NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(thousands of United States dollars, except per share amounts, unless otherwise stated)
1. Basis of Presentation and Recent Developments
The accompanying consolidated financial statements include the accounts of MDC Partners Inc. (the “Company” or “MDC”), its subsidiaries and variable interest entities for which the Company is the primary beneficiary. References herein to “Partner Firms” generally refer to the Company’s subsidiary agencies.
MDC Partners Inc. has prepared the unaudited condensed consolidated interim financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting interim financial information on Form 10-Q. Accordingly, the financial statements have been condensed and do not include certain information and disclosures pursuant to these rules. The preparation of financial statements in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions. The consolidated results for interim periods are not necessarily indicative of results for the full year and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”).
The accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in the opinion of management are necessary for a fair presentation, in all material respects, of the information contained therein. Intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
Due to changes in the composition of certain business and the Company’s internal management and reporting structure during 2019, reportable segment results for the 2018 periods presented have been recast to reflect the reclassification of certain businesses between segments. See Note 12 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information.
2. Revenue
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 (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’ 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
three and six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Industry
|
Reportable Segment
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Food & Beverage
|
All
|
|
$
|
73,305
|
|
|
$
|
84,464
|
|
|
$
|
139,969
|
|
|
$
|
147,932
|
|
Retail
|
All
|
|
39,894
|
|
|
38,396
|
|
|
72,350
|
|
|
76,411
|
|
Consumer Products
|
All
|
|
45,296
|
|
|
41,367
|
|
|
78,232
|
|
|
77,973
|
|
Communications
|
All
|
|
47,793
|
|
|
43,097
|
|
|
87,490
|
|
|
81,454
|
|
Automotive
|
All
|
|
18,541
|
|
|
25,294
|
|
|
36,732
|
|
|
45,788
|
|
Technology
|
All
|
|
28,876
|
|
|
23,540
|
|
|
54,279
|
|
|
45,080
|
|
Healthcare
|
All
|
|
25,954
|
|
|
35,426
|
|
|
49,161
|
|
|
68,002
|
|
Financials
|
All
|
|
27,868
|
|
|
30,207
|
|
|
52,795
|
|
|
52,702
|
|
Transportation and Travel/Lodging
|
All
|
|
27,050
|
|
|
18,776
|
|
|
44,085
|
|
|
33,664
|
|
Other
|
All
|
|
27,553
|
|
|
39,176
|
|
|
75,828
|
|
|
77,705
|
|
|
|
|
$
|
362,130
|
|
|
$
|
379,743
|
|
|
$
|
690,921
|
|
|
$
|
706,711
|
|
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 twelve countries around the world. In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which included discretionary components that are easier to reduce in the short term than other operating expenses.
The following table presents revenue disaggregated by geography for the
three and six months ended June 30, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Geographic Location
|
Reportable Segment
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
United States
|
All
|
|
$
|
284,659
|
|
|
$
|
295,268
|
|
|
$
|
547,676
|
|
|
$
|
551,792
|
|
Canada
|
All, excluding Media Services
|
|
24,564
|
|
|
33,086
|
|
|
46,942
|
|
|
59,465
|
|
Other
|
All, excluding Media Services and Domestic Creative Agencies
|
|
52,907
|
|
|
51,389
|
|
|
96,303
|
|
|
95,454
|
|
|
|
|
$
|
362,130
|
|
|
$
|
379,743
|
|
|
$
|
690,921
|
|
|
$
|
706,711
|
|
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
$92,317
and
$64,362
at
June 30, 2019
and
December 31, 2018
, respectively, and are included as a component of accounts receivable on the
Unaudited Condensed Consolidated Balance Sheets
. Outside vendor costs incurred on behalf of clients which have yet to be invoiced were
$40,605
and
$42,369
at
June 30, 2019
and
December 31, 2018
, respectively, and are included on the
Unaudited Condensed 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
Unaudited Condensed Consolidated Balance Sheets
. Advance billings at
June 30, 2019
and
December 31, 2018
were
$168,142
and
$138,505
, respectively. The increase in the advance billings balance of
$29,637
for the
six months ended June 30, 2019
is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by
$101,431
of revenues recognized that were included in the advance billings balances as of December 31, 2018 and reductions due to the incurrence of third-party costs.
Changes in the contract asset and liability balances during the
six months ended June 30, 2019
and
December 31, 2018
were not materially impacted by write-offs, impairment losses or any other factors.
3. Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
4,290
|
|
|
$
|
3,406
|
|
|
$
|
4,177
|
|
|
$
|
(26,010
|
)
|
Accretion on convertible preference shares
|
(3,242
|
)
|
|
(2,068
|
)
|
|
(5,625
|
)
|
|
(4,095
|
)
|
Net income allocated to convertible preference shares
|
(273
|
)
|
|
(205
|
)
|
|
—
|
|
|
—
|
|
Net income (loss) attributable to MDC Partners Inc. common shareholders
|
$
|
775
|
|
|
$
|
1,133
|
|
|
$
|
(1,448
|
)
|
|
$
|
(30,105
|
)
|
|
|
|
|
|
|
|
|
Adjustment to net income allocated to convertible preference shares
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Numerator for dilutive income (loss) per common share:
|
|
|
|
|
|
|
|
Net income (loss) attributable to MDC Partners Inc. common shareholders
|
$
|
775
|
|
|
$
|
1,134
|
|
|
$
|
(1,448
|
)
|
|
$
|
(30,105
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
71,915,832
|
|
|
57,439,823
|
|
|
66,118,749
|
|
|
56,924,208
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Impact of stock options and non-vested stock under employee stock incentive plans
|
108,857
|
|
|
363,049
|
|
|
—
|
|
|
—
|
|
Diluted weighted average number of common shares outstanding
|
72,024,689
|
|
|
57,802,872
|
|
|
66,118,749
|
|
|
56,924,208
|
|
Basic
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.53
|
)
|
Diluted
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.53
|
)
|
Anti-dilutive stock awards
2,662,666
327,500
4,406,206
1,594,761
Restricted stock and restricted stock unit awards of
242,338
and
1,308,781
for the
three and six months ended June 30, 2019 and 2018
, respectively, which are contingent upon the Company meeting a cumulative three year earnings target and contingent upon continued employment, are excluded from the computation of diluted income per common share as the contingencies were not satisfied at
June 30, 2019
and
2018
, respectively. In addition, there were
145,000
and 95,000 Preference Shares outstanding which were convertible into
25,621,189
and
10,544,708
Class A common shares at
June 30, 2019 and 2018
, respectively. These Preference Shares were anti-dilutive for each period presented in the table above and are therefore excluded from the diluted income (loss) per common share calculation.
4. Acquisitions and Dispositions
2019 Acquisition
Effective April 1, 2019, the Company acquired the
35%
ownership interest of HPR Partners LLC (Hunter) it did not own for an aggregate purchase price of
$9,585
, comprised of a closing cash payment of
$3,890
and additional deferred acquisition payments with an estimated present value at the acquisition date of
$5,695
. The deferred payments are based on the financial results of the underlying business from 2018 to 2020 with final payment due in 2021. As of the acquisition date, the fair value of the additional interest acquired was
$20,178
. The fair value was measured using a discounted cash flow model.
As a result of the transaction, the Company reduced redeemable noncontrolling interests by
$9,488
. The difference between the purchase price and the noncontrolling interest of
$97
was recorded in common stock and other paid-in capital in the Unaudited Condensed Consolidated Balance Sheet.
2019 Disposition
On March 8, 2019, the Company consummated the sale of Kingsdale, an operating segment with operations in Toronto and New York City that provides shareholder advisory services. As consideration for the sale, the Company was paid cash plus the assumption of certain liabilities totaling approximately
$50 million
in the aggregate. The sale resulted in a loss of approximately
$3 million
, which is included in Other, net within the Unaudited Condensed Consolidated Statement of Operations.
Assets and Liabilities Held for Sale - Change in Plan to Sell
In the fourth quarter of 2018, the Company initiated a process to sell its ownership interest in a foreign office within the Global Integrated Agencies reportable segment. The assets and liabilities of the entity were classified as Assets and Liabilities held for sale, at their fair value less cost to sell, within the Consolidated Balance Sheet as of December 31, 2018. In the second quarter of 2019, following the appointment of Mark Penn as Chief Executive Officer, management changed its strategy and plan to sell the foreign office. In connection with management’s decision, the amounts classified within assets and liabilities held for sale were reclassified into the respective line items within the Unaudited Condensed Consolidated Balance Sheet as of June 30, 2019.
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 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
Unaudited Condensed 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.
5. Deferred Acquisition Consideration
Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel. Contingent deferred acquisition consideration is recorded at the acquisition date fair value and adjusted at each reporting period through operating income, for contingent purchase price payments, or net interest expense, for fixed purchase price payments. The Company accounts for retention payments through operating income as stock-based compensation over the required retention period.
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
June 30, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2019
|
|
2018
|
Beginning Balance of contingent payments
|
$
|
82,598
|
|
|
$
|
119,086
|
|
Payments
|
(24,492
|
)
|
|
(54,947
|
)
|
Redemption value adjustments
(1)
|
(6,100
|
)
|
|
3,512
|
|
Additions - acquisitions and step up transactions
|
5,695
|
|
|
14,943
|
|
Other
|
—
|
|
|
4
|
|
Ending Balance of contingent payments
|
$
|
57,701
|
|
|
$
|
82,598
|
|
Fixed payments
|
542
|
|
|
1,097
|
|
|
$
|
58,243
|
|
|
$
|
83,695
|
|
(1)
Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments and stock-based compensation charges relating to acquisition payments that are tied to continued employment. Redemption value adjustments are recorded within cost of services sold and office and general expenses on the Unaudited Condensed Consolidated Statements of Operations.
The following table presents the impact to the Company’s statement of operations due to the redemption value adjustments for the contingent deferred acquisition consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Income (loss) attributable to fair value adjustments
|
$
|
2,073
|
|
|
$
|
(5,065
|
)
|
|
$
|
(5,570
|
)
|
|
$
|
(2,479
|
)
|
Stock-based compensation
|
(1,339
|
)
|
|
2,321
|
|
|
(530
|
)
|
|
4,682
|
|
Redemption value adjustments
|
$
|
734
|
|
|
$
|
(2,744
|
)
|
|
$
|
(6,100
|
)
|
|
$
|
2,203
|
|
6. Leases
Effective January 1, 2019, the Company adopted FASB ASC Topic 842, Leases (“ASC 842”). As a result, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 840, Leases. See Note 14 of the Notes to the
Unaudited Condensed Consolidated Financial Statements
included herein for additional information regarding the Company’s adoption of ASC 842. The policies described herein refer to those in effect as of January 1, 2019.
The Company leases office space in North America, Europe, Asia, South America, and Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. These leases are classified as operating leases and expire between years 2019 through 2032. Finance leases are considered to be immaterial to the Company.
The Company’s leasing policies are established in accordance with ASC 842, and accordingly, the Company recognizes on the balance sheet at the time of lease commencement a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. Right-of-use lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. All right-of-use assets are reviewed for impairment. As the Company’s implicit rate in its leases is not readily determinable, in determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the commencement date. Lease payments included in the measurement of the lease liability are comprised of noncancelable lease payments, payments based upon an index or rate, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.
Lease costs are recognized in the Consolidated Statement of Operations over the lease term on a straight-line basis. Leasehold improvements are depreciated on a straight-line basis over the lesser of the term of the related lease or the estimated useful life of the asset.
Some of the Company’s leases contain variable lease payments, including payments based upon an index or rate. Variable lease payments based upon an index or rate are initially measured using the index or rate in effect at the lease commencement date and are included within the lease liabilities. Lease liabilities are not remeasured as a result of changes in the index or rate, rather changes in these types of payments are recognized in the period in which the obligation for those payments is incurred. In addition, some of our leases contain variable payments for utilities, insurance, real estate tax, repairs and maintenance, and other variable operating expenses. Such amounts are not included in the measurement of the lease liability and are recognized in the period when the facts and circumstances on which the variable lease payments are based upon occur.
The Company’s leases include options to extend or renew the lease through 2040. The renewal and extension options are not included in the lease term as the Company is not reasonably certain that it will exercise its option.
From time to time, the Company enters into sublease arrangements both with unrelated third-parties and with our partner agencies. These leases are classified as operating leases and expire between years 2019 through 2023. Sublease income is recognized over the lease term on a straight-line basis. Currently, the Company subleases office space in North America, Europe and Asia.
As of June 30, 2019, the Company has entered into an operating lease for which the commencement date has not yet occurred as this leased space is in the process of being prepared by the landlord for occupancy. Accordingly, this lease represents an obligation of the Company that is not on the Consolidated Balance Sheet as of June 30, 2019. The aggregate future liability related to the lease is approximately
$6 million
.
The discount rate used for leases accounted for under ASC 842 is the Company’s collateralized credit adjusted borrowing rate.
The following table presents lease costs and other quantitative information for the
three and six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2019
|
Lease Cost:
|
|
|
|
Operating lease cost
|
$
|
17,473
|
|
|
$
|
33,914
|
|
Variable lease cost
|
4,361
|
|
|
9,325
|
|
Sublease rental income
|
(2,590
|
)
|
|
(4,189
|
)
|
Total lease cost
|
$
|
19,244
|
|
|
$
|
39,050
|
|
Additional information:
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for operating leases
|
|
|
|
Operating cash flows
|
$
|
19,523
|
|
|
$
|
35,175
|
|
|
|
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
$
|
2,195
|
|
|
$
|
259,013
|
|
Weighted average remaining lease term (in years) - Operating leases
|
7.0
|
|
|
7.0
|
|
Weighted average discount rate - Operating leases
|
8.6
|
|
|
8.6
|
|
Operating lease expense is included in office and general expenses in the Unaudited Condensed Consolidated Statement of Operations. Lease expense for leases with a term of 12 months or less is immaterial to the Company. Rental expense for the three and six months ended June 30, 2018 was
$15,981
and
$33,541
, respectively, offset by
$926
and
$1,640
, respectively in sublease rental income.
The following table presents minimum future rental payments under the Company’s leases at
June 30, 2019
and their reconciliation to the corresponding lease liabilities:
|
|
|
|
|
|
Maturity Analysis
|
Remaining 2019
|
$
|
33,776
|
|
2020
|
66,425
|
|
2021
|
56,428
|
|
2022
|
45,942
|
|
2023
|
42,113
|
|
Thereafter
|
133,823
|
|
Total
|
378,507
|
|
Less: Present value discount
|
(99,004
|
)
|
Lease liability
|
$
|
279,503
|
|
7. Debt
As of
June 30, 2019
and
December 31, 2018
, the Company’s indebtedness was comprised as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Revolving credit agreement
|
$
|
27,545
|
|
|
$
|
68,143
|
|
6.50% Notes due 2024
|
900,000
|
|
|
900,000
|
|
Debt issuance costs
|
(13,453
|
)
|
|
(14,036
|
)
|
|
$
|
914,092
|
|
|
$
|
954,107
|
|
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.
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.
The Indenture includes covenants that 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
June 30, 2019
.
Credit Agreement
The Company is party to a
$250,000
secured revolving credit facility due May 3, 2021. The amounts outstanding under the revolving credit facility as of
June 30, 2019
and
December 31, 2018
are presented in the table above and additional details are provided below.
On March 12, 2019 (the “Amendment Effective Date”), the Company, Maxxcom Inc. (a subsidiary of the Company) (“Maxxcom”) and each of their subsidiaries party thereto entered into an Amendment to the existing senior secured revolving credit facility, dated as of May 3, 2016 (as amended, the “Credit Agreement”), among the Company, Maxxcom, each of their subsidiaries party thereto, Wells Fargo Capital Finance, LLC, as agent (“Wells Fargo”) and the lenders from time to time party thereto. Advances under the Credit Agreement are to be used for working capital and general corporate purposes, in each case pursuant to the terms of the Credit Agreement.
The Amendment provides financial covenant relief by increasing the total leverage ratio applicable on each testing date after the Amendment Effective Date through the period ending December 31, 2020 from
5.5
:1.0 to
6.25
:1.0. The total leverage ratio applicable on each testing date after December 31, 2020 will revert to
5.5
:1.0.
In connection with the Amendment, the Company reduced the aggregate maximum amount of revolving commitments provided by the lenders under the Credit Agreement to
$250 million
from
$325 million
.
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 and subject to customary exceptions and collateralized by a portion of MDC’s outstanding receivable balance. The Company is currently in compliance with all of the terms and conditions of its Credit Agreement.
At
June 30, 2019
and
December 31, 2018
, the Company had issued undrawn outstanding letters of credit of
$4,744
and
$4,701
, respectively.
8. Share Capital
The authorized and outstanding share capital of the Company is as follows:
Series 6 Convertible Preference Shares
On March 14, 2019 (the “Series 6 Issue Date”), the Company entered into a securities purchase agreement with Stagwell Agency Holdings LLC (“Stagwell Holdings”), an affiliate of Stagwell Group LLC (“Stagwell”), pursuant to which Stagwell Holdings agreed to purchase, (i)
14,285,714
newly authorized Class A shares (the “Stagwell Class A Shares”) for an aggregate contractual purchase price of
$50,000
and (ii)
50,000
newly authorized Series 6 convertible preference shares (“Series 6 Preference Shares”) for an aggregate contractual purchase price of
$50 million
. The Company received proceeds of approximately
$98,620
, net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. The proceeds allocated to the Stagwell Class A Shares were
$35,997
and to Series 6 Preference Shares were
$62,623
based on their relative fair value calculated by utilizing a Monte Carlo Simulation model. In connection with the closing of the transaction, the Company increased the size of its Board and appointed one nominee designated by the Purchaser. Except as required by law, the Series 6 Preference Shares do not have voting rights and are not redeemable at the option of the Purchaser.
The holders of the Series 6 Preference Shares have the right to convert their Series 6 Preference Shares in whole at any time and from time to time, and in part at any time and from time to time, into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion price at such time (the “Conversion Price”). The initial liquidation per share preference of each Series 6 Preference Share is
$1,000
. The initial Conversion Price is
$5.00
per Series 6 Preference Share, subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities.
The Series 6 Preference Shares’ liquidation preference accretes at
8.0%
per annum, compounded quarterly until the
five
-year anniversary of the Series 6 Issue Date. During the
six months ended June 30, 2019
, the Series 6 Preference Shares accreted at a monthly rate of $6.69, for total accretion of
$1,193
, bringing the aggregate liquidation preference to
$51,193
as of
June 30, 2019
. The accretion is considered in the calculation of net income (loss) attributable to MDC Partners Inc. common shareholders. See Note 3 of the Notes to the
Unaudited Condensed Consolidated Financial Statements
included herein for further information regarding the Series 6 Preference Shares.
Holders of the Series 6 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 6 Preference Shares. The Series 6 Preference Shares are convertible at the Company’s option (i) on and after the
two
-year anniversary of the Series 6 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least
125%
of the Conversion Price or (ii) after the fifth anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 6 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at
7%
), and (ii) the Company will have a right to redeem the Series 6 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
Effective March 18, 2019, the Company’s Board of Directors (the “Board”) appointed Mark Penn as the Chief Executive Officer and as a director of the Board. Mr. Penn is manager of Stagwell. Effective April 18, 2019, Mr. Penn was also appointed as Chairman of the Board.
Series 4 Convertible Preference Shares
On March 7, 2017 (the “Series 4 Issue Date”), the Company issued
95,000
newly created Preference Shares (“Series 4 Preference Shares”) to affiliates of The Goldman Sachs Group, Inc. (collectively, the “Purchaser”) pursuant to a
$95,000
private placement. The Company received proceeds of approximately
$90,123
, net of fees and estimated expenses, which were primarily used to pay down existing debt under the Company’s credit facility and for general corporate purposes. In connection with the closing of the transaction, the Company increased the size of its Board and appointed one nominee designated by the Purchaser. Except as required by law, the Series 4 Preference Shares do not have voting rights and are not redeemable at the option of the Purchaser.
Subsequent to the ninetieth day following the Series 4 Issue Date, the holders of the Series 4 Preference Shares have the right to convert their Series 4 Preference Shares in whole at any time and from time to time and in part at any time and from time to time into a number of Class A Shares equal to the then-applicable liquidation preference divided by the applicable conversion
price at such time (the “Conversion Price”). The initial liquidation per share preference of each Series 4 Preference Share is
$1,000
. The Conversion Price of a Series 4 Preference Share is subject to customary adjustments for share splits and combinations, dividends, recapitalizations and other matters, including weighted average anti-dilution protection for certain issuances of equity or equity-linked securities. In connection with the anti-dilution protection provision triggered by the issuance of equity securities to Stagwell, the Conversion Price per Series 4 Preference Share was reduced to
$7.42
from the initial Conversion Price of
$10.00
.
The Series 4 Preference Shares’ liquidation preference accretes at
8.0%
per annum, compounded quarterly until the five-year anniversary of the Series 4 Issue Date. During the
six months ended June 30, 2019
, the Series 4 Preference Shares accreted at a monthly rate of approximately
$7.85
per Series 4 Preference Share, for total accretion of
$4,432
, bringing the aggregate liquidation preference to
$114,139
as of
June 30, 2019
. The accretion is considered in the calculation of net income (loss) attributable to MDC Partners Inc. common shareholders. See Note 3 of the Notes to the
Unaudited Condensed Consolidated Financial Statements
included herein for further information regarding the Series 4 Preference Shares.
Holders of the Series 4 Preference Shares are entitled to dividends in an amount equal to any dividends that would otherwise have been payable on the Class A Shares issued upon conversion of the Series 4 Preference Shares. The Series 4 Preference Shares are convertible at the Company’s option (i) on and after the two-year anniversary of the Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least
125%
of the Conversion Price or (ii) after the fifth anniversary of the Series 4 Issue Date, if the closing trading price of the Class A Shares over a specified period prior to conversion is at least equal to the Conversion Price.
Following certain change in control transactions of the Company in which holders of Series 4 Preference Shares are not entitled to receive cash or qualifying listed securities with a value at least equal to the liquidation preference plus accrued and unpaid dividends, (i) holders will be entitled to cash dividends on the liquidation preference at an increasing rate (beginning at
7%
), and (ii) the Company will have a right to redeem the Series 4 Preference Shares for cash at the greater of their liquidation preference plus accrued and unpaid dividends or their as-converted value.
Class A Common Shares (“Class A Shares”)
An unlimited number of subordinate voting shares, carrying
one
vote each, entitled to dividends equal to or greater than Class B Shares, convertible at the option of the holder into one Class B Share for each Class A Share after the occurrence of certain events related to an offer to purchase all Class B shares. There were
71,943,994
(including the Class A Shares issued to Stagwell) and
57,517,568
Class A Shares issued and outstanding as of
June 30, 2019
and
December 31, 2018
, respectively.
Class B Common Shares (“Class B Shares”)
An unlimited number of voting shares, carrying
twenty
votes each, convertible at any time at the option of the holder into one Class A share for each Class B share. There were
3,749
and
3,755
Class B Shares issued and outstanding as of
June 30, 2019
and
December 31, 2018
, respectively.
9. 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
Unaudited Condensed 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
Unaudited Condensed Consolidated Balance Sheets
.
Noncontrolling Interests
Changes in amounts due to noncontrolling interest holders included in accruals and other liabilities on the
Unaudited Condensed Consolidated Balance Sheets
for the year ended
December 31, 2018
and
six months ended June 30, 2019
were as follows:
|
|
|
|
|
|
Noncontrolling
Interests
|
Balance, December 31, 2017
|
$
|
11,030
|
|
Income attributable to noncontrolling interests
|
11,785
|
|
Distributions made
|
(13,419
|
)
|
Other
(1)
|
(118
|
)
|
Balance, December 31, 2018
|
$
|
9,278
|
|
Income attributable to noncontrolling interests
|
3,472
|
|
Distributions made
|
(7,957
|
)
|
Other
(1)
|
25
|
|
Balance, June 30, 2019
|
$
|
4,818
|
|
|
|
(1)
|
Other consists of cumulative translation adjustments.
|
Changes in the Company’s ownership interests in our less than 100% owned subsidiaries during the
three and six months ended June 30, 2019 and 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
4,290
|
|
|
$
|
3,406
|
|
|
$
|
4,177
|
|
|
$
|
(26,010
|
)
|
Transfers from the noncontrolling interest:
|
|
|
|
|
|
|
|
Decrease in MDC Partners Inc. paid-in capital for purchase of equity interests in excess of redeemable noncontrolling interests and noncontrolling interests
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
|
(1,166
|
)
|
Net transfers from noncontrolling interests
|
$
|
(97
|
)
|
|
$
|
—
|
|
|
$
|
(97
|
)
|
|
$
|
(1,166
|
)
|
Change from net loss attributable to MDC Partners Inc. and transfers to noncontrolling interests
|
$
|
4,193
|
|
|
$
|
3,406
|
|
|
$
|
4,080
|
|
|
$
|
(27,176
|
)
|
Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Year Ended December 31, 2018
|
Beginning Balance
|
$
|
51,546
|
|
|
$
|
62,886
|
|
Redemptions
|
(9,486
|
)
|
|
(11,943
|
)
|
Granted
|
—
|
|
|
—
|
|
Changes in redemption value
|
421
|
|
|
1,067
|
|
Currency translation adjustments
|
154
|
|
|
(464
|
)
|
Ending Balance
|
$
|
42,635
|
|
|
$
|
51,546
|
|
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
$42,635
as of
June 30, 2019
, consists of
$19,158
assuming that the subsidiaries perform over the relevant future periods at their discounted cash flows earnings level and such rights are exercised,
$19,926
upon termination of such owner’s employment with the applicable subsidiary or death and
$3,551
representing the initial redemption
value (required floor) recorded for certain acquisitions in excess of the amount the Company would have to pay should the Company acquire the remaining ownership interests for such subsidiaries.
These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. For the
three months ended June 30, 2019 and 2018
, there was no related impact on the Company’s loss per share calculation.
10. Fair Value Measurements
A fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. The hierarchy for observable and unobservable inputs used to measure fair value into three broad levels are described below:
|
|
•
|
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
|
|
|
•
|
Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
|
|
|
•
|
Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
|
Financial Liabilities that are not Measured at Fair Value on a Recurring Basis
The following table presents certain information for our financial liability that is not measured at fair value on a recurring basis at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
6.50% Senior Notes due 2024
|
$
|
900,000
|
|
|
$
|
823,500
|
|
|
$
|
900,000
|
|
|
$
|
834,750
|
|
Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices in markets that are not active. Therefore, this debt is classified as Level 2 within the fair value hierarchy.
Financial Liabilities Measured at Fair Value on a Recurring Basis
Contingent deferred acquisition consideration 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 5 of the Notes to the
Unaudited Condensed Consolidated Financial Statements
included herein for additional information regarding contingent deferred acquisition consideration.
At
June 30, 2019
and
December 31, 2018
, the carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximated fair value because of their short-term maturity.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets are measured at fair value on a nonrecurring basis, primarily goodwill and intangible assets (a Level 3 fair value assessment). Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. The Company did not recognize an impairment of goodwill or intangible assets in the
three and six months ended June 30, 2019
or
June 30, 2018
11. Supplemental Information
Accounts Payable, Accruals and Other Liabilities
At
June 30, 2019
and
December 31, 2018
, accruals and other liabilities included accrued media of
$151,143
and
$180,586
, respectively; and also included amounts due to noncontrolling interest holders for their share of profits. See Note 9 of the Notes to the
Unaudited Condensed Consolidated Financial Statements
included herein for additional information regarding noncontrolling interest holders share of profits.
Goodwill and Indefinite Lived Intangibles
Goodwill and indefinite life intangible assets (trademarks) 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. Goodwill balances as of
June 30, 2019
and
December 31, 2018
, were
$743,582
and
$740,955
, respectively.
Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in interim periods.
Income tax expense for the
three months ended June 30, 2019
was
$2,088
(on income of
$9,215
resulting in an effective tax rate of
22.7%
) compared to an expense of
$1,977
(on income of
$7,956
resulting in an effective tax rate of
24.8%
) for the
three months ended June 30, 2018
. The change in the effective tax rate was primarily driven by the jurisdictional mix of earnings.
Income tax expense for the
six months ended June 30, 2019
was $2,835 (on income of $10,195 resulting in an effective tax rate of 27.8%) compared to a benefit of $6,353 (on a loss of $28,979 resulting in an effective tax rate of 21.9%) for the
six months ended June 30, 2018
. The change in the effective tax rate was primarily driven by the jurisdictional mix of earnings.
12. Segment Information
The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”) to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.
Due to changes in the composition of certain business and the Company’s internal management and reporting structure during 2019, reportable segment results for the 2018 periods presented have been recast to reflect the reclassification of certain businesses between segments. The changes were as follows:
|
|
•
|
Doner, previously within the Global Integrated Agencies reportable segment is now included within the Domestic Creative Agencies reportable segment.
|
|
|
•
|
HL Group Partners, previously within the Specialist Communications reportable segment, and Redscout, previously within the All Other category, are now included in the Yes & Company operating segment. The Yes & Company operating segment previously within the Media Services reportable segment is now included within the Domestic Creative Agencies reportable segment.
|
|
|
•
|
Attention, previously within the Forsman & Bodenfors operating segment has operationally merged into MDC Media Partners, which is included within the Media Services reportable segment.
|
The
four
reportable segments that result from applying the aggregation criteria are as follows: “Global Integrated Agencies”; “Domestic Creative Agencies”; “Specialist Communications”; and “Media Services.” In addition, the Company combines and discloses those operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described throughout the Notes to the
Unaudited Condensed Consolidated Financial Statements
included herein and Note 2 of the Company’s Form 10-K for the year ended December 31, 2018.
|
|
•
|
The
Global Integrated Agencies
reportable segment is comprised of the Company’s
four
global, integrated operating segments (72andSunny, Anomaly, Crispin Porter + Bogusky, and Forsman & Bodenfors) serving multinational clients around the world. These operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of global clients and the methods used to provide services; and (iii) the extent to which they may be impacted by global economic and geopolitical risks. In addition, these operating segments compete with each other for new business and from time to time have business move between them. The Company believes the historic and expected average long-term profitability is similar among the operating segments aggregated in the Global Integrated Agencies reportable segment.
|
The operating segments within the Global Integrated Agencies
reportable segment provides a range of different services for its clients, including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast).
|
|
•
|
The
Domestic Creative Agencies
reportable segment is comprised of
seven
operating segments that are primarily national advertising agencies (Colle + McVoy, Doner, Laird + Partners, Mono Advertising, Union, Yamamoto, and Yes & Company) leveraging creative capabilities at their core. These operating segments share similar characteristics related to (i) the nature of their services; (ii) the type of domestic client accounts and the methods used to provide services; and (iii) the extent to which they may be impacted by domestic economic and policy factors within North America. In addition, these operating segments compete with each other for new business and from time to time have business move between them. The Company believes the historic and expected average long- term 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
four
operating segments that are each communications agencies (Allison & Partners, Hunter, KWT Global, and Veritas) with core service offerings in public relations and related communications services. These operating segments share similar characteristics related to (i) the 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.
|
The operating segments within the Specialist Communications reportable segment provide public relations and communications services including strategy, editorial, crisis support or issues management, media training, influencer engagement, and events management.
|
|
•
|
The
Media Services
reportable segment is comprised of a single operating segment known as MDC Media Partners. MDC Media Partners, which operates primarily in North America, performs media buying and planning as 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 (through the date of sale on March 8, 2019), Instrument, Relevent, Team, Vitro, and Y Media Labs. The nature of the specialist services provided by these operating segments vary among each other and from those operating segments aggregated into the reportable segments. This results in these operating segments having current and long-term performance expectations inconsistent with those operating segments aggregated in the reportable segments. The operating segments within All Other provide a range of diverse marketing communication services, including application and website design and development, data and analytics, experiential marketing, customer research management, creative services, and branding.
|
|
|
•
|
Corporate
consists of corporate office expenses incurred in connection with the strategic resources provided to the operating segments, as well as certain other centrally managed expenses that are not fully allocated to the operating segments. These office and general expenses include (i) salaries and related expenses for corporate office employees, including employees dedicated to supporting the operating segments, (ii) occupancy expenses relating to properties occupied by all corporate office employees, (iii) other office and general expenses including professional fees for the financial statement audits and other public company costs, and (iv) certain other professional fees managed by the corporate office. Additional expenses managed by the corporate office that are directly related to the operating segments are allocated to the appropriate reportable segment and the All Other category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
154,368
|
|
|
$
|
158,163
|
|
|
$
|
284,087
|
|
|
$
|
287,686
|
|
Domestic Creative Agencies
|
65,193
|
|
|
72,971
|
|
|
132,201
|
|
|
139,625
|
|
Specialist Communication
|
47,170
|
|
|
40,304
|
|
|
86,123
|
|
|
79,128
|
|
Media Services
|
21,331
|
|
|
21,398
|
|
|
41,510
|
|
|
46,082
|
|
All Other
|
74,068
|
|
|
86,907
|
|
|
147,000
|
|
|
154,190
|
|
Total
|
$
|
362,130
|
|
|
$
|
379,743
|
|
|
$
|
690,921
|
|
|
$
|
706,711
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss):
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
20,720
|
|
|
$
|
18,352
|
|
|
$
|
24,491
|
|
|
$
|
4,760
|
|
Domestic Creative Agencies
|
8,730
|
|
|
5,077
|
|
|
14,207
|
|
|
7,955
|
|
Specialist Communication
|
6,683
|
|
|
6,216
|
|
|
13,760
|
|
|
9,944
|
|
Media Services
|
991
|
|
|
(1,719
|
)
|
|
(843
|
)
|
|
(1,738
|
)
|
All Other
|
2,949
|
|
|
15,986
|
|
|
8,962
|
|
|
22,430
|
|
Corporate
|
(16,631
|
)
|
|
(13,140
|
)
|
|
(21,454
|
)
|
|
(27,212
|
)
|
Total
|
$
|
23,442
|
|
|
$
|
30,772
|
|
|
$
|
39,123
|
|
|
$
|
16,139
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses):
|
|
|
|
|
|
|
|
Interest expense and finance charges, net
|
$
|
(16,413
|
)
|
|
$
|
(16,859
|
)
|
|
$
|
(33,174
|
)
|
|
$
|
(32,942
|
)
|
Foreign exchange gain (loss)
|
2,932
|
|
|
(6,549
|
)
|
|
8,374
|
|
|
(13,209
|
)
|
Other, net
|
(746
|
)
|
|
592
|
|
|
(4,128
|
)
|
|
1,033
|
|
Income (loss) before income taxes and equity in earnings of non-consolidated affiliates
|
9,215
|
|
|
7,956
|
|
|
10,195
|
|
|
(28,979
|
)
|
Income tax expense (benefit)
|
2,088
|
|
|
1,977
|
|
|
2,835
|
|
|
(6,353
|
)
|
Income (loss) before equity in earnings of non-consolidated affiliates
|
7,127
|
|
|
5,979
|
|
|
7,360
|
|
|
(22,626
|
)
|
Equity in earnings (losses) of non-consolidated affiliates
|
206
|
|
|
(28
|
)
|
|
289
|
|
|
58
|
|
Net income (loss)
|
7,333
|
|
|
5,951
|
|
|
7,649
|
|
|
(22,568
|
)
|
Net income attributable to the noncontrolling interest
|
(3,043
|
)
|
|
(2,545
|
)
|
|
(3,472
|
)
|
|
(3,442
|
)
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
4,290
|
|
|
$
|
3,406
|
|
|
$
|
4,177
|
|
|
$
|
(26,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
4,437
|
|
|
$
|
4,743
|
|
|
$
|
8,502
|
|
|
$
|
12,152
|
|
Domestic Creative Agencies
|
1,547
|
|
|
1,281
|
|
|
2,786
|
|
|
2,574
|
|
Specialist Communication
|
698
|
|
|
992
|
|
|
1,265
|
|
|
1,959
|
|
Media Services
|
794
|
|
|
635
|
|
|
1,485
|
|
|
1,273
|
|
All Other
|
2,966
|
|
|
3,892
|
|
|
5,025
|
|
|
5,736
|
|
Corporate
|
221
|
|
|
160
|
|
|
438
|
|
|
384
|
|
Total
|
$
|
10,663
|
|
|
$
|
11,703
|
|
|
$
|
19,501
|
|
|
$
|
24,078
|
|
|
|
|
|
|
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
1,232
|
|
|
$
|
2,475
|
|
|
$
|
4,999
|
|
|
$
|
4,935
|
|
Domestic Creative Agencies
|
522
|
|
|
1,097
|
|
|
986
|
|
|
1,507
|
|
Specialist Communication
|
52
|
|
|
52
|
|
|
78
|
|
|
239
|
|
Media Services
|
(16
|
)
|
|
74
|
|
|
(16
|
)
|
|
149
|
|
All Other
|
652
|
|
|
684
|
|
|
940
|
|
|
1,341
|
|
Corporate
|
1,192
|
|
|
1,221
|
|
|
(381
|
)
|
|
2,469
|
|
Total
|
$
|
3,634
|
|
|
$
|
5,603
|
|
|
$
|
6,606
|
|
|
$
|
10,640
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
1,816
|
|
|
$
|
2,411
|
|
|
$
|
3,234
|
|
|
$
|
4,654
|
|
Domestic Creative Agencies
|
369
|
|
|
569
|
|
|
1,063
|
|
|
1,473
|
|
Specialist Communication
|
231
|
|
|
2,208
|
|
|
482
|
|
|
2,443
|
|
Media Services
|
126
|
|
|
131
|
|
|
167
|
|
|
315
|
|
All Other
|
1,757
|
|
|
547
|
|
|
2,958
|
|
|
772
|
|
Corporate
|
18
|
|
|
24
|
|
|
19
|
|
|
32
|
|
Total
|
$
|
4,317
|
|
|
$
|
5,890
|
|
|
$
|
7,923
|
|
|
$
|
9,689
|
|
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.
See Note 2 of the Notes to the
Unaudited Condensed Consolidated Financial Statements
included herein for a summary of the Company’s revenue by geographic region for
three months ended June 30, 2019 and 2018
.
13. 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.
Deferred Acquisition Consideration and Options to Purchase.
See Notes 5 and 9 of the Notes to the
Unaudited Condensed Consolidated Financial Statements
included herein for information regarding potential payments associated with deferred acquisition consideration and the acquisition of noncontrolling shareholders’ ownership interest in subsidiaries.
Natural Disasters.
Certain of the Company’s operations are located in regions of the United States which typically are subject to hurricanes. During the
three and six months ended June 30, 2019 and 2018
these operations did not incur any material costs related to damages resulting from hurricanes.
Guarantees
. Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically
extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Commitments.
At
June 30, 2019
, the Company had
$4,744
of undrawn letters of credit.
14. New Accounting Pronouncements
Adopted In The Current Reporting Period
Effective January 1, 2019, the Company adopted ASC 842. As a result, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 840, Leases. With the adoption of ASC 842, the Company has elected to apply the package of practical expedients: (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. Additionally, the Company elected the practical expedient to not separate non-lease components from lease components for all operating leases.
The adoption of ASC 842 had a material impact on the Company’s
Unaudited Condensed Consolidated Balance Sheets
, resulting in the recognition, on January 1, 2019, of a lease liability of
$299,243
which represents the present value of the remaining lease payments, and a right-of-use asset of
$254,245
which represents the lease liability, offset by adjustments as appropriate under ASC 842. The adoption of ASC 842 did not have a material impact on the Company’s other
Unaudited Condensed Consolidated Financial Statements
.