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, 2017 (“2017 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, such as the reclassification of contingent consideration payments in the statement of cash flows in connection with the adoption of Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flow. See Note 14 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding the new guidance and reclass within the statement of cash flows.
On September 12, 2018 the Company announced that Scott Kauffman will step down as the Company’s Chairman and Chief Executive Officer. He will remain in his role as Chairman and CEO until a successor is named. Mr. Kauffman is also expected to continue as a member of the MDC Board of Directors for the remainder of his current term.
On September 20, 2018, the Company announced its intention to explore and evaluate potential strategic alternatives, which may result in, among other things, the possible sale of the Company. The Company has not made a decision to pursue any specific strategic alternative, and there is no timetable for completing the strategic review process. This review process is proceeding in parallel with the Company’s search to identify a successor CEO. There can be no assurance that the Company will complete any specific action or transaction.
2. Revenue
Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (the “FASB”) ASC Topic 606, Revenue from Contracts with Customers (“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 FASB ASC Topic 605, Revenue Recognition (“ASC 605”). See Note 14 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for additional details surrounding the Company’s adoption of ASC 606. The Company’s policy surrounding revenue under ASC 605 is described in Note 2 of Item 8 of the Company’s 2017 Form 10-K. The policies described herein refer to those in effect as of January 1, 2018.
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 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.
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.
Although certain of our performance obligations are recognized at a point in time, we typically satisfy our performance obligations over time, as services are performed. 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. Fees for services are typically recognized using input methods that correspond with efforts incurred to date in relation to total estimated efforts to complete the contract.
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 for our client, then we generally act as agent and record revenue equal to the net amount retained, when the fee or commission is earned. We have determined that 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 nine months ended September 30, 2018 and 2017
, and the impact of adoption of ASC 606:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
Industry
|
Reportable Segment
|
|
As reported
|
|
Adjustment to exclude impact of Adoption of ASC 606
|
|
Adjusted
|
|
|
Food & Beverage
|
All
|
|
$
|
80,919
|
|
|
$
|
(1,212
|
)
|
|
$
|
79,707
|
|
|
$
|
80,247
|
|
Retail
|
All
|
|
40,421
|
|
|
(4,457
|
)
|
|
35,964
|
|
|
43,202
|
|
Consumer Products
|
All
|
|
40,124
|
|
|
1,136
|
|
|
41,260
|
|
|
43,825
|
|
Communications
|
All
|
|
46,779
|
|
|
8,337
|
|
|
55,116
|
|
|
46,649
|
|
Automotive
|
All
|
|
21,282
|
|
|
734
|
|
|
22,016
|
|
|
30,547
|
|
Technology
|
All
|
|
26,005
|
|
|
171
|
|
|
26,176
|
|
|
25,748
|
|
Healthcare
|
All
|
|
33,751
|
|
|
84
|
|
|
33,835
|
|
|
31,181
|
|
Financials
|
All
|
|
30,378
|
|
|
283
|
|
|
30,661
|
|
|
26,631
|
|
Transportation and Travel/Lodging
|
All
|
|
19,357
|
|
|
1,333
|
|
|
20,690
|
|
|
14,412
|
|
Other
|
All
|
|
36,814
|
|
|
1,763
|
|
|
38,577
|
|
|
33,358
|
|
|
|
|
$
|
375,830
|
|
|
$
|
8,172
|
|
|
$
|
384,002
|
|
|
$
|
375,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
Industry
|
Reportable Segment
|
|
As reported
|
|
Adjustment to exclude impact of Adoption of ASC 606
|
|
Adjusted
|
|
|
Food & Beverage
|
All
|
|
$
|
234,203
|
|
|
$
|
4,171
|
|
|
$
|
238,374
|
|
|
$
|
225,873
|
|
Retail
|
All
|
|
116,832
|
|
|
(2,685
|
)
|
|
114,147
|
|
|
134,993
|
|
Consumer Products
|
All
|
|
118,097
|
|
|
362
|
|
|
118,459
|
|
|
119,554
|
|
Communications
|
All
|
|
128,232
|
|
|
20,519
|
|
|
148,751
|
|
|
150,703
|
|
Automotive
|
All
|
|
67,070
|
|
|
6,809
|
|
|
73,879
|
|
|
96,832
|
|
Technology
|
All
|
|
71,085
|
|
|
(139
|
)
|
|
70,946
|
|
|
72,620
|
|
Healthcare
|
All
|
|
101,753
|
|
|
603
|
|
|
102,356
|
|
|
92,380
|
|
Financials
|
All
|
|
83,079
|
|
|
1,194
|
|
|
84,273
|
|
|
73,777
|
|
Transportation and Travel/Lodging
|
All
|
|
53,021
|
|
|
2,109
|
|
|
55,130
|
|
|
42,187
|
|
Other
|
All
|
|
109,169
|
|
|
6,233
|
|
|
115,402
|
|
|
102,113
|
|
|
|
|
$
|
1,082,541
|
|
|
$
|
39,176
|
|
|
$
|
1,121,717
|
|
|
$
|
1,111,032
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
Geographic Location
|
Reportable Segment
|
|
As reported
|
|
Adjustment to exclude impact of Adoption of ASC 606
|
|
Adjusted
|
|
|
United States
|
All
|
|
$
|
296,544
|
|
|
$
|
1,899
|
|
|
$
|
298,443
|
|
|
$
|
289,701
|
|
Canada
|
All
|
|
32,132
|
|
|
286
|
|
|
32,418
|
|
|
31,418
|
|
Other
|
All
|
|
47,154
|
|
|
5,987
|
|
|
53,141
|
|
|
54,681
|
|
|
|
|
$
|
375,830
|
|
|
$
|
8,172
|
|
|
$
|
384,002
|
|
|
$
|
375,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
Geographic Location
|
Reportable Segment
|
|
As reported
|
|
Adjustment to exclude impact of Adoption of ASC 606
|
|
Adjusted
|
|
|
United States
|
All
|
|
$
|
848,336
|
|
|
$
|
16,940
|
|
|
$
|
865,276
|
|
|
$
|
868,847
|
|
Canada
|
All
|
|
91,597
|
|
|
(2,352
|
)
|
|
89,245
|
|
|
88,471
|
|
Other
|
All
|
|
142,608
|
|
|
24,588
|
|
|
167,196
|
|
|
153,714
|
|
|
|
|
$
|
1,082,541
|
|
|
$
|
39,176
|
|
|
$
|
1,121,717
|
|
|
$
|
1,111,032
|
|
See Note 12 of the Notes to the Unaudited Condensed Consolidated Financial Statements for information related to the nature of the services offered by the Company’s reportable segments.
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
$92,900
and
$54,177
at
September 30, 2018
and
December 31, 2017
, 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
$59,317
and
$31,146
at
September 30, 2018
and
December 31, 2017
, 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 the production process.
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
September 30, 2018
and
December 31, 2017
were
$182,305
and
$148,133
, respectively. The increase in the advance billings balance of
$34,172
for the nine months ended September 30, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by
$85,665
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.
Changes in the contract asset and liability balances during the nine months ended
September 30, 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.
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
(16,125
|
)
|
|
$
|
18,493
|
|
|
$
|
(42,135
|
)
|
|
$
|
19,180
|
|
Accretion on convertible preference shares
|
(2,109
|
)
|
|
(1,948
|
)
|
|
(6,204
|
)
|
|
(4,365
|
)
|
Net income allocated to convertible preference shares
|
—
|
|
|
(2,408
|
)
|
|
—
|
|
|
(1,782
|
)
|
Numerator for basic income (loss) per common share - Net income (loss) attributable to MDC Partners Inc. common shareholders
|
(18,234
|
)
|
|
14,137
|
|
|
(48,339
|
)
|
|
13,033
|
|
Adjustment to net income allocated to convertible preference shares
|
—
|
|
|
13
|
|
|
—
|
|
|
9
|
|
Numerator for diluted income (loss) per common share- Net income (loss) attributable to MDC Partners Inc. common shareholders
|
$
|
(18,234
|
)
|
|
$
|
14,150
|
|
|
$
|
(48,339
|
)
|
|
$
|
13,042
|
|
Denominator
|
|
|
|
|
|
|
|
|
Denominator for basic income (loss) per common share - weighted average common shares
|
57,498,661
|
|
|
57,566,707
|
|
|
57,117,797
|
|
|
53,915,536
|
|
Impact of stock options and non-vested stock under employee stock incentive plans
|
—
|
|
|
376,373
|
|
|
—
|
|
|
312,672
|
|
Denominator for diluted income (loss) per common share - adjusted weighted shares and assumed conversions
|
57,498,661
|
|
|
57,943,080
|
|
|
57,117,797
|
|
|
54,228,208
|
|
Basic income (loss) per common share
|
$
|
(0.32
|
)
|
|
$
|
0.25
|
|
|
$
|
(0.85
|
)
|
|
$
|
0.24
|
|
Diluted income (loss) per common share
|
$
|
(0.32
|
)
|
|
$
|
0.24
|
|
|
$
|
(0.85
|
)
|
|
$
|
0.24
|
|
Anti-dilutive stock awards
1,524,218
-
1,524,218
-
Restricted stock and restricted stock unit awards of
1,015,637
and
1,443,921
for the three and nine months ended
September 30, 2018
and
2017
, 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 contingency was not satisfied at
September 30, 2018
or
2017
. In addition, there were
95,000
shares of Preference Shares outstanding which were convertible into
10,755,602
and
9,936,514
Class A common shares at
September 30, 2018
and
2017
, respectively. These Preference Shares were anti-dilutive for each period presented in the table above and are therefore excluded from the diluted income (loss) per common share calculation.
4. 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
(subject to a working capital adjustment) and additional deferred acquisition payments estimated to be a nominal amount. 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 payments to be made on or before April 2020. 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 estimated 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 preliminary 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
$29,514
. 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 and prior year are 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 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.
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
$3,352
, increased fixed deferred consideration liability by
$7,208
, reduced redeemable noncontrolling interests by
$269
, reduced noncontrolling interests by
$11,947
, and increased additional paid-in capital by
$2,652
. In addition, a stock-based compensation charge of
$997
has been recognized representing the consideration paid in excess of the fair value of the interest acquired.
2017 Dispositions
In 2017, the Company sold all of its ownership interests in three subsidiaries resulting in recognition of a net loss on sale of business of
$1,424
. The net assets reflected in the calculation of the net loss on sale was inclusive of goodwill of
$17,593
. Goodwill was allocated to subsidiaries based on 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
.
The Company expenses acquisition related costs as incurred. For the
three and nine months ended September 30, 2018 and 2017
,
$232
and
$943
, respectively, and
$216
and
$693
respectively, of acquisition related costs were charged to operations.
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, and a reconciliation to the amounts reported on the balance sheets as of
September 30, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Beginning balance of contingent payments
|
$
|
119,086
|
|
|
$
|
224,754
|
|
Payments
(1)
|
(54,947
|
)
|
|
(110,234
|
)
|
Additions - acquisitions and step up transactions
|
12,816
|
|
|
—
|
|
Redemption value adjustments
(2)
|
16,276
|
|
|
3,273
|
|
Foreign translation adjustment
|
(22
|
)
|
|
1,293
|
|
Ending balance of contingent payments
|
$
|
93,209
|
|
|
$
|
119,086
|
|
Fixed payments
|
1,520
|
|
|
3,340
|
|
|
$
|
94,729
|
|
|
$
|
122,426
|
|
|
|
(1)
|
For the year 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, respectively, 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.
|
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 September 30,
|
|
Nine months ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Expense (Income) attributable to fair value adjustments
|
$
|
11,003
|
|
|
$
|
(2,462
|
)
|
|
$
|
8,522
|
|
|
$
|
12,152
|
|
Stock-based compensation
|
3,076
|
|
|
3,160
|
|
|
7,758
|
|
|
7,080
|
|
6. Debt
The Company’s indebtedness was comprised as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31, 2017
|
Revolving credit agreement
|
$
|
102,990
|
|
|
$
|
—
|
|
6.50% Notes due 2024
|
900,000
|
|
|
900,000
|
|
Debt issuance costs
|
(15,350
|
)
|
|
(17,587
|
)
|
|
987,640
|
|
|
882,413
|
|
Obligations under capital leases
|
600
|
|
|
706
|
|
|
988,240
|
|
|
883,119
|
|
Less: Current portion of long-term debt
|
360
|
|
|
313
|
|
|
$
|
987,880
|
|
|
$
|
882,806
|
|
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.
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 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
September 30, 2018
.
Revolving
Credit Agreement
MDC, Maxxcom Inc. (a subsidiary of MDC) and each of their subsidiaries party thereto entered into an amended and restated,
$325,000
senior secured revolving credit agreement due
May 3, 2021
(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
1.50%
in the case of Base Rate Loans and
1.75%
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. 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.
At
September 30, 2018
, the Company had issued
$5,248
of undrawn outstanding letters of credit.
The foregoing descriptions of the Indenture and the Credit Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the agreements.
7. Share Capital
The Company’s issued and outstanding share capital is as follows:
Series 4 Convertible Preference Shares
A total of
95,000
, non-voting convertible preference shares, all of which were issued and outstanding as of
September 30, 2018
and
December 31, 2017
. See Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information.
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
57,511,684
and
56,371,376
Class A Shares issued and outstanding as of
September 30, 2018
and
December 31, 2017
, respectively.
On June 6, 2018, the Company’s shareholders approved additional authorized Class A Shares of
1,250,000
to be added to the Company’s 2016 Stock Incentive Plan, for a total of
2,750,000
authorized Class A Shares under the 2016 Stock Incentive Plan.
Class B Common Shares (“Class B Shares”)
An unlimited number of voting shares, carrying
20
votes each, convertible at any time at the option of the holder into one Class A share for each Class B share. There were
3,755
Class B Shares issued and outstanding as of
September 30, 2018
and
December 31, 2017
.
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 balance sheet. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity at their estimated acquisition date redemption value and adjusted at each reporting period for changes to their estimated redemption value through additional paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. On occasion, the Company may initiate a renegotiation to acquire an incremental ownership interest and the amount of consideration paid may differ materially from the balance sheet amounts.
Noncontrolling Interests
Changes in amounts due to noncontrolling interest holders included in accrued and other liabilities for the year ended
December 31, 2017
and
nine months ended September 30, 2018
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
|
5,900
|
|
Distributions made
|
(10,410
|
)
|
Other
(1)
|
196
|
|
Balance, September 30, 2018
|
$
|
6,716
|
|
|
|
(1)
|
Other consists primarily of business acquisitions, sale of a business, step-up transactions, and cumulative translation adjustments.
|
Changes in the Company’s ownership interests in our less than 100% owned subsidiaries during the three and nine months ended September 30, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
(16,125
|
)
|
|
$
|
18,493
|
|
|
$
|
(42,135
|
)
|
|
$
|
19,180
|
|
Transfers from the noncontrolling interest:
|
|
|
|
|
|
|
|
Increase (Decrease) in MDC Partners Inc. paid-in capital for purchase of equity interests in excess of Redeemable Noncontrolling Interests and Noncontrolling Interests
|
4,975
|
|
|
(337
|
)
|
|
3,809
|
|
|
2,315
|
|
Net transfers from noncontrolling interests
|
$
|
4,975
|
|
|
$
|
(337
|
)
|
|
$
|
3,809
|
|
|
$
|
2,315
|
|
Change from net income (loss) attributable to MDC Partners Inc. and transfers to noncontrolling interests
|
$
|
(11,150
|
)
|
|
$
|
18,156
|
|
|
$
|
(38,326
|
)
|
|
$
|
21,495
|
|
Redeemable Noncontrolling Interests
The following table presents changes in redeemable noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
Year Ended December 31, 2017
|
Beginning Balance
|
$
|
62,886
|
|
|
$
|
60,180
|
|
Redemptions
|
(9,791
|
)
|
|
(910
|
)
|
Granted
|
—
|
|
|
1,666
|
|
Changes in redemption value
|
4,409
|
|
|
1,498
|
|
Currency translation adjustments
|
(311
|
)
|
|
452
|
|
Ending Balance
|
$
|
57,193
|
|
|
$
|
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
2018
to
2023
. It is not determinable, at this time, if or when the owners of these rights will exercise all or a portion of these rights.
The amount payable by the Company to purchase the noncontrolling shareholders’ incremental ownership interests if exercised is dependent on various valuation formulas and on future events, such as the average earnings of the relevant subsidiary through the date of exercise, the growth rate of the earnings of the relevant subsidiary during that period and, in some cases, the currency exchange rate at the date of payment. The ultimate amount payable relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised.
The redeemable noncontrolling interest of
$57,193
as of
September 30, 2018
, consists of
$14,320
assuming that the subsidiaries perform over the relevant future periods at their discounted cash flows earnings level and such rights are exercised,
$38,540
upon termination of such owner’s employment with the applicable subsidiary or death and
$4,333
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
nine months ended September 30, 2018 and 2017
, there was
no
related impact on the Company’s loss per share calculation.
9. 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. In connection with the closing of the transaction, effective
March 7, 2017
, the Company increased the size of its Board of Directors (the “Board”) to seven members and appointed one nominee designated by the Purchaser. 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 will be
$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.
The Preference Shares’ liquidation preference accretes at
8.0%
per annum, compounded quarterly until the five-year anniversary of the Issue Date. During the
nine months ended September 30, 2018
, the Preference Shares accreted at a monthly rate of approximately
$7.40
per Preference Share, for total accretion of
$6,204
, bringing the aggregate liquidation preference to
$107,556
as of
September 30, 2018
. 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.
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.
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
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
6.50% Senior Notes due 2024
|
$
|
900,000
|
|
|
$
|
798,750
|
|
|
$
|
900,000
|
|
|
$
|
904,500
|
|
Our long-term debt includes fixed rate debt. The fair value of this instrument is based on quoted market prices.
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 on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period and, in some cases, the currency exchange rate as of the date of payment (Level 3). See Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding contingent deferred acquisition consideration.
At
September 30, 2018
and
December 31, 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. The Company does not disclose the fair value for equity method investments or investments held at cost as it is not practical to estimate fair value since there is no readily available market data.
Non-financial Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Certain non-financial assets are measured at fair value on a nonrecurring basis, primarily goodwill, intangible assets, and property and equipment. Accordingly, these assets are not measured and adjusted to fair value on an ongoing basis but are subject to periodic evaluations for potential impairment. During the third quarter of 2018, the Company performed an interim goodwill impairment evaluation resulting in an impairment of goodwill. See Note 11 of the Notes to the Unaudited Condensed Consolidated Financial Statements for information related to the measurement of the fair value of goodwill and the impairment.
11. Supplemental Information
Accounts Payable, Accruals and Other Liabilities
At
September 30, 2018
and
December 31, 2017
, accounts payable included
$54,320
and
$41,989
of outstanding checks, respectively.
At
September 30, 2018
and
December 31, 2017
, accruals and other liabilities included accrued media of
$173,222
and
$207,482
, respectively; and also include amounts due to noncontrolling interest holders for their share of profits. See Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding noncontrolling interest holders share of profits.
Goodwill and Other Asset Impairment
The Company recognized an impairment of goodwill and other assets of
$21,008
in the three months ended and
$23,325
for the
nine months ended September 30, 2018
. The impairment primarily consists of the write-down of goodwill equal to the excess
carrying value above the fair value of a reporting unit within the Global Integrated Agencies reportable segment and the full write-down of a trademark for a reporting unit also within the Global Integrated Agencies reportable segment. The trademark is no longer in active use given its merger with another reporting unit in the third quarter of 2018. See Note 12 of the Notes to the Unaudited Condensed Consolidated Financial Statements for information related to the merger.
During the third quarter of 2018, the Company performed an interim goodwill impairment test resulting in, along with the impairment mentioned above, the fair value of a reporting unit, with goodwill of approximately
$130,000
, exceeding its carrying value by a minimal percentage. A reduction in the projected long-term operating performance of this reporting unit, market declines, changes in discount rates or other conditions could result in an impairment in the future. In connection with the interim impairment test, the Company used a combination of the income approach, which incorporates the use of a discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. The Company applied an equal weighting to the income and market approaches for the impairment test. The income approach and the market approach both require the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates. This methodology is a Level 3 fair value assessment.
Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in the quarter. Our 2018 estimated annual effective tax rate of
26.3%
differs from the Canadian statutory rate of
26.5%
primarily due to exclusion of income attributable to minority interest from the annual forecasted income, partially offset by U.S. federal tax impact of Global Intangible Low Taxed Income (GILTI) inclusion as well as certain non-deductible expenditures.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions, including a reduction of the U.S. corporate income tax rate to
21%
effective January 1, 2018. The Company is required to recognize the effect of tax law changes in the period of enactment, which required the Company to re-measure its U.S. deferred tax assets and liabilities and to reassess the net realizability of its deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. The Company recorded a provisional tax expense of
$26,674
at year-end related to re-measurement of deferred tax assets and liabilities due to change in corporate tax rate from
35%
to
21%
. The Company recorded no tax expense related to transition tax.
The 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. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return (the “routine return”), which is defined as the excess of (1) 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment (QBAI) of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. A deduction is permitted to a domestic corporation in an amount up to 50% of the sum of the GILTI inclusion and the amount treated as a dividend because the corporation has claimed a foreign tax credit (FTC) as a result of the inclusion of the GILTI amount in income.
During the quarter ended September 30, 2018, the Company evaluated additional guidance provided by the tax authorities and has completed its tax accounting for the provisions of the Act in accordance with SAB 118. The Company has not recorded an adjustment to its provisional estimate during the period ended September 30, 2018 and has made a policy election to record tax effects of GILTI as a period expense when incurred.
The Company has unrecognized tax benefits at September 30, 2018 of
$1,198
, as compared to
$1,556
at December 31, 2017. It is reasonably possible that the amount of unrecognized tax benefits could decrease by a range of
$400
to
$500
within the next twelve months as a result of expiration of certain statute of limitations.
Income tax expense for the
three months ended September 30, 2018
was
$2,986
(on a loss of
$10,981
resulting in an effective tax rate of 27.1%) compared to
$9,049
(on income of
$29,611
resulting in an effective tax rate of 30.6%) for the
three months ended September 30, 2017
, representing a decrease of
$6,063
. The variance in tax expense year over year was primarily driven by impairments and non-deductible stock compensation in the current period for which tax benefit was not recognized as well as the impact of a valuation allowance in the U.S. in the prior period.
Our effective tax rate for the nine months ended September 30, 2018 was
8.4%
compared to
42.5%
for the nine months ended September 30, 2017. Income tax expense for the nine months ended September 30, 2018 was a benefit of
$3,367
compared to an expense of
$17,659
for the nine months ended September 30, 2017, representing a decrease of
$21,026
. The variance in the tax expense year over year was primarily driven by jurisdictional mix of earnings, non-deductible impairments and stock compensation in the current period for which tax benefit was not recognized as well as the impact of a valuation allowance in the U.S. in the prior period.
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 Company’s internal management and reporting structure during 2018, reportable segment results for the 2017 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
|
In the third quarter of 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.” 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, 2017.
|
|
•
|
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
177,398
|
|
|
$
|
196,974
|
|
|
$
|
510,360
|
|
|
$
|
585,290
|
|
Domestic Creative Agencies
|
24,798
|
|
|
28,096
|
|
|
75,503
|
|
|
77,325
|
|
Specialist Communications
|
42,636
|
|
|
40,670
|
|
|
129,724
|
|
|
125,470
|
|
Media Services
|
35,022
|
|
|
38,315
|
|
|
104,460
|
|
|
122,207
|
|
All Other
|
95,976
|
|
|
71,745
|
|
|
262,494
|
|
|
200,740
|
|
Total
|
$
|
375,830
|
|
|
$
|
375,800
|
|
|
$
|
1,082,541
|
|
|
$
|
1,111,032
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
Global Integrated Agencies*
|
$
|
2,633
|
|
|
$
|
20,069
|
|
|
$
|
6,099
|
|
|
$
|
33,240
|
|
Domestic Creative Agencies
|
5,532
|
|
|
6,627
|
|
|
14,451
|
|
|
15,411
|
|
Specialist Communications
|
4,677
|
|
|
4,775
|
|
|
14,471
|
|
|
13,423
|
|
Media Services
|
1,387
|
|
|
2,555
|
|
|
407
|
|
|
9,169
|
|
All Other
|
6,413
|
|
|
13,920
|
|
|
28,565
|
|
|
29,740
|
|
Corporate
|
(18,024
|
)
|
|
(10,726
|
)
|
|
(45,236
|
)
|
|
(28,983
|
)
|
Total
|
$
|
2,618
|
|
|
$
|
37,220
|
|
|
$
|
18,757
|
|
|
$
|
72,000
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest expense and finance charges, net
|
(17,063
|
)
|
|
(16,258
|
)
|
|
(50,005
|
)
|
|
(48,309
|
)
|
Foreign exchange transaction gain (loss)
|
3,275
|
|
|
9,913
|
|
|
(9,934
|
)
|
|
18,798
|
|
Other, net
|
189
|
|
|
(1,264
|
)
|
|
1,222
|
|
|
(986
|
)
|
Income (loss) before income taxes and equity in earnings (losses) of non-consolidated affiliates
|
(10,981
|
)
|
|
29,611
|
|
|
(39,960
|
)
|
|
41,503
|
|
Income tax expense (benefit)
|
2,986
|
|
|
9,049
|
|
|
(3,367
|
)
|
|
17,659
|
|
Income (loss) before equity in earnings (losses) of non-consolidated affiliates
|
(13,967
|
)
|
|
20,562
|
|
|
(36,593
|
)
|
|
23,844
|
|
Equity in earnings of non-consolidated affiliates
|
300
|
|
|
1,422
|
|
|
358
|
|
|
1,924
|
|
Net income (loss)
|
(13,667
|
)
|
|
21,984
|
|
|
(36,235
|
)
|
|
25,768
|
|
Net income attributable to the noncontrolling interest
|
(2,458
|
)
|
|
(3,491
|
)
|
|
(5,900
|
)
|
|
(6,588
|
)
|
Net income (loss) attributable to MDC Partners Inc.
|
$
|
(16,125
|
)
|
|
$
|
18,493
|
|
|
$
|
(42,135
|
)
|
|
$
|
19,180
|
|
* A goodwill and other asset impairment charge of $21,008 was recognized within the Global Integrated Agencies reportable segment in the three and nine months ended of 2018. See Note 11 of the Notes to the Unaudited Condensed Consolidated Financial Statements for information related to the impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
5,154
|
|
|
$
|
6,365
|
|
|
$
|
18,499
|
|
|
$
|
17,913
|
|
Domestic Creative Agencies
|
396
|
|
|
375
|
|
|
1,185
|
|
|
1,172
|
|
Specialist Communications
|
1,134
|
|
|
1,220
|
|
|
3,163
|
|
|
3,657
|
|
Media Services
|
781
|
|
|
1,011
|
|
|
2,315
|
|
|
3,232
|
|
All Other
|
3,470
|
|
|
2,026
|
|
|
9,467
|
|
|
6,078
|
|
Corporate
|
199
|
|
|
255
|
|
|
583
|
|
|
864
|
|
Total
|
$
|
11,134
|
|
|
$
|
11,252
|
|
|
$
|
35,212
|
|
|
$
|
32,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
3,360
|
|
|
$
|
3,840
|
|
|
$
|
8,492
|
|
|
$
|
9,912
|
|
Domestic Creative Agencies
|
175
|
|
|
187
|
|
|
945
|
|
|
534
|
|
Specialist Communications
|
43
|
|
|
659
|
|
|
542
|
|
|
2,264
|
|
Media Services
|
112
|
|
|
161
|
|
|
282
|
|
|
495
|
|
All Other
|
932
|
|
|
1,056
|
|
|
2,532
|
|
|
2,066
|
|
Corporate
|
1,620
|
|
|
477
|
|
|
4,089
|
|
|
1,599
|
|
Total
|
$
|
6,242
|
|
|
$
|
6,380
|
|
|
$
|
16,882
|
|
|
$
|
16,870
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Global Integrated Agencies
|
$
|
2,418
|
|
|
$
|
1,950
|
|
|
$
|
7,875
|
|
|
$
|
17,645
|
|
Domestic Creative Agencies
|
371
|
|
|
367
|
|
|
860
|
|
|
980
|
|
Specialist Communications
|
743
|
|
|
206
|
|
|
3,207
|
|
|
673
|
|
Media Services
|
428
|
|
|
2,308
|
|
|
845
|
|
|
4,107
|
|
All Other
|
1,551
|
|
|
2,317
|
|
|
2,380
|
|
|
4,896
|
|
Corporate
|
32
|
|
|
1
|
|
|
65
|
|
|
4
|
|
Total
|
$
|
5,543
|
|
|
$
|
7,149
|
|
|
$
|
15,232
|
|
|
$
|
28,305
|
|
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 and nine months ended September 30, 2018 and 2017
.
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.
Dismissal of Class Action Litigation in Canada.
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.
Antitrust Subpoena.
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 are fully cooperating with this confidential investigation. Specifically, the Company
and its subsidiary are providing information and engaging in discussions with the DOJ, including preliminary discussions regarding the feasibility of a potential settlement with the DOJ. However, there can be no assurance as to the timing of any settlement or that a settlement will be reached on any particular terms or at all. Moreover, the DOJ may determine to expand the scope of its investigation or initiate a proceeding to bring charges against our subsidiary or one or more members of the subsidiary agency’s former management. The DOJ may also seek to impose monetary sanctions.
Deferred Acquisition Consideration and Options to Purchase.
See Note 5 and 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements 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
nine months ended September 30, 2018 and 2017
, these operations did not incur any material costs related to damages resulting from hurricanes.
Guarantees
. Generally, the Company has indemnified the purchasers of certain assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable.
Commitments.
At
September 30, 2018
, the Company had
$5,248
of undrawn letters of credit. In addition, the Company has commitments to fund investments in an aggregate amount of
$60
.
14. New Accounting Pronouncements
Adopted In The Current Reporting Period
Effective January 1, 2018, the Company adopted FASB ASC Topic 606, Revenue from Contracts with Customers (“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 FASB ASC Topic 605, Revenue Recognition (“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 unaudited condensed consolidated statement of operations during the three and nine months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
As Reported
|
|
Adjustments
|
|
Adjusted to Exclude Adoption of ASC 606
|
Revenue - Services
|
|
$
|
375,830
|
|
|
$
|
8,172
|
|
|
$
|
384,002
|
|
Costs of services sold
|
|
$
|
238,690
|
|
|
$
|
14,122
|
|
|
$
|
252,812
|
|
Operating profit (loss)
|
|
$
|
2,618
|
|
|
$
|
(5,950
|
)
|
|
$
|
(3,332
|
)
|
Net loss attributable to MDC Partners, Inc. common shareholders
|
|
$
|
(18,234
|
)
|
|
$
|
(4,700
|
)
|
|
$
|
(22,934
|
)
|
Loss per common share - basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
As Reported
|
|
Adjustments
|
|
Adjusted to Exclude Adoption of ASC 606
|
Revenue - Services
|
|
$
|
1,082,541
|
|
|
$
|
39,176
|
|
|
$
|
1,121,717
|
|
Costs of services sold
|
|
$
|
735,110
|
|
|
$
|
48,083
|
|
|
$
|
783,193
|
|
Operating profit (loss)
|
|
$
|
18,757
|
|
|
$
|
(8,907
|
)
|
|
$
|
9,850
|
|
Net loss attributable to MDC Partners, Inc. common shareholders
|
|
$
|
(48,339
|
)
|
|
$
|
(6,085
|
)
|
|
$
|
(54,424
|
)
|
Loss per common share - basic and diluted
|
|
$
|
(0.85
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.95
|
)
|
The impact on the balance sheets and shareholders’ deficit as of and for the nine months ended
September 30, 2018
was immaterial. There was no effect on other comprehensive income (loss) and the statement of cash flows for the three and nine months ended September 30, 2018 and 2017.
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 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,
$36,570
of an acquisition-related contingent consideration payment of
$89,126
, 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
nine months ended September 30, 2017
. 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.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Cuts and Jobs Act (the “Act”). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. During the quarter ended September 30, 2018 the Company has made a policy election to record tax effects of GILTI as an expense in the period incurred.
Standard 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. In July 2018, the FASB issued ASU 2018-11 to provide 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 financial statements. The Company plans to adopt the standard on its effective date of January 1, 2019 using the modified adoption method. The Company is in the process of reviewing its lease contracts, updating its accounting policies, and implementing a new system as well as processes and internal controls to support the Company’s financial reporting and disclosure under the new standard. The Company is not yet able to assess 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.