# Stagwell Inc (STGW) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Stagwell Inc's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/876883/000087688323000010/stgw-20221231.htm
Accession: 0000876883-23-000010
Filing date: 2023-03-06
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/STGW/
All MD&A years: /company/STGW/mda/
Previous year: /company/STGW/mda/fy2021/ (FY 2021)
Next year: /company/STGW/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis are based on and should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Form 10-K. The following discussion and analysis contains forward-looking statements and should be read in conjunction with the disclosures and information contained and referenced under the captions “Forward-Looking Statements” and “Risk Factors” in this Form 10-K. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. A description of the non-GAAP financial measures discussed in this section and reconciliations to the comparable GAAP measures are below.

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In this section, the terms “Stagwell,” “we,” “us,” “our” and the “Company” refer (i) with respect to events occurring or periods ending before August 2, 2021, to Stagwell Marketing Group LLC and its direct and indirect subsidiaries and (ii) with respect to events occurring or periods ending on or after August 2, 2021, to Stagwell Inc. and its direct and indirect subsidiaries. References to a “fiscal year” mean the Company’s year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2022 means the period beginning January 1, 2022, and ending December 31, 2022).

Executive Summary

Overview

Stagwell conducts its business through its networks, which provide marketing and business solutions that realize the potential of combining data and creativity. Stagwell’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. Stagwell’s differentiation lies in its 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. Stagwell 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.

Stagwell manages its business by monitoring several financial and non-financial performance indicators. The key indicators that we focus on are revenue, operating expenses, capital expenditures and the non-GAAP financial measures described below. Revenue growth is analyzed by reviewing a mix of measurements, including (i) growth by major geographic location, (ii) growth from existing clients and the addition of new clients, (iii) growth by principal capability, (iv) growth from currency changes, and (v) 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 networks. These indicators may include a network’s recent new client win/loss record; the depth and scope of a pipeline of potential new client account activity; the overall quality of the services provided to clients; and the relative strength of the network’s next generation team that is in place as part of a potential succession plan to succeed the current senior executive team.

Business Combination

On December 21, 2020, MDC and Stagwell Media LP announced that they had entered into the Transaction Agreement, providing for the combination of MDC with the “Stagwell Subject Entities.” The Stagwell Subject Entities comprised Stagwell Marketing and its direct and indirect subsidiaries.

On August 2, 2021 (the “Closing Date”), we completed the Transactions. In connection with the Transactions, among other things, (i) MDC completed a series of transactions pursuant to which it emerged as a wholly owned subsidiary of the Company, converted into OpCo; (ii) Stagwell Media contributed the equity interests of Stagwell Marketing and its direct and indirect subsidiaries to OpCo; and (iii) the Company converted into a Delaware corporation, succeeded MDC as the publicly-traded company and changed its name to Stagwell Inc.

The Transactions were treated as a reverse acquisition for financial reporting purposes, with MDC treated as the legal acquirer and Stagwell Marketing treated as the accounting acquirer. As a result of the Transactions and the change in our business and operations, under applicable accounting principles, the historical financial results of Stagwell Marketing prior to August 2, 2021 are considered our historical financial results. Accordingly, historical information presented in this Form 10-K for events occurring or periods ending before August 2, 2021 does not reflect the impact of the Transactions and may not be comparable with historical information for events occurring or periods ending on or after August 2, 2021, which do not include the financial results of MDC. See Note 4 of the Notes included herein for additional information regarding the Transactions.

Recent Developments

On March 1, 2023, the Board authorized an extension and a $125.0 million increase in the size of the Repurchase Program to an aggregate of $250.0 million, with any previous purchases under the Repurchase Program continuing to count against that limit. The Repurchase Program, as amended, will expire on March 1, 2026.

Significant Factors Affecting our Business and Results of Operations

The most significant factors affecting our business and results of operations 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 digital and data-driven products that our Brands offer. A client may choose to change marketing communication firms for several reasons, such as a change in leadership where new management wants to retain a Brand that it may have previously worked with. In addition, if

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the client is merged or acquired by another company, the marketing communication firm is often changed. Clients also change firms as a result of the firm’s failure to meet marketing performance targets or other expectations in client service delivery.

Seasonality

Historically, we typically generate the highest quarterly revenue during the fourth quarter in each year. In addition, client concentration increases during election years due to the cyclical nature of our advocacy Brands. The highest volumes of retail related consumer marketing increase with the back-to-school season through the end of the holiday season.

Non-GAAP Financial Measures

The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“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 financial measures included are “organic revenue growth or decline,” “Adjusted EBITDA,” and “Adjusted Diluted EPS.”

“Organic revenue growth” and “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 prior period revenue for any acquired businesses, less the prior period revenue of any businesses that were disposed of during the current period. The organic revenue growth (decline) component reflects the constant currency impact of (a) the change in revenue of the Brands that the Company has held throughout each of the comparable periods presented, and (b) “Net acquisitions (divestitures).” Net acquisitions (divestitures) 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 the same prior year 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.

Adjusted EBITDA is defined as Net income (loss) attributable to Stagwell Inc. common shareholders excluding non-operating income or expense to achieve operating income (loss), plus depreciation and amortization, stock-based compensation, deferred acquisition consideration adjustments, and other items. Other items include restructuring costs, acquisition-related expenses, and non-recurring items.

Adjusted Diluted EPS is defined as (i) Net income (loss) attributable to Stagwell Inc. common shareholders, plus net income attributable to Class C shareholders, excluding the impact of amortization expense, impairment and other losses, stock-based compensation, deferred acquisition consideration adjustments, discrete tax items, and other items, based on total consolidated amounts, then allocated to Stagwell Inc. common shareholders and Class C shareholders, based on their respective income allocation percentage using a normalized effective income tax rate divided by (ii) (a) the weighted average number of common shares outstanding plus (b) the weighted average number of shares of Class C Common Stock outstanding. Other items includes restructuring costs, acquisition-related expenses, and non-recurring items. The diluted weighted average shares outstanding include shares of Class C Common Stock as if converted to shares of Class A Common Stock to calculate Adjusted Diluted EPS.

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 in Item 7 herein that are not considered meaningful are presented as “NM.”

Segments

The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues and incurs expenses, (ii) has discrete financial information, and is (iii) regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Mark Penn, Chief Executive Officer and Chairman, to make decisions regarding resource allocation for the segment and assess its performance. Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable. This determination is based upon a quantitative analysis of the expected and historic average long-term profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.

The CODM uses Adjusted EBITDA as a key metric, to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions.

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Due to changes in the Company’s internal management and reporting structure in the second quarter of 2022, reportable segment results for periods presented prior to the second quarter of 2022 have been recast to reflect the reclassification of certain reporting units (Brands) between operating segments. The changes in reportable segments were that the Forsman & Bodenfors, Observatory, Crispin Porter Bogusky, Bruce Mau and Vitro Brands, previously within the Integrated Agencies Network, are now within the Stagwell Brand Performance Network.

The Company has three reportable segments as follows: “Integrated Agencies Network,” “Brand Performance Network” and the “Communications 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. See Note 2 of the Notes included herein for the Company’s significant accounting policies.

In addition, Stagwell reports its corporate office expenses incurred in connection with the strategic resources provided to the networks, as well as certain other centrally managed expenses that are not fully allocated to the operating segments as Corporate. Corporate provides client and business development support to the networks as well as certain strategic resources, including accounting, administrative, financial, real estate, human resource and legal functions.

The following discussion focuses on the operating performance of the Company for the years ended December 31, 2022 and 2021 and the financial condition of the Company as of December 31, 2022.

For similar operating and financial data and discussion of the Company’s year ended December 31, 2021 results compared to the Company’s year ended December 31, 2020 results, refer to Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K that was filed with the SEC on March 17, 2022, including the sections entitled “Result of Operations — Twelve Months Ended December 31, 2021 Compared to Twelve Months Ended December 31, 2020” and “Liquidity — Cash Flows”.

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Results of Operations:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2022","","2021","","2020"],["","","","","","(dollars in thousands)"],["Revenue:"],["Integrated Agencies Network","","","","","$","1,479,802","","","$","770,056","","","$","221,595"],["Brand Performance Network","","","","","757,208","","","424,632","","","262,362"],["Communications Network","","","","","430,820","","","248,832","","","382,815"],["All Other","","","","","19,962","","","25,843","","","21,260"],["Total Revenue","","","","","$","2,687,792","","","$","1,469,363","","","$","888,032"],["Operating Income","","","","","$","159,228","","","$","44,726","","","$","83,740"],["Other Income (Expenses):"],["Interest expense, net","","","","","(76,062)","","","(31,894)","","","(6,223)"],["Foreign exchange, net","","","","","(2,606)","","","(3,332)","","","(721)"],["Other, net","","","","","(7,059)","","","50,058","","","544"],["Income before income taxes and equity in earnings of non-consolidated affiliates","","","","","73,501","","","59,558","","","77,340"],["Income tax expense","","","","","7,580","","","23,398","","","5,937"],["Income before equity in earnings of non-consolidated affiliates","","","","","65,921","","","36,160","","","71,403"],["Equity in income (loss) of non-consolidated affiliates","","","","","(79)","","","(240)","","","58"],["Net income","","","","","65,842","","","35,920","","","71,461"],["Net income attributable to noncontrolling and redeemable noncontrolling interests","","","","","(38,573)","","","(14,884)","","","(15,105)"],["Net income attributable to Stagwell Inc. common shareholders","","","","","$","27,269","","","$","21,036","","","$","56,356"],["Reconciliation to Adjusted EBITDA:"],["Net income attributable to Stagwell Inc. common shareholders","","","","","$","27,269","","","$","21,036","","","$","56,356"],["Non-operating items (1)","","","","","131,959","","","23,690","","","27,384"],["Operating income","","","","","159,228","","","44,726","","","83,740"],["Depreciation and amortization","","","","","131,273","","","77,503","","","41,025"],["Impairment and other losses","","","","","122,179","","","16,240","","","\u2014"],["Stock-based compensation","","","","","33,152","","","75,032","","","\u2014"],["Deferred acquisition consideration","","","","","(13,405)","","","18,721","","","4,497"],["Other items, net","","","","","18,691","","","21,430","","","13,906"],["Adjusted EBITDA","","","","","$","451,118","","","$","253,652","","","$","143,168"],["(1) Non-operating items includes items within the Statements of Operations, below Operating Income, and above Net income attributable to Stagwell Inc. common shareholders."]]
[[/GREPCENT_TABLE]]

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YEAR ENDED DECEMBER 31, 2022 COMPARED TO YEAR ENDED DECEMBER 31, 2021

Consolidated Results of Operations

The components of operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","2021","Change"],["","","(dollars in thousands)"],["","","","","","","$","","%"],["Revenue","","$","2,687,792","","","$","1,469,363","","","$","1,218,429","","","82.9","%"],["Operating Expenses"],["Cost of services","","1,673,576","","","906,856","","","766,720","","","84.5","%"],["Office and general expenses","","601,536","","","424,038","","","177,498","","","41.9","%"],["Depreciation and amortization","","131,273","","","77,503","","","53,770","","","69.4","%"],["Impairment and other losses","","122,179","","","16,240","","","105,939","","","NM"],["","","$","2,528,564","","","$","1,424,637","","","$","1,103,927","","","77.5","%"],["Operating income","","$","159,228","","","$","44,726","","","$","114,502","","","NM"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Change"],["","(dollars in thousands)"],["","","","","","$","","%"],["Net Revenue","$","2,222,153","","","$","1,268,937","","","$","953,216","","","75.1","%"],["Billable costs","465,639","","","200,426","","","265,213","","","NM"],["Revenue","2,687,792","","1,469,363","","1,218,429","","","82.9","%"],["Billable costs","465,639","","","200,426","","","265,213","","","NM"],["Staff costs","1,392,535","","","790,121","","","602,414","","","76.2","%"],["Administrative costs","256,755","","","144,294","","","112,461","","","77.9","%"],["Unbillable and other costs, net","121,745","","","80,870","","","40,875","","","50.5","%"],["Adjusted EBITDA","451,118","","","253,652","","","197,466","","","77.8","%"],["Stock-based compensation","33,152","","","75,032","","","(41,880)","","","(55.8)","%"],["Depreciation and amortization","131,273","","","77,503","","","53,770","","","69.4","%"],["Deferred acquisition consideration","(13,405)","","","18,721","","","(32,126)","","","NM"],["Impairment and other losses","122,179","","","16,240","","","105,939","","","NM"],["Other items, net","18,691","","","21,430","","","(2,739)","","","(12.8)","%"],["Operating Income (1)","$","159,228","","","$","44,726","","","$","114,502","","","NM"],["(1) See the Results of Operations section above for a reconciliation of Operating Income to Net Income attributable to Stagwell Inc. common shareholders."]]
[[/GREPCENT_TABLE]]

Revenue

Revenue for the year ended December 31, 2022 was $2,687.8 million compared to $1,469.4 million for the year ended December 31, 2021, an increase of $1,218.4 million.

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Net Revenue

The components of the fluctuations in net revenue for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","","Net Revenue - Components of Change","","","","","","Change"],["","Year Ended December 31, 2021","","Foreign Currency","","Net Acquisitions (Divestitures)","","Organic","","Total Change","","Year Ended December 31, 2022","","Organic","","Total"],["","(dollars in thousands)"],["Integrated Agencies Network","$","683,563","","","$","(4,467)","","","$","458,712","","","$","109,560","","","$","563,805","","","$","1,247,368","","","16.0","%","","82.5","%"],["Brand Performance Network","393,481","","","(9,542)","","","188,168","","","95,775","","","274,401","","","667,882","","","24.3","%","","69.7","%"],["Communications Network","166,050","","","(484)","","","51,460","","","69,915","","","120,891","","","286,941","","","42.1","%","","72.8","%"],["All Other","25,843","","","(835)","","","(4,616)","","","(430)","","","(5,881)","","","19,962","","","(1.7)","%","","(22.8)","%"],["","$","1,268,937","","","$","(15,328)","","","$","693,724","","","$","274,820","","","$","953,216","","","$","2,222,153","","","21.7","%","","75.1","%"],["Component % change","","","(1.2)%","","54.7%","","21.7%","","75.1%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2022, organic net revenue increased $274.8 million, or 21.7%. The organic revenue growth was primarily attributable to increased spending by existing clients and business with new clients, as well as higher public relations business due to advocacy services, as these are typically higher during election years. The increase in net acquisitions (divestitures) was primarily driven by the acquisition of MDC.

The geographic mix in net revenues for the years ended December 31, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["","(dollars in thousands)"],["United States","$","1,790,776","","","$","1,039,934"],["United Kingdom","175,422","","","101,900"],["Other","255,955","","","127,103"],["Total","$","2,222,153","","","$","1,268,937"]]
[[/GREPCENT_TABLE]]

Impairment and Other Losses

The Company recognized an impairment and other losses charge of $122.2 million for the year ended December 31, 2022, primarily related to the impairment of goodwill, right-of-use leases assets and intangible assets.

The Company recognized a charge of $116.7 million of goodwill impairment to write-down the carrying value in excess of the fair value of eight reporting units, two within the Integrated Agencies Network, five within the Brand Performance Network and one within the All Other category. The expense was recorded within Impairment and other losses on the Consolidated Statements of Operations.

The Company recognized a charge of $2.6 million to reduce the carrying value of three of its right-of-use lease assets and related leasehold improvements. These right-of-use lease assets related to agencies within the Integrated Agencies Network and the Brand Performance Network. This impairment charge is included in Impairment and other losses within the Consolidated Statements of Operations.

The Company recognized a charge of $1.4 million to reduce the carrying values of intangible assets within the Integrated Agencies Network and Brand Performance Network reportable segments primarily in connection with the abandonment of certain trade names as part of the integration of certain entities. The impairment charge was recorded within Impairment and other losses on the Consolidated Statements of Operations

During the year ended December 31, 2021, the Company recognized an impairment and other loss of $16.2 million in connection with a write-down of trade names no longer in use.

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Operating Income

Operating income for the year ended December 31, 2022 was $159.2 million compared to $44.7 million for the year ended December 31, 2021, representing an increase of $114.5 million.

Operating income for the year ended December 31, 2022 was impacted primarily by an increase in revenue and expenses from existing operations and due to the acquisition of MDC.

Stock-based compensation expense decreased, primarily driven by awards issued to employees in the third quarter of 2021, in connection with the acquisition of MDC, that fully vested in the third quarter of 2021 and the first quarter of 2022, partially offset by awards issued in 2022.

Deferred acquisition consideration decreased primarily due to a decline in fair value associated with a Brand in which the deferred acquisition consideration liability originated in the fourth quarter of 2021 from the purchase of the remaining interest we did not already own.

Depreciation and amortization increased primarily due to the recognition of depreciable fixed assets and amortizable intangible assets in connection with the acquisitions of MDC and GoodStuff Holdings Limited (“Goodstuff”).

Impairment and other losses increased primarily due to the impairment of goodwill, intangible assets and right-of-use lease assets in 2022.

Other, net

Other, net, for the year ended December 31, 2022 was expense of $7.1 million, compared to income of $50.1 million for the year ended December 31, 2021 a decrease of $57.1 million, primarily due to a gain of approximately $43.0 million in connection with the sale of Reputation Defender in the third quarter of 2021.

Foreign Exchange Transaction Gain (Loss)

The foreign exchange loss for the year ended December 31, 2022 was $2.6 million compared to a loss of $3.3 million for the year ended December 31, 2021.

Interest Expense, Net

Interest expense, net, for the year ended December 31, 2022 was $76.1 million compared to $31.9 million for the year ended December 31, 2021, an increase of $44.2 million, primarily driven by a higher level of debt due to the issuance of $1,100.0 million aggregate principal amount of 5.625% senior notes due 2029 (“5.625% Notes”) in August 2021.

Income Tax Expense

The Company had an income tax expense for the year ended December 31, 2022 of $7.6 million (on a pre-tax income of $73.5 million resulting in an effective tax rate of 10.3%) compared to income tax expense of $23.4 million (on pre-tax income of $59.6 million resulting in an effective tax rate of 39.3%) for the year ended December 31, 2021.

The difference in the effective tax rate of 10.3% in the year ended December 31, 2022 as compared to 39.3% in the year ended December 31, 2021 was primarily related to share-based compensation, revaluation of the TRA step up, and return to provision adjustments in the year ended December 31, 2022 and a change in ownership of OpCo, offset in part by the impact of non-deductible goodwill impairments in the year ended December 31, 2022.

Noncontrolling and Redeemable Noncontrolling Interests

The effect of noncontrolling and redeemable noncontrolling interests for the year ended December 31, 2022 was $38.6 million compared to $14.9 million for the year ended December 31, 2021. The increase is primarily related to noncontrolling interest income associated with holders of Class C Common Stock.

Net Income (Loss) Attributable to Stagwell Inc. Common Shareholders

As a result of the foregoing, net income attributable to Stagwell Inc. common shareholders for the year ended December 31, 2022 was $27.3 million compared to net income attributable to Stagwell Inc. common shareholders of $21.0 million for the year ended December 31, 2021.

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Earnings Per Share

Diluted EPS and Adjusted Diluted EPS for the year ended December 31, 2022 was as follows:

[[GREPCENT_TABLE]]
[["","","Reported (GAAP)","","Adjustments(1)","","(Non-GAAP)"],["","","(dollars in thousands, except per share amounts)"],["Net income attributable to Stagwell Inc. common shareholders","","$","27,269","","","$","95,147","","","$","122,416"],["Net income attributable to Class C shareholders","","24,452","","","120,655","","","145,107"],["Net income attributable to Stagwell Inc. and Class C and adjusted net income","","$","51,721","","","$","215,802","","","$","267,523"],["Weighted average number of common shares outstanding","","130,625","","","\u2014","","","130,625"],["Weighted average number of common Class C shares outstanding","","165,971","","","\u2014","","","165,971"],["Weighted average number of shares outstanding","","296,596","","","\u2014","","","296,596"],["Diluted EPS and Adjusted Diluted EPS","","$","0.17","","","","","$","0.90"],["Adjustments to Net Income(1)"],["","","Pre-Tax","","Tax","","Net"],["","","(dollars in thousands)"],["Amortization","","$","104,763","","","$","(20,953)","","","$","83,810"],["Impairment and other losses","","122,179","","","(1,093)","","","121,086"],["Stock-based compensation","","33,152","","","(6,630)","","","26,522"],["Deferred acquisition consideration","","(13,405)","","","2,681","","","(10,724)"],["Other items, net","","18,691","","","(3,738)","","","14,953"],["Tax adjustments","","7,482","","","(27,327)","","","(19,845)"],["","","$","272,862","","","$","(57,060)","","","$","215,802"]]
[[/GREPCENT_TABLE]]

Adjusted EBITDA

Adjusted EBITDA for the year ended December 31, 2022 was $451.1 million, compared to $253.7 million for the year ended December 31, 2021, representing an increase of $197.5 million, primarily driven by the increase in revenue from existing operations and the acquisitions of MDC and Goodstuff, partially offset by higher operating expenses.

Integrated Agencies Network

The components of operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","Change"],["","","(dollars in thousands)"],["","","","","","","$","","%"],["Revenue","","$","1,479,802","","","$","770,056","","","$","709,746","","","92.2","%"],["Operating Expenses"],["Cost of services","","951,003","","","506,195","","","444,808","","","87.9","%"],["Office and general expenses","","262,560","","","167,993","","","94,567","","","56.3","%"],["Depreciation and amortization","","74,609","","","37,646","","","36,963","","","98.2","%"],["Impairment and other losses","","52,360","","","1,394","","","50,966","","","NM"],["","","$","1,340,532","","","$","713,228","","","$","627,304","","","88.0","%"],["Operating income","","$","139,270","","","$","56,828","","","$","82,442","","","NM"]]
[[/GREPCENT_TABLE]]

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Table of Contents

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Change"],["","(dollars in thousands)"],["","","","","","$","","%"],["Net Revenue","$","1,247,368","","","$","683,563","","","$","563,805","","","82.5","%"],["Billable costs","232,434","","","86,493","","","145,941","","","NM"],["Revenue","1,479,802","","","770,056","","","709,746","","","92.2","%"],["Billable costs","232,434","","","86,493","","","145,941","","","NM"],["Staff costs","771,324","","","405,589","","","365,735","","","90.2","%"],["Administrative costs","112,285","","","59,479","","","52,806","","","88.8","%"],["Unbillable and other costs, net","70,116","","","54,899","","","15,217","","","27.7","%"],["Adjusted EBITDA","293,643","","","163,596","","","130,047","","","79.5","%"],["Stock-based compensation","13,774","","","47,190","","","(33,416)","","","(70.8)","%"],["Depreciation and amortization","74,609","","","37,646","","","36,963","","","98.2","%"],["Deferred acquisition consideration","9,157","","","18,457","","","(9,300)","","","(50.4)","%"],["Impairment and other losses","52,360","","","1,394","","","50,966","","","NM"],["Other items, net","4,473","","","2,081","","","2,392","","","NM"],["Operating Income","$","139,270","","","$","56,828","","","$","82,442","","","NM"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue for the year ended December 31, 2022 was $1,479.8 million compared to $770.1 million for the year ended December 31, 2021, an increase of $709.7 million.

Net Revenue

The components of the fluctuations in net revenue for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","","Net Revenue - Components of Change","","","","","","Change"],["","Year Ended December 31, 2021","","Foreign Currency","","Net Acquisitions (Divestitures)","","Organic","","Total Change","","Year Ended December 31, 2022","","Organic","","Total"],["","(dollars in thousands)"],["Integrated Agencies Network","$","683,563","","","$","(4,467)","","","$","458,712","","","$","109,560","","","$","563,805","","","$","1,247,368","","","16.0","%","","82.5","%"],["Component % change","","","(0.7)%","","67.1%","","16.0%","","82.5%"]]
[[/GREPCENT_TABLE]]

The growth in organic net revenue was primarily attributable to increased spending by existing and new clients, primarily driven by creative, digital transformation and consumer insights services. The increase in net acquisitions (divestitures) was primarily driven by the acquisition of MDC.

Operating Income

The increase in expenses was primarily driven by higher costs associated with providing services as well as the acquisition of MDC.

Stock-based compensation expense decreased, primarily driven by awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022 as well as a net decrease in the value of profits interests awards in 2022.

Depreciation and amortization grew due to the recognition of depreciable fixed assets and amortizable intangible assets primarily in connection with the acquisition of MDC.

Deferred acquisition consideration decreased primarily due to the earn-out periods for certain of our Brands ending in the second quarter of 2022 and thus the final payments being made to those Brands at that time.

Impairment and other losses for the year ended December 31, 2022 of $52.4 million relates to the impairment of goodwill, an intangible asset, and right-of-use lease assets in 2022.

50

Table of Contents

Operating income and Adjusted EBITDA were higher driven by the increase in revenues, partially offset by higher expenses as detailed above.

Brand Performance Network

The components of operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","Change"],["","","(dollars in thousands)"],["","","","","","","$","","%"],["Revenue","","$","757,208","","","$","424,632","","","$","332,576","","","78.3","%"],["Operating Expenses"],["Cost of services","","439,814","","","219,492","","","220,322","","","NM"],["Office and general expenses","","217,254","","","148,761","","","68,493","","","46.0","%"],["Depreciation and amortization","","33,674","","","26,031","","","7,643","","","29.4","%"],["Impairment and other losses","","50,778","","","14,846","","","35,932","","","NM"],["","","$","741,520","","","$","409,130","","","$","332,390","","","81.2","%"],["Operating income","","$","15,688","","","$","15,502","","","$","186","","","1.2","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Change"],["","(dollars in thousands)"],["","","","","","$","","%"],["Net Revenue","$","667,882","","","$","393,481","","","$","274,401","","","69.7","%"],["Billable costs","89,326","","","31,151","","","58,175","","","NM"],["Revenue","757,208","","","424,632","","","332,576","","","78.3","%"],["Billable costs","89,326","","","31,151","","","58,175","","","NM"],["Staff costs","412,982","","","244,078","","","168,904","","","69.2","%"],["Administrative costs","90,853","","","58,411","","","32,442","","","55.5","%"],["Unbillable and other costs, net","48,212","","","25,050","","","23,162","","","92.5","%"],["Adjusted EBITDA","115,835","","","65,942","","","49,893","","","75.7","%"],["Stock-based compensation","5,830","","","5,251","","","579","","","11.0","%"],["Depreciation and amortization","33,674","","","26,031","","","7,643","","","29.4","%"],["Deferred acquisition consideration","1,736","","","184","","","1,552","","","NM"],["Impairment and other losses","50,778","","","14,846","","","35,932","","","NM"],["Other items, net","8,129","","","4,128","","","4,001","","","96.9","%"],["Operating Income","$","15,688","","","$","15,502","","","$","186","","","1.2","%"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue for the year ended December 31, 2022 was $757.2 million compared to $424.6 million for the year ended December 31, 2021, an increase of $332.6 million.

51

Table of Contents

Net Revenue

The components of the fluctuations in net revenue for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","","Net Revenue - Components of Change","","","","","","Change"],["","Year Ended December 31, 2021","","Foreign Currency","","Net Acquisitions (Divestitures)","","Organic","","Total Change","","Year Ended December 31, 2022","","Organic","","Total"],["","(dollars in thousands)"],["Brand Performance Network","$","393,481","","","$","(9,542)","","","$","188,168","","","$","95,775","","","$","274,401","","","$","667,882","","","24.3","%","","69.7","%"],["Component % change","","","(2.4)%","","47.8%","","24.3%","","69.7%"]]
[[/GREPCENT_TABLE]]

The increase in organic net revenue was primarily attributable to new clients and increased spending by existing clients. The increase in net acquisitions (divestitures) was primarily driven by the acquisitions of MDC and Goodstuff.

Operating Income

The increase in expenses was primarily driven by an increase in the costs associated with providing services as well as the impact of the acquisitions of MDC and Goodstuff.

Depreciation and amortization expense increased primarily due to the recognition of depreciable fixed assets and amortizable intangible assets in connection with the acquisitions of MDC and Goodstuff.

Impairment and other losses for the year ended December 31, 2022 of $50.8 million, relates to the impairment of goodwill, intangible assets, and one right-of-use lease asset. Impairment and other losses of $14.8 million for the year ended December 31, 2021 relates to the write-down of certain trade names no longer in use.

Deferred acquisition consideration increased primarily due to the acquisition of Goodstuff in the fourth quarter of 2021, partially offset by a decrease in the fair value of deferred acquisition consideration for the year ended 2022.

Operating income and Adjusted EBITDA were driven by an increase in revenues, partially offset by higher expenses as detailed above.

Communications Network

The components of operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","Change"],["","","(dollars in thousands)"],["","","","","","","$","","%"],["Revenue","","$","430,820","","","$","248,832","","","$","181,988","","","73.1","%"],["Operating Expenses"],["Cost of services","","272,752","","","167,303","","","105,449","","","63.0","%"],["Office and general expenses","","50,638","","","52,106","","","(1,468)","","","(2.8)","%"],["Depreciation and amortization","","10,831","","","7,553","","","3,278","","","43.4","%"],["","","$","334,221","","","$","226,962","","","$","107,259","","","47.3","%"],["Operating income","","$","96,599","","","$","21,870","","","$","74,729","","","NM"]]
[[/GREPCENT_TABLE]]

52

Table of Contents

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Change"],["","(dollars in thousands)"],["","","","","","$","","%"],["Net Revenue","$","286,941","","","$","166,050","","","$","120,891","","","72.8","%"],["Billable costs","143,879","","","82,782","","","61,097","","","73.8","%"],["Revenue","430,820","","","248,832","","","181,988","","","73.1","%"],["Billable costs","143,879","","","82,782","","","61,097","","","73.8","%"],["Staff costs","169,109","","","104,173","","","64,936","","","62.3","%"],["Administrative costs","31,721","","","16,106","","","15,615","","","97.0","%"],["Unbillable and other costs, net","427","","","244","","","183","","","75.0","%"],["Adjusted EBITDA","85,684","","","45,527","","","40,157","","","88.2","%"],["Stock-based compensation","1,797","","","15,928","","","(14,131)","","","(88.7)","%"],["Depreciation and amortization","10,831","","","7,553","","","3,278","","","43.4","%"],["Deferred acquisition consideration","(24,298)","","","80","","","(24,378)","","","NM"],["Other items, net","755","","","96","","","659","","","NM"],["Operating Income","$","96,599","","","$","21,870","","","$","74,729","","","NM"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue for the year ended December 31, 2022 was $430.8 million compared to $248.8 million for the year ended December 31, 2021, an increase of $182.0 million.

Net Revenue

The components of the fluctuations in net revenue for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","","Net Revenue - Components of Change","","","","","","Change"],["","Year Ended December 31, 2021","","Foreign Currency","","Net Acquisitions (Divestitures)","","Organic","","Total Change","","Year Ended December 31, 2022","","Organic","","Total"],["","(dollars in thousands)"],["Communications Network","$","166,050","","","$","(484)","","","$","51,460","","","$","69,915","","","$","120,891","","","$","286,941","","","42.1","%","","72.8","%"],["Component % change","","","(0.3)%","","31.0%","","42.1%","","72.8%"]]
[[/GREPCENT_TABLE]]

The increase in organic net revenue was primarily attributable to increased spending by existing and new clients, primarily driven by higher public relations as well as advocacy services, as these are higher during election years. The increase in net acquisitions (divestitures) was driven by the acquisition of MDC.

Operating Income

The increase in expenses was primarily driven by an increase in the costs associated with providing services as well as the impact of the acquisition of MDC.

Deferred acquisition consideration decreased primarily due to the reduction in fair value associated with the deferred acquisition consideration assumed in connection with the purchase of a portion of the remaining interest in one of our Brands in the fourth quarter of 2021.

Stock-based compensation expense decreased primarily due to awards issued to employees in the third quarter of 2021 in connection with the acquisition of MDC that fully vested in the third quarter of 2021 and the first quarter of 2022, partially offset by awards issued to employees in 2022.

Depreciation and amortization increased primarily due to the recognition of amortizable intangible assets in connection with the acquisition of MDC.

53

Table of Contents

Operating income and Adjusted EBITDA were driven by an increase in revenues, partially offset by higher expenses as detailed above.

All Other

The components of operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","Change"],["","","(dollars in thousands)"],["","","","","","","$","","%"],["Revenue","","$","19,962","","","$","25,843","","","$","(5,881)","","","(22.8)","%"],["Operating Expenses"],["Cost of services","","10,007","","","13,866","","","(3,859)","","","(27.8)","%"],["Office and general expenses","","10,951","","","12,785","","","(1,834)","","","(14.3)","%"],["Depreciation and amortization","","5,234","","","2,498","","","2,736","","","NM"],["Impairment and other losses","","19,041","","","\u2014","","","19,041","","","100.0","%"],["","","$","45,233","","","$","29,149","","","$","16,084","","","55.2","%"],["Operating loss","","$","(25,271)","","","$","(3,306)","","","$","(21,965)","","","NM"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Change"],["","(dollars in thousands)"],["","","","","","$","","%"],["Net Revenue","$","19,962","","","$","25,843","","","$","(5,881)","","","(22.8)","%"],["Revenue","19,962","","","25,843","","","(5,881)","","","(22.8)","%"],["Staff costs","14,011","","","16,454","","","(2,443)","","","(14.8)","%"],["Administrative costs","3,894","","","9,481","","","(5,587)","","","(58.9)","%"],["Unbillable and other costs, net","2,990","","","677","","","2,313","","","NM"],["Adjusted EBITDA","(933)","","","(769)","","","(164)","","","21.3","%"],["Stock-based compensation","41","","","39","","","2","","","5.1","%"],["Depreciation and amortization","5,234","","","2,498","","","2,736","","","NM"],["Impairment and other losses","19,041","","","\u2014","","","19,041","","","100.0","%"],["Other items, net","22","","","\u2014","","","22","","","100.0","%"],["Operating Loss","$","(25,271)","","","$","(3,306)","","","$","(21,965)","","","NM"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue for the year ended December 31, 2022 was $20.0 million compared to $25.8 million for the year ended December 31, 2021, a decrease of $5.9 million.

54

Net Revenue

The components of the fluctuations in net revenue for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","","Net Revenue - Components of Change","","","","","","Change"],["","Year Ended December 31, 2021","","Foreign Currency","","Net Acquisitions (Divestitures)","","Organic","","Total Change","","Year Ended December 31, 2022","","Organic","","Total"],["","(dollars in thousands)"],["All Other","$","25,843","","","$","(835)","","","$","(4,616)","","","$","(430)","","","$","(5,881)","","","$","19,962","","","(1.7)","%","","(22.8)","%"],["Component % change","","","(3.2)%","","(17.9)%","","(1.7)%","","(22.8)%"]]
[[/GREPCENT_TABLE]]

Organic net revenue remained relatively flat. The decrease related to net acquisitions (divestitures) was primarily attributable to the sale of Reputation Defender in 2021.

Operating Loss

The increase in operating loss was primarily driven by a decrease in revenues and an increase in impairment and other losses due to the impairment of goodwill. The decrease in Adjusted EBITDA was primarily driven by a decrease in revenue.

Corporate

The components of operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021 were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Change"],["","(dollars in thousands)"],["","","","","","$","","%"],["Staff costs","$","25,109","","","$","19,827","","","$","5,282","","","26.6","%"],["Administrative costs","18,002","","","817","","","17,185","","","NM"],["Adjusted EBITDA","(43,111)","","","(20,644)","","","(22,467)","","","NM"],["Stock-based compensation","11,710","","","6,624","","","5,086","","","76.8","%"],["Depreciation and amortization","6,925","","","3,775","","","3,150","","","83.4","%"],["Other items, net","5,312","","","15,125","","","(9,813)","","","(64.9)","%"],["Operating Loss","$","(67,058)","","","$","(46,168)","","","$","(20,890)","","","45.2","%"]]
[[/GREPCENT_TABLE]]

Operating expenses increased primarily in connection with the acquisition of MDC. In addition, stock-based compensation expense increased, primarily driven by awards issued to employees in the first quarter of 2022. Other items, net decreased primarily due to professional fees associated with the acquisition of MDC in 2021.

55

Liquidity and Capital Resources:

The following table provides summary information about the Company’s liquidity position:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["","(dollars in thousands)"],["Net cash provided by operating activities","$","347,586","","","$","200,856"],["Net cash (used in) provided by investing activities","(116,275)","","","163,952"],["Net cash used in financing activities","(186,736)","","","(273,414)"]]
[[/GREPCENT_TABLE]]

The Company had cash and cash equivalents of $220.6 million and $184.0 million as of December 31, 2022 and December 31, 2021, respectively. The Company expects to maintain sufficient cash and/or available borrowings to fund operations for the next twelve months and subsequent periods. The Company has historically maintained and expanded its business using cash generated from operating activities, funds available under its revolving credit agreement, and other initiatives, such as obtaining additional debt and equity financing. On December 31, 2022, the Company had $100.0 million of borrowings outstanding, $25.3 million of outstanding and undrawn letters of credit resulting in $374.7 million available under its $500.0 million Combined Credit Agreement (as defined and discussed in Note 11 of the Notes to the Audited Consolidated Financial Statements included herein).

The Company enters into agreements with third parties to accelerate the collection of certain accounts receivable by transferring ownership of those receivables to the third parties. Accordingly, the Company accounts for the transfers as sales of trade receivables by recognizing an increase to cash and a decrease to accounts receivable when proceeds from the transactions are received, with the proceeds being included in Cash flows from operating activities in the Consolidated Statements of Cash Flows.

The amount transferred to the third parties under these arrangements was $176.5 million, $42.1 million and $44.2 million during the years ended December 31, 2022, 2021 and 2020, respectively. The amount collected and due to the third parties under the arrangements was $5.7 million as of December 31, 2022. No amounts were collected and due to third parties during the years ended December 31, 2021 and 2020. Fees for the arrangements were recorded in Office and general expenses in the Consolidated Statements of Operations and totaled $1.8 million, $0.1 million, and $0.2 million for the years ended December 31, 2022, 2021 and 2020. The fees are almost entirely offset by reduced interest expense from lower borrowings driven by the acceleration of cash collections.

On March 23, 2022, the Board authorized the Repurchase Program under which we may repurchase up to $125.0 million of shares of our outstanding Class A Common Stock. Under the Repurchase Program, share repurchases may be made at our discretion from time to time in open market transactions at prevailing market prices (including through trading plans that may be adopted in accordance with Rule 10b5-1 of the Exchange Act), in privately negotiated transactions, or through other means. The timing and number of shares repurchased under the Repurchase Program will depend on a variety of factors, including the performance of our stock price, general market and economic conditions, regulatory requirements, the availability of funds, and other considerations we deem relevant. The Repurchase Program may be suspended, modified or discontinued at any time without prior notice. Our board of directors will review the Repurchase Program periodically and may authorize adjustments of its terms.

See Note 1 of the Notes included herein for information regarding amendments to the Repurchase Program.

As of December 31, 2022, there were 7.2 million shares of Class A Common Stock repurchased under the Repurchase Program at an aggregate value, excluding fees, of $51.5 million. These were purchased at an average share price of $7.17 per share. The remaining value of shares of Class A Common Stock permitted to be repurchased under the Repurchase Program was $73.3 million as of December 31, 2022. On March 1, 2023, the Board authorized an extension and a $125.0 million increase in the size of the Repurchase Program to an aggregate of $250.0 million, with any previous purchases under the Repurchase Program continuing to count against that limit. The Repurchase Program, as amended, will expire on March 1, 2026.

The Company’s obligations extending beyond twelve months primarily consist of deferred acquisition consideration payments, purchases of noncontrolling interests, subsidiary awards, capital expenditures, scheduled lease obligation payments, and interest payments on borrowings under the Company’s 5.625% Notes and Combined Credit Agreement. The Company expects to make estimated cash payments in the future to satisfy obligations under the Tax Receivables Agreement (“TRA”) (see Note 17 of the Notes included herein for additional details). The amount and timing of payments are contingent on the Company achieving certain tax savings, if any, that we actually realize, or in certain circumstances are deemed to realize as a result of (i) increases in the tax basis of OpCo’s assets resulting from exchanges of Paired Units (each as defined in Note 15 of

56

the Notes included herein) for shares of Class A Common Stock or cash, as applicable, and (ii) certain other tax benefits related to the Company making payments under the TRA. 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 Combined Credit Agreement, will be sufficient to meet the Company’s anticipated cash needs for the next twelve months and subsequent periods. The Company’s ability to make scheduled deferred acquisition consideration payments, to make principal and interest payments, to refinance indebtedness or to fund planned capital expenditures or other obligations will depend on future performance, which is subject to general economic conditions, the competitive environment and other factors, including those described in this Form 10-K and in the Company’s other SEC filings.

Cash Flows

Operating Activities

Cash flows provided by operating activities for the year ended December 31, 2022 were $347.6 million, primarily driven by earnings as well as favorable working capital requirements.

Cash flows provided by operating activities for the year ended December 31, 2021 were $200.9 million, primarily driven by earnings and favorable working capital requirements.

Investing Activities

Cash flows used in investing activities were $116.3 million for the year ended December 31, 2022, primarily driven by $74.2 million in acquisitions and $22.7 million in capital expenditures.

Cash flows provided by investing activities were $164.0 million for the year ended December 31, 2021, primarily driven by the addition of $150.3 million of cash in connection with the acquisition of MDC, and $37.2 million from the sale of Reputation Defender, partially offset by capital expenditures of $8.8 million.

Financing Activities

During the year ended December 31, 2022, cash flows used in financing activities were $186.7 million, primarily driven by $63.2 million of deferred acquisition consideration payments, $39.2 million of distributions to noncontrolling interests, $51.5 million in stock repurchases under the Repurchase Program, and $18.7 million related to shares acquired and cancelled in connection with the vesting of stock awards.

During the year ended December 31, 2021, cash flows used in financing activities were $273.4 million, which primarily consisted of $884.4 million for the repurchase of the Company’s 7.50% Senior Notes due 2024, $202.4 million in net payments under the Company’s previous revolving credit agreement, and distributions of $233.2 million to Stagwell Media, offset by receipt of $1.1 billion from the issuance of the 5.625% Notes.

Total Debt

Debt, net of debt issuance costs, as of December 31, 2022 was $1,184.7 million as compared to $1,191.6 million outstanding at December 31, 2021. See Note 11 to the Audited Consolidated Financial Statements included herein for information regarding the Company’s 5.625% Notes, and the Combined Credit Agreement, which provides for a $500.0 million senior secured revolving credit facility with a five-year maturity.

The Company is currently in compliance with all of the terms and conditions of the Combined Credit Agreement, and management believes, based on its current financial projections, that the Company will 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 Combined Credit Agreement, or if the Company uses the maximum available amount under the 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 or access to the capital markets, 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.

On April 28, 2022, the Company amended the Combined Credit Agreement. Among other things, this amendment replaced any references to LIBOR with references to the Secured Overnight Financing Rate (“SOFR”). Borrowings pursuant to the Combined Credit Agreement, as amended, bear interest at a rate equal to, at the Company’s option, (i) the greatest of (a) the prime rate of interest in effect on such day, (b) the federal funds effective rate plus 0.50% and (c) SOFR plus 1% in each case, plus the applicable margin (calculated based on the Company’s Total Leverage Ratio, as defined in the Combined Credit Agreement) at that time. Additionally, the Combined Credit Agreement was amended to remove certain pre-commencement notice provisions for certain acquisitions under $50.0 million in the aggregate, to increase the amount permitted for certain investments allowed under the Combined Credit Agreement, and, subject to certain conditions, to allow for the repurchase of

57

Stagwell Inc. stock in an amount not to exceed $100.0 million in any fiscal year. All other substantive terms of the Combined Credit Agreement remain unchanged.

On December 14, 2022, the Company amended the Combined Credit Agreement to allow for the sale of accounts receivable summarized above and in Note 2 of the Notes included herein. All other substantive terms of the Combined Credit Agreement remained unchanged.

Pursuant to the Combined Credit Agreement, the Company must maintain a Total Leverage Ratio (as defined in the Combined Credit Agreement) below a threshold established in the Combined Credit Agreement. For the period ended December 31, 2022, the Company’s calculation of each of this ratio, and the maximum permitted under the Combined Credit Agreement, respectively, were calculated based on the trailing twelve months as follows:

[[GREPCENT_TABLE]]
[["","December 31, 2022"],["Total Leverage Ratio","2.42"],["Maximum per covenant","4.50"]]
[[/GREPCENT_TABLE]]

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 Combined Credit Agreement. They are presented here to demonstrate compliance with the covenants in the Combined Credit Agreement, as non-compliance with such covenants could have a material adverse effect on the Company.

Material Cash Requirements

The Company’s Brands 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 Brands purchase media for clients and act as an agent for a disclosed principal. These commitments are included in Accounts payable and Accrued media when the media services are delivered by the media providers. Stagwell takes precautions against default on payment for these services and has historically had a very low incidence of default. Stagwell 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.

The following table summarizes current and long-term requirements as of December 31, 2022. Management anticipates that the obligations outstanding at December 31, 2022 will be repaid with new financing, equity offerings, asset sales and/or cash flow from operations:

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["Material Cash Requirements","","Total","","Less than 1 Year","","1 \u2013 3 Years","","3 \u2013 5 Years","","After 5 Years"],["","","(dollars in thousands)"],["Indebtedness (1)","","$","1,100,000","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","1,100,000"],["Operating lease obligations","","432,241","","","91,084","","","137,286","","","84,752","","","119,119"],["Interest on debt","","433,125","","","61,875","","","123,750","","","123,750","","","123,750"],["Deferred acquisition consideration","","161,323","","","90,183","","","66,937","","","4,203","","","\u2014"],["Total","","$","2,126,689","","","$","243,142","","","$","327,973","","","$","212,705","","","$","1,342,869"]]
[[/GREPCENT_TABLE]]

(1) Includes the principal amount of the 5.625% Notes which are due in 2029 and does not include borrowings under the Combined Credit Agreement.

Deferred acquisition consideration on the balance sheet consists of deferred obligations related to contingent and fixed purchase price payments. See Note 9 of the Notes included herein for additional information regarding contingent deferred acquisition consideration. As of December 31, 2022, approximately, $51.0 million of the deferred acquisition consideration is expected to be settled in shares of Class A Common Stock.

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 incremental purchase may be required of the Company, the amounts are recorded as redeemable noncontrolling interests in mezzanine equity. See Note 13 of the Notes included herein for additional information regarding noncontrolling interests and redeemable noncontrolling interests.

Certain of the Company’s subsidiaries grant awards to their employees providing them with an equity interest in the respective subsidiary (the “profits interests awards”). The awards generally provide the employee the right, but not the

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obligation, to sell its interest in the subsidiary to the Company based on a performance-based formula and, in certain cases, receive a profit share distribution.

The Company intends to finance the cash portion of these contingent payment obligations using available cash from operations, borrowings under the Combined Credit Agreement (or any 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.

Critical Accounting Estimates

Stagwell has prepared the Audited Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of the SEC for reporting financial information on Form 10-K. Preparation of the Audited 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 included herein. Our critical accounting estimates 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 estimates is necessary to analyze our financial results.

Our critical accounting estimates 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 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 included herein for further information.

Business Combinations. Business combinations are accounted for using the acquisition method and accordingly, the assets acquired (including identified intangible assets), the liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values.

For each acquisition, the Company undertakes a detailed review to identify other intangible assets and a valuation is performed for all such identified assets. The Company uses several market participant measurements to determine the estimated value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies. A substantial portion of the intangible 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 acquired is derived from customer relationships, including the related customer contracts, trademarks, developed technology and other intangible assets.

Deferred Acquisition Consideration. Certain 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 are recorded as deferred acquisition consideration liabilities on the balance sheet, at the acquisition date fair value and are remeasured at each reporting period. These liabilities are derived from the projected performance of the acquired entity. These arrangements may be dependent on future events, such as the growth rate of the earnings of the relevant subsidiary during the contractual period. At each reporting date, the Company models each business’ future performance, including revenue growth and free cash flows, to estimate the value of each deferred acquisition consideration liability. 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. These adjustments are recorded in the Consolidated Statements of Operations. In instances where such contingent payments require the sellers’ continuous employment with the Company after the transaction, they are recorded as compensation expense in the Consolidated Statements of Operations.

Redeemable Noncontrolling Interests. Many of the Company’s acquisitions include contractual arrangements where the noncontrolling shareholders may require the Company to purchase such noncontrolling shareholders’ incremental ownership interests under certain circumstances. 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 by the Company, the amounts are recorded in Redeemable Noncontrolling Interests in mezzanine equity on the Consolidated Balance Sheets at their acquisition date fair value and adjusted for changes to their estimated redemption value through Retained earnings or Paid-in capital (when at an accumulated deficit) in the Consolidated Balance Sheets (but not less than their initial redemption value),

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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. Goodwill (the excess of the acquisition cost over the fair value of the net assets acquired) acquired as a result of a business combination which is not subject to amortization is tested for impairment, at the reporting unit level, annually as of October 1st of each year, or more frequently if indicators of potential impairment exist.

For the annual impairment test, the Company has the option of assessing qualitative factors to determine whether it is more likely than not that the carrying amount of a reporting unit exceeds its fair value or performing a quantitative goodwill impairment test. Qualitative factors considered in the assessment include industry and market considerations, the competitive environment, overall financial performance, changing cost factors such as labor costs, and other factors specific to each reporting unit such as change in management or key personnel.

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, the Company will perform the quantitative impairment test, which compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not considered impaired. However, if the fair value of the reporting unit is lower than the carrying amount of the net assets assigned to the reporting unit, an impairment charge is recognized equal to the excess of the carrying amount over the fair value.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The Company uses a combination of the income approach, which incorporates the use of the discounted cash flow (“DCF”) method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. The Company generally applies an equal weighting to the income and market approaches for the impairment test. The income approach and the market approach both require the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value and appropriate discount rates.

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, demand trends and appropriate discount rates based on a reporting unit’s 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.

At each reporting period, the Company assesses whether it is more likely than not that the carrying amount of its reporting units exceed their fair value. As of October 1, 2022 (the annual impairment test date) and December 31, 2022, the Company performed this assessment and determined that certain reporting units’ carrying values exceeded their fair value. As of October 1, 2022, the Company performed a quantitative impairment test for all reporting units (37) and as of December 31, 2022, the Company performed a quantitative impairment test for certain reporting units that were determined to be more likely than not impaired. As a result of these tests, management concluded there to be 8 reporting units with a carrying value in excess of their fair value resulting in an impairment of $116.7 million in 2022. The difference in carrying value versus fair value was primarily due to a combination of changes in fair value measures such as an increase in interest rates and decrease in market multiples of comparable public companies and financial forecasts below previous forecasts. The Company utilized a long-term average growth rate ranging from 1% to 4% and a WACC ranging from 11.50% to 20.00%. Of the remaining reporting units, approximately 50% have fair values that are substantially in excess of the carrying amounts. For the other reporting units, we performed a sensitivity analysis using the latest impairment assessment performed, which included an approximate 2% increase in the WACC (with the exception of one reporting unit where we utilized 1%), and concluded that this would not result in an impairment.

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Based on our December 31, 2022 assessment, the fair value of two reporting units, with goodwill of approximately $13 million, exceeded their carrying value by less than 20%. The Company believes the estimates and assumptions used in the calculations are reasonable. However, if there were an adverse change in the facts and circumstances, then an impairment charge may be necessary in the future. As a result, to the extent that, among other factors, (i) there is underperformance in one or more reporting units, (ii) a potential recession further disrupts the economic environment or (iii) interest rates continue to rise in response to persistent inflation, the fair value of one or more of these reporting units could fall below their carrying value, resulting in a goodwill impairment charge. The Company monitors its reporting units to determine if there is an indicator of potential impairment.

Income Taxes. We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The Company records associated interest and penalties as a component of income tax expense. 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, taxable income in eligible carryback years, 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. Compensation cost is measured at fair value at the date of grant and is expensed over the service period, generally the award’s vesting period. The Company recognizes forfeitures as they occur.

Certain of our awards are settled in cash (stock appreciation awards) and are recorded at fair value on the date of grant and remeasured as each reporting period. The measurement of the compensation cost for these awards is based on using the Black-Scholes option pricing model and is recorded in Operating income over the service period, in this case the award’s vesting period. The assumption for expected volatility is based on the historical volatility of a peer group of market participants as the Company has limited historical volatility.

The Company has adopted the straight-line attribution method for determining the compensation cost to be recorded during each accounting period. The Company commences recording compensation expense related to awards that are based on performance conditions under the straight-line attribution method when it is probable that such performance conditions will be met.

New Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-04, and in January 2021 subsequently issued ASU 2021-01, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective upon issuance, through December 31, 2022. The Combined Credit Agreement is the Company’s only contractual arrangement that referenced LIBOR and is impacted by ASU 2020-04. On April 28, 2022, the Company amended the Combined Credit Agreement. Among other things, this amendment replaced any references to LIBOR with references to SOFR. Based on the Company’s assessment, the Company has elected to apply the optional expedient and treat the contract modifications as a continuation of an existing contract. This election does not have a material effect on our results of operations or financial position.