Stagwell Inc 10-K

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 2020 means the period beginning January 1, 2020, and ending December 31, 2020). The Company reports its financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In addition, the Company has included 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 making period-to-period comparisons 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. The non-GAAP measures included are “organic revenue growth” or “organic revenue decline” and “Adjusted EBITDA.” Organic revenue growth or organic revenue decline 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 20 Table of Contents 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 entirely 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.” Adjusted EBITDA is defined as Net income (loss) attributable to MDC Partners Inc. common shareholders plus or minus adjustments to Operating income (loss) plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, distributions from non-consolidated affiliates, and other items, net. Distributions from non-consolidated affiliates includes (i) cash received for profit distributions from non-consolidated affiliates, and (ii) consideration from the sale of ownership interests in non-consolidated affiliates less contributions to date plus undistributed earnings (losses). Other items include items such as impairment charges, fees associated with the combination of MDC with the Stagwell Entities, severance expense and other restructuring expenses, including costs for leases that will either be terminated or sublet in connection with the centralization of our New York real estate portfolio. 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 December 21, 2020, MDC and Stagwell Media LP, a Delaware limited partnership (“Stagwell”), announced that they entered into a definitive transaction agreement (the “Transaction Agreement”) providing for the combination of MDC with the subsidiaries of Stagwell that own and operate a portfolio of marketing services companies (the “Stagwell Entities”). Under the terms of the Transaction Agreement, the combination between MDC and the Stagwell Entities will be effected using an “Up-C” partnership structure. Through a series of steps and transactions (collectively, the “Transactions”), including the domestication of MDC to a Delaware corporation and the merger of MDC Delaware with one of its indirect wholly owned subsidiaries (the “MDC Merger”), MDC Delaware will become a direct subsidiary (from and after the merger, “OpCo”) of a newly-formed, Delaware-organized, NASDAQ-listed corporation (“New MDC”). Following the MDC Merger, (i) OpCo will convert into a limited liability company that will hold MDC’s operating assets and to which Stagwell will contribute the equity interests of the Stagwell Entities (the “Stagwell Contribution”) in exchange for 216,250,000 common membership interests of OpCo (the “Stagwell OpCo Units”), and (ii) Stagwell will contribute to New MDC an aggregate amount of cash equal to $100 in exchange for shares of a new Class C series of voting-only common stock (the “New MDC Class C Stock”) equal in number to the Stagwell OpCo Units. On a pro forma basis, without giving effect to any outstanding preference shares of MDC, the existing holders of MDC’s Class A and Class B shares would receive interests equal to approximately 26% of the combined company and Stagwell would be issued New MDC Class C Stock equivalent to approximately 74% of the voting rights of the combined company and exchangeable, together with Stagwell OpCo Units, into Class A shares of New MDC on a one-for-one basis at Stagwell’s election. The number of Stagwell OpCo Units and shares of New MDC Class C Stock that Stagwell will receive in 21 Table of Contents the Transactions, and the percentage of the combined company that Stagwell will hold following the consummation of the Transactions, will be reduced, and the percentage of the combined company that existing MDC shareholders will hold will be proportionally increased, if Stagwell is unable to effect certain restructuring transactions prior to the closing of the Transactions. On December 21, 2020, MDC and Broad Street Principal Investments, L.L.C., an affiliate of Goldman Sachs (“Broad Street”), entered into a letter agreement, pursuant to which Broad Street consented to the Transactions subject to entry with MDC into a definitive agreement reflecting revised terms of MDC’s issued and outstanding Series 4 convertible preference shares (the “Goldman Letter Agreement”). The revised terms of the Series 4 convertible preference shares would (subject to the closing of the Transactions) reduce the conversion price from $7.42 to $5.00 and extend accretion for two years beyond the date on which accretion would have otherwise ceased, at a reduced rate of 6%. In connection with the closing of the Transactions, Broad Street will have the right to redeem up to $30 million of its preference shares in exchange for a $25 million subordinated note or loan with a 3-year maturity (i.e., exchange at an approximately 17% discount to face value). The $25 million note or loan will accrue interest at 8.0% per annum and is, pre-payable any time at par without penalty. On December 21, 2020, MDC entered into consent and support agreements (the “Consent and Support Agreements”) with holders of more than 50% of the aggregate principal amount of its Senior Notes to consent to the consummation of the combination of MDC with the Stagwell Entities. Pursuant to the Consent and Support Agreements, MDC agreed to increase the interest rate on the Senior Notes by 1% per annum effective as of the date of the Consent and Support Agreements and to pay a consent fee of 2% to all holders of Notes upon a successful consent solicitation, or 3% if a supplemental indenture with the waivers and amendments is executed and becomes operative and the combination of MDC with the Stagwell Entities is consummated. On February 5, 2021, MDC announced it had received and accepted consents from holders of at least a majority in principal amount of the Senior Notes, and on February 8, 2021, MDC entered into a supplemental indenture providing for waivers and amendments in connection with the combination of MDC with the Stagwell Entities. On February 8, 2021, MDC filed a proxy statement/prospectus on Form S-4, which describes the Transaction Agreement, the Transactions, and ancillary agreements related thereto in more detail. Executive Summary The novel coronavirus (“COVID-19”) is a pandemic that has altered how society interacts across the world. The outbreak of COVID-19 and the measures put in place to reduce its transmission, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, have adversely impacted the global economy. We took various actions to address the pandemic. The Company implemented comprehensive controls and procedures to protect our employees, families, clients, and their communities. This included implementing a world-wide work-from-home policy and stress-testing our infrastructure to ensure that all employees had the tools and resources to work virtually. Our leadership and business continuity teams also proactively took thorough measures to ensure the highest level of continued service and partnership for our clients. Our Partner Firms altered how they work and respond to client challenges around the world, generating impactful creative work, rapid pivots, and inventive business solutions for brands in every sector. Early in 2020, the Company aligned operating expenses with changes in revenue. We implemented freezes on hiring, staff reductions, furloughs, salary reductions, benefit reductions and a significant reduction in discretionary spending. In addition to expense reductions, we tightened capital expenditures where possible to preserve our cash flow. The effects of the COVID-19 pandemic negatively impacted our results of operations, financial position and cash flows in 2020. While it is difficult to predict the continued impact of the pandemic, we anticipate that its negative impact on our revenue will continue through the first half of 2021. If the impact of the pandemic is prolonged beyond our expectation, the Company believes it is well positioned through the actions taken in 2020 to successfully work through the effects of COVID-19 in 2021. MDC conducts its business through its network of Partner Firms, 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, capital expenditures and non-GAAP measures described above. 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 22 Table of Contents 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. Effective in 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 reassessed our reportable segments to align our external reporting with how we operate the Networks under our new organizational structure. Prior periods presented have been recast to reflect the change in reportable segments. See Notes 1 and 20 of the Notes to the Consolidated Financial Statements included herein for a description of each of our reportable segments, the All Other category, as well as information regarding a change in reportable segments between the first and second quarter of 2020. The three reportable segments that result from our assessment are as follows: “Integrated Networks - Group A,” “Integrated Networks - Group B” and the “Media & Data Network.” In addition, the Company combines and discloses operating segments that do not meet the aggregation criteria as “All Other.” The Company also reports corporate expenses, as further detailed below, as “Corporate.” All segments follow the same basis of presentation and accounting policies as those described in Note 2 of the Notes to the Consolidated Financial Statements included herein. 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 . In addition to the impact of the COVID-19 pandemic discussed above, 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. Integration is typically implemented promptly, and new Partner Firms can begin to tap into the full range of MDC’s resources immediately. 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 21 of the Notes to the Consolidated Financial Statements included herein for information relating to the Company’s quarterly results. 23 Table of Contents Results of Operations: Years Ended December 31, 2020 2019 2018 Revenue: (Dollars in Thousands) Integrated Networks - Group A $ 379,648 $ 392,101 $ 393,890 Integrated Networks - Group B 435,589 531,717 551,317 Media & Data Network 139,015 161,451 183,287 All Other 244,759 330,534 346,594 Total Revenue $ 1,199,011 $ 1,415,803 $ 1,475,088 Operating Income (Loss): Integrated Networks - Group A $ 14,297 $ 35,230 $ 59,130 Integrated Networks - Group B 34,581 61,417 34,659 Media & Data Network (7,724) 2,376 (51,441) All Other (23,021) 26,205 14,243 Corporate (63,890) (45,768) (55,157) Total Operating Income (Loss) $ (45,757) $ 79,460 $ 1,434 Other Income (Expenses): Interest expense and finance charges, net $ (62,163) $ (64,942) $ (67,075) Foreign exchange gain (loss) (982) 8,750 (23,258) Other, net 20,500 (2,401) 230 Income (loss) before income taxes and equity in earnings of non-consolidated affiliates (88,402) 20,867 (88,669) Income tax expense 116,555 10,316 29,615 Income (loss) before equity in earnings of non-consolidated affiliates (204,957) 10,551 (118,284) Equity in earnings of non-consolidated affiliates (2,240) 352 62 Net income (loss) (207,197) 10,903 (118,222) Net income attributable to the noncontrolling interest (21,774) (16,156) (11,785) Net loss attributable to MDC Partners Inc. (228,971) (5,253) (130,007) Accretion on and net income allocated to convertible preference shares (14,179) (12,304) (8,355) Net loss attributable to MDC Partners Inc. common shareholders $ (243,150) $ (17,557) $ (138,362) Adjusted EBITDA: Integrated Networks - Group A $ 79,793 $ 74,822 $ 75,609 Integrated Networks - Group B 84,297 84,568 74,091 Media & Data Network 9,707 7,746 12,205 All Other 30,755 37,618 38,307 Corporate (27,220) (30,601) (38,761) Total Adjusted EBITDA $ 177,332 $ 174,153 $ 161,451 24 Table of Contents Years Ended December 31, 2020 2019 2018 Capital expenditures: Integrated Networks - Group A $ 1,087 $ 5,934 $ 8,228 Integrated Networks - Group B 987 9,270 6,352 Media & Data Network 569 627 1,632 All Other 966 2,729 3,985 Corporate 33,694 36 67 Total $ 37,303 $ 18,596 $ 20,264 Corporate’s capital expenditures in 2020 are primarily for leasehold improvements at its new headquarters at One World Trade Center in connection with the centralization of the Company’s New York real estate portfolio. As of December 31, 2020, the Company had $12,993 of capital expenditures that were incurred in the current year, but not yet paid. The following tables reconcile Net income (loss) attributable to MDC Partners Inc. common shareholders (GAAP) to Adjusted EBITDA (non-GAAP) for the twelve months ended December 31, 2020, 2019 and 2018. The adjustments from Net income (loss) attributable to MDC Partners Inc. common shareholders to Operating income (loss) are detailed in the table above. Twelve Months Ended December 31, 2020 Integrated Networks - Group A Integrated Networks - Group B Media & Data Network All Other Corporate Total (Dollars in Thousands) Net loss attributable to MDC Partners Inc. common shareholders $(243,150) Adjustments 197,393 Operating income (loss) $14,297 $34,581 $(7,724) $(23,021) $(63,890) $(45,757) Adjustments: Depreciation and amortization 6,467 17,204 4,376 7,478 1,380 36,905 Impairment and other losses 6,391 31,784 11,760 45,335 1,129 96,399 Stock-based compensation 7,580 3,191 122 304 2,982 14,179 Deferred acquisition consideration adjustments 44,073 (2,706) 375 445 — 42,187 Distributions from non-consolidated affiliates — — — — 2,175 2,175 Other items, net 985 243 798 214 29,004 31,244 Adjusted EBITDA $79,793 $84,297 $9,707 $30,755 $(27,220) $177,332 25 Table of Contents Twelve Months Ended December 31, 2019 Integrated Networks - Group A Integrated Networks - Group B Media & Data Network All Other Corporate Total (Dollars in Thousands) Net loss attributable to MDC Partners Inc. common shareholders $ (17,557) Adjustments 97,017 Operating income (loss) $ 35,230 $ 61,417 $ 2,376 $ 26,205 $ (45,768) $ 79,460 Adjustments: Depreciation and amortization 8,559 15,904 4,303 8,695 868 38,329 Impairment and other losses 4,879 1,933 929 11 847 8,599 Stock-based compensation 24,420 4,303 63 374 1,880 31,040 Deferred acquisition consideration adjustments 1,734 1,261 75 2,333 — 5,403 Distributions from non-consolidated affiliates — (250) — — 2,298 2,048 Other items, net — — — — 9,274 9,274 Adjusted EBITDA $ 74,822 $ 84,568 $ 7,746 $ 37,618 $ (30,601) $ 174,153 Twelve Months Ended December 31, 2018 Integrated Networks - Group A Integrated Networks - Group B Media & Data Network All Other Corporate Total (Dollars in Thousands) Net loss attributable to MDC Partners Inc. common shareholders $ (138,362) Adjustments 139,796 Operating income (loss) $ 59,130 $ 34,659 $ (51,441) $ 14,243 $ (55,157) $ 1,434 Adjustments: Depreciation and amortization 9,602 19,032 3,820 12,980 762 46,196 Impairment and other losses — 17,828 59,188 7,871 2,317 87,204 Stock-based compensation 5,792 6,890 320 755 4,659 18,416 Deferred acquisition consideration adjustments 1,085 (4,318) 318 2,458 — (457) Distributions from non-consolidated affiliates — — — — 779 779 Other items, net — — — — 7,879 7,879 Adjusted EBITDA $ 75,609 $ 74,091 $ 12,205 $ 38,307 $ (38,761) $ 161,451 26 Table of Contents YEAR ENDED DECEMBER 31, 2020 COMPARED TO YEAR ENDED DECEMBER 31, 2019 Consolidated Results of Operations Revenues Revenue was $1.20 billion for the twelve months ended December 31, 2020 compared to revenue of $1.42 billion for the twelve months ended December 31, 2019 representing a decrease of $216.8 million, or 15.3%. The components of the fluctuations in revenues for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 were as follows: Total United States Canada Other $ % $ % $ % $ % (Dollars in Thousands) December 31, 2019 $ 1,415,803 $ 1,116,045 $ 105,067 $ 194,691 Components of revenue change: Foreign exchange impact (1,014) (0.1) % — — % (600) (0.6) % (414) (0.2) % Non-GAAP acquisitions (dispositions), net (18,312) (1.3) % (14,607) (1.3) % (3,705) (3.5) % — — % Organic revenue (197,466) (13.9) % (141,802) (12.7) % (18,832) (17.9) % (36,832) (18.9) % Total Change (216,792) (15.3) % (156,409) (14.0) % (23,137) (22.0) % (37,246) (19.1) % December 31, 2020 $ 1,199,011 $ 959,636 $ 81,930 $ 157,445 The negative foreign exchange impact of $1.0 million, or 0.1%, 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, 2020, organic revenue decreased by $197.5 million or 13.9%. The decline in revenue from existing Partner Firms was primarily attributable to reduced spending by clients in connection with the COVID-19 pandemic. The change in revenue was primarily driven by a decline in categories including food and beverage, communications, technology, transportation, financials and automotive, partially offset by growth in healthcare. The table below provides a reconciliation between the revenue from acquired/disposed businesses in the Statements of Operations to non-GAAP acquisitions (dispositions), net for the twelve months ended December 31, 2020: Acquisition (Dispositions) Revenue Reconciliation All Other (Dollars in Thousands) GAAP revenue from 2019 and 2020 acquisitions $ — Foreign exchange impact (248) Contribution to non-GAAP organic revenue (growth) decline (411) Prior year revenue from dispositions (17,653) Non-GAAP acquisitions (dispositions), net $ (18,312) The geographic mix in revenues for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 United States 80.1 % 78.8 % Canada 6.8 % 7.4 % Other 13.1 % 13.8 % 27 Table of Contents Impairment and Other Losses The Company recognized a charge of $96.4 million for the twelve months ended December 31, 2020 consisting of an impairment of goodwill and intangible assets of $61.7 million and $12.1 million, respectively, as well as a charge of $22.7 million associated with the impairment of right-of-use lease assets and related leasehold improvements and the acceleration of variable lease expenses. The lease charge was primarily in connection with the exit of properties in New York as part of the centralization of the Company’s New York real estate portfolio. Operating Income (Loss) Operating loss for the twelve months ended December 31, 2020 was $45.8 million compared to income of $79.5 million for the twelve months ended December 31, 2019, representing a change of $125.2 million. The operating loss in 2020 was impacted by the impairment and other losses of $96.4 million as compared to operating income in 2019 being impacted by an impairment and other losses of $8.6 million in connection with a write-down of the carrying value of goodwill and right-of-use lease assets and related leasehold improvements. In addition, the decline in revenues more than offset by the reduction in operating expenses also drove the change in operating income (loss). Adjusted EBITDA Adjusted EBITDA for the twelve months ended December 31, 2020 was $177.3 million, compared to $174.2 million for the twelve months ended December 31, 2019, representing an increase of $3.2 million, principally resulting from a reduction in operating expenses that more than offset the decline in revenues. Interest Expense and Finance Charges, Net Interest expense and finance charges, net, for the twelve months ended December 31, 2020 was $62.2 million compared to $64.9 million for the twelve months ended December 31, 2019, representing a decrease of $2.8 million, primarily driven by a decline in the average amounts outstanding under the Company’s revolving credit facility and a lower amount of Senior Notes outstanding due to a partial repurchase of Notes in 2020. Foreign Exchange Transaction Gain (Loss) The foreign exchange loss for the twelve months ended December 31, 2020 was $1.0 million compared to a gain of $8.8 million for the twelve months ended December 31, 2019. The change in foreign exchange was primarily attributable to the weakening 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, 2020 was income of $20.5 million compared to loss of $2.4 million for the twelve months ended December 31, 2019. In 2020, we recognized a gain of $16.8 million related to the sale of Sloane and Company LLC (“Sloane”), an indirectly wholly owned subsidiary of the Company. Additionally, the Company repurchased $29.7 million of Senior Notes, which resulted in a gain of $7.4 million, partially offset by a loss of $3.7 million related to other investments. Income Tax Expense (Benefit) Income tax expense for the twelve months ended December 31, 2020 was $116.6 million (on pre-tax loss of $88.4 million resulting in a negative effective tax rate of 131.8%) compared to $10.3 million (on pre-tax income of $20.9 million resulting in an effective tax rate of 49.4%) for the twelve months ended December 31, 2019. The negative effective tax rate in 2020 was driven by the recognition of a valuation allowance of $128.9 million to establish a reserve primarily for U.S. deferred tax assets. The effective tax rate in 2019 was driven by the taxation of foreign operations, base erosion and anti-abuse tax, 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 $2.2 million of loss for the twelve months ended December 31, 2020 compared to $0.4 million of income for the twelve months ended December 31, 2019. Noncontrolling Interests The effect of noncontrolling interests for the twelve months ended December 31, 2020 was $21.8 million compared to $16.2 million for the twelve months ended December 31, 2019, attributable to an increase in operating results at Partner Firms with a noncontrolling interest. 28 Table of Contents Net Income (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, 2020 was $243.2 million, or $3.34 per diluted loss per share, compared to a net loss attributable to MDC Partners Inc. common shareholders of $17.6 million, or $0.25 per diluted loss per share, for the twelve months ended December 31, 2019. Integrated Networks - Group A The change in operating results in the Integrated Networks - Group A reportable segment for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change Integrated Networks - Group A $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Revenue $ 379,648 $ 392,101 $ (12,453) (3.2) % Operating expenses Cost of services sold 248,902 65.6 % 283,421 72.3 % (34,519) (12.2) % Office and general expenses 103,591 27.3 % 60,012 15.3 % 43,579 72.6 % Depreciation and amortization 6,467 1.7 % 8,559 2.2 % (2,092) (24.4) % Impairment and other losses 6,391 1.7 % 4,879 1.2 % 1,512 31.0 % 365,351 96.2 % 356,871 91.0 % 8,480 2.4 % Operating income $ 14,297 3.8 % $ 35,230 9.0 % $ (20,933) (59.4) % Adjusted EBITDA $ 79,793 21.0 % $ 74,822 19.1 % $ 4,971 6.6 % Revenue decline was primarily attributable to lower spending by clients in connection with the COVID-19 pandemic. The decline in operating income was attributable to a decline in revenue and higher operating expenses, as outlined below. The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group A reportable segment for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change Integrated Networks - Group A $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Direct costs $ 58,289 15.4 % $ 51,794 13.2 % $ 6,495 12.5 % Staff costs 204,433 53.8 % 221,456 56.5 % (17,023) (7.7) % Administrative 38,118 10.0 % 44,029 11.2 % (5,911) (13.4) % Deferred acquisition consideration 44,073 11.6 % 1,734 0.4 % 42,339 NM Stock-based compensation 7,580 2.0 % 24,420 6.2 % (16,840) (69.0) % Depreciation and amortization 6,467 1.7 % 8,559 2.2 % (2,092) (24.4) % Impairment and other losses 6,391 1.7 % 4,879 1.2 % 1,512 31.0 % Total operating expenses $ 365,351 96.2 % $ 356,871 91.0 % $ 8,480 2.4 % The increase in direct costs was associated with higher revenue from public relations services which grew in 2020 as compared to 2019. The decline in staff costs was attributable to a reduction in staff to combat the impact of the COVID-19 pandemic on the business. Administrative costs were lower due to a decline in spending resulting from the orders to work-from-home given the COVID-19 pandemic and related cost containment initiatives. The increase in deferred acquisition consideration for the twelve months ended December 31, 2020 was primarily attributable to the favorable performance of a Partner Firm achieving certain contractual targets. 29 Table of Contents Stock-based compensation expense declined in 2020 compared to 2019, which reflected the recognition of expense associated with performance based awards granted in the prior year. The impairment and other losses in the twelve months ended December 31, 2020 included an impairment charge of $6.4 million to reduce the carrying value of right-of-use lease assets and related leasehold improvements as well as the acceleration of the variable lease expenses primarily associated with the exit of properties in New York as part of the centralization of the Company’s New York real estate portfolio. For the twelve months ended December 31, 2019, an impairment charge of $4.9 million was attributable to the write-down of the carrying value of goodwill. The increase in Adjusted EBITDA grew in 2020 principally from a reduction in operating expenses that more than offset the decline in revenues. Integrated Networks - Group B The change in operating results in the Integrated Networks - Group B reportable segment for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change Integrated Networks - Group B $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Revenue $ 435,589 $ 531,717 $ (96,128) (18.1) % Operating expenses Cost of services sold 257,524 59.1 % 328,165 61.7 % (70,641) (21.5) % Office and general expenses 94,496 21.7 % 124,298 23.4 % (29,802) (24.0) % Depreciation and amortization 17,204 3.9 % 15,904 3.0 % 1,300 8.2 % Impairment and other losses 31,784 7.3 % 1,933 0.4 % 29,851 NM 401,008 92.1 % 470,300 88.4 % (69,292) (14.7) % Operating income $ 34,581 7.9 % $ 61,417 11.6 % $ (26,836) NM Adjusted EBITDA $ 84,297 19.4 % $ 84,568 15.9 % $ (271) (0.3) % The decline in revenue was primarily attributable to lower spending by clients in connection with the COVID-19 pandemic. The change in operating income was attributable to a 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 Integrated Networks - Group B reportable segment for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change Integrated Networks - Group B $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Direct costs $ 48,806 11.2 % $ 73,776 13.9 % $ (24,970) (33.8) % Staff costs 249,963 57.4 % 306,549 57.7 % (56,586) (18.5) % Administrative 52,766 12.1 % 66,574 12.5 % (13,808) (20.7) % Deferred acquisition consideration (2,706) (0.6) % 1,261 0.2 % (3,967) NM Stock-based compensation 3,191 0.7 % 4,303 0.8 % (1,112) (25.8) % Depreciation and amortization 17,204 3.9 % 15,904 3.0 % 1,300 8.2 % Impairment and other losses 31,784 7.3 % 1,933 0.4 % 29,851 NM Total operating expenses $ 401,008 92.1 % $ 470,300 88.4 % $ (69,292) (14.7) % Direct costs declined in connection with the reduction in revenue as discussed above. The decline in staff costs was attributable to a reduction in staff to combat the impact of the COVID-19 pandemic on the business. 30 Table of Contents Administrative costs were lower due to a decline in spending resulting from the orders to work-from-home given the COVID-19 pandemic and related cost containment initiatives. Deferred acquisition consideration change for the twelve months ended December 31, 2020 was primarily attributable to the aggregate performance of certain Partner Firms in 2020 relative to the previously projected expectations. The decrease in stock-based compensation expense was primarily driven by awards that fully vested in 2020. For the twelve months ended December 31, 2020, the impairment and other losses charge of $31.8 million was attributable to a $16.1 million charge to reduce the carrying value of goodwill, a $9.1 million charge to reduce the carrying value of an intangible asset and a $6.6 million impairment to reduce the carrying value of right-of-use lease assets and related leasehold improvements as well as the acceleration of the variable lease expenses associated with the exit of properties in New York as part of the centralization of the Company’s New York real estate portfolio. For the twelve months ended December 31, 2019, an impairment charge of $1.9 million was attributable to an impairment 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. Adjusted EBITDA in 2020 remained flat compared to 2019 as the decline in revenue was offset by the reduction in operating expenses. Media & Data Network The change in operating results in the Media & Data Network reportable segment for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change Media & Data Network $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Revenue $ 139,015 $ 161,451 $ (22,436) (13.9) % Operating expenses Cost of services sold 98,633 71.0 % 118,189 73.2 % (19,556) (16.5) % Office and general expenses 31,970 23.0 % 35,654 22.1 % (3,684) (10.3) % Depreciation and amortization 4,376 3.1 % 4,303 2.7 % 73 1.7 % Impairment and other losses 11,760 8.5 % 929 0.6 % 10,831 NM 146,739 105.6 % 159,075 98.5 % (12,336) (7.8) % Operating income (loss) $ (7,724) (5.6) % $ 2,376 1.5 % $ (10,100) NM Adjusted EBITDA $ 9,707 7.0 % $ 7,746 4.8 % $ 1,961 25.3 % The decrease in revenue was primarily attributable to lower spending by clients in connection with the COVID-19 pandemic. The change in operating income (loss) was attributable to the decline in revenue, partially offset by lower operating expenses, as outlined below. 31 Table of Contents The change in the categories of expenses as a percentage of revenue in the Media & Data Network reportable segment for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change Media & Data Network $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Direct costs $ 35,864 25.8 % $ 43,232 26.8 % $ (7,368) (17.0) % Staff costs 72,204 51.9 % 85,627 53.0 % (13,423) (15.7) % Administrative 22,038 15.9 % 24,846 15.4 % (2,808) (11.3) % Deferred acquisition consideration 375 0.3 % 75 — % 300 NM Stock-based compensation 122 0.1 % 63 — % 59 93.7 % Depreciation and amortization 4,376 3.1 % 4,303 2.7 % 73 1.7 % Impairment and other losses 11,760 8.5 % 929 0.6 % 10,831 NM Total operating expenses $ 146,739 105.6 % $ 159,075 98.5 % $ (12,336) (7.8) % Direct costs declined in connection with the reduction in revenue. The decline in staff costs was attributable to a reduction in staff to combat the impact of the COVID-19 pandemic on the business. Administrative costs were lower due to a decline in spending resulting from the orders to work-from-home given the COVID-19 pandemic and related cost containment initiatives. For the twelve months ended December 31, 2020, the impairment and other losses included an $11.8 million charge to reduce the carrying value of goodwill and a $5.3 million charge for the acceleration of variable lease expenses of $6.5 million associated with the exit of a property in New York as part of the centralization of the Company’s New York real estate portfolio. 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. Adjusted EBITDA in 2020 remained was higher compared to 2019 as the decline in operating expenses more than offset the decline in revenue. All Other The change in operating results in the All Other category for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change All Other $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Revenue $ 244,759 $ 330,534 $ (85,775) (26.0) % Operating expenses Cost of services sold 164,840 67.3 % 231,301 70.0 % (66,461) (28.7) % Office and general expenses 50,127 20.5 % 64,322 19.5 % (14,195) (22.1) % Depreciation and amortization 7,478 3.1 % 8,695 2.6 % (1,217) (14.0) % Impairment and other losses 45,335 18.5 % 11 — % 45,324 NM 267,780 109.4 % 304,329 92.1 % (36,549) (12.0) % Operating income (loss) $ (23,021) (9.4) % $ 26,205 7.9 % $ (49,226) NM Adjusted EBITDA $ 30,755 12.6 % $ 37,618 11.4 % $ (6,863) (18.2) % The decrease in revenue was primarily attributable to lower spending by clients due to the COVID-19 pandemic and the reduction in revenues in connection with the sale of Sloane in 2020. 32 Table of Contents The change in operating income (loss) was attributable to a 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 All Other category for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change All Other $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Direct costs $ 44,098 18.0 % $ 67,868 20.5 % $ (23,770) (35.0) % Staff costs 141,514 57.8 % 186,785 56.5 % (45,271) (24.2) % Administrative 28,606 11.7 % 38,263 11.6 % (9,657) (25.2) % Deferred acquisition consideration 445 0.2 % 2,333 0.7 % (1,888) (80.9) % Stock-based compensation 304 0.1 % 374 0.1 % (70) (18.7) % Depreciation and amortization 7,478 3.1 % 8,695 2.6 % (1,217) (14.0) % Impairment and other losses 45,335 18.5 % 11 — % 45,324 NM Total operating expenses $ 267,780 109.4 % $ 304,329 92.1 % $ (36,549) (12.0) % Direct costs declined in line with the reduction in revenues. The decline in staff costs was primarily attributable to a reduction in staff to combat the impact on the business from the COVID-19 pandemic. Administrative costs were lower due to a decline in spending resulting from the orders to work-from-home given the COVID-19 pandemic and other cost containment initiatives. Deferred acquisition consideration change for the twelve months ended December 31, 2020 was primarily attributable to the aggregate performance of certain Partner Firms in 2020 relative to the previously projected expectations. For the twelve months ended December 31, 2020, the impairment and other losses charge of $45.3 million was attributable to a $40.2 million charge to reduce the carrying value of goodwill, a $3.0 million impairment to reduce the carrying value of an intangible asset and a charge of $2.1 million to reduce the carrying value of right-of-use lease assets and related leasehold improvements as well as the acceleration of the variable lease expenses associated with the exit of properties in New York as part of the centralization of the Company’s New York real estate portfolio. Adjusted EBITDA declined in 2020 compared to 2019 as a result of the decline in revenue, partially offset by the reduction of operating expenses. Corporate The change in operating expenses for Corporate for the twelve months ended December 31, 2020 and 2019 was as follows: 2020 2019 Change Corporate $ $ $ % (Dollars in Thousands) Staff costs $ 23,817 $ 29,434 $ (5,617) (19.1) % Administrative 34,582 12,739 21,843 NM Stock-based compensation 2,982 1,880 1,102 58.6 % Depreciation and amortization 1,380 868 512 59.0 % Impairment and other losses 1,129 847 282 33.3 % Total operating expenses $ 63,890 $ 45,768 $ 18,122 39.6 % Adjusted EBITDA $ (27,220) $ (30,601) $ 3,381 (11.0) % The reduction in staff costs is primarily driven by a severance charge in 2019 not repeated in 2020. Administrative costs were higher primarily due to costs, primarily professional fees, associated with the combination of MDC with the Stagwell Entities. 33 Table of Contents The increase in stock-based compensation expense was driven by favorable operating results in connection with awards tied to performance and the grant of new awards in 2020. The impairment was recognized to write-down the carrying value of a right-of-use lease asset to its fair value. The increase in Adjusted EBITDA is a result of the change in operating expenses, and the exclusion of professional fees associated with restructuring activities and the occupancy costs associated with the centralization of our New York real estate portfolio. 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 representing a decrease of $59.3 million, or 4.0%. The components of the fluctuations in revenues for the twelve months ended December 31, 2019 compared to December 31, 2018 were as follows: Total United States Canada Other $ % $ % $ % $ % (Dollars in Thousands) December 31, 2018 $ 1,475,088 $ 1,152,399 $ 124,001 $ 198,688 Components of revenue change: Foreign exchange impact (12,697) (0.9) % — — % (2,390) (1.9) % (10,307) (5.2) % Non-GAAP acquisitions (dispositions), net (1,563) (0.1) % 11,339 1.0 % (15,483) (12.5) % 2,581 1.3 % Non-GAAP organic revenue growth (decline) (45,025) (3.1) % (47,693) (4.1) % (1,061) (0.9) % 3,729 1.9 % Total Change (59,285) (4.0) % (36,354) (3.2) % (18,934) (15.3) % (3,997) (2.0) % December 31, 2019 $ 1,415,803 $ 1,116,045 $ 105,067 $ 194,691 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 $45.0 million or 3.1%. 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 from acquired/disposed businesses in the statement of operations to non-GAAP acquisitions (dispositions), net for the twelve months ended December 31, 2019: Integrated Networks - Group B All Other Total (Dollars in Thousands) GAAP revenue from 2018 and 2019 acquisitions $ 17,882 $ 4,163 $ 22,045 Foreign exchange impact — 222 222 Contribution to non-GAAP organic revenue growth (decline) (6,547) (1,780) (8,327) Prior year revenue from dispositions — (15,503) (15,503) Non-GAAP acquisitions (dispositions), net $ 11,335 $ (12,898) $ (1,563) 34 Table of Contents The geographic mix in revenues for the years 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 % Impairment and Other Losses The Company recognized an impairment of goodwill and other assets charge of $8.6 million for the twelve months ended December 31, 2019 compared to $87.2 million for the twelve months ended December 31, 2018. The impairment consisted of the write-down of $4.9 million goodwill equal to the excess carrying value above the fair value of one reporting unit within the Integrated Networks - Group A, and a charge of $3.7 million to reduce the carrying value of right-of-use lease assets and related leasehold improvements. Operating Income (Loss) Operating income for the twelve months ended December 31, 2019 was $79.5 million, compared to $1.4 million for the twelve months ended December 31, 2018, representing a change of $78.0 million. The improvement was driven by a lower impairment charge in 2019 of $8.6 million associated with the write-down of the carrying value of goodwill, right-of-use lease assets and related leasehold improvements compared to $87.2 million in 2018 primarily in connection with a write-down of goodwill. In addition, the decline in revenues more than offset by the reduction in operating expenses also drove the change in operating income. Adjusted EBITDA Adjusted EBITDA for the twelve months ended December 31, 2019 was $174.2 million, compared to $161.5 million for the twelve months ended December 31, 2018, representing an increase of $12.7 million, principally resulting from a reduction in operating expenses that more than offset the decline in revenues. 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. Foreign Exchange Transaction Gain (Loss) The foreign exchange gain for the twelve months ended December 31, 2019 was $8.8 million compared to 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 $10.3 million (on income of $20.9 million resulting in an effective tax rate of 49.4%), driven by the taxation of foreign operations, base erosion and anti-abuse tax, 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 $29.6 million (on a loss of $88.7 million resulting in an effective tax rate of negative 33.4%), driven by an increase in valuation allowance primarily attributed to Canada and non-deductible impairments. 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. 35 Table of Contents 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 preferences shares, the net loss attributable to MDC Partners Inc. common shareholders for the twelve months ended December 31, 2019 was $17.6 million or $0.25 diluted loss per share, compared to a net loss of $138.4 million, or $2.42 diluted loss per share reported for the twelve months ended December 31, 2018. Integrated Networks - Group A The change in operating results in the Integrated Networks - Group A reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows: 2019 2018 Change Integrated Networks - Group A $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Revenue $ 392,101 $ 393,890 $ (1,789) (0.5) % Operating expenses Cost of services sold 283,421 72.3 % 263,005 66.8 % 20,416 7.8 % Office and general expenses 60,012 15.3 % 62,153 15.8 % (2,141) (3.4) % Depreciation and amortization 8,559 2.2 % 9,602 2.4 % (1,043) (10.9) % Impairment and other losses 4,879 1.2 % — — % 4,879 — % 356,871 91.0 % 334,760 85.0 % 22,111 6.6 % Operating income $ 35,230 9.0 % $ 59,130 15.0 % $ (23,900) (40.4) % Adjusted EBITDA $ 74,822 19.1 % $ 75,609 19.2 % (787) (1.0) % Revenue decline was primarily attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients of $0.2 million, or 0.0%, and unfavorable impact of foreign exchange of $2.0 million, or 0.5%. The change in operating income was attributable to a decline in revenue, and higher operating expenses, as outlined below. The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group A reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows: 2019 2018 Change Integrated Networks - Group A $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Direct costs $ 51,794 13.2 % $ 50,830 12.9 % $ 964 1.9 % Staff costs 221,456 56.5 % 220,197 55.9 % 1,259 0.6 % Administrative 44,029 11.2 % 47,254 12.0 % (3,225) (6.8) % Deferred acquisition consideration 1,734 0.4 % 1,085 0.3 % 649 59.8 % Stock-based compensation 24,420 6.2 % 5,792 1.5 % 18,628 NM Depreciation and amortization 8,559 2.2 % 9,602 2.4 % (1,043) (10.9) % Impairment and other losses 4,879 1.2 % — — % 4,879 — % Total operating expenses $ 356,871 91.0 % $ 334,760 85.0 % $ 22,111 6.6 % The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives. 36 Table of Contents 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 $4.9 million was primarily attributable to the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit. Adjusted EBITDA in 2019 remained flat compared to 2018 as the decline in revenue was offset by the reduction in operating expenses. Integrated Networks - Group B The change in operating results in the Integrated Networks - Group B reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows: 2019 2018 Change Integrated Networks - Group B $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Revenue $ 531,717 $ 551,317 $ (19,600) (3.6) % Operating expenses Cost of services sold 328,165 61.7 % 355,346 64.5 % (27,181) (7.6) % Office and general expenses 124,298 23.4 % 124,452 22.6 % (154) (0.1) % Depreciation and amortization 15,904 3.0 % 19,032 3.5 % (3,128) (16.4) % Impairment and other losses 1,933 0.4 % 17,828 3.2 % (15,895) (89.2) % 470,300 88.4 % 516,658 93.7 % (46,358) (9.0) % Operating income $ 61,417 11.6 % $ 34,659 6.3 % $ 26,758 77.2 % Adjusted EBITDA $ 84,568 15.9 % $ 74,091 13.4 % $ 10,477 14.1 % Revenue decline was primarily attributable to client losses and a reduction in spending by certain clients, partially offset by new client wins and higher spending by other clients of $26.2 million, or 4.8% and unfavorable impact of foreign exchange of $4.7 million, or 0.9%, offset by a contribution of $11.3 million, or 2.1%, from an acquired Partner Firm. The change in operating income was attributable to a decline in revenue, more than offset by lower operating expenses, as outlined below. The change in the categories of expenses as a percentage of revenue in the Integrated Networks - Group B reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows: 2019 2018 Change Integrated Networks - Group B $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Direct costs $ 73,776 13.9 % $ 56,755 10.3 % $ 17,021 30.0 % Staff costs 306,549 57.7 % 345,853 62.7 % (39,304) (11.4) % Administrative 66,574 12.5 % 74,618 13.5 % (8,044) (10.8) % Deferred acquisition consideration 1,261 0.2 % (4,318) (0.8) % 5,579 NM Stock-based compensation 4,303 0.8 % 6,890 1.2 % (2,587) (37.5) % Depreciation and amortization 15,904 3.0 % 19,032 3.5 % (3,128) (16.4) % Impairment and other losses 1,933 0.4 % 17,828 3.2 % (15,895) (89.2) % Total operating expenses $ 470,300 88.4 % $ 516,658 93.7 % $ (46,358) (9.0) % 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. 37 Table of Contents 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 decrease in stock-based compensation expense was driven by 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 attributable to an impairment 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 $17.8 million primarily attributable to the write-down of goodwill equal to the excess carrying value above the fair value of a reporting unit. The increase in Adjusted EBITDA in 2019 principally from a reduction in operating expenses that more than offset the decline in revenues. Media & Data Network The change in operating results in the Media & Data Network reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows: 2019 2018 Change Media & Data Network $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Revenue $ 161,451 $ 183,287 $ (21,836) (11.9) % Operating expenses Cost of services sold 118,189 73.2 % 129,296 70.5 % (11,107) (8.6) % Office and general expenses 35,654 22.1 % 42,424 23.1 % (6,770) (16.0) % Depreciation and amortization 4,303 2.7 % 3,820 2.1 % 483 12.6 % Impairment and other losses 929 0.6 % 59,188 32.3 % (58,259) (98.4) % 159,075 98.5 % 234,728 128.1 % (75,653) (32.2) % Operating income (loss) $ 2,376 1.5 % $ (51,441) (28.1) % $ 53,817 NM Adjusted EBITDA $ 7,746 4.8 % $ 12,205 6.7 % $ (4,459) (36.5) % The decrease in revenue was primarily attributable to client losses and a reduction in spending by certain clients. The change in operating income (loss) was attributable to a decline in revenue, more than offset by lower operating expenses. The change in the categories of expenses as a percentage of revenue in the Media & Data Network reportable segment for the twelve months ended December 31, 2019 and 2018 was as follows: 2019 2018 Change Media & Data Network $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Direct costs $ 43,232 26.8 % $ 43,363 23.7 % $ (131) (0.3) % Staff costs 85,627 53.0 % 101,267 55.3 % (15,640) (15.4) % Administrative 24,846 15.4 % 26,452 14.4 % (1,606) (6.1) % Deferred acquisition consideration 75 — % 318 0.2 % (243) (76.4) % Stock-based compensation 63 — % 320 0.2 % (257) (80.3) % Depreciation and amortization 4,303 2.7 % 3,820 2.1 % 483 12.6 % Impairment and other losses 929 0.6 % 59,188 32.3 % (58,259) (98.4) % Total operating expenses $ 159,075 98.5 % $ 234,728 128.1 % $ (75,653) (32.2) % The decrease in staff costs was attributable to staffing reductions in connection with client losses. 38 Table of Contents 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 $59.2 million was recognized, primarily attributable to the write-down of goodwill equal to the excess carrying value above the fair value of reporting unit. The decrease in Adjusted EBITDA is primarily due to the reduction in revenue, partially offset by lower operating expense. All Other The change in operating results in the All Other category for the years ended December 31, 2019 and 2018 was as follows: 2019 2018 Change All Other $ % of Revenue $ % of Revenue $ % (Dollars in Thousands) Revenue $ 330,534 $ 346,594 $ (16,060) (4.6) % Operating expenses Cost of services sold 231,301 70.0 % 243,568 70.3 % (12,267) (5.0) % Office and general expenses 64,322 19.5 % 67,932 19.6 % (3,610) (5.3) % Depreciation and amortization 8,695 2.6 % 12,980 3.7 % (4,285) (33.0) % Impairment and other losses 11 — % 7,871 2.3 % (7,860) (99.9) % 304,329 92.1 % 332,351 95.9 % (28,022) (8.4) % Operating income $ 26,205 7.9 % $ 14,243 4.1 % $ 11,962 84.0 % Adjusted EBITDA $ 37,618 11.4 % $ 38,307 11.1 % $ (689) (1.8) % The change in revenue included contributions of $3.3 million, or 1.0%, and revenue from existing Partner Firms of $1.8 million, or 0.5%, more than offset by a negative revenue impact of $16.2 million, or 4.7%, from the disposition of a Partner Firm and unfavorable impact of foreign exchange of $4.9 million, or 1.4%. In addition, revenue from existing Partner Firms increased $1.8 million, or 0.5%, at certain Partner Firms. The change in operating income was attributable to a 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 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) Direct costs $ 67,868 20.5 % $ 62,406 18.0 % $ 5,462 8.8 % Staff costs 186,785 56.5 % 205,142 59.2 % (18,357) (8.9) % Administrative 38,263 11.6 % 40,739 11.8 % (2,476) (6.1) % Deferred acquisition consideration 2,333 0.7 % 2,458 0.7 % (125) (5.1) % Stock-based compensation 374 0.1 % 755 0.2 % (381) (50.5) % Depreciation and amortization 8,695 2.6 % 12,980 3.7 % (4,285) (33.0) % Impairment and other losses 11 — % 7,871 2.3 % (7,860) (99.9) % Total operating expenses $ 304,329 92.1 % $ 332,351 95.9 % $ (28,022) (8.4) % The decrease in staff costs was primarily attributable to staff reductions and the disposition of a Partner Firm. The decrease in administrative costs was driven by lower spending across various categories in connection with savings initiatives. The decrease in deferred acquisition consideration was primarily attributable to the aggregate performance of certain Partner Firms in 2019 relative to the previously projected expectations. 39 Table of Contents For the twelve months ended December 31, 2019, the impairment charge 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, the impairment charge was primarily attributable to the write-down of goodwill equal to excess carrying value above the fair value of a reporting unit. Adjusted EBITDA in 2019 remained flat compared to 2018 as the decline in revenue was offset by the reduction in operating expenses. Corporate The change in operating expenses for Corporate for the twelve months ended December 31, 2019 and 2018 was as follows: 2019 2018 Change Corporate $ $ $ % (Dollars in Thousands) Staff costs $ 29,434 $ 30,179 $ (745) (2.5) % Administrative 12,739 17,240 (4,501) (26.1) % Stock-based compensation 1,880 4,659 (2,779) (59.6) % Depreciation and amortization 868 762 106 13.9 % Impairment and other losses 847 2,317 (1,470) (63.4) % Total operating expenses $ 45,768 $ 55,157 $ (9,389) (17.0) % Adjusted EBITDA $ (30,601) $ (38,761) $ 8,160 (21.1) % Staff costs declined in connection with a reduction in staff. The decrease in administrative costs was primarily related to lower professional fees and various other costs in connection with cost savings initiatives. Stock-based compensation was lower in the twelve months ended December 31, 2019 due to the reversal of expense previously recognized in connection with the forfeiture of a performance-based equity award. The increase in Adjusted EBITDA is a result of the change in operating expenses and the exclusion of professional fees associated with restructuring activities and the occupancy costs associated with the centralization of our New York real estate portfolio. Liquidity and Capital Resources: Liquidity The following table provides summary information about the Company’s liquidity position: 2020 2019 2018 (Dollars in Thousands) Net cash provided by operating activities $ 32,559 $ 86,539 $ 17,280 Net cash provided by (used in) investing activities $ (8,287) $ 115 $ (50,431) Net cash provided by (used in) financing activities $ (73,426) $ (11,729) $ 21,434 The effects of the COVID-19 pandemic negatively impacted the Company’s cash flows in 2020. The Company took various actions to combat the impact of COVID-19 as discussed in the Executive Summary section above. While it is difficult to predict the continued impact of the pandemic, the Company believes it is well positioned through the actions taken in 2020 to successfully work through the effects of COVID-19 in 2021. The Company had cash and cash equivalents of $60.8 million and $106.9 million as of December 31, 2020 and December 31, 2019, respectively. The Company intends to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months. The Company has historically been able to maintain and expand its business using cash generated from operating activities, funds available under its Credit Agreement, and other initiatives, such as obtaining additional debt and equity financing. At December 31, 2020, the Company had no borrowings outstanding and $192.8 million available under the Credit Agreement. 40 Table of Contents The Company’s obligations extending beyond twelve months primarily consist of deferred acquisition payments, capital expenditures, scheduled lease obligation payments, and interest payments on borrowings under the Company’s 7.50% Notes due 2024. Based on the current outlook, the Company believes future cash flows from operations, together with the Company’s existing cash balance and availability of funds under the Company’s Credit Agreement, will be sufficient to meet the Company’s anticipated cash needs for the next twelve months. The Company’s ability to make scheduled deferred acquisition payments, principal and interest payments, to refinance indebtedness or to fund planned capital expenditures will depend on future performance, which is subject to general economic conditions, the competitive environment and other factors, including those described in this 2020 Form 10-K and in the Company’s other SEC filings. Working Capital At December 31, 2020, the Company had a working capital deficit of $204.1 million compared to a deficit of $197.7 million at December 31, 2019. The Company’s working capital is impacted by seasonality in media buying, amounts spent by clients, and timing of amounts received from clients and subsequently paid to suppliers. Media buying is impacted by the timing of certain events, such as major sporting competitions and national holidays, and there can be a quarter to quarter lag between the time amounts received from clients for the media buying are subsequently paid to suppliers. The Company intends to maintain sufficient cash or availability of funds under the Credit Agreement at any particular time to adequately fund working capital should there be a need to do so from time to time. Cash Flows Operating Activities Cash flows provided by operating activities for the twelve months ended December 31, 2020 was $32.6 million, primarily driven by cash flows from earnings, partially offset by unfavorable working capital requirements, primarily driven by media and other supplier payments. Cash flows provided by operating activities for the twelve months ended December 31, 2019 was $86.5 million, primarily driven by cash flows from earnings, accompanied by nominal unfavorable working capital requirements. Cash flows provided by operating activities for the twelve months ended December 31, 2018 was $17.3 million, primarily reflecting unfavorable working capital requirements, driven by media and other supplier payments, and deferred acquisition consideration payments. Investing Activities During the twelve months ended December 31, 2020, cash flows used in investing activities was $8.3 million, which primarily consisted of proceeds of $19.6 million from the sale of the Company’s equity interest in Sloane, offset by $24.3 million of capital expenditures and $1.8 million paid for acquisitions. During the twelve months ended December 31, 2019, cash flows provided by investing activities was $0.1 million, which primarily consisted of proceeds of $23.1 million from the sale of the Company’s equity interest in Kingsdale, partially offset by $18.6 million of capital expenditures and $4.8 million paid for acquisitions. During December 31, 2018, cash flows used in investing activities was $50.4 million, primarily consisting of cash paid of $32.7 million for acquisitions and capital expenditures of $20.3 million. Financing Activities During the twelve months ended December 31, 2020, cash flows used in financing activities was $73.4 million, primarily driven by $35.4 million in deferred acquisition consideration payments, $22.0 million for the purchase of a portion of the Company’s Senior Notes and $16.0 million in distribution payments. During the twelve months ended December 31, 2019, cash flows used in financing activities was $11.7 million, primarily driven by $98.6 million in proceeds, net of fees, from the issuance of common and preferred shares, more than offset by $68.1 million in net repayments under the Credit Agreement, $30.2 million in deferred acquisition consideration payments and $12.0 million in distribution payments. During December 31, 2018, cash flows provided by financing activities was $21.4 million, primarily driven by $68.1 million in net borrowing under the Credit Agreement, offset by $32.2 million of deferred acquisition consideration payments and $14.5 million in distribution payments. Total Debt Debt, net of debt issuance costs, was $843.2 million as of December 31, 2020 as compared to $887.6 million outstanding at December 31, 2019. The decline of $44.4 million was primarily a result of the repurchase of a portion of the Company’s Senior Notes and the capitalization of consent fees due to all holders of the Senior Notes in connection with the consent to the 41 Table of Contents consummation of the combination of MDC with the Stagwell Entities. See Note 11 of the Notes to the Consolidated Financial Statements for information regarding the Company’s $870.3 million aggregate principal amount of its Senior Notes and $211.5 million senior secured revolving credit agreement due February 3, 2022 (the “Credit Agreement”). The Company is in compliance with all of the terms and conditions of the Credit Agreement, and management believes, based on its current financial projections, that the Company will continue to be in compliance with its covenants over the next twelve months. If the Company loses all or a substantial portion of its lines of credit under the Credit Agreement, or if the Company uses the maximum available amount under the Credit Agreement, it will be required to seek other sources of liquidity. If the Company were unable to find these sources of liquidity, for example through an equity offering, access to the capital markets or asset sales, the Company’s ability to fund its working capital needs and any contingent obligations with respect to acquisitions and redeemable noncontrolling interests would be adversely affected. Pursuant to the Credit Agreement, the Company must comply with certain financial covenants including, among other things, covenants for (i) total senior leverage ratio, (ii) total leverage ratio, (iii) fixed charges ratio, and (iv) minimum earnings before interest, taxes and depreciation and amortization, in each case as such term is specifically defined in the Credit Agreement. For the period ended December 31, 2020, the Company’s calculation of each of these covenants, and the specific requirements under the Credit Agreement, respectively, were calculated based on the trailing twelve months as follows: December 31, 2020 Total Senior Leverage Ratio (0.02) Maximum per covenant 2.00 Total Leverage Ratio 4.42 Maximum per covenant 6.25 Fixed Charges Ratio 2.52 Minimum per covenant 1.00 Earnings before interest, taxes, depreciation and amortization (in millions) $ 190.1 Minimum per covenant (in millions) $ 120.0 These ratios and measures are not based on GAAP and are not presented as alternative measures of operating performance or liquidity. Some of these ratios and measures include, among other things, pro forma adjustments for acquisitions, one-time charges, and other items, as defined in the Credit Agreement. They are presented here to demonstrate compliance with the covenants in the Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company. 42 Table of Contents Contractual Obligations and Other Commercial Commitments The following table provides a payment schedule of present and future obligations. Management anticipates that the obligations outstanding at December 31, 2020 will be repaid with new financing, equity offerings, asset sales and/or cash flow from operations: Payments Due by Period Contractual Obligations Total Less than 1 Year 1 – 3 Years 3 – 5 Years After 5 Years (Dollars in Thousands) Indebtedness (1) $ 870,256 $ — $ — $ 870,256 $ — Operating lease obligations 425,208 68,375 117,094 88,789 150,950 Interest on debt 227,225 64,053 130,538 32,634 — Deferred acquisition consideration (2) 83,065 53,730 29,335 — — Other long-term liabilities 5,185 2,870 2,315 — — Total contractual obligations (3) $ 1,610,939 $ 189,028 $ 279,282 $ 991,679 $ 150,950 (1) Indebtedness includes no borrowings under the Credit Agreement which is due in 2022. (2) Deferred acquisition consideration excludes future payments with an estimated fair value of $3.1 million that are contingent upon employment terms as well as financial performance and will be expensed as stock-based compensation over the required retention period. The Company estimates all of the $3.1 million will be paid in 2022. (3) Pension obligations of $17.5 million are not included since the timing of payments are not known. Other-Balance Sheet Commitments Media and Production The Company’s agencies enter into contractual commitments with media providers and agreements with production companies on behalf of its clients at levels that exceed the revenue from services. Some of our agencies purchase media for clients and act as an agent on behalf of their clients. These commitments are included in Accruals and other liabilities when the media services are delivered by the media providers. MDC takes precautions against default on payment for these services 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. Deferred Acquisition Consideration Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments, and to a lesser extent, contingent and fixed retention payments tied to continued employment of specific personnel. See Notes 2 and 9 of the Notes to the Consolidated Financial Statements for additional information regarding contingent deferred acquisition consideration. 43 Table of Contents The following table presents the changes in the deferred acquisition consideration by segment for the year ended December 31, 2020: December 31, 2020 Integrated Networks - Group A Integrated Networks - Group B Media & Data Network All Other Total (Dollars in Thousands) Beginning balance of contingent payments $ 36,124 $ 27,060 $ — $ 11,487 $ 74,671 Payments (28,538) (15,242) (375) (2,637) (46,792) Additions - acquisitions and step-up transactions 5,227 2,476 — — 7,703 Redemption value adjustments (1) 44,073 (2,706) 375 445 42,187 Stock-based compensation (1) 1,195 1,611 — — 2,806 Other 2,179 52 — (4) 2,227 Ending balance of contingent payments 60,260 13,251 — 9,291 82,802 Fixed payments — 263 — — 263 $ 60,260 $ 13,514 $ — $ 9,291 $ 83,065 (1) Redemption value adjustments are fair value changes from the Company’s initial estimates of deferred acquisition payments and stock-based compensation charges are those that are tied to continued employment. Redemption value adjustments and stock-based compensation are recorded within Office and general expenses on the Consolidated Statements of Operations. Redeemable Noncontrolling Interest When acquiring less than 100% ownership of an entity, the Company may enter into agreements that give the Company an option to purchase, or require the Company to purchase, the incremental ownership interests under certain circumstances. Where the option to purchase the incremental ownership is within the Company’s control, the amounts are recorded as noncontrolling interests in the equity section of the Company’s balance sheet. Where the incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity. See Notes 2 and 13 of the Notes to the Consolidated Financial Statements included herein for further information. The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the Credit Agreement (and refinancings thereof), and, if necessary, through the incurrence of additional debt and/or issuance of additional equity. The ultimate amount payable in the future relating to these transactions will vary because it is dependent on the future results of operations of the subject businesses and the timing of when these rights are exercised. Guarantees Generally, the Company has indemnified the purchasers of certain of its assets in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years. Historically, the Company has not made any significant indemnification payments under such agreements and no amounts has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. The Company continues to monitor the conditions that are subject to guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under any guarantees or indemnifications in the period when those losses are probable and estimable. Critical Accounting Policies and Estimates MDC has prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting financial information on Form 10-K. Preparation of the Consolidated Financial Statements and related disclosures requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed in the accompanying financial statements and footnotes. Our significant accounting policies are discussed in Note 2 of the Notes to the Consolidated Financial Statements. Our critical accounting policies are those that are considered by management to require significant judgment, use of estimates and that could have a significant impact on our financial statements. An understanding of our critical accounting policies is necessary to analyze our financial results. Our critical accounting policies include our accounting for revenue recognition, business combinations, deferred acquisition consideration, redeemable noncontrolling interests, goodwill and intangible assets, income taxes and stock-based compensation. The financial statements are evaluated on an ongoing basis and estimates are based on historical experience, current conditions 44 Table of Contents and various other assumptions believed to be reasonable under the circumstances. Actual results can differ from those estimates, and it is possible that the differences could be material. Revenue Recognition. The Company’s revenue is recognized when control of the promised goods or services is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. See Note 5 of the Notes to the Consolidated Financial Statements included herein for further information. Business Combinations. The Company has historically made, and may continue to make, selective acquisitions of marketing communications businesses. In making acquisitions, the price paid is determined by various factors, including service offerings, competitive position, reputation and geographic coverage, as well as prior experience and judgment. Due to the nature of advertising, marketing and corporate communications services companies, the companies acquired frequently have significant identifiable intangible assets, which primarily consist of customer relationships. For each of the Company’s acquisitions, a detailed review is undertaken to identify other intangible assets and a valuation is performed for all such identified assets. The Company uses several market participant measurements to determine estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. Like most service businesses, a substantial portion of the intangible asset value that the Company acquires is the specialized know-how of the workforce, which is treated as part of goodwill and is not required to be valued separately. The majority of the value of the identifiable intangible assets that the Company acquires is derived from customer relationships, including the related customer contracts, as well as trademarks. Deferred Acquisition Consideration . Most acquisitions include an initial payment at the time of closing and provide for future additional contingent purchase price payments. Contingent purchase price obligations for these transactions is recorded as a deferred acquisition consideration liability, are derived from the performance of the acquired entity and are based on predetermined formulas. These various contractual valuation formulas may be dependent on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period, and, in some cases, the currency exchange rate on the date of payment. The liability is adjusted quarterly based on changes in current information affecting each subsidiary’s current operating results and the impact this information will have on future results included in the calculation of the estimated liability. In addition, changes in various contractual valuation formulas as well as adjustments to present value impact quarterly adjustments. These adjustments are recorded in results of operations. Redeemable Noncontrolling Interests . Many of the Company’s acquisitions include contractual arrangements where the noncontrolling shareholders have an option to purchase, or may require the Company to purchase, such noncontrolling shareholders’ incremental ownership interests under certain circumstances and the Company has similar call options under the same contractual terms. The amount of consideration under these contractual arrangements is not a fixed amount, but rather is dependent upon various valuation formulas, such as the average earnings of the relevant subsidiary through the date of exercise or the growth rate of the earnings of the relevant subsidiary during that period. In the event that an incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity on the Consolidated Balance Sheet at their acquisition date fair value and adjusted for changes to their estimated redemption value through Common stock and other paid-in capital (but not less than their initial redemption value), except for foreign currency translation adjustments. These adjustments will not impact the calculation of earnings (loss) per share if the redemption values are less than the estimated fair values. Goodwill. The Company reviews goodwill for impairment annually as of October 1st of each year or more frequently if indicators of potential impairment exist. The Company performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit. For the annual impairment testing, the Company has the option of assessing qualitative factors to determine whether it is more likely than not that the carrying amount of a reporting unit exceeds its fair value or performing a quantitative goodwill impairment test. Qualitative factors considered in the assessment include industry and market considerations, the competitive environment, overall financial performance, changing cost factors such as labor costs, and other factors specific to each reporting unit such as change in management or key personnel. If the Company elects to perform the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is more than its carrying amount, then goodwill is not considered impaired and the quantitative impairment test is not necessary. For reporting units for which the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount and for reporting units for which the qualitative assessment is not performed, the Company will perform the quantitative impairment test, which compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not considered impaired and additional analysis is not required. However, if the carrying amount of the net 45 Table of Contents assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the recognition of an impairment charge is required. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. For the 2020 annual impairment test, the Company used an income approach, which incorporates the use of the discounted cash flow (“DCF”) method. The income approach requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates. The DCF estimates incorporate expected cash flows that represent a spectrum of the amount and timing of possible cash flows of each reporting unit from a market participant perspective. The expected cash flows are developed from the Company’s long-range planning process using projections of operating results and related cash flows based on assumed long-term growth rates and demand trends and appropriate discount rates based on a reporting units weighted average cost of capital (“WACC”) as determined by considering the observable WACC of comparable companies and factors specific to the reporting unit. The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and the Company’s expectations. We performed the quantitative impairment test in 2020. See Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding the Company’s impairment test and impairment charges recognized. The Company utilized long-term growth rates and a WACC for the Company’s reporting units ranging from 0% to 3% and 11% to 21%, respectively, in our annual goodwill impairment test. For the 2020 annual goodwill impairment test, the Company had 23 reporting units, all of which were subject to the quantitative goodwill impairment test. The excess of fair value over the carrying amount ("headroom") for the Company’s reporting units ranged from 2% to in excess of 100%. The Company performed a sensitivity analysis which included a 1% increase in the WACC, which resulted in a nominal impairment for one reporting with a headroom of 2%. The Company believes the estimates and assumptions used in the calculations are reasonable. However, if there was an adverse change in the facts and circumstances, then an impairment charge may be necessary in the future. Specifically, as mentioned above, the fair value of one reporting unit, with goodwill of approximately $89 million, exceeded its carrying value by 2% and therefore is highly sensitive to adverse changes in the facts and circumstances that could result in a possible future impairment. Should the fair value of any of the Company’s reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. The Company monitors its reporting units to determine if there is an indicator of potential impairment. Income Taxes. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management evaluates on a quarterly basis all available positive and negative evidence considering factors such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies, changes in tax laws and other factors. The periodic assessment of the net carrying value of the Company’s deferred tax assets under the applicable accounting rules requires significant management judgment. A change to any of these factors could impact the estimated valuation allowance and income tax expense. Stock-based Compensation . The fair value method is applied to all awards granted, modified or settled. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the service period that is the award’s vesting period. Awards based on performance conditions are recorded as compensation expense when the performance conditions are expected to be met. See Note 15 of the Notes to the Consolidated Financial Statements for further information. From time to time, certain acquisitions and step-up transactions include an element of compensation related payments. The Company accounts for those payments as stock-based compensation. New Accounting Pronouncements Information regarding new accounting pronouncements can be found in Note 3 of the Notes to the Consolidated Financial Statements included herein.