10-K 1 mdca-20191231x10knew.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
 
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 001-13718
 
 
MDC PARTNERS INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Canada
 
98-0364441
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
330 Hudson Street, 10th Floor, New York, New York 10013
(646) 429-1800
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbols
 
Name of Each Exchange on Which Registered
Class A Subordinate Voting Shares, no par value
 
MDCA
 
NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None.
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer ý Non-accelerated filer o Smaller reporting company ý Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the shares of all classes of voting and non-voting common stock of the registrant held by non-affiliates as of June 28, 2019, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $140.7 million, computed upon the basis of the closing sales price $2.52 of the Class A subordinate voting shares on that date.
As of February 21, 2020, there were 72,166,854 outstanding shares of Class A subordinate voting shares without par value, and 3,749 outstanding shares of Class B multiple voting shares without par value, of the registrant.


DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement relating to the 2020 Annual General Meeting of Stockholders are incorporated by reference in Part III of this report.




MDC PARTNERS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
Page
PART I
PART II
PART III
PART IV
 




References in this Annual Report on Form 10-K to “MDC Partners,” “MDC,” the “Company,” “we,” “us” and “our” refer to MDC Partners Inc. and, unless the context otherwise requires or otherwise is expressly stated, its subsidiaries. References in this Annual Report on Form 10-K to “Partner Firms” generally refer to the Company’s subsidiary agencies.
All dollar amounts are stated in U.S. dollars unless otherwise stated.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.


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FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. The Company’s representatives may also make forward-looking statements orally or in writing from time to time. Statements in this document that are not historical facts, including statements about the Company’s beliefs and expectations, recent business and economic trends, potential acquisitions, and estimates of amounts for redeemable noncontrolling interests and deferred acquisition consideration, constitute forward-looking statements. These statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined in this section. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the Company’s control. Therefore, you should not place undue reliance on such statements. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events, if any.
Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such risk factors include, but are not limited to, the following:
risks associated with international, national and regional economic conditions that could affect the Company or its clients, including as a result of the recent coronavirus outbreak;
the Company’s ability to attract new clients and retain existing clients;
reduction in client spending and changes in client advertising, marketing and corporate communications requirements;
financial failure of the Company’s clients;
the Company’s ability to retain and attract key employees;
the Company’s ability to achieve the full amount of its stated cost saving initiatives;
the Company’s implementation of strategic initiatives;
the Company’s ability to remain in compliance with its debt agreements and the Company’s ability to finance its contingent payment obligations when due and payable, including but not limited to those relating to redeemable noncontrolling interests and deferred acquisition consideration;
the successful completion and integration of acquisitions which complement and expand the Company’s business capabilities; and
foreign currency fluctuations.
Investors should carefully consider these risk factors and the additional risk factors outlined in more detail in this Annual Report on Form 10-K under Item 1A, under the caption “Risk Factors” and in the Company’s other SEC filings.
SUPPLEMENTARY FINANCIAL INFORMATION
The Company reports its financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, the Company has included certain non-GAAP financial measures and ratios, which it believes, provide useful information to both management and readers of this report in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other titled measures determined in accordance with GAAP.



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PART I
Item 1. Business
MDC PARTNERS INC.
MDC was formed by Certificate of Amalgamation effective December 19, 1986, pursuant to the Business Corporations Act (Ontario). Effective December 19, 1986, MDC amalgamated with Branbury Explorations Limited, and thereby became a public company operating under the name of MDC Corporation. On January 1, 2004, MDC changed its name to its current name, MDC Partners Inc., and on June 28, 2004, MDC was continued under Section 187 of the Canada Business Corporations Act. MDC’s registered address is located at 33 Draper Street, Toronto, Ontario, M5V 2M3, and its head office address is located at 330 Hudson Street, 10th Floor, New York, New York 10013. MDC is not a “foreign private issuer” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
About Us
MDC Partners is a leading global marketing and communications network, providing marketing and business solutions that realize the potential of combining data and creativity. Through its network of agencies, MDC delivers a broad range of client services, including (1) global advertising and marketing, (2) data analytics and insights, (3) mobile and technology experiences, (4) media buying, planning and optimization, (5) direct marketing, (6) database and customer relationship management, (7) business consulting, (8) sales promotion, (9) corporate communications, (10) market research, (11) corporate identity, design and branding services, (12) social media strategy and communications, (13) product and service innovation, and (14) e-commerce management. These marketing, communications, and consulting agencies (or “Partner Firms”) provide a wide range of service offerings both domestically and globally. While in some cases the firms provide the same or similar service offerings, the core or principal service offering is the key factor that distinguishes the Partner Firms from one another.
Market Strategy
MDC’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. MDC’s differentiation lies in its best-in-class creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. To be the modern marketing company of choice, MDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
The MDC model is driven by:
Data + Creativity.  MDC creates solutions that aim to realize the potential of data and creativity, bringing the network’s award-winning creativity to modern solutions in mobile, digital experiences, and all methods of marketing communications. This is reinforced by the venture investments the Company makes in technology solutions as well as those it makes in building its own proprietary technologies and solutions from the ground up.
Talent + Entrepreneurialism.  The entrepreneurial spirit of both MDC and its firms is optimized through (1) its model that incentivizes senior-level ambition, including the creation of multi-agency networks that enable proven leaders to steward increasingly scaled platforms and provide growth opportunities for talent at all levels, and (2) best-in-class shared resources within the corporate group that allow individual firms to focus on client business and company growth.
Collaboration. MDC values collaboration as manifested through (1) MDC’s creation of customized solutions for clients across disciplines that foster the integration of complementary disciplines, driving better results for clients, and in turn, growth for its firms, and (2) the creation of multi-agency networks that drive greater opportunity for individual firms to benefit from the scale of the holding company and as well as resources of like-minded agencies within the group, and create fewer cost centers.
Reporting Segments
MDC has four reportable segments, plus an All Other category, all of which form the Advertising and Communications Group as of December 31, 2019.
The four reportable segments and the All Other category are as follows:
Global Integrated Agencies - This segment is comprised of the Company’s four global, integrated Partner Firms serving multinational clients around the world. The Partner Firms within the Global Integrated Agencies reportable segment provide a range of different services for their clients, including strategy, creative and production for advertising campaigns across a variety of platforms (print, digital, social media, television broadcast).
Domestic Creative Agencies - This segment is comprised of seven Partner Firms that are national advertising agencies leveraging creative capabilities at their core.

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Specialist Communications - This segment is comprised of four Partner Firms that are each communications agencies with core service offerings in public relations and related communications services.
Media Services - This segment is comprised of one operating segment with media buying and planning as its core competency.
All Other - This category consists of the Company’s remaining Partner Firms that provide a range of diverse marketing communication services but are not eligible for aggregation with the reportable segments. Each of the Partner Firms in the All Other category represent less than 10% of consolidated revenue and do not meet the criteria to be a separate reportable segment.
Corporate - In addition, MDC reports its corporate office expenses incurred in connection with the strategic resources provided to the Partner Firms, as well as certain other centrally managed expenses that are not fully allocated to the Partner Firms as Corporate, including interest expense and public company overhead costs. Corporate provides client and business development support to the Partner Firms as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions. Additional expenses managed by the corporate office that are directly related to the Partner Firms are allocated to the appropriate reportable segment and the All Other category.
For further information relating to the Company’s segments, including financial information, see Note 21 of the Notes to the Consolidated Financial Statements and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mark Penn, Chief Executive Officer and Chairman of the Company, appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we are assessing a change in our reportable segments, effective with the Company’s 2020 fiscal year, to align our external reporting with how we operate the Networks under our new organizational structure.
Ownership Information
MDC maintains a majority or 100% ownership position in substantially all of its Partner Firms with management of the Partner Firms owning the remaining equity.  MDC generally has rights to increase ownership of non-wholly owned subsidiaries to 100% over a defined period of time. MDC’s effective economic interest in each Partner Firm may vary from its voting ownership interest due to certain factors, such as the existence of contingent deferred acquisition payments and/or cash distribution hurdles related to noncontrolling interest holders. 
The table below sets forth MDC’s voting ownership percentage of each listed Partner Firm as of December 31, 2019.  The table does not display all agencies or components within each Partner Firm for which MDC may or may not maintain the same ownership percentage.


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MDC PARTNERS INC. AND SUBSIDIARIES
SCHEDULE OF ADVERTISING AND COMMUNICATIONS COMPANIES
 
 
Year of Initial
 
 
 
Company
 
Investment
 
Locations (City or Country)
Ownership %
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
Global Integrated Agencies:
 
 
 
 
 
72andSunny
 
2010
 
Los Angeles, New York, Netherlands, UK, Australia, Singapore
100.0
%
Anomaly
 
2011
 
New York, Los Angeles, Netherlands, Canada, UK, China, Germany
100.0
%
Crispin Porter Bogusky
 
2001
 
Boulder, Los Angeles, UK, Brazil, China
100.0
%
Forsman & Bodenfors
 
2004
 
Sweden, New York, Canada, China, UK, Los Angeles, Singapore
100.0
%
The Media Kitchen
 
2004
 
New York, Canada, UK
100.0
%
 
 
 
 
 
 
Domestic Creative Agencies:
 
 
 
 
 
Doner
 
2012
 
Detroit, Cleveland, Los Angeles, UK
100.0
%
Yes & Company
 
2018
 
New York
 
    HL Group Partners
 
2007
 
New York, Los Angeles, China

100.0
%
    Redscout
 
2007
 
New York, UK
100.0
%
    Bruce Mau Design
 
2004
 
Canada, New York
100.0
%
    Northstar Research Partners
 
1998
 
Canada, New York, UK, Indonesia
100.0
%
Colle McVoy
 
1999
 
Minneapolis
100.0
%
Laird + Partners
 
2011
 
New York
100.0
%
Mono Advertising
 
2004
 
Minneapolis, San Francisco
70.0
%
Union
 
2013
 
Canada
75.0
%
Yamamoto
 
2000
 
Minneapolis
100.0
%
Civilian
 
2000
 
Chicago
100.0
%
 
 
 
 
 
 
Specialist Communications:
 
 
 
 
 
Allison & Partners
 
2010
 
San Francisco, Los Angeles, New York and other US Locations, China, France, Singapore, UK, Japan, Germany
100.0
%
Luntz Global
 
2014
 
Washington, D.C.
100.0
%
     Sloane & Company (Sold in February 2020)
 
2010
 
New York
100.0
%
Hunter PR
 
2014
 
New York, UK
100.0
%
KWT Global
 
2010
 
New York, UK, Canada
77.5
%
Veritas
 
1993
 
Canada
90.0
%
 
 
 
 
 
 
Media Services:
 
 
 
 
 
MDC Media Partners
 
2010
 
New York
 
Attention
 
2009
 
New York, Los Angeles
100.0
%

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Varick Media Management
 
2010
 
New York
100.0
%
Assembly
 
2010
 
New York, Detroit, Atlanta, Los Angeles
100.0
%
EnPlay
 
2015
 
New York
100.0
%
Trade X
 
2011
 
New York
90.0
%
Unique Influence
 
2015
 
Austin
100.0
%
 
 
 
 
 
 
All Other:
 
 
 
 
 
6degrees Communications
 
1993
 
Canada
74.9
%
Concentric Partners
 
2011
 
New York, UK
72.3
%
Gale Partners
 
2014
 
Canada, New York, India, Singapore
60.0
%
Instrument
 
2018
 
Portland
51.0
%
Kenna
 
2010
 
Canada
100.0
%
Relevent
 
2010
 
New York
100.0
%
TEAM
 
2010
 
Ft. Lauderdale
100.0
%
Vitro
 
2004
 
San Diego, Austin
81.6
%
Y Media Labs
 
2015
 
Redwood City, New York, India
60.0
%
Competition
MDC operates in a highly competitive and fragmented industry. MDC Partner Firms compete for business and talent with the operating subsidiaries of large global holding companies such as Omnicom Group Inc., Interpublic Group of Companies, Inc., WPP plc, Publicis Groupe SA, Dentsu Inc. and Havas SA, as well as with numerous independent agencies that operate in multiple markets. Our Partner Firms also face competition from consultancies, tech platforms, media companies and other services firms that offer related services. MDC’s Partner Firms must compete with all of these other companies to maintain and grow existing client relationships and to obtain new clients and assignments.
MDC’s Partner Firms compete at this level by providing clients with innovative marketing solutions that leverage the full power of data, technology, and superior creativity. MDC also benefits from cooperation among its entrepreneurial Partner Firms, which enables MDC to service the full range of global clients’ varied marketing needs through custom integrated solutions. Additionally, MDC’s maintenance of separate, independent operating companies enables MDC to effectively manage potential conflicts of interest by representing competing clients across its network.
Industry Trends
There are several recent economic and industry trends that affect or may be expected to affect the Company’s results of operations. Historically, advertising has been the primary service provided by the marketing communications industry. However, as clients aim to establish one-to-one relationships with customers, and more accurately measure the effectiveness of their marketing expenditures, specialized and digital communications services as well as data and analytics services are consuming a growing portion of marketing dollars. The Company believes these changes in the way consumers interact with media are increasing the demand for a broader range of non-advertising marketing communications services (i.e., user experience design, product innovation, direct marketing, sales promotion, interactive, mobile, strategic communications and public relations), which we expect could have a positive impact on our results of operations. In addition, the rise of technology and data solutions have rendered scale less crucial as it once was in areas such as media buying, creating significant opportunities for agile and modern players. Global marketers now demand breakthrough and integrated creative ideas, and no longer require traditional brick-and-mortar communications partners in every market to optimize the effectiveness of their marketing efforts. Combined with the fragmentation of the media landscape, these factors provide new opportunities for small to mid-sized communications companies like those in the MDC network. In addition, marketers now require even greater speed-to-market to drive financial returns on their marketing and media investment, causing them to turn to more nimble, entrepreneurial and collaborative communications firms like MDC’s Partner Firms.
Clients
MDC serves a large base of clients across the full spectrum of industry verticals. In many cases, we serve the same clients in various geographic locations, across multiple disciplines, and through multiple Partner Firms. Representation of a client rarely means that MDC handles marketing communications for all brands or product lines of the client in every geographical location. During 2019, 2018 and 2017, the Company did not have a client that accounted for 5% or more of revenues. In addition, MDC’s

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ten largest clients (measured by revenue generated) accounted for approximately 23% of revenue for the three-year period ended December 31, 2019.
MDC’s agencies have written contracts with many of their clients. As is customary in the industry, these contracts generally provide for termination by either party on relatively short notice. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview” for a further discussion of MDC’s arrangements with its clients.
Employees
As of December 31, 2019, we employed 5,647 people worldwide. The following table provides a breakdown of full time employees across MDC’s four reportable segments, the All Other category, and Corporate:
Segment
 
Total
Global Integrated Agencies
 
2,167

Domestic Creative Agencies
 
1,002

Specialist Communications
 
695

Media Services
 
336

All Other
 
1,381

Corporate
 
66

Total
 
5,647

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the effect of cost of services sold on MDC’s historical results of operations. Because of the personal service character of the marketing communications businesses, the quality of personnel is of crucial importance to MDC’s continuing success. MDC considers its relations with its employees to be satisfactory.
Seasonality
Historically, with some exceptions, we generate the highest quarterly revenues during the fourth quarter in each year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail-related consumer marketing occur. See Note 22 of the Notes to the Consolidated Financial Statements for information relating to the Company’s quarterly results.
Available Information
Information regarding the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, at the Company’s website at https://www.mdc-partners.com, as soon as reasonably practicable after the Company electronically files such reports with or furnishes them to the Securities and Exchange Commission (the “SEC”). The information found on, or otherwise accessible through, the Company’s website is for information purposes only and is included as an inactive textual reference. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K. The Company’s filings are also available to the public from the SEC’s website at https://www.sec.gov.



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Item 1A. Risk Factors
You should carefully consider the risk factors set forth below, as well as the other information contained in this Form 10-K, including our consolidated financial statements and related notes. This Form 10-K contains forward-looking statements that involve risks and uncertainties. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. The following risk factors are not necessarily presented in order of relative importance and should not be considered to represent a complete set of all potential risks that could affect our business, financial condition or results of operation.
Future economic and financial conditions could adversely impact our financial condition and results.
Advertising, marketing and communications expenditures are sensitive to global, national and regional macroeconomic conditions, as well as specific budgeting levels and buying patterns. Adverse developments including heightened economic uncertainty could reduce the demand for our services, which could have a material adverse effect on our revenue, results of operations, cash flows and financial position.
a. As a marketing services company, our revenues are highly susceptible to declines as a result of unfavorable economic conditions.
Global economic conditions affect the advertising and marketing services industry more severely than other industries. In the past, some clients have responded to weakening economic conditions with reductions to their marketing budgets, which include discretionary components that are easier to reduce in the short term than other operating expenses. This pattern may recur in the future. Decreases in our revenue would negatively affect our financial results, including a reduction of our estimates of free cash flow from operations.
b. If our clients experience financial distress, their weakened financial position could negatively affect our own financial position and results.
We have a diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy protection or go out of business. Unfavorable economic and financial conditions in the global economy could increase client financial difficulties resulting in reduced demand for our services, reduced revenues, delayed payments by clients, and increased write offs of accounts receivable.
c. Conditions in the credit markets could adversely impact our results of operations and financial position.
Turmoil in the credit markets or a contraction in the availability of credit would make it more difficult for businesses to meet their capital requirements and could lead clients to change their financial relationship with their vendors, including us. If that were to occur, it could materially adversely impact our results of operations and financial position.
d. Our financial condition and results of operations for fiscal 2020 may be adversely affected by the recent coronavirus outbreak.
In December 2019, a novel strain of coronavirus surfaced in Wuhan, China. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
MDC competes for clients in highly competitive industries.
The Company operates in a highly competitive environment in an industry characterized by numerous advertising and marketing agencies of varying sizes, with no single advertising and marketing agency or group of agencies having a dominant position in the marketplace. MDC is, however, smaller than several of its larger industry competitors. Competitive factors include creative reputation, management, personal relationships, quality and reliability of service and expertise in particular niche areas of the marketplace. In addition, because an agency’s principal asset is its people, barriers to entry are minimal, and relatively small agencies are, on occasion, able to take all or some portion of a client’s business from a larger competitor.
While many of MDC’s client relationships are long-standing, companies put their advertising and marketing services businesses up for competitive review from time to time, including at times when clients enter into strategic transactions or experience senior management changes. To the extent that the Company fails to maintain existing clients or attract new clients, MDC’s business, financial condition, operating results, and cash flows may be affected in a materially adverse manner.
If our available liquidity is insufficient, our financial condition could be adversely affected and we may be unable to fund contingent deferred acquisition liabilities, and any put options if exercised.
MDC maintains a committed $250 million senior secured revolving credit agreements due May 3, 2021 (the “Credit Agreement”), together with cash flow from operations, to fund its working capital needs and to fund the exercise of put option

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obligations and contingent deferred acquisition payments. If credit were unavailable or insufficient under the Credit Agreement, MDC’s liquidity could be adversely affected and MDC’s ability to fund its working capital needs and any contingent obligations with respect to put options or contingent deferred acquisition payments could be adversely affected. MDC has made acquisitions for which it has deferred payment of a portion of the purchase price, with the deferred acquisition consideration generally payable based on achievement of certain thresholds of future earnings of the acquired company. In addition, a noncontrolling shareholder in an acquired business often has the right to require MDC to purchase all or part of its interest, either at specified dates or upon the termination of such shareholder’s employment with the subsidiary or death (put rights). Payments to be made by the Company in respect of deferred acquisition consideration and noncontrolling shareholder put rights may be significantly higher than the amounts estimated by MDC because the actual obligation adjusts based on the performance of the acquired businesses over time. If available liquidity is insufficient, MDC may be unable to fund contingent deferred acquisition payments.
MDC may not realize the benefits it expects from past acquisitions or acquisitions or other strategic transactions MDC may make in the future.
MDC’s business strategy includes ongoing efforts to engage in acquisitions of ownership interests in entities in the marketing communications services industry and other strategic transactions.
The success of acquisitions or strategic investments depends on the effective integration of newly acquired businesses into MDC’s current operations. Such integration is subject to risks and uncertainties, including realization of anticipated synergies and cost savings, the ability to retain and attract executives and clients, the diversion of management’s attention from other business concerns, and undisclosed or potential legal liabilities of the acquired company. MDC’s failure to address these risks or other problems encountered in connection with our past or future acquisitions and other strategic transactions could cause MDC to fail to realize their anticipated benefits, incur unanticipated liabilities and harm MDC’s business generally. MDC’s acquisitions and other strategic transactions could also result in dilutive issuances of the Company’s equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which could harm its financial condition or operating results. Furthermore, the anticipated benefits or value of MDC’s acquisitions and other strategic transactions may not materialize.
MDC’s business could be adversely affected if it loses key clients.
MDC’s strategy has been to acquire ownership stakes in diverse marketing communications businesses to minimize the effects that might arise from the loss of any one client. The loss of one or more clients could materially affect the results of the individual agencies and MDC as a whole.
The loss of several of our largest clients could have a material adverse effect on our business, results of operations, cash flows and financial position.
Our ten largest clients (measured by revenue generated) accounted for 23% of our revenue for the three-year period ended December 31, 2019. A significant reduction in spending on our services by our largest clients, or the loss of several of our largest clients, could have a material adverse effect on our business, results of operations and financial position.
MDC’s ability to generate new business from new and existing clients may be limited.
To increase its revenues, MDC needs to obtain additional clients or generate demand for additional services from existing clients. MDC’s ability to generate initial demand for its services from new clients and additional demand from existing clients is subject to such clients’ and potential clients’ requirements, pre-existing vendor relationships, financial conditions, strategic plans and internal resources, as well as the quality of MDC’s employees, services and reputation and the breadth of its services. To the extent MDC cannot generate new business from new and existing clients due to these limitations, MDC’s ability to grow its business and to increase its revenues will be limited.
MDC’s business could be adversely affected if it loses or fails to attract key executives or employees.
Management succession at our operating units is very important to the ongoing results of MDC because, as in any service business, the success of a particular agency is dependent upon the leadership of key executives and management. If key executives were to leave our operating units, the relationships that MDC has with its clients could be adversely affected.
Employees, including creative, research, analytics, media, technology development, account and practice group specialists, and their skills and relationships with clients, are among MDC’s most important assets. An important aspect of MDC’s competitiveness is its ability to retain key employee and management personnel. Compensation for these key employees is an essential factor in attracting and retaining them, and MDC may not offer a level of compensation sufficient to attract and retain these key employees. If MDC fails to hire and retain a sufficient number of these key employees, it may not be able to compete effectively. If key executives were to leave our operating units, the relationships that MDC has with its clients could be adversely affected.


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MDC is exposed to the risk of client defaults.
MDC’s agencies often incur expenses on behalf of their clients for productions and in order to secure a variety of media time and space, in exchange for which they receive a fee. The difference between the gross production costs and media purchases and the revenue earned by us can be significant. While MDC takes precautions against default on payment for these services (such as credit analysis, advance billing of clients, and in some cases acting as an agent for a disclosed principal) and has historically had a very low incidence of default, MDC is still exposed to the risk of significant uncollectible receivables from our clients. The risk of a material loss could significantly increase in periods of severe economic downturn. Such a loss could have a material adverse effect on our results of operations, cash flows and financial position.
MDC’s results of operations are subject to currency fluctuation risks.
Although MDC’s financial results are reported in U.S. dollars, a portion of its revenues and operating costs are denominated in currencies other than the U.S. dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and other currencies, particularly the Canadian dollar, may affect MDC’s financial results and competitive position.
Goodwill, intangible assets and right-of-use assets may become impaired.
We have recorded a significant amount of goodwill and intangible assets in our consolidated financial statements in accordance with GAAP resulting from our acquisition activities, which principally represents the specialized know-how of the workforce at the agencies we have acquired. We test, at least annually, the carrying value of goodwill for impairment, as discussed in Note 2 of the Notes to the Consolidated Financial Statements included herein. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If MDC concludes that any intangible asset and goodwill values are impaired, any resulting non-cash impairment charge could have a material adverse effect on our results of operations and financial position. See Note 8 of the Notes to the Consolidated Financial Statements for details on goodwill impairment recorded for the twelve months ended December 31, 2019. 
In addition, we have recorded a significant amount of right-of-use assets in our consolidated financial statements in accordance with GAAP as a result of the adoption of Accounting Standards Codification, Leases (“ASC 842”). Upon a triggering event, we test the right-of-use assets for impairment, as discussed in Note 2 of the Notes to the Consolidated Financial Statements included herein. If a right-of-use asset is impaired, the resulting non-cash impairment charge could have a material adverse effect on our results of operations and financial position. See Note 10 of the Notes to the Consolidated Financial Statements for details on lease impairments recorded related to right-of-use assets. 
MDC is subject to regulations and litigation risk that could restrict our activities or negatively impact our revenues.
Advertising and marketing communications businesses are subject to government regulation, both domestic and foreign. There has been an increasing trend in the United States for advertisers to resort to litigation and self-regulatory bodies to challenge comparative advertising on the grounds that the advertising is false and deceptive. Moreover, there has recently been an expansion of specific rules, prohibitions, media restrictions, labeling disclosures, and warning requirements with respect to advertising for certain products. Proposals have been made to ban the advertising of specific products and to impose taxes on or deny deductions for advertising which, if successful, may have an adverse effect on advertising expenditures and consequently, on MDC’s revenues.
Certain of MDC’s agencies produce software and e-commerce tools for their clients, and these product offerings have become increasingly subject to litigation based on allegations of patent infringement or other violations of intellectual property rights. As we expand these product offerings, the possibility of an intellectual property claim against MDC grows. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not successful in defending such claims, we could be required to stop offering these services, pay monetary damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our clients. Such arrangements may cause our operating margins to decline.
In addition, laws and regulations related to consumer privacy, use of personal information and digital tracking technologies have been proposed or enacted in the United States and certain international markets (including the European Union’s General Data Protection Regulation, or “GDPR,” the proposed European Union “ePrivacy Regulation” and the recently enacted California Consumer Privacy Act, or “CCPA”). We face increasing costs of compliance in an uncertain regulatory environment and any failure to comply with these legal requirements could result in regulatory penalties or other legal ability. Furthermore, these laws and regulations may impact the efficacy and profitability of certain digital marketing and analytics services we provide to clients, making it difficult to achieve our clients’ goals. These and other related factors could affect our business and reduce demand for certain of our services, which could have a material adverse effect on our results of operations and financial position.
Compliance with data privacy laws requires ongoing investment in systems, policies and personnel and will continue to impact our business in the future by increasing legal, operational and compliance costs. While we have taken steps to comply with data privacy laws, we cannot guarantee that our efforts will meet the evolving standards imposed by data protection authorities. In the event that we are found to have violated data privacy laws, we may be subject to additional potential private consumer, business

8



partner or securities litigation, regulatory inquiries, governmental investigations and proceedings and we may incur damage to our reputation. Any such developments may subject us to material fines and other monetary penalties and damages, divert management’s time and attention, and lead to enhanced regulatory oversight all of which could have a material adverse effect on our business and results of operations.
Some of MDCs Partner Firms rely upon signatory service companies to employ union performers in commercials.
Some of MDC’s creative agencies that have not entered into the SAG-AFTRA Commercials Contract have traditionally used signatory service companies, which are parties to the SAG-AFTRA Commercials Contract, to employ SAG-AFTRA union performers appearing in television, new media, and other commercials produced by those agencies. SAG-AFTRA has recently persuaded the principal signatory service companies to change the way such signatory service companies do business. These changes will make it more cumbersome and expensive for advertising agencies which have not entered into the SAG-AFTRA Commercials Contract to produce advertisements using SAG-AFTRA members, and in some cases may preclude the use of SAG-AFTRA members in a production. If a Partner Firm is unable to produce a commercial using a union performer, it may reduce the amount of business conducted by such Partner Firm. Accordingly, if SAG-AFTRA’s recent restrictions on signatory service companies are not modified, it could have a material adverse effect on our business, results of operations and financial position.
We rely extensively on information technology systems and cybersecurity incidents could adversely affect us.
We rely on information technologies and infrastructure to manage our business, including digital storage of client marketing and advertising information and developing new business opportunities. Increased cybersecurity threats and attacks, which are becoming more sophisticated, pose a risk to our systems and networks. Security breaches, improper use of our systems and unauthorized access to our data and information by employees and others may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. We also have access to sensitive or personal data or information that is subject to privacy laws and regulations. Our systems and processes to protect against, detect, prevent, respond to and mitigate cybersecurity incidents and our organizational training for employees to develop an understanding of cybersecurity risks and threats may be unable to prevent material security breaches, theft, modification or loss of data, employee malfeasance and additional known and unknown threats. In addition, we use third-party service providers, including cloud providers, to store, transmit and process data.  Any breakdown or breach in our systems or data-protection policies, or those of our third-party service providers, could adversely affect our reputation or business.   
Future issuances of equity securities, which may include securities that would rank senior to our Class A shares, may cause dilution to our existing shareholders and adversely affect the market price of our Class A shares.
The market price of our Class A shares could decline as a result of sales of a large number of our Class A shares in the market, or the sale of securities convertible into a large number of our Class A shares. The perception that these sales could occur may also depress the market price of our Class A shares. On March 7, 2017, we issued 95,000 Series 4 convertible preference shares (the “Series 4 Preference Shares”) with an initial aggregate liquidation preference of $95.0 million, which will be convertible into Class A shares or our Series 5 convertible preference shares at a current conversion price of $7.42 per share.  On March 14, 2019, we issued 50,000 Series 6 convertible preference shares (the “Series 6 Preference Shares” and, together with the Series 4 Preference Shares, the “Preference Shares”) with an initial aggregate liquidation preference of $50.0 million, which will be convertible into Class A shares or our Series 7 convertible preference shares at an initial conversion price of $5.00 per share.  The terms of the Preference Shares provide that the conversion price may be reduced, which would result in the Preference Shares being convertible into additional Class A shares upon certain events, including distributions on our Class A shares or issuances of additional Class A shares or equity-linked securities, at a price less than the then-applicable conversion price. The issuance of Class A Shares upon conversion of the Preference Shares would result in immediate and substantial dilution to the interests of our Class A shareholders. In addition, the holders of the Preference Shares may ultimately receive and sell all of the shares issuable in connection with the conversion of such Preference Shares, which could result in a decline in the market price of our Class A shares.  The market price of our Class A shares may also be affected by factors, such as whether the market price is near or above the conversion price, that could make conversion of the Preference Shares more likely.
Further, the Preference Shares rank senior to the Class A shares, which could affect the value of the Class A shares on liquidation or, as a result of contractual provisions, on a change in control transaction. For example, pursuant to the related purchase agreements, the Company has agreed, with certain exceptions, not to become party to certain change in control transactions that are approved by the Board other than a qualifying transaction in which holders of Preference Shares are entitled to receive cash or qualifying listed securities with a value equal to the then-applicable liquidation preference plus accrued and unpaid dividends. See Note 15 of the Notes to the Consolidated Financial Statements for more information regarding the Series 4 Preference Shares and the Series 6 Preference Shares.
Additionally, any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our Class A shares, and may result in dilution to owners of our Class A shares. Because our decision to issue additional debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot

9



predict or estimate the amount, timing or nature of our future issuances. Also, we cannot predict the effect, if any, of future issuances of our Class A shares on the market price of our Class A shares.
The indenture governing the 6.50% Notes and the Credit Agreement governing our secured line of credit contain various covenants that limit our discretion in the operation of our business.
MDC has issued 6.50% senior notes due 2024 in the aggregate principal amount of $900 million (the “6.50% Notes”). The indenture governing the 6.50% Notes and the Credit Agreement governing our lines of credit contain various provisions that limit our discretion in the operation of our business by restricting our ability to:
sell assets;
pay dividends and make other distributions;
redeem or repurchase our capital stock;
incur additional debt and issue capital stock;
create liens;
consolidate, merge or sell substantially all of our assets;
enter into certain transactions with our affiliates;
make loans, investments or advances;
repay subordinated indebtedness;
undergo a change in control;
enter into certain transactions with our affiliates;
engage in new lines of business; and
enter into sale and leaseback transactions.
These restrictions on our ability to operate our business in our discretion could seriously harm our business by, among other things, limiting our ability to take advantage of financing, mergers and acquisitions and other corporate opportunities. The Credit Agreement is subject to various additional covenants, including a senior leverage ratio, a total leverage ratio, a fixed charge coverage ratio, and a minimum EBITDA level (as defined). Events beyond our control could affect our ability to meet these financial tests, and we cannot assure you that they will be met.
Our substantial indebtedness could adversely affect our cash flow and prevent us from fulfilling our obligations, including the 6.50% Notes.
As of December 31, 2019, MDC had $887.6 million, net of debt issuance costs, of indebtedness. In addition, we expect to make additional drawings under the Credit Agreement from time to time. As a holding company, our ability to pay principal and interest on our indebtedness is dependent on the generation of cash flow by and distributions from our subsidiaries. Our subsidiaries’ business may not generate sufficient cash flow from operations to meet MDC’s debt service and other obligations. If we are unable to meet our expenses and debt service obligations, we may need to obtain additional debt, refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We may not be able to obtain additional debt, refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations, to obtain additional debt or to refinance our obligations on commercially reasonable terms would have a material adverse effect on our business, financial condition and results of operations.
Further, we currently receive senior unsecured and long-term debt and corporate quality ratings from Standard & Poor’s Rating Services and Moody’s Investor Service Inc. Our ratings are subject to periodic review, and we cannot assure you that we will be able to retain our current or any future ratings. If our ratings are reduced from their current levels, this could further adversely affect our liquidity and our business, financial condition and results of operation.
If we cannot make scheduled payments on our debt, we will be in default and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable; the lenders under the Credit Agreement could terminate their commitments to loan us money and foreclose against the assets securing our borrowings; and we could be forced into bankruptcy or liquidation. Our level of indebtedness could have important consequences. For example, it could:
make it more difficult for us to satisfy our obligations with respect to the 6.50% Notes;
make it difficult for us to meet our obligations with respect to our contingent deferred acquisition payments;

10



limit our ability to increase our ownership stake in our Partner Firms;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other activities;
limit our flexibility in planning for, or reacting to, changes in our business and the advertising industry, which may place us at a competitive disadvantage compared to our competitors that have less debt; and
limit, particularly in concert with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds or take other actions.
Despite our current debt levels, we may be able to incur substantially more indebtedness, which could further increase the risks associated with our leverage.
We may incur substantial additional indebtedness in the future. The terms of our Credit Agreement and the indenture governing the 6.50% Notes permit us and our subsidiaries to incur additional indebtedness subject to certain limitations. If we or our subsidiaries incur additional indebtedness, the related risks that we face could increase.
We may be subject to adverse tax consequences such as those related to changes in tax laws or tax rates or their interpretations, and the related application of judgment in determining our global provision for income taxes, deferred tax assets or liabilities or other tax liabilities given the ultimate tax determination is uncertain.
We are a Canada-domiciled multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that jurisdictional tax authorities may take a contrary view, which may have a significant impact on our global provision for income taxes.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The U.S. recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.
We are a holding company dependent on our subsidiaries for our ability to service our debt.
MDC is a holding company with no operations of our own. Consequently, our ability to service our debt is dependent upon the earnings from the businesses conducted by our subsidiaries. Our subsidiaries are separate and distinct legal entities. Although our operating subsidiaries have generally agreed to allow us to consolidate and “sweep” cash, subject to the timing of payments due to noncontrolling interest holders, any distribution of earnings to us from our subsidiaries is contingent upon the subsidiaries’ earnings and various other business considerations. Also, our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of common stock to participate in those assets, will be structurally subordinated to the claims of that subsidiary’s creditors. In addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.
MDC may not be able to meet our performance targets and milestones.
MDC communicates to the public certain targets and milestones for our financial and operating performance. These targets and milestones are not predictions or guidance, and investors should not place undue reliance on them. MDC may fail to meet such targets and milestones because of the inherent risk and uncertainty of operating our business and executing on our strategic and other plans.
MDC is launching alliances among its agencies to improve collaboration and client service.
MDC is in the midst of transforming how its advertising and marketing agencies collaborate and work together in order to improve MDC’s ability to attract and retain clients, and expand the amount and variety of services provided to clients. There can be no guarantee that the structures and incentives we have put in place to improve collaboration among our agencies will be successful, or will lead to attracting or retaining clients, or expanding the amount and variety of services provided to clients. If our agency collaboration initiatives are unsuccessful, there could be a material adverse effect on our business, financial condition and results of operations and cash flows.


11



MDC is consolidating and densifying its real estate occupancy in New York.
MDC is in the midst of consolidating the real estate occupancy of its advertising and marketing agencies, in order to lower MDC’s leasing costs and improve collaboration among our agencies. MDC contemplates that in New York City its advertising and marketing agencies will colocate in a single location. MDC may not be able to sublease existing spaces to be vacated on expected terms or at all. Our anticipated savings from consolidating and densifying our real estate occupancy is subject to timely completing construction, and construction could be delayed. If we fail to sublet on expected terms the existing leased offices to be vacated, or construction of our consolidated leased space is delayed, there could be a material adverse effect on our business, financial condition and results of operations.
Our shares of common stock are thinly traded and our stock price may be volatile.
Because MDC’s Class A shares are thinly traded, their market price may fluctuate significantly more than the stock market in general or the stock prices of similar companies, which are exchanged, listed or quoted on NASDAQ or another stock exchange. Our Class A shares may be less liquid than the stock of companies with broader public ownership, and as a result, the trading price for our Class A shares may be more volatile. Among other things, trading of a relatively small volume of our Class A shares may have a greater impact on the trading price for our stock than would be the case if our public float were larger.
The Company has identified a material weakness in our internal control over financial reporting for income taxes. If we are unable to remediate the material weakness and otherwise maintain an effective system of internal control over financial reporting, it could result in us not preventing or detecting on a timely basis a material misstatement of the Company's financial statements.
Management identified a material weakness in the Company’s internal control over financial reporting for income taxes as of December 31, 2019, as described in Part II, Item 9A of this Form 10-K.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Although we intend to implement a plan to remediate this material weakness, we cannot be certain of the success of the plan. If our remedial measures are insufficient to address the material weakness, or if one or more additional material weaknesses or significant deficiencies in our disclosure controls and procedures or internal control over financial reporting are discovered or occur in the future, we may not be able to prevent or identify irregularities or ensure the fair and accurate presentation of our financial statements included in our periodic reports filed with the U.S. Securities and Exchange Commission.


Item 1B. Unresolved Staff Comments
None.


12



Item 2. Properties
See Note 10 of the Consolidated Financial Statements included in this Annual Report for a discussion of the Company’s lease commitments and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the impact of occupancy costs on the Company’s operating expenses.
The Company maintains office space in many cities in North America, Europe, Asia, South America, and Australia. This space is primarily used for office and administrative purposes by the Company’s employees in performing professional services. This office space is in suitable and well-maintained condition for MDC’s current operations. All of the Company’s materially important office space is leased from third parties with varying expiration dates. Certain of these leases are subject to rent reviews or contain various escalation clauses and certain of our leases require our payment of various operating expenses, which may also be subject to escalation. In addition, leases related to the Company’s non-U.S. businesses are denominated in currencies other than U.S. dollars and are therefore subject to changes in foreign exchange rates.
The table below provides a brief description of all locations in which office space is maintained and the related reportable segment.
Reportable Segment
 
Office Locations
Global Integrated Agencies
 
Los Angeles, New York, Boulder, Canada, Sweden, UK, Netherlands, China, Hong Kong, Australia, Singapore, Germany, and Brazil.
Domestic Creative Agencies
 
Atlanta, Los Angeles, Cleveland, Chicago, Detroit, Pittsburgh, Norwalk, New York, Minneapolis, San Francisco, UK, and Canada.
Specialist Communications
 
Atlanta, Boston, Chicago, Dallas, Gainsville, Minneapolis, Portland, Phoenix, San Francisco, San Diego, Seattle, Los Angeles, New York, Washington D.C., Canada, UK, China, Hong Kong, Singapore, Japan, Germany and Thailand.
Media Services
 
New York, Los Angeles, and Austin.
All Other
 
Atlanta, Austin, Carlstadt, Los Angeles, Indianapolis, New York, Portland, San Francisco, Ft. Lauderdale, San Diego, Redwood City, Canada, India, and Singapore

Corporate
 
New York, Washington D.C., Canada, and UK
Item 3. Legal Proceedings
In the ordinary course of business, we are involved in various legal proceedings. We do not presently expect that these proceedings will have a material adverse effect on our results of operations, cash flows or financial position.
Item 4. Mine Safety Disclosures
Not applicable.


13



PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Class A Subordinate Voting Shares
The principal market on which the Company’s Class A subordinate voting shares are traded is the NASDAQ National Market (“NASDAQ”) (symbol: “MDCA”). There is no established public trading market for our Class B voting shares. As of February 21, 2020, the approximate number of registered holders of our Class A subordinate voting shares and Class B voting shares, including those whose shares are held in nominee name, was 241 and 87, respectively.
Dividend Practice
The Company has not declared a dividend for the three year period ending December 31, 2019.
The payment of any future dividends will be at the discretion of MDC’s board of directors and will depend upon limitations under applicable law and contained in our Credit Agreement and the indenture governing the 6.50% Notes, future earnings, capital requirements, our general financial condition and general business conditions.
Securities Authorized for Issuance Under Equity Compensation Plans
For information on securities authorized for issuance under our equity compensation plans, see Item 12, “Item 1. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which relevant information will be included in our Proxy Statement for the 2020 Annual General Meeting of Stockholders.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers
For the twelve months ended December 31, 2019, the Company made no open market purchases of its Class A shares or its Class B shares. Pursuant to its Credit Agreement and the indenture governing the 6.50% Notes, the Company is currently limited from repurchasing its shares in the open market.
During 2019, the Company’s employees surrendered Class A shares in connection with the required tax withholding resulting from the vesting of restricted stock. The Company paid these withholding taxes on behalf of the related employees. These Class A shares were subsequently retired and no longer remain outstanding as of December 31, 2019. The following table details those shares withheld during the fourth quarter of 2019:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Maximum Number of Shares That May Yet Be Purchased Under the Program
10/1/2019 - 10/31/2019
 

 
$

 

 

11/1/2019 - 11/30/2019
 

 

 

 

12/1/2019 - 12/31/2019
 
1,814

 
2.68
 

 

Total
 
1,814

 
$
2.68

 

 



14



Item 6. Selected Financial Data
The following selected financial data should be read in connection with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related Notes that are included in this Form 10-K.
 
Years Ended December 31,
  
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
  
(Dollars in Thousands, Except per Share Data)
Operating Data
 
 
 
 
 
 
 
 
 
Revenues
$
1,415,803

 
$
1,476,203

 
$
1,513,779

 
$
1,385,785

 
$
1,326,256

Operating income
$
80,240

 
$
9,696

 
$
131,959

 
$
48,431

 
$
72,110

Net income (loss)
$
11,466

 
$
(111,948
)
 
$
257,223

 
$
(40,621
)
 
$
(20,119
)
Stock-based compensation included in income (loss)
$
31,040

 
$
18,416

 
$
24,350

 
$
21,003

 
$
17,796

Net income (loss) per Share
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to MDC Partners Inc. common shareholders
$
(0.25
)
 
$
(2.31
)
 
$
3.72

 
$
(0.89
)
 
$
(0.58
)
Diluted
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to MDC Partners Inc. common shareholders
$
(0.25
)
 
$
(2.31
)
 
$
3.71

 
$
(0.89
)
 
$
(0.58
)
Cash dividends declared per share

 

 

 
0.63
 
0.84
Financial Position Data

 

 

 

 

Total assets
$
1,839,492

 
$
1,611,573

 
$
1,698,892

 
$
1,577,378

 
$
1,577,625

Total debt
$
887,630

 
$
954,107

 
$
883,119

 
$
936,436

 
$
728,883

Redeemable noncontrolling interests
$
36,973

 
$
51,546

 
$
62,886

 
$
60,180

 
$
69,471

Deferred acquisition consideration
$
75,220

 
$
83,695

 
$
122,426

 
$
229,564

 
$
347,104

Effective January 1, 2019, the Company adopted FASB Accounting Standards Codification (or “ASC”), Topic 842 Leases (“ASC 842”). As a result, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 840, Leases. See Note 10 to the Consolidated Financial Statements included herein for further information regarding the adoption of ASC 842.

15



Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, references to the “Company” or “MDC” mean MDC Partners Inc. and its subsidiaries, and references to a “fiscal year” means the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2019 means the period beginning January 1, 2019, and ending December 31, 2019).
The Company reports its financial results in accordance with GAAP. In addition, the Company has included certain non-GAAP financial measures and ratios, which management uses to operate the business which it believes provide useful supplemental information to both management and readers of this report in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by GAAP and should not be construed as an alternative to other titled measures determined in accordance with GAAP.
Two such non-GAAP measures are “organic revenue growth” or “organic revenue decline” that refer to the positive or negative results, respectively, of subtracting both the foreign exchange and acquisition (disposition) components from total revenue growth. The acquisition (disposition) component is calculated by aggregating the prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were disposed of in the current period. The organic revenue growth (decline) component reflects the constant currency impact (a) of the change in revenue of the Partner Firms which the Company has held throughout each of the comparable periods presented and (b) “non-GAAP acquisitions (dispositions), net.” Non-GAAP acquisitions (dispositions), net consists of (i) for acquisitions during the current year, the revenue effect from such acquisition as if the acquisition had been owned during the equivalent period in the prior year and (ii) for acquisitions during the previous year, the revenue effect from such acquisitions as if they had been owned during that entire year or same period as the current reportable period, taking into account their respective pre-acquisition revenues for the applicable periods and (iii) for dispositions, the revenue effect from such disposition as if they had been disposed of during the equivalent period in the prior year. The Company believes that isolating the impact of acquisition activity and foreign currency impacts is an important and informative component to understand the overall change in the Company’s consolidated revenue. The change in the consolidated revenue that remains after these adjustments illustrates the underlying financial performance of the Company’s businesses. Specifically, it represents the impact of the Company’s management oversight, investments and resources dedicated to supporting the businesses’ growth strategy and operations. In addition, it reflects the network benefit of inclusion in the broader portfolio of firms that includes, but is not limited to, cross-selling and sharing of best practices. This approach isolates changes in performance of the business that take place under the Company’s stewardship, whether favorable or unfavorable, and thereby reflects the potential benefits and risks associated with owning and managing a talent-driven services business.
Accordingly, during the first twelve months of ownership by the Company, the organic growth measure may credit the Company with growth from an acquired business that is dependent on work performed prior to the acquisition date, and may include the impact of prior work in progress, existing contracts and backlog of the acquired businesses. It is the presumption of the Company that positive developments that may have taken place at an acquired business during the period preceding the acquisition will continue to result in value creation in the post-acquisition period.
While the Company believes that the methodology used in the calculation of organic revenue change is consistent with our closest U.S. competitors, the calculations may not be comparable to similarly titled measures presented by other publicly traded companies in other industries. Additional information regarding the Company’s acquisition activity as it relates to potential revenue growth is provided in this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Certain Factors Affecting our Business.”
Direct costs represent billable or non-billable internal and third-party expenses that are directly tied to providing services to our clients where we are principal in the arrangement. Direct costs exclude staff costs, which are presented separately.
All amounts are in dollars unless otherwise stated. Amounts reported in millions herein are computed based on the amounts in thousands. As a result, the sum of the components, and related calculations, reported in millions may not equal the total amounts due to rounding.
The percentage changes included in the tables herein Item 7 that are not considered meaningful are presented as “NM”.
Recent Developments
On February 14, 2020, the Company sold substantially all the assets and certain liabilities of Sloane and Company LLC (“Sloane”), an indirectly wholly owned subsidiary of the Company, to an affiliate of The Stagwell Group LLC (“Stagwell”), for an aggregate purchase price of approximately $26 million, consisting of cash paid at closing plus contingent deferred payments expected to be paid over the next two years. The sale resulted in a gain estimated at approximately $16 million. An affiliate of Stagwell has a minority ownership interest in the Company.  Mark Penn is the CEO and Chairman of the Board of Directors of the Company and is also manager of Stagwell.

On February 27, 2020, in connection with the centralization of our New York real estate portfolio, the Company entered into an agreement to lease space at One World Trade Center. The lease term is for approximately eleven years commencing on

16



April 1, 2020, with rental payments totaling approximately $115 million. As part of the centralization initiative, the Company will sublease existing properties currently under lease, resulting in the recovery of a significant portion of our rent obligation under such arrangements.
   
Effective in the first quarter of 2020, the Company reorganized its management structure resulting in the aggregation of certain Partner Firms into integrated groups (“Networks”). Mark Penn, Chief Executive Officer and Chairman of the Company, appointed key agency executives, that report directly into him, to lead each Network. In connection with the reorganization, we are assessing a change in our reportable segments, effective with the Company’s 2020 fiscal year, to align our external reporting with how we operate the Networks under our new organizational structure.

Executive Summary
MDC conducts its business through its network of Partner Firms, the “Advertising and Communications Group,” which provide marketing and business solutions that realize the potential of combining data and creativity. MDC’s strategy is to build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment. MDC’s differentiation lies in its best-in-class creative roots and proven entrepreneurial leaders, which together with innovations in technology and data, bring transformational marketing, activation, communications and strategic consulting services to clients. MDC leverages its range of services in an integrated manner, offering strategic, creative and innovative solutions that are technologically forward and media-agnostic. The Company’s work is designed to challenge the industry status quo, realize outsized returns on investment, and drive transformative growth and business performance for its clients and stakeholders.
MDC manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenues, operating expenses and capital expenditures. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth by client industry vertical, (iii) growth from existing clients and the addition of new clients, (iv) growth by primary discipline, (v) growth from currency changes, and (vi) growth from acquisitions. In addition to monitoring the foregoing financial indicators, the Company assesses and monitors several non-financial performance indicators relating to the business performance of our Partner Firms. These indicators may include a Partner Firm’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the Partner Firm’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.
The Company aggregates operating segments into one of the four reportable segments and combines and discloses those operating segments that do not meet the aggregation criteria in the All Other category. Due to changes in the composition of certain businesses and the Company’s internal management and reporting structure during 2019, reportable segment results for the 2018 and 2017 periods presented have been recast to reflect the reclassification of certain businesses between segments. See Note 21 of the Notes to the Consolidated Financial Statements included herein for a description of each of our reportable segments and All Other category and further information regarding the reclassification of certain businesses between segments.
In addition, MDC reports its corporate office expenses incurred in connection with the strategic resources provided to the Partner Firms, as well as certain other centrally managed expenses that are not fully allocated to the operating segments as Corporate, including interest expense and public company overhead costs. Corporate provides client and business development support to the Partner Firms as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions.
Significant Factors Affecting our Business and Results of Operations.  The most significant factors include national, regional and local economic conditions, our clients’ profitability, mergers and acquisitions of our clients, changes in top management of our clients and our ability to retain and attract key employees. New business wins and client losses occur due to a variety of factors. The two most significant factors are (i) our clients’ desire to change marketing communication firms, and (ii) the creative product that our Partner Firms offer. A client may choose to change marketing communication firms for a number of reasons, such as a change in top management and the new management wants to retain an agency that it may have previously worked with. In addition, if the client is merged or acquired by another company, the marketing communication firm is often changed. Another factor in a client changing firms is the agency’s campaign or work failing to meet the client’s expected financial or other measures.
Acquisitions and Dispositions. The Company’s strategy includes acquiring ownership stakes in well-managed businesses with world class expertise and strong reputations in the industry. The Company provides post-acquisition support to Partner Firms in order to help accelerate growth, including in areas such as business and client development (including cross-selling), corporate communications, corporate development, talent recruitment and training, procurement, legal services, human resources, financial management and reporting, and real estate utilization, among other areas. As most of the Company’s acquisitions remain as stand-alone entities post acquisition, integration is typically implemented promptly, and new Partner Firms can begin to tap into the full

17



range of MDC’s resources immediately. Often the acquired businesses may begin to tap into certain MDC resources in the pre-acquisition period, such as talent recruitment or real estate.
Seasonality.  Historically, the Company typically generates the highest quarterly revenues during the fourth quarter in each year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail related consumer marketing occur. See Note 22 of the Notes to the Consolidated Financial Statements for information relating to the Company’s quarterly results.
Results of Operations:
 
Years Ended December 31,
 
2019
 
2018
 
2017
Revenue:
(Dollars in Thousands)
Global Integrated Agencies
$
598,184

 
$
610,290

 
$
688,011

Domestic Creative Agencies
230,718

 
246,642

 
277,587

Specialist Communications
180,591

 
163,367

 
153,506

Media Services
97,825

 
121,859

 
150,198

All Other
308,485

 
334,045

 
244,477

Total
$
1,415,803

 
$
1,476,203

 
$
1,513,779

 
 
 
 
 
 
Segment operating income (loss):
 
 
 
 
 
Global Integrated Agencies
$
58,933

 
$
63,972

 
$
60,891

Domestic Creative Agencies
28,254

 
51

 
38,221

Specialist Communications
23,822

 
17,316

 
19,978

Media Services
(5,398
)
 
(51,169
)
 
13,900

All Other
20,397

 
34,683

 
39,825

Corporate
(45,768
)
 
(55,157
)
 
(40,856
)
Total
$
80,240

 
$
9,696

 
$
131,959

 
 
 
 
 
 
Other Income (expense):
 
 
 
 
 
Interest expense and finance charges, net
$
(64,942
)
 
$
(67,075
)
 
$
(64,364
)
Foreign exchange gain (loss)
8,750

 
(23,258
)
 
18,137

Other, net
(2,401
)
 
230

 
1,346

Income (loss) before income taxes and equity in earnings of non-consolidated affiliates
21,647

 
(80,407
)
 
87,078

Income tax expense (benefit)
10,533

 
31,603

 
(168,064
)
Income (loss) before equity in earnings of non-consolidated affiliates
11,114

 
(112,010
)
 
255,142

Equity in earnings of non-consolidated affiliates
352

 
62

 
2,081

Net income (loss)
11,466

 
(111,948
)
 
257,223

Net income attributable to the noncontrolling interest
(16,156
)
 
(11,785
)
 
(15,375
)
Net income (loss) attributable to MDC Partners Inc.
$
(4,690
)
 
$
(123,733
)
 
$
241,848




18



 
Years Ended December 31,
 
2019
 
2018
 
2017
Depreciation and amortization:
(Dollars in Thousands)
Global Integrated Agencies
$
16,572

 
$
21,179

 
$
21,206

Domestic Creative Agencies
4,843

 
5,052

 
5,143

Specialist Communications
2,577

 
4,113

 
4,567

Media Services
3,261

 
2,693

 
3,709

All Other
10,208

 
12,397

 
7,751

Corporate
868

 
762

 
1,098

Total
$
38,329

 
$
46,196

 
$
43,474

 
 
 
 
 
 
Stock-based compensation:
 
 
 
 
 
Global Integrated Agencies
$
26,207

 
$
8,095

 
$
14,666

Domestic Creative Agencies
1,532

 
2,623

 
2,301

Specialist Communications
209

 
372

 
2,160

Media Services
20

 
276

 
614

All Other
1,192

 
2,391

 
2,475

Corporate
1,880

 
4,659

 
2,134

Total
$
31,040

 
$
18,416

 
$
24,350

 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
Global Integrated Agencies
$
8,223

 
$
8,731

 
$
18,897

Domestic Creative Agencies
3,044

 
2,692

 
4,695

Specialist Communications
1,166

 
3,553

 
1,181

Media Services
194

 
806

 
3,035

All Other
5,933

 
4,415

 
5,127

Corporate
36

 
67

 
23

Total
$
18,596

 
$
20,264

 
$
32,958

YEAR ENDED DECEMBER 31, 2019 COMPARED TO YEAR ENDED DECEMBER 31, 2018
Consolidated Results of Operations
Revenues
Revenue was $1.42 billion for the twelve months ended December 31, 2019 compared to revenue of $1.48 billion for the twelve months ended December 31, 2018. See the Advertising and Communications Group section below for a discussion regarding consolidated revenues.
Operating Income
Operating income for the twelve months ended December 31, 2019 was $80.2 million compared to $9.7 million for the twelve months ended December 31, 2018, representing a change of $70.5 million. The improvement was driven by a lower impairment charge in 2019 of $7.8 million associated with the write-down of the carrying value of goodwill, right-of-use lease assets and related leasehold improvements compared to $80.1 million in 2018 primarily in connection with a write-down of goodwill. The decline in revenues was mostly offset by a reduction in expenses.
Interest Expense and Finance Charges, Net
Interest expense and finance charges, net, for the twelve months ended December 31, 2019 was $64.9 million compared to $67.1 million for the twelve months ended December 31, 2018, representing a decrease of $2.2 million, primarily driven by a decline in the average amounts outstanding under the Company’s revolving credit facility in 2019.



19



Foreign Exchange Transaction Gain (Loss)
The foreign exchange gain for the twelve months ended December 31, 2019 was $8.8 million compared to a loss of $23.3 million for the twelve months ended December 31, 2018. The change in foreign exchange was primarily attributable to the strengthening of the Canadian dollar against the U.S. dollar, in connection with a U.S. dollar denominated indebtedness that is an obligation of our Canadian parent company.
Other, Net
Other, net, for the twelve months ended December 31, 2019 was a loss of $2.4 million compared to income of $0.2 million for the twelve months ended December 31, 2018. In 2019, we recognized a loss of $4.3 million primarily on the sale of Kingsdale Partners LP and Kingsdale Shareholder Services US LLC (collectively, “Kingsdale”), partially offset by a gain of $2.3 million primarily related to the sale of certain investments.
Income Tax Expense (Benefit)
Income tax expense for the twelve months ended December 31, 2019 was $10.5 million (on income of $21.6 million resulting in an effective tax rate of 48.7%), driven by the taxation of foreign operations and non-deductible stock compensation for which a tax benefit was not recognized. Income tax expense for the twelve months ended December 31, 2018 was $31.6 million (on a loss of $80.4 million resulting in an effective tax rate of negative 39.3%), driven by impairments and non-deductible stock compensation for which a tax benefit was not recognized.
Equity in Earnings (Losses) of Non-Consolidated Affiliates
Equity in earnings (losses) of non-consolidated affiliates represents the income or losses attributable to equity method investments. The Company recorded $0.4 million of income for the twelve months ended December 31, 2019 compared to $0.1 million of income for the twelve months ended December 31, 2018.
Noncontrolling Interests
The effect of noncontrolling interests for the twelve months ended December 31, 2019 was $16.2 million compared to $11.8 million for the twelve months ended December 31, 2018, attributable to an increase in operating results at Partner Firms with a noncontrolling interest.
Net Loss Attributable to MDC Partners Inc. Common Shareholders
As a result of the foregoing and the impact of accretion on and net income allocated to convertible preference shares, the net loss attributable to MDC Partners Inc. common shareholders for the twelve months ended December 31, 2019 was $17.0 million, or $0.25 per diluted loss per share, compared to a net loss attributable to MDC Partners Inc. common shareholders of $132.1 million, or $2.31 per diluted loss per share, for the twelve months ended December 31, 2018.
Advertising and Communications Group
The following discussion provides additional detailed disclosure for each of the Company’s four (4) reportable segments, plus the “All Other” category, within the Advertising and Communications Group.
The components of the fluctuations in revenues for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 were as follows:
 
Total
 
United States
 
Canada
 
Other
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
(Dollars in Thousands)
December 31, 2018
$
1,476,203

 
 
 
$
1,153,191

 
 
 
$
124,001

 
 
 
$
199,011

 
 
Components of revenue change:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange impact
(12,697
)
 
(0.9
)%
 

 
 %
 
(2,390
)
 
(1.9
)%
 
(10,307
)
 
(5.2
)%
Non-GAAP acquisitions (dispositions), net
(1,561
)
 
(0.1
)%
 
11,340

 
1.0
 %
 
(15,483
)
 
(12.5
)%
 
2,582

 
1.3
 %
Non-GAAP Organic revenue growth (decline)
(46,142
)
 
(3.1
)%
 
(48,486
)
 
(4.2
)%
 
(1,061
)
 
(0.9
)%
 
3,405

 
1.7
 %
Total Change
(60,400
)
 
(4.1
)%
 
(37,146
)
 
(3.2
)%
 
(18,934
)
 
(15.3
)%
 
(4,320
)
 
(2.2
)%
December 31, 2019
$
1,415,803

 
 
 
$
1,116,045

 
 
 
$
105,067

 
 
 
$
194,691

 
 

20



Revenue for the Advertising and Communications Group was $1.42 billion for the twelve months ended December 31, 2019 compared to revenue of $1.48 billion for the twelve months ended December 31, 2018, representing a decrease of $60.4 million, or 4.1%.
The negative foreign exchange impact of $12.7 million, or 0.9%, was attributable to the fluctuation of the U.S. dollar against the Canadian dollar, Swedish Króna, Euro and British Pound.
The Company utilizes non-GAAP metrics called organic revenue growth (decline) and non-GAAP acquisitions (dispositions), net, as defined above. For the twelve months ended December 31, 2019, organic revenue decreased by $46.2 million or 3.1%, of which $54.5 million, or 3.7% pertained to Partner Firms the Company has owned throughout each of the comparable periods presented, offset by growth of $8.3 million, or 0.6%, generated from acquired Partner Firms. The decline in revenue from existing Partner Firms was attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients. The change in revenue was primarily driven by a decline in categories including healthcare, food and beverage and automotive, partially offset by growth in transportation, communications, and travel/lodging and technology.
The table below provides a reconciliation between the revenue in the Advertising and Communications Group from acquired/disposed businesses in the statement of operations to non-GAAP acquisitions (dispositions), net for the twelve months ended December 31, 2019:
Acquisition Revenue Reconciliation
 
Specialist Communications
 
All Other
 
Total
 
 
(Dollars in Thousands)
GAAP revenue from 2018 and 2019 acquisitions
 
$
4,163

 
$
17,882

 
$
22,045

Foreign exchange impact
 
17

 
207

 
224

Contribution to non-GAAP organic revenue growth (decline)
 
(864
)

(7,463
)

(8,327
)
Prior year revenue from dispositions
 

 
(15,503
)
 
(15,503
)
Non-GAAP acquisitions (dispositions), net
 
$
3,316

 
$
(4,877
)
 
$
(1,561
)
The geographic mix in revenues for the twelve months ended December 31, 2019 and 2018 was as follows:
 
2019
 
2018
United States
78.8
%
 
78.1
%
Canada
7.4
%
 
8.4
%
Other
13.8
%
 
13.5
%
The change in operating results in the Advertising and Communications Group for the twelve months ended December 31, 2019 and 2018 was as follows:


2019

2018

Change
Advertising and Communications Group

$

% of
Revenue

$
 
% of
Revenue

$

%


(Dollars in Thousands)
Revenue

$
1,415,803





$
1,476,203


 

$
(60,400
)

(4.1
)%
Operating expenses







 




Cost of services sold

961,076


67.9
%

991,215


67.1
%

(30,139
)

(3.0
)%
Office and general expenses

284,286


20.1
%

296,961


20.1
%

(12,675
)

(4.3
)%
Depreciation and amortization

37,461


2.6
%

45,434


3.1
%

(7,973
)

(17.5
)%
Goodwill and other asset impairment charge

6,972


0.5
%

77,740


5.3
%

(70,768
)

(91.0
)%


1,289,795


91.1
%

1,411,350


95.6
%

(121,555
)

(8.6
)%
Operating profit

$
126,008


8.9
%

$
64,853


4.4
%

$
61,155


94.3
 %
The increase in operating profit was attributable to a decline in revenue, more than offset by lower operating expenses, as outlined below.

21



The change in the categories of expenses as a percentage of revenue in the Advertising and Communications Group for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Advertising and Communications Group
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
236,670

 
16.7
%
 
$
213,354

 
14.5
 %
 
$
23,316

 
10.9
 %
Staff costs
 
800,417

 
56.5
%
 
872,459

 
59.1
 %
 
(72,042
)
 
(8.3
)%
Administrative
 
173,712

 
12.3
%
 
189,063

 
12.8
 %
 
(15,351
)
 
(8.1
)%
Deferred acquisition consideration
 
5,403

 
0.4
%
 
(457
)
 
 %
 
5,860

 
NM

Stock-based compensation
 
29,160

 
2.1
%
 
13,757

 
0.9
 %
 
15,403

 
NM

Depreciation and amortization
 
37,461

 
2.6
%
 
45,434

 
3.1
 %
 
(7,973
)
 
(17.5
)%
Goodwill and other asset impairment charge
 
6,972

 
0.5
%
 
77,740

 
5.3
 %
 
(70,768
)
 
(91.0
)%
Total operating expenses
 
$
1,289,795

 
91.1
%
 
$
1,411,350

 
95.6
 %
 
$
(121,555
)
 
(8.6
)%
Direct costs were higher, inclusive of higher billable costs for client arrangements accounted for as principal.
The decrease in staff costs was primarily attributable to staffing reductions at Partner Firms in connection with the decline in revenues and cost savings initiatives.
The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives.
Deferred acquisition consideration change for the twelve months ended December 31, 2019 was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
The increase in stock-based compensation expense was driven by favorable operating results in connection with awards tied to performance.
For the twelve months ended December 31, 2019, an impairment charge of $7.0 million was recognized, in connection with goodwill and the sublet of leased properties, to reduce the carrying value of right-of-use lease assets and related leasehold improvements within the Global Integrated Agencies segment and the Media Services segment and in connection with the write-down of goodwill within the All Other segment.
For the twelve months ended December 31, 2018, an impairment charge of $77.7 million was recognized pertaining to goodwill within the Domestic Creative Agencies and Media Services Agencies reportable segment and a trademark within the Global Integrated Agencies reportable segment.
Global Integrated Agencies
The change in operating results in the Global Integrated Agencies reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Global Integrated Agencies
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
598,184

 
 
 
$
610,290


 
 
$
(12,106
)
 
(2.0
)%
Operating expenses
 
 
 
 
 



 
 
 
 
Cost of services sold
 
397,918

 
66.5
%
 
397,313


65.1
%
 
605

 
0.2
 %
Office and general expenses
 
122,817

 
20.5
%
 
124,646


20.4
%
 
(1,829
)
 
(1.5
)%
Depreciation and amortization
 
16,572

 
2.8
%
 
21,179


3.5
%
 
(4,607
)
 
(21.8
)%
Other asset impairment
 
1,944

 
0.3
%
 
3,180


0.5
%
 
(1,236
)
 
(38.9
)%
 
 
539,251

 
90.1
%
 
546,318


89.5
%
 
(7,067
)
 
(1.3
)%
Operating profit
 
$
58,933

 
9.9
%
 
$
63,972


10.5
%
 
$
(5,039
)
 
(7.9
)%

22



Revenue declined due to the unfavorable impact of foreign exchange of $9.7 million, or 1.6%, and by $2.4 million, or 0.4%, driven by client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients.
The decline in operating profit was primarily attributable to the decline in revenue, partially offset by lower operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the Global Integrated Agencies reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Global Integrated Agencies
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
62,803

 
10.5
%
 
$
33,441


5.5
 %
 
$
29,362

 
87.8
 %
Staff costs
 
353,506

 
59.1
%
 
397,666


65.2
 %
 
(44,160
)
 
(11.1
)%
Administrative
 
77,000

 
12.9
%
 
88,756


14.5
 %
 
(11,756
)
 
(13.2
)%
Deferred acquisition consideration
 
1,219

 
0.2
%
 
(5,999
)

(1.0
)%
 
7,218

 
NM

Stock-based compensation
 
26,207

 
4.4
%
 
8,095


1.3
 %
 
18,112

 
NM

Depreciation and amortization
 
16,572

 
2.8
%
 
21,179


3.5
 %
 
(4,607
)
 
(21.8
)%
Other asset impairment
 
1,944

 
0.3
%
 
3,180


0.5
 %
 
(1,236
)
 
(38.9
)%
Total operating expenses
 
$
539,251

 
90.1
%
 
$
546,318


89.5
 %
 
$
(7,067
)
 
(1.3
)%
Direct costs were higher, inclusive of higher billable costs for client arrangements accounted for as principal.
The decrease in staff costs was attributable to staffing reductions at certain Partner Firms in connection with the decline in revenue and cost savings initiatives.
The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives.
Deferred acquisition consideration change for the twelve months ended December 31, 2019 was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
The increase in stock-based compensation expense was driven by favorable operating results in connection with awards tied to performance.
For the twelve months ended December 31, 2019, an impairment charge of $1.9 million was recognized, in connection with the sublet of a leased property, to reduce the carrying value of a right-of-use lease asset and related leasehold improvements.
For the twelve months ended December 31, 2018, an impairment charge of $3.2 million was recognized to reduce the carrying value of a trademark.

23



Domestic Creative Agencies
The change in operating results in the Domestic Creative Agencies reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Domestic Creative Agencies
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
230,718

 
 
 
$
246,642



 
$
(15,924
)
 
(6.5
)%
Operating expenses
 
 
 
 
 



 
 
 
 
Cost of services sold
 
147,444

 
63.9
%
 
167,346


67.8
%
 
(19,902
)
 
(11.9
)%
Office and general expenses
 
50,177

 
21.7
%
 
56,365


22.9
%
 
(6,188
)
 
(11.0
)%
Depreciation and amortization
 
4,843

 
2.1
%
 
5,052


2.0
%
 
(209
)
 
(4.1
)%
Goodwill impairment
 

 
%
 
17,828


7.2
%
 
(17,828
)
 
(100.0
)%
 
 
202,464

 
87.8
%
 
246,591


100.0
%
 
(44,127
)
 
(17.9
)%
Operating profit
 
$
28,254

 
12.2
%
 
$
51

 
0.0
%
 
$
28,203

 
NM

The decline in revenue was attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients.
The change in operating profit was primarily attributable to lower operating expenses, as outlined below, partially offset by the decline in revenue.
The change in the categories of expenses as a percentage of revenue in the Domestic Creative Agencies reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Domestic Creative Agencies
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
25,412

 
11.0
%
 
$
29,124


11.8
%
 
$
(3,712
)
 
(12.7
)%
Staff costs
 
141,958

 
61.5
%
 
159,130


64.5
%
 
(17,172
)
 
(10.8
)%
Administrative
 
28,443

 
12.3
%
 
31,516


12.8
%
 
(3,073
)
 
(9.8
)%
Deferred acquisition consideration
 
276

 
0.1
%
 
1,318


0.5
%
 
(1,042
)
 
(79.1
)%
Stock-based compensation
 
1,532

 
0.7
%
 
2,623


1.1
%
 
(1,091
)
 
(41.6
)%
Depreciation and amortization
 
4,843

 
2.1
%
 
5,052


2.0
%
 
(209
)
 
(4.1
)%
Goodwill impairment
 

 
%
 
17,828


7.2
%
 
(17,828
)
 
(100.0
)%
Total operating expenses
 
$
202,464

 
87.8
%
 
$
246,591


100.0
%
 
$
(44,127
)
 
(17.9
)%
The decrease in direct costs was in connection with the decline in revenues.
The decrease in staff costs was attributable to staffing reductions at certain Partner Firms in connection with the decline in revenue and cost savings initiatives.
The decrease in administrative costs was driven by lower spending in connection with savings initiatives.
For the twelve months ended December 31, 2018, an impairment charge of $17.8 million was recognized to reduce the carrying value of goodwill.

24



Specialist Communications
The change in operating results in the Specialist Communications reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Specialist Communications
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
180,591

 
 
 
$
163,367




 
$
17,224

 
10.5
 %
Operating expenses
 
 
 
 
 
 


 
 
 
 
Cost of services sold
 
121,782

 
67.4
%
 
111,801


68.4
%
 
9,981

 
8.9
 %
Office and general expenses
 
32,410

 
17.9
%
 
30,137


18.4
%
 
2,273

 
7.5
 %
Depreciation and amortization
 
2,577

 
1.4
%
 
4,113


2.5
%
 
(1,536
)
 
(37.3
)%
 
 
156,769

 
86.8
%
 
146,051


89.4
%
 
10,718

 
7.3
 %
Operating profit
 
$
23,822

 
13.2
%
 
$
17,316


10.6
%
 
$
6,506

 
37.6
 %
The increase in operating profit was primarily attributable to higher revenue, partially offset by an increase in operating expenses, as outlined below.
The change in the categories of expenses as a percentage of revenue in the Specialist Communications reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Specialist Communications
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
46,914

 
26.0
%
 
$
42,144


25.8
%
 
$
4,770

 
11.3
 %
Staff costs
 
83,625

 
46.3
%
 
77,000


47.1
%
 
6,625

 
8.6
 %
Administrative
 
20,136

 
11.2
%
 
20,557


12.6
%
 
(421
)
 
(2.0
)%
Deferred acquisition consideration
 
3,308

 
1.8
%
 
1,865


1.1
%
 
1,443

 
NM

Stock-based compensation
 
209

 
0.1
%
 
372


0.2
%
 
(163
)
 
(43.8
)%
Depreciation and amortization
 
2,577

 
1.4
%
 
4,113


2.5
%
 
(1,536
)
 
(37.3
)%
Total operating expenses
 
$
156,769

 
86.8
%
 
$
146,051


89.4
%
 
$
10,718

 
7.3
 %
The increase in direct costs was directly related to the growth in revenue.
The increase in staff costs was primarily attributable to contributions from an acquired Partner Firm and higher costs to support the growth of certain Partner Firms.
Deferred acquisition consideration change for the twelve months ended December 31, 2019 was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations.
Media Services
The change in operating results in the Media Services reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:

25



 
 
2019
 
2018
 
Change
Media Services
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
97,825

 
 
 
$
121,859


 
 
$
(24,034
)
 
(19.7
)%
Operating expenses
 
 
 
 
 
 

 
 

 


Cost of services sold
 
74,444

 
76.1
 %
 
86,975


71.4
 %
 
(12,531
)
 
(14.4
)%
Office and general expenses
 
24,589

 
25.1
 %
 
31,319


25.7
 %
 
(6,730
)
 
(21.5
)%
Depreciation and amortization
 
3,261

 
3.3
 %
 
2,693


2.2
 %
 
568

 
21.1
 %
   Goodwill impairment and other
 
929

 
0.9
 %
 
52,041

 
42.7
 %
 
(51,112
)
 
(98.2
)%
 
 
103,223

 
105.5
 %
 
173,028


142.0
 %
 
(69,805
)
 
(40.3
)%
Operating loss
 
$
(5,398
)
 
(5.5
)%
 
$
(51,169
)

(42.0
)%
 
$
45,771

 
(89.5
)%
The decrease in revenue was primarily attributable to client losses and a reduction in spending by certain clients.
The operating loss declined primarily attributable to lower operating expenses, as outlined below, partially offset by a decline in revenue.
The change in the categories of expenses as a percentage of revenue in the Media Services reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
Media Services
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Direct costs
 
$
27,726

 
28.3
%
 
$
30,326

 
24.9
%
 
$
(2,600
)
 
(8.6
)%
Staff costs
 
53,870

 
55.1
%
 
68,716

 
56.4
%
 
(14,846
)
 
(21.6
)%
Administrative
 
17,342

 
17.7
%
 
18,697

 
15.3
%
 
(1,355
)
 
(7.2
)%
Deferred acquisition consideration
 
75

 
0.1
%
 
279

 
0.2
%
 
(204
)
 
(73.1
)%
Stock-based compensation
 
20

 
%
 
276

 
0.2
%
 
(256
)
 
(92.8
)%
Depreciation and amortization
 
3,261

 
3.3
%
 
2,693

 
2.2
%
 
568

 
21.1
 %
Goodwill impairment and other
 
929

 
0.9
%
 
52,041

 
42.7
%
 
(51,112
)
 
(98.2
)%
Total operating expenses
 
$
103,223

 
105.5
%
 
$
173,028

 
142.0
%
 
$
(69,805
)
 
(40.3
)%
The decrease in direct costs was directly related to the reduction in revenue.
The decrease in staff costs was attributable to staffing reductions in connection with client losses.
For the twelve months ended December 31, 2019, an impairment charge of $0.9 million was recognized, in connection with the sublet of a leased property, to reduce the carrying value of a right-of-use lease asset and related leasehold improvements.
For the twelve months ended December 31, 2018, an impairment charge of $52.0 million was recognized to reduce the carrying value of goodwill.

26



All Other
The change in operating results in the All Other category for the twelve months ended December 31, 2019 and 2018 was as follows:
 
 
2019
 
2018
 
Change
All Other
 
$
 
% of
Revenue
 
$
 
% of
Revenue
 
$
 
%
 
 
(Dollars in Thousands)
Revenue
 
$
308,485

 
 
 
$
334,045

 
 
 
$
(25,560
)
 
(7.7
)%
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services sold
 
219,488

 
71.2
%
 
227,780

 
68.2
%
 
(8,292
)
 
(3.6
)%
Office and general expenses
 
54,293

 
17.6
%
 
54,494

 
16.3
%
 
(201
)
 
(0.4
)%
Depreciation and amortization
 
10,208

 
3.3
%
 
12,397

 
3.7
%
 
(2,189
)
 
(17.7
)%
   Goodwill impairment
 
4,099

 
1.3
%
 
4,691

 
1.4
%
 
(592
)
 
(12.6
)%
 
 
288,088

 
93.4
%
 
299,362

 
89.6
%
 
(11,274
)
 
(3.8
)%
Operating profit
 
$
20,397

 
6.6
%
 
$
34,683

 
10.4
%
 
$
(14,286
)
 
(41.2