; incur certain liens, sell or otherwise dispose of certain assets; enter into transactions with affiliates; enter into sale and leaseback transactions; and consolidate or merge with or into, or sell substantially all of MDC’s assets to, another person. These covenants are subject to a number of important limitations and exceptions. The Company is currently in compliance with all of the terms and conditions of its Credit Agreement, and management believes, based on its current financial projections, that the Company will be in compliance with the covenants over the next twelve months.
Amendment to Credit Agreement
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 (the “Amendment”) to the existing senior secured revolving credit facility, dated as of May 3, 2016 (as amended, the “Credit Agreement”), among the Company, Maxxcom Inc., a Delaware corporation, each of their subsidiaries party thereto, Wells Fargo Capital Finance, LLC, as agent (“Wells Fargo”), and the lenders from time to time party thereto.
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 addition, the Company is permitted to apply a portion of the net cash proceeds of the Kingsdale Sale to the prepayment, redemption, defeasement, purchase or other acquisition of the Company’s senior unsecured debt.
In connection with the Amendment, the Company reduced the aggregate maximum amount of revolving commitments provided by the lenders under the Credit Agreement to
$250.0 million
from
$325.0 million
.
At December 31,
2018
, the Company had issued
$4,701
of undrawn letters of credit.
At December 31,
2018
and
2017
, accounts payable included
$40,271
and
$41,989
, respectively, of outstanding checks.
Future Principal Repayments
Future principal repayments, including capital lease obligations, for the years ended December 31, and in aggregate, are as follows:
|
|
|
|
|
|
|
|
|
Period
|
|
Amount
|
2019
|
|
$
|
356
|
|
2020
|
|
101
|
|
2021
|
|
68,164
|
|
2022
|
|
—
|
|
2023
|
|
—
|
|
2024 and thereafter
|
|
900,000
|
|
|
|
$
|
968,621
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
12. Debt – (continued)
Capital Leases
Future minimum capital lease payments for the years ended December 31 and in aggregate, are as follows:
|
|
|
|
|
|
Period
|
|
Amount
|
2019
|
|
$
|
356
|
|
2020
|
|
101
|
|
2021
|
|
21
|
|
2022
|
|
—
|
|
2023
|
|
—
|
|
2024 and thereafter
|
|
—
|
|
|
|
478
|
|
Less: imputed interest
|
|
(42
|
)
|
|
|
436
|
|
Less: current portion
|
|
(356
|
)
|
|
|
$
|
80
|
|
Capital lease obligations at December 31 were:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Current
|
$
|
356
|
|
|
$
|
313
|
|
Long-term
|
122
|
|
|
393
|
|
|
$
|
478
|
|
|
$
|
706
|
|
13. Share Capital
As of December 31, 2018, we changed the presentation of our Consolidated Statements of Shareholders’ Deficit to combine the amounts in common shares and charges in excess of capital to present a combined “Common stock and other paid-in capital” as SEC Regulation S-X allows for this presentation. As such, we reclassified the prior year balances as of December 31, 2017 and 2016 to conform with the current period presentation.
Authorized Share Capital
The authorized share capital of the Company is as follows:
Series 4 Convertible Preference Shares
See Note 14 of the Notes to the Consolidated Financial Statements included herein for additional information.
Class A Shares
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 is an unlimited number of Class A shares authorized,
57,517,568
and
56,371,376
Class A shares are issued and outstanding as of December 31, 2018, and 2017, respectively.
Class B Shares
An unlimited number, carrying
20
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 is an unlimited number of Class B shares authorized,
3,755
Class B shares are issued and outstanding as of December 31, 2018, and 2017, respectively.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
13. Share Capital – (continued)
Employee Stock Incentive Plan
As of December 31, 2018, a total of
15,650,000
shares have been authorized under our employee stock incentive plan.
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, 2017
|
—
|
|
|
$
|
—
|
|
|
785,085
|
|
|
$
|
11.94
|
|
Granted
|
503,321
|
|
|
9.17
|
|
|
156,440
|
|
|
7.38
|
|
Vested
|
(4,444
|
)
|
|
10.30
|
|
|
(239,085
|
)
|
|
14.99
|
|
Forfeited
|
(45,965
|
)
|
|
9.29
|
|
|
(75,500
|
)
|
|
9.75
|
|
Balance at December 31, 2018
|
452,912
|
|
|
$
|
9.15
|
|
|
626,940
|
|
|
$
|
9.83
|
|
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. Performance based and time based awards granted in the twelve months ended December 31, 2016 had a weighted average grant date fair value of
$14.00
and
$12.53
, respectively. The vesting of the performance based awards is contingent upon the Company meeting a cumulative three year earnings target and continued employment through the vesting date. Once the Company defines the earnings target, the grant date is established and the Company will record the compensation expense over the vesting period. 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 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,
2018
,
2017
and
2016
was
$3,583
,
$7,316
and
$6,272
, respectively. At December 31,
2018
, the weighted average remaining contractual life for time based and performance based awards was
1.98
and less than a year, respectively.
At December 31,
2018
, the unrecognized compensation expense for performance based awards was
$260
to be recognized over a weighted average period of less than a year. At December 31,
2018
, the unrecognized compensation expense for time based awards was
$2,325
to be recognized over a weighted average period of
1.98
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, 2017
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Granted
|
111,866
|
|
|
2.23
|
|
|
4.85
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2018
|
111,866
|
|
|
$
|
2.23
|
|
|
$
|
4.85
|
|
We use the Black-Scholes option-pricing model to estimate the fair value of options granted. 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 vesting period of these awards is generally commensurate with the requisite service period. At December 31, 2018, the weighted average remaining contractual life for these awards was
3
years.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
13. Share Capital – (continued)
No
options were exercised during 2018. The intrinsic value of options exercised during 2017 and 2016, was
$125
and
$471
, respectively. The aggregate intrinsic value of options outstanding as of December 31, 2018 is
nil
. As of December 31, 2018, no options were exercisable. No options were granted in 2017 or 2016.
At December 31,
2018
, the unrecognized compensation expense for these awards was
$225
to be recognized over a weighted average period of
3
years. The cash received from the stock options exercised in 2017 and 2016 was
nil
and
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, 2017
|
327,500
|
|
|
$
|
2.35
|
|
|
$
|
6.60
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(76,700
|
)
|
|
2.35
|
|
|
6.60
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2018
|
250,800
|
|
|
$
|
2.35
|
|
|
$
|
6.60
|
|
We use the Black-Scholes option-pricing model to estimate the fair value of the SAR awards. 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%
. 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 vesting period of awards granted is generally commensurate with the requisite service period. At December 31, 2018, the weighted average remaining contractual life for these awards was
1.08
years.
No
SAR awards were granted in 2016. As of December 31, 2018,
no
SAR awards were exercisable. As of December 31, 2018, there were
no
SAR awards that were vested. The aggregate intrinsic value of the SAR awards outstanding as of December 31, 2018 is
nil
.
At December 31, 2018, the unrecognized compensation expense for these awards was
$213
to be recognized over a weighted average period of
1.08
years.
For the years ended December 31, 2018, 2017 and 2016,
$5,892
,
$5,335
, and
$5,808
was recognized in stock compensation related to all stock compensation awards, respectively. The related income tax benefit for the years ended December 31, 2018, 2017 and 2016 was
$472
,
$1,401
, and
$2,030
, respectively.
14
. Convertible Preference Shares
On March 7, 2017 (the “Issue Date”), the Company issued
95,000
newly created 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. Except as required by law, the Preference Shares do not have voting rights, and are not redeemable at the option of the Purchaser.
The holders of the Preference Shares have the right to convert their Preference Shares in whole at any time and from time to time, and in part at any time and from time to time after the ninetieth day following the original issuance date of the Preference Shares, into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation per share preference of each Preference Share is
$1,000
. The initial Conversion Price is
$10.00
per 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. In connection with the anti-dilution protection provision associated with the issuance of equity securities on March 14, 2019 (see Note 23), the Conversion Price has been reduced to
$7.42
from
$10.00
per Preference Share.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
14. Convertible Preference Shares – (continued)
The Preference Shares’ liquidation preference accretes at
8.0%
per annum, compounded quarterly until the five-year anniversary of the Issue Date. For the twelve months ended
2018
and
2017
, the Preference Shares accreted at a monthly rate of approximately
$7.55
and
$6.97
per Preference Share, for total accretion of
$8,355
and
$6,352
, respectively, bringing the aggregate liquidation preference to $
109,707
as of
December 31, 2018
. The accretion is considered in the calculation of net income (loss) attributable to MDC Partners Inc. common shareholders.
Holders of the 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 Preference Shares. The 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 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 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 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
15. 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 inputs 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.
|
|
|
•
|
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 measured at fair value on a recurring basis at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
6.50% Senior Notes due 2024
|
$
|
900,000
|
|
|
$
|
834,750
|
|
|
$
|
900,000
|
|
|
$
|
904,500
|
|
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 are 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 6 of the Notes to the Consolidated Financial Statements for additional information regarding contingent deferred acquisition consideration.
At December 31,
2018
and
2017
, 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 and intangible assets. Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. See Note 2 and 10 of the Notes to the Consolidated Financial Statements for information related to the measurement of the fair value of goodwill (a Level 3 fair value assessment).
16. 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. Effective January 1, 2019, the Executive Committee assumed the role and responsibilities of the Chief Executive Officer until the appointment of a successor which occurred on March 18, 2019. See Note 1 of the Notes to the Consolidated Financial Statements included herein for additional information. 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 profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
16. Segment Information – (continued)
Due to changes in the Company’s internal management and reporting structure during 2018, reportable segment results for 2017 and prior periods presented have been recast to reflect the reclassification of certain businesses between segments. The changes were as follows:
|
|
•
|
Source Marketing, previously within the All Other category, was included within the Doner operating segment, which is aggregated into the Global Integrated Agencies reportable segment;
|
|
|
•
|
Yamamoto, previously within the All Other category, was operationally merged with Civilian and is now included within the Domestic Creative Agencies reportable segment;
|
|
|
•
|
Bruce Mau Design, Hello Design and Northstar Research Partners, previously within the All Other category, and Varick Media Management, previously within the Media Services reportable segment, were included into a newly-formed operating segment, Yes & Company, which is aggregated within the Media Services reportable segment.
|
Also in 2018, Forsman & Bodenfors and kbs+, both within the Global Integrated Agencies reportable segment, merged under the Forsman & Bodenfors name.
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
five
global, integrated operating segments (72andSunny, Anomaly, Crispin Porter Bogusky, Doner 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
five
operating segments that are national advertising agencies (Colle + McVoy, Laird + Partners, Mono Advertising, Union and Yamamoto) 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 profitability 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
five
operating segments that are each communications agencies (Allison & Partners, HL Group Partners, Hunter PR, KWT Global (formerly Kwittken), and Veritas) with core service offerings in public relations and related communications services. These operating segments share similar characteristics related to (i) the 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 profitability is similar among the operating segments aggregated in the Specialist Communications reportable segment.
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
16. Segment Information – (continued)
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
two
operating segments (MDC Media Partners and Yes & Company). These operating segments perform media buying and planning as their 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, Instrument, Redscout, 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.
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
16. Segment Information – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenue:
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
698,872
|
|
|
$
|
797,347
|
|
|
$
|
712,793
|
|
Domestic Creative Agencies
|
102,063
|
|
|
104,417
|
|
|
97,199
|
|
Specialist Communications
|
179,065
|
|
|
172,565
|
|
|
170,285
|
|
Media Services
|
140,753
|
|
|
166,216
|
|
|
157,696
|
|
All Other
|
355,450
|
|
|
273,234
|
|
|
247,812
|
|
Total
|
$
|
1,476,203
|
|
|
$
|
1,513,779
|
|
|
$
|
1,385,785
|
|
|
|
|
|
|
|
Segment operating income (loss):
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
44,868
|
|
|
$
|
71,857
|
|
|
$
|
59,193
|
|
Domestic Creative Agencies
|
18,552
|
|
|
19,333
|
|
|
18,089
|
|
Specialist Communications
|
18,629
|
|
|
20,728
|
|
|
1,940
|
|
Media Services
|
(51,196
|
)
|
|
13,126
|
|
|
5,554
|
|
All Other
|
34,000
|
|
|
47,771
|
|
|
7,773
|
|
Corporate
|
(55,157
|
)
|
|
(40,856
|
)
|
|
(44,118
|
)
|
Total
|
$
|
9,696
|
|
|
$
|
131,959
|
|
|
$
|
48,431
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
Interest expense and finance charges, net
|
(67,075
|
)
|
|
(64,364
|
)
|
|
(65,050
|
)
|
Foreign exchange transaction gain (loss)
|
(23,258
|
)
|
|
18,137
|
|
|
(213
|
)
|
Loss on redemption of Notes
|
—
|
|
|
—
|
|
|
(33,298
|
)
|
Other, net
|
230
|
|
|
1,346
|
|
|
414
|
|
Income (loss) before income taxes and equity in earnings (losses) of non-consolidated affiliates
|
(80,407
|
)
|
|
87,078
|
|
|
(49,716
|
)
|
Income tax expense (benefit)
|
31,603
|
|
|
(168,064
|
)
|
|
(9,404
|
)
|
Income (loss) before equity in earnings (losses) of non-consolidated affiliates
|
(112,010
|
)
|
|
255,142
|
|
|
(40,312
|
)
|
Equity in earnings (losses) of non-consolidated affiliates
|
62
|
|
|
2,081
|
|
|
(309
|
)
|
Net income (loss)
|
(111,948
|
)
|
|
257,223
|
|
|
(40,621
|
)
|
Net income attributable to the noncontrolling interest
|
(11,785
|
)
|
|
(15,375
|
)
|
|
(5,218
|
)
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
(123,733
|
)
|
|
$
|
241,848
|
|
|
$
|
(45,839
|
)
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
16. Segment Information – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Depreciation and amortization:
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
23,571
|
|
|
$
|
23,831
|
|
|
$
|
21,555
|
|
Domestic Creative Agencies
|
1,583
|
|
|
1,582
|
|
|
1,811
|
|
Specialist Communications
|
4,252
|
|
|
4,714
|
|
|
6,637
|
|
Media Services
|
3,119
|
|
|
4,052
|
|
|
6,091
|
|
All Other
|
12,909
|
|
|
8,197
|
|
|
8,768
|
|
Corporate
|
762
|
|
|
1,098
|
|
|
1,584
|
|
Total
|
$
|
46,196
|
|
|
$
|
43,474
|
|
|
$
|
46,446
|
|
|
|
|
|
|
|
Stock-based compensation:
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
8,521
|
|
|
$
|
15,225
|
|
|
$
|
12,177
|
|
Domestic Creative Agencies
|
1,100
|
|
|
887
|
|
|
651
|
|
Specialist Communications
|
714
|
|
|
2,954
|
|
|
3,629
|
|
Media Services
|
318
|
|
|
656
|
|
|
318
|
|
All Other
|
3,104
|
|
|
2,494
|
|
|
1,703
|
|
Corporate
|
4,659
|
|
|
2,134
|
|
|
2,525
|
|
Total
|
$
|
18,416
|
|
|
$
|
24,350
|
|
|
$
|
21,003
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
10,088
|
|
|
$
|
20,760
|
|
|
$
|
16,486
|
|
Domestic Creative Agencies
|
951
|
|
|
1,168
|
|
|
1,153
|
|
Specialist Communications
|
3,618
|
|
|
1,288
|
|
|
2,741
|
|
Media Services
|
966
|
|
|
3,842
|
|
|
5,266
|
|
All Other
|
4,574
|
|
|
5,877
|
|
|
3,753
|
|
Corporate
|
67
|
|
|
23
|
|
|
33
|
|
Total
|
$
|
20,264
|
|
|
$
|
32,958
|
|
|
$
|
29,432
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
76,781
|
|
|
$
|
4,779
|
|
|
$
|
6,629
|
|
|
$
|
88,189
|
|
2017
|
$
|
77,163
|
|
|
$
|
5,638
|
|
|
$
|
7,505
|
|
|
$
|
90,306
|
|
Goodwill and Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
679,344
|
|
|
$
|
61,748
|
|
|
$
|
67,628
|
|
|
$
|
808,720
|
|
2017
|
$
|
706,241
|
|
|
$
|
127,014
|
|
|
$
|
73,285
|
|
|
$
|
906,540
|
|
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
16. 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:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
$
|
1,153,192
|
|
|
$
|
124,000
|
|
|
$
|
199,011
|
|
|
$
|
1,476,203
|
|
2017
|
$
|
1,172,364
|
|
|
$
|
123,092
|
|
|
$
|
218,323
|
|
|
$
|
1,513,779
|
|
2016
|
$
|
1,103,714
|
|
|
$
|
124,101
|
|
|
$
|
157,970
|
|
|
$
|
1,385,785
|
|
17. Related Party Transaction
Scott L. Kauffman is Chairman of the Company’s Board of Directors, and is the former Chief Executive Officer of the Company. His daughter, Sarah Kauffman, has been employed by Partner Firm Forsman & Bodenfors since July 2011, and currently acts as Director of Operations, Attention Partners. In
2018
and
2017
, her total compensation, including salary, bonus and other benefits, totaled approximately
$172
and
$155
, respectively. Her compensation is commensurate with that of her peers.
18. Commitments, Contingencies and Guarantees
Legal Proceedings
. The Company’s operating entities are involved in legal proceedings of various types. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.
Dismissal of Class Action Litigation
. On August 7, 2015, Roberto Paniccia issued a Statement of Claim in the Ontario Superior Court of Justice in the City of Brantford, Ontario seeking to certify a class action suit naming the following as defendants: MDC, former CEO Miles S. Nadal, former CAO Michael C. Sabatino, CFO David Doft and BDO U.S.A. LLP. The Plaintiff alleged violations of section 138.1 of the Ontario Securities Act (and equivalent legislation in other Canadian provinces and territories) as well as common law misrepresentation based on allegedly materially false and misleading statements in the Company’s public statements, as well as omitting to disclose material facts with respect to the SEC investigation. On June 4, 2018, the Court dismissed (with costs) the putative class members’ motion for leave to proceed with the Plaintiff’s claims for misrepresentations of material facts pursuant to the Ontario Securities Act. Following the Court’s decision, on June 18, 2018, the Plaintiff, MDC and each of the other defendants consented to the dismissal of the action with prejudice (and without costs). In July 2018, the Court entered a final order approving the dismissal of this claim.
Closing of Antitrust Investigation.
In 2016, one of the Company’s subsidiary agencies received a subpoena from the U.S. Department of Justice Antitrust Division (the “DOJ”) concerning the DOJ’s ongoing investigation of production bidding practices in the advertising industry. The Company and its subsidiary fully cooperated with this confidential investigation. By letter dated November 5, 2018 (received by the Company’s counsel on November 12, 2018), the DOJ confirmed that the foregoing investigation had been closed. The DOJ did not bring any charges against the Company, its subsidiary or any of their respective employees.
Deferred Acquisition Consideration and Option to Purchase.
See Note 6 of the Notes to the Consolidated Financial Statements included herein for additional information regarding potential payments associated with deferred acquisition consideration and Note 8 for the acquisition of noncontrolling shareholders’ ownership interest in subsidiaries.
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, 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 these losses are probable and estimable.
Commitments
. At December 31,
2018
, the Company had
$4,701
of undrawn letters of credit. In addition, the Company has commitments to fund investments in an aggregate amount of
$40
.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
18. Commitments, Contingencies and Guarantees - (continued)
Leases
. The Company and its subsidiaries lease certain facilities and equipment. For the years ended December 31,
2018
,
2017
, and
2016
, gross premises rental expense amounted to
$65,093
,
$64,086
, and
$56,725
, respectively, which was reduced by sublease income of
$3,671
,
$2,797
, and
$3,027
, respectively. Certain of our office facilities’ leases contain escalation clauses, lease renewals and lease incentives, including periods of free rent and allowances from landlords to be applied against necessary leasehold improvements.
In circumstances where the exercise of renewal options is reasonably assured at the inception of the lease, the renewal period is included in the determination of the lease term. Where leases contain escalation clauses or other concessions, the impact of such adjustments is recognized on a straight-line basis over the minimum lease period.
Minimum rental commitments for the rental of office and production premises and equipment under non-cancellable leases net of sublease income, some of which provide for rental adjustments due to increased property taxes and operating costs, for the years ending December 31,
2019
and thereafter, are as follows:
|
|
|
|
|
|
Period
|
|
Amount
|
2019
|
|
$
|
58,015
|
|
2020
|
|
55,211
|
|
2021
|
|
45,974
|
|
2022
|
|
40,387
|
|
2023
|
|
38,348
|
|
2024 and thereafter
|
|
107,975
|
|
|
|
$
|
345,910
|
|
At December 31,
2018
, the total future cash to be received on sublease income is
$15,930
.
19. New Accounting Pronouncements
Adopted In The Current Reporting Period
Effective January 1, 2018, the Company adopted ASC 606. ASC 606 was applied using the modified retrospective method, with the cumulative effect of the initial adoption being recognized as an adjustment to opening retained earnings at January 1, 2018. As a result, comparative prior periods have not been adjusted and continue to be reported under ASC 605.
The following represents changes to the Company’s policies resulting from the adoption of ASC 606:
|
|
i.
|
Under the guidance in effect through December 31, 2017, performance incentives were recognized in revenue when specific quantitative goals were achieved, or when the Company’s performance against qualitative goals was determined by the client. Under ASC 606, the Company now estimates the amount of the incentive that will be earned at the inception of the contract and recognizes such incentive over the term of the contract. This results in an acceleration of revenue recognition for certain contract incentives compared to ASC 605.
|
|
|
ii.
|
Under the guidance in effect through December 31, 2017, non-refundable retainer fees were generally recognized on a straight-line basis over the term of the specific customer arrangement. Under ASC 606, an input method is typically used to measure progress and recognize revenue for these types of arrangements. This resulted in both the deferral and acceleration of revenue recognition in certain instances.
|
|
|
iii.
|
In certain client arrangements, the Company records revenue as a principal and includes within revenue certain third-party-pass-through and out-of-pocket costs, which are billed to clients in connection with the services provided. In other arrangements, the Company acts as an agent and records revenue equal to the net amount retained. The adoption of ASC 606 resulted in certain arrangements previously being accounted for as principal, now being accounted for as agent.
|
As a result of these changes, the Company recorded a cumulative effect adjustment to increase opening accumulated deficit at January 1, 2018 by
$1,170
.
The following table summarizes the impact of adoption of ASC 606 on the Consolidated Statement of Operations during the twelve months ended
December 31, 2018
:
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
19. New Accounting Pronouncements – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2018
|
|
|
As Reported
|
|
Adjustments
|
|
Adjusted to Exclude Adoption of ASC 606
|
Revenue - Services
|
|
$
|
1,476,203
|
|
|
$
|
51,636
|
|
|
$
|
1,527,839
|
|
Costs of services sold
|
|
$
|
991,198
|
|
|
$
|
62,358
|
|
|
$
|
1,053,556
|
|
Operating income (loss)
|
|
$
|
9,696
|
|
|
$
|
(10,722
|
)
|
|
$
|
(1,026
|
)
|
Net loss attributable to MDC Partners Inc. common shareholders
|
|
$
|
(132,088
|
)
|
|
$
|
(6,883
|
)
|
|
$
|
(138,971
|
)
|
Loss per common share - basic and diluted
|
|
$
|
(2.31
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(2.43
|
)
|
The impact on the Consolidated Balance Sheet and Consolidated Statement of Shareholders’ Deficit as of and for the
twelve months ended
December 31, 2018
was immaterial. There was no effect on the Consolidated Statement of Comprehensive Income (Loss) and the Consolidated Statement of Cash Flows for the
twelve months ended
December 31, 2018 and 2017.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119, which provides guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Cuts and Jobs Act (the “Act”). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. The Company has adopted this standard effective January 1, 2018 and has made a policy election to record tax effects of GILTI as an expense in the period incurred. For the twelve months ending December 31, 2018 GILTI resulted in additional income tax expense of
$710
. For more information on the adoption of the Act, see Note 11.
In May 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting, which provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. This guidance is effective for annual and interim periods beginning after December 15, 2017. Amendments in this ASU are applied prospectively to any award modified on or after the adoption date. The Company adopted this guidance on January 1, 2018. The impact on the Company’s consolidated statement of financial position and results of operations was not material.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits, which requires the presentation of the service cost component of the net periodic pension and postretirement benefits costs in the same line item in the statement of operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of the net periodic pension and postretirement benefits costs are required to be presented as non-operating expenses in the statement of operations. This guidance is effective for annual periods beginning after December 15, 2017. The Company adopted this guidance on January 1, 2018. The impact on the Company’s consolidated statement of financial position and results of operations was not material.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) which requires that the Consolidated Statement of Cash Flows present the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. We have adopted this amended guidance retrospectively as of the year ended December 31, 2018. The Consolidated Statements of Cash Flows now reflect the inclusion and activity of restricted cash balances of
$3.9 million
(classified within Assets held for sale in the Consolidated Balance Sheet),
$4.6 million
, and
$5.3 million
as of December 31, 2018, 2017, and 2016 respectively.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows. This new guidance is intended to reduce diversity in practice regarding the classification of certain transactions in the statement of cash flows. This guidance is effective January 1, 2018 and requires a retrospective transition method. Prior to the Company’s adoption on January 1, 2018, all cash outflows for contingent consideration were classified as a financing activity. Effective January 1, 2018, the Company is now required to classify any cash payments made soon after the acquisition date of a business to settle a contingent consideration liability as cash outflows for investing activities. Cash payments which are not made soon after the acquisition date of a business to settle a contingent consideration liability are separated and classified as cash outflows for financing activities up to the amount of the contingent consideration liability recognized at the acquisition date and as cash outflows from operating activities for any excess. As a result,
$29,141
,
$42,790
, and
$44,914
of an acquisition-related contingent consideration payment of
$61,313
,
$99,873
, and
$135,693
, which was in excess of the liability initially recognized at the acquisition date, has been classified as a cash outflow within net cash provided by operating activities in the accompanying consolidated statement of cash flows for the
twelve months ended
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
19. New Accounting Pronouncements – (continued)
December 31,
2018
, 2017, and 2016 respectively. There was no impact on the Company’s consolidated statement of financial position and results of operations.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities
,
which will require equity investments, except equity method investments, to be measured at fair value and any changes in fair value will be recognized in results of operations. This guidance is effective for annual and interim periods beginning after December 15, 2017. Additionally, this guidance provides for the recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. The Company adopted this guidance on January 1, 2018. The impact on the Company’s consolidated statement of financial position and results of operations was not material.
To be Adopted in Future Reporting Periods
In February 2016, the FASB issued ASU 2016-02, Leases. The new guidance will require lessees to recognize a right-to-use asset and lease liability for most of its leases with a term of more than twelve months, including those classified as operating leases. The new guidance also requires additional quantitative and qualitative disclosures. This guidance will be effective for annual periods beginning after December 15, 2018, with early adoption permitted. The FASB issued ASU No. 2018-10 “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11 “Leases (Topic 842) Targeted Improvements” in July 2018. ASU 2018-10 provides certain amendments that affect narrow aspects of the guidance issued in ASU 2016-02. ASU 2018-11 provides an optional transition method allowing entities to apply the new lease standard at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (modified retrospective approach) as opposed to restating prior period consolidated financial statements. The Company elected to adopt the standard on January 1, 2019, which is the date of initial application, using the modified retrospective adoption method. The Company has implemented a new system to support the Company’s financial reporting and disclosure under the new standard and is finalizing its new accounting policies, processes and internal controls. The Company is in the process of quantifying the full impact of the application of the new guidance; however, it expects that the recognition of a right-to-use asset and lease liability for operating leases will have a significant impact on its balance sheet.
20. Employee Benefit Plans
A subsidiary acquired in 2012 sponsors a defined benefit plan. The benefits under the defined benefit plan are based on each employee’s years of service and compensation. Effective February 28, 2007, the plan was closed to all new entrants, and effective February 28, 2010, all benefit accruals under the plan were frozen.
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
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2018
|
|
2017
|
|
2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost on benefit obligation
|
1,641
|
|
|
1,725
|
|
|
1,855
|
|
Expected return on plan assets
|
(1,948
|
)
|
|
(1,830
|
)
|
|
(1,863
|
)
|
Curtailment and settlements
|
1,039
|
|
|
—
|
|
|
929
|
|
Amortization of actuarial losses
|
258
|
|
|
222
|
|
|
137
|
|
Net periodic benefit cost
|
$
|
990
|
|
|
$
|
117
|
|
|
$
|
1,058
|
|
The above costs are included within Other income, net on the Consolidated Statements of Operations.
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
20. Employee Benefit Plans (continued)
The following weighted average assumptions were used to determine net periodic costs at December 31:
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2018
|
|
2017
|
|
2016
|
Discount rate
|
3.83
|
%
|
|
4.32
|
%
|
|
4.69
|
%
|
Expected return on plan assets
|
7.00
|
%
|
|
7.40
|
%
|
|
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
|
|
Pension
Benefits
|
|
2018
|
|
2017
|
Current year actuarial (gain) loss
|
$
|
(520
|
)
|
|
$
|
1,558
|
|
Amortization of actuarial loss
|
(258
|
)
|
|
(222
|
)
|
Total recognized in other comprehensive (income) loss
|
$
|
(778
|
)
|
|
$
|
1,336
|
|
Total recognized in net periodic benefit cost and other comprehensive (income) loss
|
$
|
212
|
|
|
$
|
1,453
|
|
The following table summarizes the change in benefit obligations and fair values of plan assets for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Change in benefit obligation:
|
|
|
|
|
|
Benefit obligation, Beginning balance
|
$
|
43,750
|
|
|
$
|
40,722
|
|
Interest Cost
|
1,641
|
|
|
1,725
|
|
Actuarial losses
|
(3,522
|
)
|
|
3,088
|
|
Benefits paid
|
(3,931
|
)
|
|
(1,785
|
)
|
Benefit obligation, Ending balance
|
37,938
|
|
|
43,750
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of plan assets, Beginning balance
|
27,977
|
|
|
24,482
|
|
Actual return on plan assets
|
(2,093
|
)
|
|
3,360
|
|
Employer contributions
|
1,228
|
|
|
1,920
|
|
Benefits paid
|
(3,931
|
)
|
|
(1,785
|
)
|
Fair value of plan assets, Ending balance
|
23,181
|
|
|
27,977
|
|
Unfunded status
|
$
|
14,757
|
|
|
$
|
15,773
|
|
Amounts recognized in the balance sheet at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2018
|
|
2017
|
Non-current liability
|
$
|
14,757
|
|
|
$
|
15,773
|
|
Net amount recognized
|
$
|
14,757
|
|
|
$
|
15,773
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
20. Employee Benefit Plans (continued)
Amounts recognized in Accumulated Other Comprehensive Loss before income taxes consists of the following components for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
2018
|
|
2017
|
Accumulated net actuarial losses
|
$
|
12,878
|
|
|
$
|
13,656
|
|
Amount recognized
|
$
|
12,878
|
|
|
$
|
13,656
|
|
In 2019, the Company estimates that it will recognize
$266
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
|
|
Pension
Benefits
|
|
2018
|
|
2017
|
Discount rate
|
4.42
|
%
|
|
3.83
|
%
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
The discount rate assumptions at December 31,
2018
and
2017
were determined independently. A yield curve was produced for a universe containing the majority of U.S.-issued AA-graded corporate bonds, all of which were non-callable (or callable with make-whole provisions). The discount rate was developed as the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.
Fair Value of Plan Assets and Investment Strategy
The fair value of the plan assets as of December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Fund – Short Term Investments
|
$
|
1,695
|
|
|
$
|
1,695
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual Funds
|
26,282
|
|
|
26,282
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
27,977
|
|
|
$
|
27,977
|
|
|
$
|
—
|
|
|
$
|
—
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except Share and per Share Amounts)
20. Employee Benefit Plans (continued)
The pension plans weighted-average asset allocation for the years ended December 31,
2018
, and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Target Allocation
|
|
Actual Allocation
|
|
Actual Allocation
|
|
2018
|
|
2018
|
|
2017
|
Asset Category:
|
|
|
|
|
|
|
|
|
Equity Securities
|
65.0
|
%
|
|
67.0
|
%
|
|
68.9
|
%
|
Debt Securities
|
30.0
|
%
|
|
25.5
|
%
|
|
25.0
|
%
|
Cash/Cash Equivalents and Short Term Investments
|
5.0
|
%
|
|
7.5
|
%
|
|
6.1
|
%
|
|
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 primarily located in the United States, as well as a smaller percentage invested in large-cap and mid-cap companies located outside of the United States. 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 2018, the Company contributed
$1,228
to the pension plan. The Company estimates that it will make approximately
$1,156
in contributions to the pension plan in 2019. 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.
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
|
2019
|
|
$
|
1,690
|
|
2020
|
|
1,857
|
|
2021
|
|
1,848
|
|
2022
|
|
1,912
|
|
2023
|
|
2,139
|
|
2024 – 2027
|
|
11,047
|
|
21. Changes in Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) for the
twelve months ended December 31,
were:
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit
Pension
|
|
Foreign Currency Translation
|
|
Total
|
Balance December 31, 2016
|
$
|
(12,320
|
)
|
|
$
|
10,496
|
|
|
$
|
(1,824
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
|
1,206
|
|
|
1,206
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(1,336
|
)
|
|
—
|
|
|
(1,336
|
)
|
Other comprehensive income (loss)
|
(1,336
|
)
|
|
1,206
|
|
|
(130
|
)
|
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 (loss) (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
|
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
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:
|
|
|
|
|
|
|
|
2018
|
$
|
326,968
|
|
|
$
|
379,743
|
|
|
$
|
375,830
|
|
|
$
|
393,662
|
|
2017
|
$
|
344,700
|
|
|
$
|
390,532
|
|
|
$
|
375,800
|
|
|
$
|
402,747
|
|
Cost of services sold:
|
|
|
|
|
|
|
|
2018
|
$
|
243,030
|
|
|
$
|
253,390
|
|
|
$
|
238,690
|
|
|
$
|
256,088
|
|
2017
|
$
|
237,563
|
|
|
$
|
267,822
|
|
|
$
|
249,418
|
|
|
$
|
268,673
|
|
Net Income (loss):
|
|
|
|
|
|
|
|
2018
|
$
|
(28,519
|
)
|
|
$
|
5,951
|
|
|
$
|
(13,667
|
)
|
|
$
|
(75,713
|
)
|
2017
|
$
|
(9,683
|
)
|
|
$
|
13,467
|
|
|
$
|
21,984
|
|
|
$
|
231,455
|
|
Net income (loss) attributable to MDC Partners Inc.:
|
|
|
|
|
|
|
|
2018
|
$
|
(29,416
|
)
|
|
$
|
3,406
|
|
|
$
|
(16,125
|
)
|
|
$
|
(81,598
|
)
|
2017
|
$
|
(10,566
|
)
|
|
$
|
11,253
|
|
|
$
|
18,493
|
|
|
$
|
222,668
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
2018
|
$
|
(0.56
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.32
|
)
|
|
$
|
(1.46
|
)
|
2017
|
$
|
(0.21
|
)
|
|
$
|
0.14
|
|
|
$
|
0.25
|
|
|
$
|
3.33
|
|
Diluted
|
|
|
|
|
|
|
|
2018
|
$
|
(0.56
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.32
|
)
|
|
$
|
(1.46
|
)
|
2017
|
$
|
(0.21
|
)
|
|
$
|
0.14
|
|
|
$
|
0.24
|
|
|
$
|
3.30
|
|
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
2018
and
2017
included a foreign exchange loss of
$13,324
and
$660
, respectively.
|
|
|
•
|
The fourth quarter of
2018
and
2017
included stock-based compensation charges of
$1,534
and
$7,480
, respectively.
|
|
|
•
|
The fourth quarter of
2018
and
2017
included changes in deferred acquisition resulting in income of
$8,979
and
$18,173
, respectively.
|
|
|
•
|
The fourth quarter of
2018
included goodwill and other asset impairment charges of
$56,732
and the third and fourth quarter of
2017
included goodwill impairment charges of
$29,631
and
$18,893
, respectively.
|
|
|
•
|
The fourth quarter of 2018 included income tax expense related to the establishment of the Company’s valuation allowance of
$49,447
. The fourth quarter of 2017 included income tax benefit of
$226,466
relating to the decrease to the valuation allowance.
|
MDC PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of United States Dollars, Unless Otherwise Stated Except per Share Amounts)
23. Subsequent Events
On March 14, 2019 (the “Issue Date”), the Company entered into a securities purchase agreement with Stagwell Holdings, an affiliate of Stagwell, pursuant to which Stagwell Holdings agreed to purchase, (i)
14,285,714
newly authorized Class A shares for
$3.50
per share for an aggregate purchase price of
$50 million
and (ii)
50,000
newly authorized Series 6 convertible preference shares (“Series 6 Preference Shares”) for an aggregate purchase price of
$50 million
.
The holders of the Series 6 Preference Shares have the right to convert their Series 6 Preference Shares in whole at any time and from time to time, and in part at any time and from time to time after
1.00
year following the original issuance date of the Preference Shares, into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation per share preference of each Series 6 Preference Share is
$1,000
. The initial Conversion Price is
$5.00
per 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 Issue Date.
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 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.
Subject to certain limitations, the Series 6 Preference Shares are not convertible into Class A Shares to the extent upon conversion the holder will beneficially hold more than
19.9%
of the Company’s outstanding common shares or voting power. In the event that such restrictions would prevent the conversion of any Series 6 Preference Shares, such Series 6 Preference Shares will be converted into a separate newly authorized series of convertible preference shares of the Company, the Series 7 convertible preference shares (the “Alternative Preference Shares”), at the same conversion rate at which the Series 6 Preference Shares would convert into Class A Shares. The Alternative Preference Shares, in turn, are convertible into Class A Shares on a
One
-to-one basis, subject to certain conversion rate adjustments.
Series 6 Preference Shares or Alternative Preference Shares will not entitle their holders to vote in the election of directors and, other than as required by applicable law, holders of the Series 6 Preference Shares will not have voting rights.