SP Plus Corporation
SP Plus Corp (Form: 10-Q, Received: 08/06/2015 17:59:31)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

Commission file number: 000-50796

 


 

GRAPHIC

 

SP Plus Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

16-1171179

(State or Other Jurisdiction of

 

(I.R.S. Employer Identification No.)

Incorporation or Organization)

 

 

 

200 E. Randolph Street, Suite 7700

Chicago, Illinois 60601-7702

(Address of Principal Executive Offices, Including Zip Code)

 

(312) 274-2000

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x   NO  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  x   NO  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  o   NO  x

 

As of August 3, 2015, there were 22,214,430 shares of common stock of the registrant outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

2

Item 1. Financial Statements

2

Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014

2

Condensed Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2015 and 2014

3

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2015 and 2014

4

Condensed Consolidated Statements of Cash Flows (unaudited) for six months ended June 30, 2015 and 2014

5

Notes to Condensed Consolidated Interim Financial Statements

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3. Quantitative and Qualitative Disclosures about Market Risk

36

Item 4. Controls and Procedures

36

 

 

PART II. OTHER INFORMATION

37

Item 1. Legal Proceedings

37

Item 1A. Risk Factors

37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3. Defaults Upon Senior Securities

37

Item 4. Mine Safety Disclosures

37

Item 5. Other Information

37

Item 6. Exhibits

38

 

 

Signatures

39

 

1



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item1. Financial Statements

 

SP Plus Corporation

Condensed Consolidated Balance Sheets

 

(in thousands, except for share and per share data)

 

June 30,
2015

 

December 31,
2014

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

23,786

 

$

18,196

 

Notes and accounts receivable, net

 

115,168

 

109,287

 

Prepaid expenses and other

 

10,759

 

17,776

 

Deferred taxes

 

10,984

 

10,992

 

Total current assets

 

160,697

 

156,251

 

Leasehold improvements, equipment, land and construction in progress, net

 

39,874

 

42,784

 

Other assets

 

 

 

 

 

Advances and deposits

 

5,206

 

6,693

 

Intangible assets, net

 

83,454

 

91,028

 

Favorable acquired lease contracts, net

 

43,389

 

48,268

 

Equity investments in unconsolidated entities

 

19,784

 

20,660

 

Other assets, net

 

18,533

 

16,697

 

Cost of contracts, net

 

11,371

 

10,481

 

Goodwill

 

432,591

 

432,888

 

Total other assets

 

614,328

 

626,715

 

Total assets

 

$

814,899

 

$

825,750

 

Liabilities and stockholders’ equity

 

 

 

 

 

Accounts payable

 

$

97,944

 

$

106,519

 

Accrued and other current liabilities

 

91,130

 

103,844

 

Current portion of obligations under senior credit facility and other long-term borrowings

 

15,959

 

15,567

 

Total current liabilities

 

205,033

 

225,930

 

Deferred taxes

 

 

5,814

 

Long-term obligations under senior credit facility and other long-term borrowings

 

242,725

 

237,833

 

Unfavorable acquired lease contracts, net

 

55,756

 

61,350

 

Other long-term liabilities

 

69,212

 

65,011

 

Total noncurrent liabilities

 

367,693

 

370,008

 

Stockholders’ equity

 

 

 

 

 

Preferred Stock, par value $0.01 per share; 5,000,000 shares authorized as of June 30, 2015 and December 31, 2014; no shares issued

 

 

 

Common stock, par value $0.001 per share; 50,000,000 shares authorized as of June 30, 2015 and December 31, 2014; 22,127,725 shares issued and outstanding as of June 30, 2015 and December 31, 2014

 

22

 

22

 

Additional paid-in capital

 

245,934

 

243,867

 

Accumulated other comprehensive income (loss)

 

(797

)

(205

)

Accumulated deficit

 

(3,480

)

(14,581

)

Total SP Plus Corporation stockholders’ equity

 

241,679

 

229,103

 

Noncontrolling interest

 

494

 

709

 

Total shareholders’ equity

 

242,173

 

229,812

 

Total liabilities and stockholders’ equity

 

$

814,899

 

$

825,750

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

SP Plus Corporation

Condensed Consolidated Statements of Income

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands, except for share and per share data, unaudited)

 

June 30,
2015

 

June 30,
2014

 

June 30,
2015

 

June 30,
2014

 

 

 

 

 

 

 

 

 

 

 

Parking services revenue

 

 

 

 

 

 

 

 

 

Lease contracts

 

$

146,454

 

$

124,958

 

$

282,269

 

$

241,593

 

Management contracts

 

88,305

 

84,931

 

182,363

 

174,886

 

Reimbursed management contract revenue

 

170,856

 

164,539

 

345,137

 

333,717

 

Total revenue

 

405,615

 

374,428

 

809,769

 

750,196

 

Cost of parking services

 

 

 

 

 

 

 

 

 

Lease contracts

 

134,474

 

111,979

 

263,167

 

224,063

 

Management contracts

 

53,850

 

50,016

 

113,840

 

109,230

 

Reimbursed management contract expense

 

170,856

 

164,539

 

345,137

 

333,717

 

Total cost of parking services

 

359,180

 

326,534

 

722,144

 

667,010

 

Gross profit

 

 

 

 

 

 

 

 

 

Lease contracts

 

11,980

 

12,979

 

19,102

 

17,530

 

Management contracts

 

34,455

 

34,915

 

68,523

 

65,656

 

Total gross profit

 

46,435

 

47,894

 

87,625

 

83,186

 

General and administrative expenses

 

24,739

 

24,996

 

50,412

 

51,062

 

Depreciation and amortization

 

8,165

 

7,730

 

16,099

 

14,893

 

Operating income

 

13,531

 

15,168

 

21,114

 

17,231

 

Other expenses (income)

 

 

 

 

 

 

 

 

 

Interest expense

 

3,062

 

4,811

 

7,105

 

9,620

 

Interest income

 

(40

)

(94

)

(100

)

(192

)

Equity in losses from investment in unconsolidated entity

 

353

 

 

824

 

 

Total other expenses (income)

 

3,375

 

4,717

 

7,829

 

9,428

 

Income before income taxes

 

10,156

 

10,451

 

13,285

 

7,803

 

Income tax provision (benefit)

 

(385

)

4,254

 

950

 

(3,184

)

Net income

 

10,541

 

6,197

 

12,335

 

10,987

 

Less: Net income attributable to noncontrolling interest

 

784

 

890

 

1,236

 

1,377

 

Net income attributable to SP Plus Corporation

 

$

9,757

 

$

5,307

 

$

11,099

 

$

9,610

 

Common stock data

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.44

 

$

0.24

 

$

0.50

 

$

0.44

 

Diluted

 

$

0.43

 

$

0.24

 

$

0.49

 

$

0.43

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

22,145,190

 

21,991,965

 

22,136,458

 

21,984,912

 

Diluted

 

22,521,832

 

22,398,886

 

22,505,403

 

22,375,377

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

SP Plus Corporation

Condensed Consolidated Statements of Comprehensive Income

 

 

 

Three Months Ended

 

Six Months Ended

 

(in thousands, unaudited)

 

June 30,
2015

 

June 30,
2014

 

June 30,
2015

 

June 30,
2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,541

 

$

6,197

 

$

12,335

 

$

10,987

 

Other comprehensive loss

 

(110

)

(209

)

(592

)

(193

)

Comprehensive income

 

10,431

 

5,988

 

11,743

 

10,794

 

Less: comprehensive income attributable to noncontrolling interest

 

784

 

890

 

1,236

 

1,377

 

Comprehensive income attributable to SP Plus Corporation

 

$

9,647

 

$

5,098

 

$

10,507

 

$

9,417

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

SP Plus Corporation

Condensed Consolidated Statements of Cash Flows

 

 

 

Six Months Ended

 

(in thousands, unaudited)

 

June 30,
2015

 

June 30,
2014

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

Net income

 

$

12,335

 

$

10,987

 

Adjustments to reconcile net income to net cash provided by operations

 

 

 

 

 

Depreciation and amortization

 

16,284

 

14,885

 

Net accretion of acquired lease contracts

 

(715

)

(801

)

Net loss on sale and abandonment of assets

 

118

 

244

 

Amortization of debt issuance costs

 

488

 

674

 

Amortization of original discount on borrowings

 

349

 

590

 

Write-off of debt issuance costs and original discount on borrowings

 

634

 

115

 

Non-cash stock-based compensation

 

2,133

 

1,941

 

Provisions for losses on accounts receivable

 

191

 

469

 

Excess tax benefit related to vesting of restricted stock units

 

 

87

 

Deferred income taxes

 

(6,288

)

(6,804

)

Net change in operating assets and liabilities

 

(15,355

)

667

 

Net cash provided by operating activities

 

10,174

 

23,054

 

Investing activities

 

 

 

 

 

Purchase of leasehold improvements and equipment

 

(4,197

)

(8,149

)

Cost of contracts purchased

 

(2,686

)

(662

)

Proceeds from sale of assets

 

216

 

146

 

Capitalized interest

 

 

(17

)

Contingent payments for a business acquired

 

 

(260

)

Net cash used in investing activities

 

(6,667

)

(8,942

)

Financing activities

 

 

 

 

 

Tax benefit from vesting of restricted stock units

 

 

(87

)

Contingent payments for businesses acquired

 

(57

)

(141

)

Proceeds from Senior Credit Facility and Restated Credit Facility revolver, net

 

2,300

 

6,800

 

Proceeds (payments) from Senior Credit Facility and Restated Credit Facility term loan, net

 

2,455

 

(19,190

)

Payments of debt issuance costs for Restated Credit Facility

 

(888

)

 

Distribution to noncontrolling interest

 

(1,209

)

(1,372

)

Redemption of convertible debentures

 

(68

)

 

Borrowings (payments) on other long-term debt obligations

 

(155

)

214

 

Net cash provided by (used in) financing activities

 

2,378

 

(13,776

)

Effect of exchange rate changes on cash and cash equivalents

 

(295

)

57

 

Increase in cash and cash equivalents

 

5,590

 

393

 

Cash and cash equivalents at beginning of period

 

18,196

 

23,158

 

Cash and cash equivalents at end of period

 

$

23,786

 

$

23,551

 

 

 

 

 

 

 

Supplemental disclosures

 

 

 

 

 

Cash paid (received) during the period for

 

 

 

 

 

Interest

 

$

5,788

 

$

7,168

 

Income taxes, net

 

$

9,212

 

$

(3,139

)

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

SP Plus Corporation

Notes to Condensed Consolidated Financial Statements

(in thousands except share and per share data, unaudited)

 

1. Significant Accounting Policies and Practices

 

The Company

 

SP Plus Corporation (the “Company”) provides parking management, ground transportation and other ancillary services to commercial, institutional and municipal clients in urban markets and airports across the United States, Puerto Rico and Canada. These services include a comprehensive set of on-site parking management and ground transportation services, which include facility maintenance, security services, training, scheduling and supervising all service personnel as well as providing customer service, marketing, and accounting and revenue control functions necessary to facilitate the operation of clients’ facilities. The Company also provides a range of ancillary services such as airport shuttle operations, valet services, taxi and livery dispatch services and municipal meter revenue collection and enforcement services.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and disclosures normally included in the Consolidated Balance Sheets, Statements of Income, Comprehensive Income and Cash Flows prepared in conformity with U.S. GAAP have been condensed or omitted as permitted by such rules and regulations.

 

In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended June 30, 2015 are not necessarily indicative of the results that might be expected for any other interim period or the fiscal year ended December 31, 2015. The financial statements presented in this report should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed on March 6, 2015.

 

Cash and cash equivalents

 

Cash equivalents represent funds temporarily invested in money market instruments with maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements was $748 and $465 as of June 30, 2015 and December 31, 2014, respectively, and are included within Cash and cash equivalents within the Consolidated Balance Sheets.

 

Financial Instruments

 

The carrying values of Cash and cash equivalents, Accounts receivable and Accounts payable approximate their fair value due to the short-term nature of these financial instruments. Book overdrafts of $26,920 and $30,782 are included within Accounts payable within the Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, respectively. Long-term debt has a carrying value that approximates fair value because these instruments bear interest at variable market rates.

 

Equity Investments in Unconsolidated Entities

 

The Company has ownership interests in forty-five partnerships, joint ventures or similar arrangements that operate parking facilities, of which twenty-nine are VIEs and seventeen are voting interest model entities where the Company’s ownership interests range from 30-50 percent and for which there are no indicators of control. The Company accounts for such investments under the equity method of accounting, and its underlying share of each investee’s equity is included in Equity investments in unconsolidated entities within the Consolidated Balance Sheets. As the operations of these entities are consistent with the Company’s underlying core business operations, the equity in earnings of these investments are included in Parking services revenue—Lease contracts within the Consolidated Financial Statements of Income. The equity earnings in these related investments was $526 and $531 for the three months ended June 30, 2015 and 2014, respectively, and $930 and $981 for the six months ended June 30, 2015 and 2014, respectively.

 

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Table of Contents

 

In October 2014, the Company entered into an agreement to establish a joint venture with Parkmobile USA, Inc. (“Parkmobile USA”) and contributed all of the assets and liabilities of its proprietary Click and Park parking prepayment business in exchange for a 30 percent interest in the newly formed legal entity called Parkmobile, LLC (“Parkmobile”). The joint venture of Parkmobile will provide on-demand and prepaid transaction processing for on- and off-street parking and transportation services. The contribution of the Click and Park business in the joint venture resulted in a loss of control of the business, and therefore it was deconsolidated from the Company’s financial statements. The Company accounts for its investment in the joint venture with Parkmobile using the equity method of accounting, and its underlying share of equity in Parkmobile is included in Equity investments in unconsolidated entities within the Consolidated Balance Sheets.  The equity earnings in the Parkmobile joint venture is included in Equity in losses from investment in unconsolidated entity within the Consolidated Statements of Income.

 

Non-Controlling Interests

 

Noncontrolling interests represent the noncontrolling holders’ percentage share of income or losses from the subsidiaries in which the Company holds a majority, but less than 100 percent, ownership interest and the results of which are consolidated and included within in our consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03,  Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs . ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. ASU 2015-03 requires retrospective application and represents a change in accounting principle. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect ASU 2015-03 to have a material effect on the Company’s results of operations, however, it will impact future balance sheet presentation and financial statement disclosures related to the Company’s debt issuance costs.

 

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement . This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently assessing the impact of adopting this standard on the Company’s financial position, results of operations, cash flows and financial statement disclosures.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis . ASU 2015- 02 amends certain aspects of the consolidation guidance in U.S. GAAP. In particular, it will modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities and also eliminates the presumption that a general partner should consolidate a limited partnership. The new guidance will also affect the consolidation analysis of the Company’s interests in VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective on January 1, 2016 and retrospectively adoption is required either through a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the year of adoption or retrospectively for all comparative periods. Early adoption is permitted. The Company is currently assessing the impact of adopting this standard on the Company’s financial position, results of operations, cash flows and financial statement disclosures.

 

In January 2015, the FASB issued ASU No. 2015-01,  Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items . This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have material impact of adopting this standard on the Company’s financial statements.

 

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In June 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-12 Compensation—Stock Compensation (Topic 718), Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period . A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation. As a result, the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact of adopting this standard on the Company’s financial position, results of operations, cash flows and financial statement disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09,  Revenue from Contracts with Customers . The amendments in ASU No. 2014-09 create Topic 606,  Revenue from Contracts with Customers , and supersede the revenue recognition requirements in Topic 605,  Revenue Recognition , including most industry specific revenue recognition guidance. In addition, the amendments supersede the cost guidance in Subtopic 605-35,  Revenue Recognition—Construction-Type and Production-Type Contract , and create a new Subtopic 340-40,  Other Assets and Deferred Costs—Contracts with Customers . The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The amendments are effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2017. Early adoption is not permitted. The Company is currently assessing the impact of adopting this standard on the Company’s financial position, results of operations, cash flows and financial statement disclosures.

 

2. Commitments and Contingencies

 

The Company is subject to claims and litigation in the normal course of its business. The Company applies the provisions as defined in the guidance related to accounting for contingencies in determining the recognition and measurement of potential liabilities associated with legal claims against the Company. Management obtains input from internal and external legal counsel on the potential outcome of litigation in determining the need to record liabilities for potential losses and the disclosure of pending legal claims.

 

Certain lease contracts acquired in the Central Merger include provisions allocating to the Company responsibility for the cost of certain structural and other repairs required to be made to the leased property, including improvement and repair costs arising as a result of ordinary wear and tear. The Company recorded $1,983 and $841 during the three months ended June 30, 2015 and 2014, respectively, and $2,078 and $942 during the six months ended June 30, 2015 and 2014, respectively, of costs (net of expected recovery of the total cost through the applicable indemnity discussed further below and in Note 3.  Acquisitions ) in Cost of parking services—Lease contracts within the Consolidated Statements of Income for structural and other repair costs related to certain lease contracts acquired in the Central Merger, whereby the Company has expensed repair costs for certain leases and  engaged third-party general contractors to complete certain structural and other repair projects. The Company expects to incur substantial additional costs for certain structural and other repair costs pursuant to the contractual requirements of certain lease contracts acquired in the Central Merger (“Structural and Repair Costs”). Based on information available at this time, the Company currently expects the additional Structural and Repair Costs to be between $5,000 and $20,000; however, the Company continues to determine the extent of the required repairs and costs associated with the lease contracts acquired in the Central Merger. The Company currently expects to recover 80% of the Structural and Repair Costs incurred prior to October 2, 2015 through the applicable indemnity discussed further in Note 3.  Acquisitions . While the Company is unable to estimate with certainty when such costs will be incurred, it is expected that all or a substantial majority of these costs will be incurred prior to October 2, 2015.

 

3. Acquisition

 

On October 2, 2012 (“Closing Date”), the Company completed its acquisition (the “Central Merger” or “Merger”) of 100% of the outstanding common shares of KCPC Holdings, Inc., which was the ultimate parent of Central Parking Corporation (collectively, “Central”), for 6,161,332 shares of Company common stock and the assumption of approximately $217,675 of Central’s debt, net of cash acquired. Additionally, Central’s former stockholders will be entitled to receive cash consideration (the “Cash Consideration”) in an amount equal to the sum of $27,000 plus, if and to the extent the Net Debt Working Capital (as defined below) was less than $275,000 (the “Lower Threshold”) as of September 30, 2012, the amount by which the Net Debt Working Capital was below such amount (such sum, the “Cash Consideration Amount”) to be paid three years after closing, to the extent the $27,000 is not used to satisfy seller indemnity obligations pursuant to the Agreement and Plan of Merger dated February 28, 2012 (the “Merger Agreement”).

 

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Pursuant to the Merger Agreement, the Company is entitled to indemnification from Central’s former stockholders (i) if and to the extent Central’s combined net debt and the absolute value of Central’s negative working capital (as determined in accordance with the Merger Agreement) (the “Net Debt Working Capital”) exceeded $285,000 (the “Upper Threshold”) as of September 30, 2012 and (ii) for certain defined adverse consequences as set forth in the Merger Agreement (including with respect to Structural and Repair Costs). Pursuant to the Merger Agreement, Central’s former stockholders are required to satisfy certain indemnity obligations, which are capped at the Cash Consideration Amount (the “Capped Items”) only through a reduction of the Cash Consideration. For certain other indemnity obligations set forth in the Merger Agreement which are not capped at the Cash Consideration Amount (the “Uncapped Items”), including the Net Debt Working Capital indemnity obligations described above, Central’s former stockholders may satisfy any amount payable pursuant to such indemnity obligations as follows (provided that the Company reserves the right to reject the cash and stock alternatives and choose to reduce the Cash Consideration):

 

·       Central’s former stockholders can elect to pay such amount with cash;

 

·       Central’s former stockholders can elect to pay such amount with the Company’s common stock (valued at $23.64 per share, the market value as of the closing date of the Merger Agreement); or

 

·       Central’s former stockholders can elect to reduce the $27,000 cash consideration by such amount, subject to the condition that the cash consideration remains at least $17,000 to cover Capped Items.

 

The Company has determined and concluded that the Net Debt Working Capital was $297,332 as of September 30, 2012 and that, accordingly, the Net Debt Working Capital exceeded the threshold by $12,332.  In addition, the Company has determined that it currently has indemnity claims of $18,756 for certain defined adverse consequences (including indemnity claims with respect to Structural and Repair Costs incurred through June 30, 2015) and the Company expects to have additional indemnity claims in the future as new matters arise. The Company has periodically given Central’s former stockholders notice regarding indemnification matters since the closing date of the Merger and has made adjustments for known matters, although Central’s former stockholders have not agreed to such adjustments nor made any elections with respect to using cash or stock as the payment of any Uncapped Items. Furthermore, following the Company’s notices of indemnification matters, the representative of Central’s former stockholders has indicated that they may make additional inquiries and raise issues with respect to the Company’s indemnification claims (including, specifically, as to Structural and Repair Costs) and that they may assert various claims of their own relating to the Merger Agreement. On April 30, 2015, with respect to the Company’s Net Debt Working Capital calculation, the representative of Central’s former stockholders submitted specific objections to such calculation, asserting that the Net Debt Working Capital as of September 30, 2012 was $270,757 ($4,242 below the Lower Threshold).  The Company continues to review and evaluate the Selling Stockholders specific objections to the Company’s calculation of Net Debt Working Capital, but currently believes that these indemnification claims should sustain challenge from the former Central stockholders and that recoverability of these indemnification claims by the Company is reasonably assured.  Under the Merger Agreement, all post-closing claims and disputes, including as to indemnification matters, are ultimately subject to resolution through binding arbitration or, in the case of a dispute as to the calculation of Net Debt Working Capital, resolution by an independent public accounting firm.  The Company and the representative of Central’s former stockholders are currently engaged in the dispute resolution process for Net Debt Working Capital, as discussed above, although the Company’s pursuit of this process and the process available for other post-closing claims and disputes, including as to indemnification matters, may be delayed by actions taken by representatives of Central’s former stockholders.  Should the dispute resolution process result in determinations unfavorable to the Company (either as to the Net Debt Working Capital calculation and/or other indemnification matters), the resulting resolution may have a material impact on the Company’s consolidated financial statements.

 

In determining the indemnity claims for certain defined adverse consequences of $18,756, the Company has evaluated the nature of the costs and related indemnity claims and has concluded that it is probable that such indemnified claims will sustain any challenge from Central’s former stockholders and recoverability of these indemnified claims is reasonably assured. As previously discussed in Note 2. Commitment and Contingencies,  certain lease contracts acquired in the Central Merger include provisions allocating to the Company responsibility for all or a defined portion of the costs of certain structural and other repair costs required on the property, including improvement and repair costs arising as a result of ordinary wear and tear. As the Company incurs additional Structural and Repair Costs, that meet the requirements of the indemnification provisions established in the Merger Agreement (including as to being incurred prior to October 2, 2015), the Company will seek indemnification for a significant portion (generally 80%) of these costs pursuant to the Merger Agreement.

 

The Company has reduced the cash consideration payable in three years from the acquisition date by $12,332, representing the amount Net Debt Working Capital exceeded the Upper Threshold, and $18,756, representing the amount of indemnified claims for certain adverse consequences (including, but not limited to Structural and Repair Costs), but only to the extent these indemnified claims do not exceed the $27,000 cash consideration payable three years from the acquisition date.  While the Company believes the indemnification claims in excess of the $27,000 cash consideration date payable in three years from the acquisition date should sustain any challenge from Selling Stockholders, the Company has not recognized the recovery of $4,088 as a receivable and corresponding gain or reduction of costs incurred by the Company, as these additional indemnified claims are contingent in nature.

 

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The following sets forth the adjustments to the cash consideration payable by the Company to the former stockholders of Central, based upon the foregoing determinations:

 

Cash consideration payable in three years from the acquisition date, pursuant to the Merger Agreement and prior to Central Net Debt Working Capital and indemnification of certain defined adverse consequences, net

 

 

 

$

27,000

 

 

 

 

 

 

 

Net Debt Working Capital at September 30, 2012 as defined in the Merger Agreement

 

$

(297,332

)

 

 

Threshold of Net Debt Working Capital, pursuant to the Merger Agreement

 

$

285,000

 

 

 

Excess over the threshold of Net Debt Working Capital

 

 

 

(12,332

)

 

 

 

 

 

 

Indemnification of certain defined adverse consequences, net

 

 

 

(18,756

)

 

 

 

 

 

 

Indemnification claims for Net Debt Working Capital and certain adverse consequences in excess of the $27,000 cash consideration payable in three years from the acquisition date

 

 

 

(4,088

)

 

 

 

 

 

 

Indemnification claims for Net Debt Working Capital and certain adverse consequences not recognized due to the contingent nature of these claims

 

 

 

4,088

 

Cash consideration payable three years from the acquisition date (October 2, 2015)

 

 

 

$

 

 

The Central Merger has been accounted for using the acquisition method of accounting (in accordance with the provisions of Accounting Standards Codification (“ASC”) 805,  Business Combinations ), which requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The purchase price has been allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. The Company finalized the purchase price allocation during the third quarter of 2013.

 

The Company incurred certain acquisition and integration costs associated with the transaction that were expensed as incurred and are reflected in the Consolidated Statements of Income. The Company recognized $374 and $537 of these costs in its Consolidated Statements of Income for the three months ended June 30, 2015 and 2014, respectively, in General and administrative expenses. The Company recognized $1,872 and $2,042 of these costs in its Consolidated Statements of Income for the six months ended June 30, 2015 and 2014, respectively, in General and administrative expenses.

 

4. Intangible Assets, net

 

The following presents a summary of intangible assets, net:

 

 

 

 

June 30, 2015 (unaudited)

 

December 31, 2014

 


Weighted
Average
Life (in
Years)

 

Acquired
Intangible
Assets,
Gross (1)

 

Accumulated
Amortization

Acquired
Intangible
Assets,
Net

Acquired
Intangible
Assets,
Gross (1)

Accumulated
Amortization

Acquired
Intangible
Assets,
Net

Covenant not to compete

3.5

 

$

933

$

(886)

$

47

 

$

933

 

$

(879)

 

$

54

Trade names and trademarks

4.4

 

 

9,770

 

(6,658)

 

3,112

 

 

9,770

 

 

(5,487)

 

 

4,283

Proprietary know how

9.9

 

 

34,650

 

(21,168)

 

13,482

 

 

34,650

 

 

(17,358)

 

 

17,292

Management contract rights

16.0

 

 

81,000

 

(14,187)

 

66,813

 

 

81,000

 

 

(11,601)

 

 

69,399

Acquired intangible assets, net (2)

13.8

 

$

126,353

$

(42,899)

$

83,454

 

$

126,353

 

$

(35,325)

 

$

91,028

 

(1)              Excludes the original cost and accumulated amortization of fully amortized intangible assets.

(2)              Intangible assets have estimated useful lives between one and nineteen years.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2015

 

June 30,
2014

 

June 30,
2015

 

June 30,
2014

 

Amortization expense related to intangible assets included in depreciation and amortization

 

$

3,792

 

$

3,796

 

$

7,575

 

$

7,597

 

 

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5. Goodwill

 

The amounts for goodwill and changes to carrying value by operating segment are as follows (unaudited):

 

 

Region
One

Region
Two

Region
Three

Region
Four

Region
Five

Total

Balance as of December 31, 2014 (1)

$

161,222

$

141,512

$

36,389

$

62,664

$

31,101

$

432,888

Foreign currency translation

(297)

(297)

Balance as of June 30, 2015

$

160,925

$

141,512

$

36,389

$

62,664

$

31,101

$

432,591

 

(1)        Due to the new segment reporting effective as of January 1, 2015, goodwill allocated to previous reporting units of Region One, Region Two, Region Three and Region Five have been reallocated to new reporting units on a retrospective basis for all periods presented.

 

The Company tests goodwill at least annually for impairment (the Company has elected to annually test for potential impairment of goodwill on the first day of the fourth quarter) and tests more frequently if indicators are present or changes in circumstances suggest that impairment may exist.  The indicators include, among others, declines in sales, earning or cash flows or the development of a material adverse change in business climate.  The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a reporting unit.

 

Due to a change in the Company’s segment reporting effective January 1, 2015, the goodwill allocated to previous reporting units have been reallocated to new reporting units based on the relative fair value of the new reporting units.  See also Note 13. Business Unit Segment Information for further disclosure on the Company’s change in reporting segments effective January 1, 2015.

 

During the first quarter 2015 and as a result of the change in internal reporting segment information, the Company completed a quantitative test (Step One) of goodwill impairment as of January 1, 2015 and concluded that the estimated fair values of each of the Company’s reporting units exceeded its carrying amount of net assets assigned to that reporting unit and therefore no further testing was required (Step Two). In conducting the January 1, 2015 goodwill impairment quantitative test (Step One), the Company analyzed actual and projected growth trends of the reporting units, gross margin, operating expenses and Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (which also includes forecasted five-year income statement and working capital projection, a market – based weighted average cost of capital and terminal values after five years).  The Company also assesses critical areas that may impact its business including economic conditions, market related exposures, competition, changes in  service offerings and changes in key personnel.  As part of the January 1, 2015 goodwill assessment, the Company engaged a third-party to evaluate its reporting unit’s fair values.

 

The reporting units are internally reported as Region One (North), Region Two (South), Region Three (New York Metropolitan tri-state area of New York, New Jersey and Connecticut), Region Four (Airport transportation operations nationwide), Region Five (other reporting units of USA Parking and event planning and transportation services). For purposes of reportable segments, the goodwill in Region Five is attributable to USA Parking and event planning and transportation services reporting units.

 

6. Fair Value Measurement

 

Fair value measurements-recurring basis

 

In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability.

 

Applicable accounting literature establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value.

 

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Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. Applicable accounting literature defines levels within the hierarchy based on the reliability of inputs as follows:

 

Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.

 

Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.

 

Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

 

The following sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at June 30, 2015 and December 31, 2014:

 

 

 

Fair Value Measurement

 

 

 

June 30, 2015 (unaudited)

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level
2

 

Level
3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

—     

 

$

47

 

—     

 

—     

 

$

551

 

 

Total

 

—     

 

$

47

 

—     

 

—     

 

$

551

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent acquisition consideration

 

—     

 

—     

 

$

176

 

—     

 

 

$

64

 

Other long term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent acquisition consideration

 

—     

 

—     

 

45

 

—     

 

 

208

 

Total

 

—     

 

 

$

221

 

—     

 

 

$

272

 

 

Interest Rate Swap

 

The Company seeks to minimize risks from interest rate fluctuations through the use of interest rate swap contracts and hedge only exposures in the ordinary course of business. Interest rate swaps are used to manage interest rate risk associated with our floating rate debt. The Company accounts for its derivative instruments at fair value, provided it meets certain documentary and analytical requirements to qualify for hedge accounting treatment. Hedge accounting creates the potential for a Consolidated Statements of Income match between the changes in fair values of derivatives and the changes in cost of the associated underlying transactions, in this case interest expense. Derivatives held by the Company are designated as hedges of specific exposures at inception, with an expectation that changes in the fair value will essentially offset the change in the underlying exposure. Discontinuance of hedge accounting is required whenever it is subsequently determined that an underlying transaction is not going to occur, with any gains or losses recognized in the Consolidated Statements of Income at such time, and with any subsequent changes in fair value recognized currently in earnings. Fair values of derivatives are determined based on quoted prices for similar contracts. The effective portion of the change in fair value of the interest rate swap is reported in accumulated other comprehensive income, a component of stockholders’ equity, and is being recognized as an adjustment to interest expense or other (expense) income, respectively, over the same period the related expenses are recognized in earnings. Ineffectiveness would occur when changes in the market value of the hedged transactions are not completely offset by changes in the market value of the derivative and those related gains and losses on derivatives representing hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized currently in earnings when incurred. No ineffectiveness was recognized during the six months ended June 30, 2015 and 2014.

 

Contingent Acquisition Consideration

 

The significant inputs used to derive the fair value of the contingent acquisition consideration include financial forecasts of future operating results, the probability of reaching the forecast and the associated discount rate. The weighted average probability of the contingent acquisition consideration ranges from 12% to 50%, with a weighted average discount rate of 12%.

 

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Table of Contents

 

The following provides a reconciliation of the beginning and ending balances for the contingent consideration liability measured at fair value using significant unobservable inputs (Level 3) (unaudited):

 

 

 

Due to Seller

 

Balance at December 31, 2014

 

$

(272

)

Payments

 

57

 

Change in fair value

 

(6

)

Balance at June 30, 2015

 

$

(221

)

 

For the three months ended June 30, 2015 and 2014, the Company recognized a reduction of expense of $28 and expense of $491, respectively, in General and administrative expenses within the Consolidated Statements of Income due to the change in fair value measurements using a Level 3 valuation technique. For the six months ended June 30, 2015 and 2014, the Company recognized an expense of $6 and $657, respectively, and recognized the related expense and benefit in General and administrative expenses within the Consolidated Statement of Income due to the change in fair value measurements using a Level 3 valuation technique. These adjustments were the result of using revised forecasts of operating results, updates to the probability of achieving the revised forecasts and updated fair value measurements that revised the Company’s contingent consideration obligations related to the purchase of this business.

 

Nonrecurring Fair Value Measurements

 

Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Non-financial assets such as goodwill, intangible assets, and leasehold improvements, equipment land and construction in progress are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized. The Company assesses the impairment of intangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. The fair value of its goodwill and intangible assets is not estimated if there is no change in events or circumstances that indicate the carrying amount of an intangible asset may not be recoverable. There were no impairment charges for the six months ended June 30, 2015 and 2014.

 

Financial instruments not measured at fair value

 

The following presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Consolidated Balance Sheets at June 30, 2015 and December 31, 2014:

 

 

 

June 30, 2015 (unaudited)

 

December 31, 2014

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,786

 

$

23,786

 

$

18,196

 

$

18,196

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

Long-term obligations under senior credit facility and other long-term borrowings

 

$

(258,684

)

$

(258,684

)

$

(253,400

)

$

(253,400

)

 

The carrying value of cash and cash equivalents approximates their fair value due to the short-term nature of these financial instruments and has been classified as a Level 1 measurement. The fair value of the Senior Credit Facility and other obligations was estimated to not be materially different from the carrying amount, as these instruments bear interest at variable market rates and are generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments and have been classified as a Level 2 measurement.

 

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7. Borrowing Arrangements

 

Long-term borrowings, in order of preference, consist of:

 

 

 

 

 

Amount Outstanding

 

 

 

Maturity Date

 

June 30,
2015
(unaudited)

 

December 31,
2014

 

Obligations under Credit Agreement and Restated Credit Agreement, net of original discount on borrowings

 

(1) / (2)

 

$

256,517

 

$

251,010

 

Other debt obligations

 

Various

 

2,167

 

2,390

 

Total debt obligations

 

 

 

258,684

 

253,400

 

Less: Current portion under Senior Credit Facility and other debt obligations

 

 

 

15,959

 

15,567

 

Total long-term borrowings

 

 

 

$

242,725

 

$

237,833

 

 

(1)              Credit Agreement was due to mature on October 2, 2017.

(2)              Restated Credit Agreement matures on February 20, 2020.

 

Senior Credit Facility

 

On October 2, 2012, the Company entered into a credit agreement (the “Credit Agreement”) with Bank of America, as administrative agent, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, as co-syndication agents, U.S. Bank National Association, First Hawaiian Bank and General Electric Capital Corporation, as co-documentation agents, Merrill Lynch, Pierce, Fenner & Smith Inc., Wells Fargo Securities, LLC and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, and the lenders party thereto.

 

Pursuant to the terms, and subject to the conditions, of the Credit Agreement, the Lenders made available to the Company a secured Senior Credit Facility (the “Senior Credit Facility”) that permitted aggregate borrowings of $450,000 consisting of (i) a revolving credit facility of up to $200,000 at any time outstanding, which included a letter of credit facility that was limited to $100,000 at any time outstanding, and (ii) a term loan facility of $250,000. The Senior Credit Facility was due to mature on October 2, 2017.

 

The Credit Agreement required the Company to make mandatory repayments of principal within 90 days of each fiscal year-end provided that certain excess cash is available, as defined within the Credit Agreement. In March 2014, the Company made a mandatory principal repayment of $7,940, as provided under the Credit Agreement.

 

Amended and Restated Credit Facility

 

On February 20, 2015 (“Amended and Restatement Date”), the Company entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with Bank of America, N.A. (“Bank of America”), as administrative agent, an issuing lender and swing-line lender; Wells Fargo Bank, N.A., as an issuing lender and syndication agent; U.S. Bank National Association, First Hawaiian Bank and BMO Harris Bank N.A., as co-documentation agents; Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC, as joint lead arrangers and joint book managers; and the lenders party thereto (the “Lenders”). The Restated Credit Facility reflects modifications to, and an extension of, the existing Credit Agreement.

 

Pursuant to the terms, and subject to the conditions, of the Restated Credit Agreement, the Lenders have made available to the Company a senior secured credit facility (the “Restated Senior Credit Facility”) that permits aggregate borrowings of $400,000 consisting of (i) a revolving credit facility of up to $200,000 at any time outstanding, which includes a $100,000 sublimit for letters of credit and a $20,000 sublimit for swing-line loans, and (ii) a term loan facility of $200,000 (reduced from $250,000). The Company may request increases of the revolving credit facility in an aggregate additional principal amount of $100,000. The Restated Senior Credit Facility matures on February 20, 2020.

 

The entire amount of the term loan portion of the Restated Senior Credit Facility had been drawn by the Company as of the Amended and Restatement Date (including approximately $10,400 drawn on such date) and is subject to scheduled quarterly amortization of principal as follows: (i) $15,000 in the first year, (ii) $15,000 in the second year, (iii) $20,000 in the third year, (iv) $20,000 in the fourth year, (v) $20,000 in the fifth year and (vi) $110,000 in the sixth year. The Company also had outstanding borrowings of $147,299 (including $53,449 in letters of credit) under the revolving credit facility as of the Amended and Restatement Date.

 

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Table of Contents

 

Borrowings under the Restated Senior Credit Facility bear interest, at the Company’s option, (i) at a rate per annum based on the Company’s consolidated total debt to EBITDA ratio for the 12-month period ending as of the last day of the immediately preceding fiscal quarter, determined in accordance with the pricing levels set forth in the Restated Credit Agreement (the “ Applicable Margin”), plus LIBOR or (ii) the Applicable Margin plus the highest of (x) the federal funds rate plus 0.5%, (y) the Bank of America prime rate and (z) a daily rate equal to LIBOR plus 1.0% (the highest of (x), (y) and (z), the “Base Rate”), except that all swing-line loans will bear interest at the Base Rate plus the Applicable Margin.

 

Under the terms of the Restated Credit Agreement, the Company is required to maintain a maximum consolidated total debt to EBITDA ratio of not greater than 4.0 to 1.0 as of the end of any fiscal quarter ending during the period from the Amended and Restatement Date through September 30, 2015, (ii) 3.75 to 1.0 as of the end of any fiscal quarter ending during the period from October 1, 2015 through September 30, 2016, and (iii) 3.5 to 1.0 as of the end of any fiscal quarter ending thereafter. In addition, the Company is required to maintain a minimum consolidated fixed charge coverage ratio of not less than 1:25:1.0.

 

Events of default under the Restated Credit Agreement include failure to pay principal or interest when due, failure to comply with the financial and operational covenants, the occurrence of any cross default event, non-compliance with the other loan documents, the occurrence of a change of control event, and bankruptcy and other insolvency events. If an event of default occurs and is continuing, the Lenders holding a majority of the commitments and outstanding term loan under the Restated Credit Agreement have the right, among others, to (i) terminate the commitments under the Restated Credit Agreement, (ii) accelerate and require the Company to repay all the outstanding amounts owed under the Restated Credit Agreement and (iii) require the Company to cash collateralize any outstanding letters of credit.

 

Each wholly-owned domestic subsidiary of the Company (subject to certain exceptions set forth in the Restated Credit Agreement) has guaranteed all existing and future indebtedness and liabilities of the other guarantors and the Company arising under the Restated Credit Agreement. The Company’s obligations under the Restated Credit Agreement and such domestic subsidiaries’ guaranty obligations are secured by substantially all of their respective assets.

 

The Company was in compliance with all covenants as of June 30, 2015.

 

As of June 30, 2015, the Company had $80,501 of borrowing availability under the Restated Credit Agreement, of which the Company could have borrowed $80,501 on June 30, 2015 and remained in compliance with the above described covenants as of such date. The additional borrowing availability under the Restated Credit Agreement is limited only as of the Company’s fiscal quarter-end by the covenant restrictions described above. At June 30, 2015, the Company had $53,449 million of letters of credit outstanding under the Restated Senior Credit Facility, with aggregate borrowings against the Restated Senior Credit Facility of $258,550 (excluding original discount on borrowings of $2,033).

 

In connection with and effective upon the execution and delivery of the Restated Credit Agreement on February 20, 2015, the Company recorded losses on extinguishment of debt, relating to debt discount and debt issuance costs, of $634.

 

Interest Rate Swap Transactions

 

In October 2012, the Company entered into Interest Rate Swap transactions (collectively, the “Interest Rate Swaps”) with each of JPMorgan Chase Bank, N.A., Bank of America, N.A. and PNC Bank, N.A. in an initial aggregate Notional Amount of $150.0 million (the “Notional Amount”). The Interest Rate Swaps have a termination date of September 30, 2017. The Interest Rate Swaps effectively fix the interest rate on an amount of variable interest rate borrowings under the Credit Agreement, originally equal to the Notional Amount at 0.7525% per annum plus the applicable margin rate for LIBOR loans under the Credit Agreement, determined based upon the Company’s consolidated total debt to EBITDA ratio. The Notional Amount is subject to scheduled quarterly amortization that coincides with quarterly prepayments of principal under the Credit Agreement. These Interest Rate Swaps are classified as cash flow hedges, and the Company assesses the effectiveness of the hedge on a monthly basis. The ineffective portion of the cash flow hedge is recognized in earnings as an increase of interest expense.  As of June 30, 2015, no ineffectiveness of the hedge has been recognized in interest expense. See Note 5. Fair Value Measurement for the fair value of the interest rate swap as of June 30, 2015 and December 31, 2014.

 

The Company does not enter into derivative instruments for any purpose other than for cash flow hedging purposes.

 

8. Bradley Agreement

 

The Company entered into a 25-year agreement with the State of Connecticut (“State”) that expires on April 6, 2025, under which it operates the surface parking and 3,500 garage parking spaces at Bradley International Airport (“Bradley”) located in the Hartford, Connecticut metropolitan area. The parking garage was financed through the issuance of State of Connecticut special facility revenue bonds and provides that the Company deposits, with the trustee for the bondholders, all gross revenues collected from operations of the surface and garage parking. From these gross revenues, the trustee pays debt service on the special facility revenue bonds outstanding, operating and capital maintenance expense of the surface and garage parking facilities, and specific annual guaranteed minimum payments to the state. Principal and interest on the Bradley special facility revenue bonds increase from approximately $3,600 in contract year 2002 to approximately $4,500 in contract year 2025. Annual guaranteed minimum payments to the State increase from approximately $8,300 in contract year 2002 to

 

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approximately $13,200 in contract year 2024. The annual minimum guaranteed payment to the State by the trustee for the twelve months ended December 31, 2015 and 2014 is $11,042 and was $10,815, respectively. All of the cash flow from the parking facilities are pledged to the security of the special facility revenue bonds and are collected and deposited with the bond trustee. Each month the bond trustee makes certain required monthly distributions, which are characterized as “Guaranteed Payments.”  To the extent the monthly gross receipts generated by the parking facilities are not sufficient for the trustee to make the required Guaranteed Payments, the Company is obligated to deliver the deficiency amount to the trustee, with such deficiency payments representing interest bearing advances to the trustee. The Company does not directly guarantee the payment of any principal or interest on any debt obligations of the State of Connecticut or the trustee.

 

The following is the list of Guaranteed Payments:

 

¡                   Garage and surface operating expenses;

¡                   Principal and interest on the special facility revenue bonds;

¡                   Trustee expenses;

¡                   Major maintenance and capital improvement deposits; and

¡                   State minimum guarantee.

 

To the extent sufficient funds are available, the trustee is then directed to reimburse the Company for deficiency payments up to the amount of the calculated surplus, with the Company having the right to be repaid the principal amount of any and all deficiency payments, together with actual interest and premium, not to exceed 10% of the initial deficiency payment. The Company calculates and records interest and premium income along with deficiency principal repayments as a reduction of cost of parking services in the period the associated deficiency repayment is received from the trustee. The Company believes these advances to be fully recoverable as the Bradley Agreement places no time restriction on the Company’s right to reimbursement. The reimbursement of principal, interest and premium will be recognized when received.

 

The total deficiency payments to the State of Connecticut, net of reimbursements, as of June 30, 2015 (unaudited) are as follows:

 

 

 

2015

 

Balance at December 31, 2014

 

$

13,327

 

Deficiency payments made

 

38

 

Deficiency repayment received

 

(837

)

Balance at June 30, 2015

 

$

12,528

 

 

During the three months ended June 30, 2015 and 2014, the Company received deficiency repayments (net of payments made) of $795 and $957, received and recorded interest of $213 and $nil and premium of $71 and $104, respectively, with the net of these amounts recorded as a reduction in Cost of parking services—Management contracts within the Consolidated Statements of Income. During the six months ended June 30, 2015 and 2014, the Company received deficiency repayments (net of payments made) of $799 and $1,050 and received and recorded interest of $256 and $nil and premium of $79 and $117, respectively, with the net of these amounts recorded as reduction in Cost of parking services—Management contracts within the Consolidated Statements of Income. The Company accrues for deficiency payments when the potential for future deficiency payments are both probable and estimable. There were no amounts of estimated deficiency payments accrued as of June 30, 2015 and December 31, 2014, as the Company concluded that the potential for future deficiency payments did not meet the criteria of both probable and estimable.

 

In addition to the recovery of certain General and administrative expenses incurred, the Bradley Agreement provides for an annual management fee payment, which is based on operating profit tiers. The annual management fee is further apportioned 60% to the Company and 40% to an unaffiliated entity and the annual management fee will be paid to the extent funds are available for the trustee to make a distribution, and are paid after Guaranteed Payments (as defined in the Bradley Agreement) are paid, and after the repayment of all deficiency payments, including interest and premium. Cumulative management fees of approximately $15,233 and $14,733 have not been recognized as of June 30, 2015 and December 31, 2014, respectively, and no management fees were recognized as revenue for the six months ended June 30, 2015 and 2014.

 

9. Stock-Based Compensation

 

Stock Options and Grants

 

There were no stock options granted during the six months ended June 30, 2015 and 2014. The Company recognized no stock-based compensation expense related to stock options for the three months ended June 30, 2015 and 2014, as all stock options previously granted were fully vested. As of June 30, 2015, there were no unrecognized compensation costs related to unvested stock options.

 

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Table of Contents

 

On April 21, 2015, the Company authorized vested stock grants to certain directors totaling 32,357 common shares.  The total value of the grant, based on the fair value of common stock on the grant date, was $722 and is included in General and administrative expenses within the Consolidated Statement of Income.  On April 22, 2014, the Company authorized vested stock grants to certain directors totaling 19,336 common shares.  The total value of the grant, based on the fair value of common stock on the grant date, was $491 and is included in General and administrative expenses within the Consolidated Statement of Income.

 

Restricted Stock Units

 

During the six months ended June 30, 2015, the Company authorized certain one-time grants of 3,963 restricted stock units to an executive that vest five years from date of issuance. During the six months ended June 30, 2015 and 2014, 1,416 restricted stock units vested. No restricted stock units were forfeited in the six months ended June 30, 2015.  During the six months ended June 30, 2014, 4,124 restricted stock units were forfeited under the amended and restated Long-Term Incentive Plan and became available for reissuance.

 

The Company recognized $403 and $721 of stock-based compensation expense related to the restricted stock units for the three months ended June 30, 2015 and 2014, respectively, which is included in General and administrative expenses within the Consolidated Statements of Income. The Company recognized $805 and $1,450 of stock-based compensation expenses related to restricted stock units for the six months ended June 30, 2015 and 2014, respectively, which is included in General and administrative expenses within the Consolidated Statements of Income. As of June 30, 2015, there was $3,720 of unrecognized stock-based compensation costs, net of estimated forfeitures, related to the restricted stock units that are expected to be recognized over a weighted average remaining period of approximately 4.1 years.

 

Performance Share Units

 

In September 2014, the Board of Directors authorized a performance-based incentive program under the Company’s Long-Term Incentive Plan (“Performance-Based Incentive Program”), whereby, the Company will issue performance share units to certain executive management individuals that represent shares potentially issuable in the future. The objective of the Performance-Based Incentive Program is to link compensation to business performance, encourage ownership of Company stock, retain executive talent, and reward executive performance. The Performance-Based Incentive Program provides participating executive management individuals with the opportunity to earn vested common stock if certain performance targets for pre-tax free cash flow are achieved over a three year performance period and recipients satisfy service-based vesting requirements. The stock-based compensation expense associated with unvested performance share units are recognized on a straight-line basis over the shorter of the vesting period or minimum service period and dependent upon the probable outcome of the number of shares that will ultimately be issued based on the achievement of pre-tax free cash flow over the cumulative three year period.  In April 2015 and September 2014 the Company granted 103,600 and 91,054 performance share units, respectively, to certain individuals within executive management.  No performance share units were forfeited during 2015 and no performance share units were vested as of June 30, 2015.

 

The Company recognized $445 and $606 of stock-based compensation expense related to the Performance-Based Incentive Program for the three and six months ended June 30, 2015, respectively, and is included in General and administrative expenses within the Consolidated Statements of Income. During the six months ended June 30, 2015, no performance-based shares were forfeited. There was no such program in place during the six months ended June 30, 2014. Future compensation expense for currently outstanding awards under the Performance Based Incentive Program could reach a maximum of $7,806. Stock-based compensation for the Performance-Based Incentive Program is expected to be recognized over a weighted average period of 2.1 years.

 

10. Net Income per Common Share

 

Basic net income per share is computed by dividing net income by the weighted daily average number of shares of common stock outstanding during the period. Diluted net income per share is based upon the weighted daily average number of shares of common stock outstanding for the period plus dilutive potential common shares, including stock options and restricted stock units using the treasury-stock method.

 

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Table of Contents

 

A reconciliation of the weighted average basic common shares outstanding to the weighted average diluted common shares outstanding is as follows (unaudited):

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30, 2015

 

June 30, 2014

 

 

June 30, 2015

 

June 30, 2014

 

Weighted average common basic shares outstanding

 

22,145,190

 

21,991,965

 

22,136,458

 

21,984,912

 

Effect of dilutive stock options and restricted stock units

 

376,642

 

406,921

 

368,945

 

390,465

 

Weighted average common diluted shares outstanding

 

22,521,832

 

22,398,886

 

22,505,403

 

22,375,377

 

Net income (loss) per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.44

 

$

0.24

 

$

0.50

 

$

0.44

 

Diluted

 

$

0.43

 

$

0.24

 

$

0.49

 

$

0.43

 

 

For the three and six months ended June 30, 2015, performance share units were excluded in the computation of weighted average diluted common share outstanding because the number of shares ultimately issuable is contingent upon the Company’s attainment of certain performance targets. There was no Performance-Based Incentive Program in place during the six months ended June 30, 2014.

 

There are no additional securities that could dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share, other than those disclosed.

 

11. Comprehensive Income

 

Comprehensive income consists of the following components, net of tax (unaudited):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2015

 

June 30,
2014

 

June 30,
2015

 

June 30,
2014

 

Net income

 

$

10,541

 

$

6,197

 

$

12,335

 

$

10,987

 

Effective portion of unrealized gain (loss) on cash flow hedge

 

14

 

(264

)

(297

)

(276

)

Foreign currency translation

 

(124

)

55

 

(295

)

83

 

Comprehensive income

 

10,431

 

5,988

 

11,743

 

10,794

 

Less: Comprehensive income attributable to noncontrolling interest

 

784

 

890

 

1,236

 

1,377

 

Comprehensive income attributable to SP Plus Corporation

 

$

9,647

 

$

5,098

 

$

10,507

 

$

9,417

 

 

Accumulated other comprehensive income is comprised of unrealized gains (losses) on cash flow hedges and foreign currency translation adjustments. The components of changes in accumulated comprehensive income (loss), net of tax, for the six months ended June 30, 2015 were as follows (unaudited):

 

 

 

Foreign Currency
Translation
Adjustments

 

Effective Portion of
Unrealized Gain (Loss)
on Cash Flow Hedge

 

Total
Accumulated
Other
Comprehensive
Income (Loss)

 

Balance at December 31, 2014

 

$

(530

)

$

325

 

$

(205)

 

Change in other comprehensive income (loss)

 

(295

)

(297

)

(592)

 

Balance at June 30, 2015

 

$

(825

)

$

28

 

$

(797)

 

 

12. Income Taxes

 

For the three months ended June 30, 2015, the Company recognized an income tax benefit of $385 on pre-tax earnings of $10,156 compared to $4,254 income tax expense on pre-tax earnings of $10,451 for the three months ended June 30, 2014. For the six months ended June 30, 2015, the Company recognized income tax expense of $950 on pre-tax earnings of $13,285 compared to $3,184 income tax benefit on pre-tax earnings of $7,803 for the six months ended June 30, 2014. The effective tax rate for the six months ended June 30, 2015 was 7.2% for the six months ended June 30, 2015 compared to a benefit of 40.8% for the six months ended June 30, 2014.

 

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Table of Contents

 

The effective tax rate for the six months ended June 30, 2015 increased primarily as a result a reduction in the reversal of valuation allowances for deferred tax assets established for historical net operating losses in the six months ended June 30, 2015, compared to the six months ended June 30, 2014.  During the six months ended June 30, 2015 the Company recognized a $4,604 discrete benefit primarily for the reversal of a valuation allowance for a deferred tax asset established for historical net operating losses attributable to the City of New York, New York (“New York City”).  The valuation allowance was reversed in the second quarter of 2015 due to the New York City law changes enacted April 1, 2015, which resulted in the Company determining that the future benefit of net operating loss carryforwards was more likely than not to be recognized.  During the six months ended June 30, 2014 the Company recognized a $6,359 discrete benefit for the reversal of a valuation allowance for a deferred tax asset established for historical net operating losses attributable to the State of New York.

 

As of June 30, 2015, the Company has not identified any uncertain tax positions that would have a material impact on the Company’s financial position. The Company recognizes potential interest and penalties related to uncertain tax positions, if any, in income tax expense.

 

The tax years that remain subject to examination for the Company’s major tax jurisdictions at June 30, 2015 are shown below:

 

2011 – 2014         United States — federal income tax

2007 – 2014         United States — state and local income tax

2011 – 2014         Canada

 

13. Business Unit Segment Information

 

Segment information is presented in accordance with a “management approach,” which designates the internal reporting used by the Chief Operating Decision Maker (“CODM”) for making decisions and assessing performance as the source of the Company’s reportable segments. The Company’s segments are organized in a manner consistent with which discrete financial information is available and evaluated regularly by the Company’s CODM in deciding how to allocate resources and in assessing performance.

 

An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and about which separate financial information is regularly evaluated by the Company’s CODM. The CODM is the Company’s chief executive officer.

 

Each of the operating segments is directly responsible for revenue and expenses related to their operations including direct regional administrative costs. Finance, information technology, human resources, and legal are shared functions that are not allocated back to the six operating segments. The CODM assesses the performance of each operating segment using information about its revenue and gross profit as its primary measure of performance, but does not evaluate segments using discrete asset information. There are no inter-segment transactions and the Company does not allocate interest and other income, interest expense, depreciation and amortization or taxes to operating segments. The accounting policies for segment reporting are the same as for the Company as a whole.

 

Effective January 1, 2015, the Company began certain organizational and executive leadership changes to align with how the CODM reviews performance and makes decisions in managing the Company and therefore, changed internal operating segment information reported to the CODM. The operating segments are internally reported as Region One (North), Region Two (South), Region Three (New York Metropolitan tri-state area of New York, New Jersey and Connecticut), Region Four (Airport transportation operations nationwide, Region Five (other operating segments of USA Parking and event planning and transportation services). All prior periods presented have been restated to reflect the new internal reporting to the CODM.

 

Region One encompasses operations in Delaware, District of Columbia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Northern California, Ohio, Oregon, Pennsylvania, Rhode Island, Virginia, Washington, West Virginia, Wisconsin and four Canadian provinces of Alberta, Manitoba, Ontario and Quebec.

 

Region Two encompasses operations in Alabama, Arizona, Colorado, Florida, Georgia, Hawaii, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, Oklahoma, South Carolina, Southern California, Tennessee, Texas Utah and Puerto Rico.

 

Region Three encompasses operations in the New York metropolitan tri-state area of New York, New Jersey and Connecticut.

 

Region Four encompasses all major airport and transportation operations nationwide.

 

Region Five encompasses other operating segments including USA Parking and event planning and transportation services.

 

Other consists of ancillary revenue that is not specifically identifiable to a region and insurance reserve adjustments related to prior years.

 

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Table of Contents

 

The business is managed based on regions administered by executive vice presidents. The following is a summary of revenues (excluding reimbursed management contract revenue) and gross profit by regions for the three and six months ended June 30, 2015 and 2014 (unaudited):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2015

 

Gross
Margin
%

 

June 30,
2014

 

Gross
Margin
%

 

June 30,
2015

 

Gross
Margin %

 

June 30,
2014

 

Gross
Margin %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region One

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

$

51,489

 

 

 

$

52,315

 

 

 

$

98,713

 

 

 

$

99,650

 

 

 

Management contracts

 

19,883

 

 

 

21,070

 

 

 

40,004

 

 

 

42,784

 

 

 

Total Region One

 

71,372

 

 

 

73,385

 

 

 

138,717

 

 

 

142,434

 

 

 

Region Two

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

33,775

 

 

 

30,499

 

 

 

65,003

 

 

 

59,259

 

 

 

Management contracts

 

21,078

 

 

 

22,300

 

 

 

41,526

 

 

 

41,245

 

 

 

Total Region Two

 

54,853

 

 

 

52,799

 

 

 

106,529

 

 

 

100,504

 

 

 

Region Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

27,652

 

 

 

29,521

 

 

 

54,057

 

 

 

57,532

 

 

 

Management contracts

 

6,788

 

 

 

5,536

 

 

 

13,506

 

 

 

12,650

 

 

 

Total Region Three

 

34,440

 

 

 

35,057

 

 

 

67,563

 

 

 

70,182

 

 

 

Region Four

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

32,370

 

 

 

11,233

 

 

 

62,077

 

 

 

22,583

 

 

 

Management contracts

 

26,114

 

 

 

25,859

 

 

 

51,585

 

 

 

52,573

 

 

 

Total Region Four

 

58,484

 

 

 

37,092

 

 

 

113,662

 

 

 

75,156

 

 

 

Region Five

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

1,159

 

 

 

1,286

 

 

 

2,400

 

 

 

2,483

 

 

 

Management contracts

 

10,858

 

 

 

8,120

 

 

 

28,415

 

 

 

21,046

 

 

 

Total Region Five

 

12,017

 

 

 

9,406

 

 

 

30,815

 

 

 

23,529

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

9

 

 

 

104

 

 

 

19

 

 

 

86

 

 

 

Management contracts

 

3,584

 

 

 

2,046

 

 

 

7,327

 

 

 

4,588

 

 

 

Total Other

 

3,593

 

 

 

2,150

 

 

 

7,346

 

 

 

4,674

 

 

 

Reimbursed management contract revenue

 

170,856

 

 

 

164,539

 

 

 

345,137

 

 

 

333,717

 

 

 

Total Revenues

 

$

405,615

 

 

 

$

374,428

 

 

 

809,769

 

 

 

$

750,196

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region One

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

$

4,090

 

8

%

$

4,192

 

8

%

$

5,632

 

6

%

$

4,769

 

5

%

Management contracts

 

8,864

 

45

%

8,849

 

42

%

18,255

 

46

%

17,958

 

42

%

Total Region One

 

12,954

 

 

 

13,041

 

 

 

23,887

 

 

 

22,727

 

 

 

Region Two

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

6,842

 

20

%

5,941

 

19

%

11,367

 

17

%

9,661

 

16

%

Management contracts

 

8,808

 

42

%

9,959

 

45

%

16,810

 

40

%

17,683

 

43

%

Total Region Two

 

15,650

 

 

 

15,900

 

 

 

28,177

 

 

 

27,344

 

 

 

Region Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

1,031

 

4

%

1,052

 

4

%

565

 

1

%

887

 

2

%

Management contracts

 

3,359

 

49

%

2,825

 

51

%

6,764

 

50

%

7,021

 

56

%

Total Region Three

 

4,390

 

 

 

3,877

 

 

 

7,329

 

 

 

7,908

 

 

 

Region Four

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

1,691

 

5

%

962

 

9

%

2,554

 

4

%

1,561

 

7

%

Management contracts

 

7,187

 

28

%

7,229

 

28

%

12,700

 

25

%

13,623

 

26

%

Total Region Four

 

8,878

 

 

 

8,191

 

 

 

15,254

 

 

 

15,184

 

 

 

 

20



Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2015

 

Gross
Margin
%

 

June 30,
2014

 

Gross
Margin
%

 

June 30,
2015

 

Gross
Margin %

 

June 30,
2014

 

Gross
Margin %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region Five

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

(22

)

-2

%

14

 

1

%

179

 

7

%

131

 

5

%

Management contracts

 

2,742

 

25

%

2,680

 

33

%

6,450

 

23

%

6,272

 

30

%

Total Region Five

 

2,720

 

 

 

2,694

 

 

 

6,629

 

 

 

6,403

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

(1,652

)

-18356

%

818

 

787

%

(1,195

)

-6289

%

521

 

606

%

Management contracts

 

3,495

 

98

%

3,373

 

165

%

7,544

 

103

%

3,099

 

68

%

Total Other

 

1,843

 

 

 

4,191

 

 

 

6,349

 

 

 

3,620

 

 

 

Total gross profit

 

$

46,435

 

 

 

$

47,894

 

 

 

$

87,625

 

 

 

83,186

 

 

 

General and administrative expenses

 

24,739

 

 

 

24,996

 

 

 

50,412

 

 

 

51,062

 

 

 

General and administrative expense percentage of gross profit

 

53

%

 

 

52

%

 

 

58

%

 

 

61%

 

 

 

Depreciation and amortization

 

8,165

 

 

 

7,730

 

 

 

16,099

 

 

 

14,893

 

 

 

Operating income

 

13,531

 

 

 

15,168

 

 

 

21,114

 

 

 

17,231

 

 

 

Other expenses (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

3,062

 

 

 

4,811

 

 

 

7,105

 

 

 

9,620

 

 

 

Interest income

 

(40

)

 

 

(94

)

 

 

(100

)

 

 

(192

)

 

 

Equity in losses from investment in unconsolidated entity

 

353

 

 

 

 

 

 

824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

10,156

 

 

 

10,451

 

 

 

13,285

 

 

 

7,803

 

 

 

Income tax (benefit)

 

(385

)

 

 

4,254

 

 

 

950

 

 

 

(3,184

)

 

 

Net income

 

10,541

 

 

 

6,197

 

 

 

12,335

 

 

 

10,987

 

 

 

Less: Net income attributable to noncontrolling interest

 

784

 

 

 

890

 

 

 

1,236

 

 

 

1,377

 

 

 

Net income attributable to SP Plus Corporation

 

$

9,757

 

 

 

$

5,307

 

 

 

$

11,099

 

 

 

$

9,610

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the notes thereto contained in this Quarterly Report on Form 10-Q and the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Important Information Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q is being filed by SP Plus Corporation (“we”, “SP Plus” or the “Company”) with the Securities and Exchange Commission (“SEC”) and contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words “expect,” “estimate,” “intend”, “will,” “predict,” “project,” “may,” “should,” “could,” “believe,” “would,” “might,” “anticipate,” or words of similar terms and phrases, but such words, terms and phrases are not the exclusive means of identifying such statements.  These expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995.  These forward looking statements are made based on management’s expectations, beliefs and projections concerning future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict and many of which are beyond management’s control.  These forward looking statements are not guarantees of future performance and there can be no assurance that our expectations, beliefs and projections will be realized.

 

Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth on our description of risk factors in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and except as expressly required by the federal securities laws, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, changed circumstances, future events or for any other reason.

 

Overview

 

Our Business

 

We provide parking management, ground transportation and other ancillary services to commercial, institutional and municipal clients in urban markets and airports across the United States, Puerto Rico and Canada. Our services include a comprehensive set of on-site parking management and ground transportation services, which include facility maintenance, security services, training, scheduling and supervising all service personnel as well as providing customer service, marketing, and accounting and revenue control functions necessary to facilitate the operation of our clients’ facilities. We also provide a range of ancillary services such as airport shuttle operations, valet services, taxi and livery dispatch services and municipal meter revenue collection and enforcement services. We typically enter into contractual relationships with property owners or managers as opposed to owning facilities.

 

Our Operations

 

We operate our clients’ properties through two types of arrangements: management contracts and leases. Under a management contract, we typically receive a base monthly fee for managing the facility, and we may also receive an incentive fee based on the achievement of facility performance objectives. We also receive fees for ancillary services. Typically, all of the underlying revenues and expenses under a standard management contract flow through to our clients rather than to us. However, some management contracts, which are referred to as “reverse” management contracts, usually provide for larger management fees and require us to pay various costs. Under lease arrangements, we generally pay to the property owner a fixed annual rent, a percentage of gross customer collections or a combination thereof. We collect all revenues under lease arrangements and we are responsible for most operating expenses, but we are typically not responsible for major maintenance, capital expenditures or real estate taxes. Margins for lease contracts vary significantly, not only due to operating performance, but also due to variability of parking rates in different cities and varying space utilization by parking facility type and location.  As of June 30, 2015, we operated 81% of our locations under management contracts and 19% under leases.

 

In evaluating our financial condition and operating performance, management’s primary focus is on our gross profit and total general and administrative expense. Although the underlying economics to us of management contracts and leases are similar, the manner in which we are required to account for them differs. Revenue from leases includes all gross customer collections derived from our leased locations (net of local parking taxes), whereas revenue from management contracts only includes our contractually agreed upon management fees and amounts attributable to ancillary services. Gross customer collections at facilities under management contracts, therefore, are not included in our revenue. Accordingly, while a change in the proportion of our operating agreements that are structured as leases versus management contracts may cause significant fluctuations in reported revenue and expense of parking services that change will not artificially affect our gross profit. For example, as of June 30, 2015, 81% of our locations were operated under management contracts and 78% of our gross profit for the six months ended June 30, 2015 was derived from management contracts. Only 39% of total revenue (excluding

 

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reimbursed management contract revenue), however, was from management contracts because under those contracts the revenue collected from parking customers belongs to our clients. Therefore, gross profit and total general and administrative expense, rather than revenue, are management’s primary focus.

 

General Business Trends

 

We believe that sophisticated commercial real estate developers and property managers and owners recognize the potential for parking and related services to be a profit generator rather than a cost center. Often, the parking experience makes both the first and the last impressions on their properties’ tenants and visitors. By outsourcing these services, they are able to capture additional profit by leveraging the unique operational skills and controls that an experienced parking management company can offer. Our ability to consistently deliver a uniformly high level of parking and related services and maximize the profit to our clients improves our ability to win contracts and retain existing locations. Our focus on customer service and satisfaction is a key driver of our high location retention rate, which was approximately 88% and 89% for the twelve month periods ended June 30, 2015 and 2014, respectively.

 

Summary of Operating Facilities

 

We focus our operations in core markets where a concentration of locations improves customer service levels and operating margins. The following table reflects our facilities operated at the end of the periods indicated:

 

 

 

June 30, 2015

 

December 31, 2014

 

June 30, 2014

 

Leased facilities

 

748

 

774

 

812

 

Managed facilities

 

3,253

 

3,409

 

3,398

 

Total facilities

 

4,001

 

4,183

 

4,210

 

 

Revenue

 

We recognize parking services revenue from lease and management contracts as the related services are provided. Substantially all of our revenue comes from the following two sources:

 

Parking services revenue—lease contracts . Parking services revenue related to lease contracts consist of all revenue received at a leased facility, including parking receipts (net of local parking taxes), consulting and real estate development fees, gains on sales of contracts and payments for exercising termination rights.

 

Parking services revenue—management contracts. Management contract revenue consists of management fees, including both fixed and performance-based fees, and amounts attributable to ancillary services such as accounting, equipment leasing, payments received for exercising termination rights, consulting, developmental fees, gains on sales of contracts, as well as insurance and other value-added services with respect to managed locations. We believe we generally purchase required insurance at lower rates than our clients can obtain on their own because we effectively self-insure for all liability and worker’s compensation claims by maintaining a large per-claim deductible. As a result, we have generated operating income on the insurance provided under our management contracts by focusing on our risk management efforts and controlling losses. Management contract revenue does not include gross customer collections at the managed locations as this revenue belongs to the property owner rather than to us. Management contracts generally provide us with a management fee regardless of the operating performance of the underlying facilities.

 

Conversions between types of contracts (lease or management) are typically determined by our client and not us. Although the underlying economics to us of management contracts and leases are similar, the manner in which we account for them differs substantially.

 

Reimbursed Management Contract Revenue

 

Reimbursed management contract revenue consists of the direct reimbursement from the property owner for operating expenses incurred under a management contract, which are reflected in our revenue.

 

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Cost of Parking Services

 

Our cost of parking services consists of the following:

 

Cost of parking services—lease contracts. The cost of parking services under a lease arrangement consists of contractual rental fees paid to the facility owner and all operating expenses incurred in connection with operating the leased facility. Contractual fees paid to the facility owner are generally based on either a fixed contractual amount or a percentage of gross revenue or a combination thereof. Generally, under a lease arrangement we are not responsible for major capital expenditures or real estate taxes.

 

Cost of parking services—management contracts. The cost of parking services under a management contract is generally the responsibility of the facility owner. As a result, these costs are not included in our results of operations. However, our reverse management contracts, which typically provide for larger management fees, do require us to pay for certain costs.

 

Reimbursed Management Contract Expense

 

Reimbursed management contract expense consists of direct reimbursed costs incurred on behalf of property owners under a management contract, which are reflected in our cost of parking services.

 

Gross Profit

 

Gross profit equals our revenue less the cost of generating such revenue. This is the key metric we use to examine our performance because it captures the underlying economic benefit to us of both lease contracts and management contracts.

 

General and Administrative Expenses

 

General and administrative expenses include salaries, wages, payroll taxes, insurance, travel and office related expenses for our headquarters, field offices, supervisory employees, and board of directors.

 

Depreciation and Amortization

 

Depreciation is determined using a straight-line method over the estimated useful lives of the various asset classes, or in the case of leasehold improvements, over the initial term of the operating lease or its useful life, whichever is shorter. Intangible assets determined to have finite lives are amortized over their remaining estimated useful life.

 

Results of Operations

 

Segments

 

An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and about which separate financial information is regularly evaluated by our Chief Operating Decision Maker (“CODM”), in deciding how to allocate resources. Our CODM is our chief executive officer.

 

Effective January 1, 2015, the Company began certain organizational and executive leadership changes to align with how our CODM reviews performance and makes decisions in managing the Company and therefore, changed internal operating segment information reported to the CODM. The operating segments are internally reported as Region One (North), Region Two (South), Region Three (New York Metropolitan tri-state area of New York, New Jersey and Connecticut), Region Four (Airport transportation operations nationwide, Region Five (other reporting units of USA Parking and event planning and transportation services). All prior periods presented have been restated to reflect the new internal reporting to the CODM.

 

Region One encompasses operations in Delaware, District of Columbia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Northern California, Ohio, Oregon, Pennsylvania, Rhode Island, Virginia, Washington, West Virginia, Wisconsin and four Canadian provinces of Alberta, Manitoba, Ontario and Quebec.

 

Region Two encompasses operations in Alabama, Arizona, Colorado, Florida, Georgia, Hawaii, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, Oklahoma, South Carolina, Southern California, Tennessee, Texas Utah and Puerto Rico.

 

Region Three encompasses operations in the New York metropolitan tri-state area of New York, New Jersey and Connecticut.

 

Region Four encompasses all major airport and transportation operations nationwide.

 

Region Five encompasses other operating segments including USA Parking and event planning and transportation services.

 

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Other consists of ancillary revenue that is not specifically identifiable to a region and insurance reserve adjustments related to prior years.

 

The following is a summary of revenues (excluding reimbursed management contract revenue), cost of parking services and gross profit by regions for the three months ended June 30, 2015 and 2014:

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

Segment revenue information is summarized as follows (unaudited):

 

 

 

Three Months Ended June 30,

 

 

 

Region One

 

Region Two

 

Region Three

 

Region Four

 

Region Five

 

Other

 

Total

 

Variance

 

 

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

Amount

 

%

 

Lease contract revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New locations

 

$

1.7

 

$

0.7

 

$

2.2

 

$

0.1

 

$

0.5

 

$

 

$

18.8

 

$

 

$

0.1

 

$

 

$

 

$

 

$

23.3

 

$

0.8

 

$

22.5

 

2813

%

Contract expirations

 

0.3

 

2.6

 

1.1

 

2.6

 

 

2.6

 

 

0.6

 

 

 

 

 

1.4

 

8.4

 

(7.0

)

-83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same locations

 

47.6

 

47.1

 

27.2

 

24.8

 

27.2

 

26.9

 

10.9

 

10.6

 

0.6

 

1.3

 

(0.1)

 

0.2

 

113.4

 

110.9

 

2.5

 

2

%

Conversions

 

1.9

 

1.9

 

3.3

<