SP Plus Corp - Quarter Report: 2014 March (Form 10-Q)

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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 March 31, 2014

 

Commission file number: 000-50796

 

 

 

SP Plus Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

 

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)

 

 

(Former Name, Former Address and
Former Fiscal Year, if Changed Since Last Report)

 

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):

 

 

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 May 1, 2014, there were 21,996,678 shares of common stock of the registrant outstanding.

 

 

Table of Contents

 

SP PLUS CORPORATION

 

TABLE OF CONTENTS

 

Part I. Financial Information	3
Item 1. Financial Statements:	3
Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013	3
Condensed Consolidated Statements of Income (unaudited) for the three months ended March 31, 2014 and 2013	4
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2014 and 2013	5
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2014 and 2013	6
Notes to Condensed Consolidated Interim Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures about Market Risk	26
Item 4. Controls and Procedures	26
Part II. Other Information	27
Item 1. Legal Proceedings	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3. Defaults Upon Senior Securities	27
Item 4. Mine Safety Disclosures	27
Item 5. Other Information	27
Item 6. Exhibits	28
Signatures	29

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SP PLUS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

		March 31, 2014			December 31, 2013
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	24,271		$	23,158
Notes and accounts receivable, net		131,489			115,126
Prepaid expenses and other		14,000			20,645
Deferred taxes		10,317			10,317
Total current assets		180,077			169,246
Leasehold improvements, equipment, land and construction in progress, net		47,525			44,885
Other assets:
Advances and deposits		6,109			7,149
Intangible assets, net		102,420			106,222
Favorable acquired lease contracts, net		56,927			60,034
Other assets, net		24,587			24,574
Cost of contracts, net		10,240			10,762
Goodwill		439,322			439,503
		639,605			648,244
Total assets		$	867,207		$	862,375
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	111,861		$	115,493
Accrued and other current liabilities		98,258			102,350
Current portion of long-term debt obligations		26,537			24,632
Total current liabilities		236,656			242,475
Deferred taxes		11,082			17,348
Long-term borrowings, excluding current portion:
Obligations under senior credit facility		277,200			263,457
Other long-term debt obligations		534			577
		277,734			264,034
Unfavorable lease contracts, net		70,244			74,130
Other long-term liabilities		63,041			60,677
Stockholders’ equity:
Preferred Stock, par value $0.01 per share; 5,000,000 shares authorized as of March 31, 2014 and December 31, 2013; no shares issued		—			—
Common stock, par value $.001 per share; 50,000,000 shares authorized as of March 31, 2014 and December 31, 2013; 21,979,907 and 21,977,311 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively		22			22
Additional paid-in capital		241,372			240,665
Accumulated other comprehensive (loss) income		134			118
Accumulated deficit		(33,376		)	(37,679		)
Total SP Plus Corporation stockholders’ equity		208,152			203,126
Noncontrolling interest		298			585
Total equity		208,450			203,711
Total liabilities and stockholders’ equity		$	867,207		$	862,375

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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SP PLUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

 

		Three Months Ended
		March 31, 2014			March 31, 2013
Parking services revenue:
Lease contracts		$	116,635		$	121,085
Management contracts		89,955			90,095
		206,590			211,180
Reimbursed management contract revenue		169,178			159,477
Total revenue		375,768			370,657
Cost of parking services:
Lease contracts		112,084			112,118
Management contracts		59,214			58,737
		171,298			170,855
Reimbursed management contract expense		169,178			159,477
Total cost of parking services		340,476			330,332
Gross profit:
Lease contracts		4,551			8,967
Management contracts		30,741			31,358
Total gross profit		35,292			40,325
General and administrative expenses		26,066			27,948
Depreciation and amortization		7,163			7,493
Operating income		2,063			4,884
Other expenses (income):
Interest expense		4,809			4,840
Interest income		(98		)	(111		)
		4,711			4,729
(Loss) income before income taxes		(2,648		)	155
Income tax (benefit)		(7,438		)	(154		)
Net income		4,790			309
Less: Net income attributable to noncontrolling interest		487			569
Net income (loss) attributable to SP Plus Corporation		$	4,303		$	(260	)
Common stock data:
Net income (loss) per share:
Basic		$	0.20		$	(0.01	)
Diluted		$	0.19		$	(0.01	)
Weighted average shares outstanding:
Basic		21,977,836			21,870,771
Diluted		22,351,845			21,870,771

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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SP PLUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, unaudited)

 

		Three Months Ended
		March 31, 2014			March 31, 2013
Net income		$	4,790		$	309
Other comprehensive income		16			18
Comprehensive income		4,806			327
Less: comprehensive income attributable to noncontrolling interest		487			569
Comprehensive income (loss) attributable to SP Plus Corporation		$	4,319		$	(242	)

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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SP PLUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

		Three Months Ended
		March 31, 2014			March 31, 2013
Operating activities:
Net income		$	4,790		$	309
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		7,150			7,537
Net accretion of acquired lease contracts		(779		)	(1,873		)
Loss (gain) loss on sale and abandonment of assets		168			(54		)
Amortization of debt issuance costs		341			452
Amortization of original discount on borrowings		414			336
Non-cash stock-based compensation		796			1,042
Provisions for losses on accounts receivable		109			130
Excess tax benefit related to vesting of restricted stock units		89			—
Deferred income taxes		(6,199		)	(289		)
Net change in operating assets and liabilities		(16,581		)	(17,106		)
Net cash used in operating activities		(9,702		)	(9,516		)
Investing activities:
Purchase of leasehold improvements and equipment		(3,327		)	(3,059		)
Cost of contracts purchased		(102		)	(54		)
Proceeds from sale of assets		42			51
Capitalized interest		(17		)	—
Contingent payments for businesses acquired		—			(6		)
Net cash used in investing activities		(3,404		)	(3,068		)
Financing activities:
Tax benefit from vesting of restricted stock units		(89		)	—
Contingent payments for businesses acquired		(141		)	—
Proceeds from senior credit facility revolver, net		28,800			17,550
Payments on term loan		(13,565		)	(5,625		)
Distribution to noncontrolling interest		(774		)	(669		)
Payments on other long-term debt obligations		(40		)	(191		)
Net cash provided by financing activities		14,191			11,065
Effect of exchange rate changes on cash and cash equivalents		28			(135		)
Increase (decrease) in cash and cash equivalents		1,113			(1,654		)
Cash and cash equivalents at beginning of period		23,158			28,450
Cash and cash equivalents at end of period		$	24,271		$	26,796
Supplemental disclosures:
Cash paid (received) during the period for:
Interest		$	3,856		$	4,101
Income taxes, net		(4,692		)	277

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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SP PLUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

1. The Company

 

The Company provides parking management, ground transportation and other ancillary services to commercial, institutional and municipal clients in the United States, Puerto Rico and Canada. Its services include a comprehensive set of on-site parking management and ground transportation services, which consist of training, scheduling and supervising all service personnel as well as providing customer service, marketing, maintenance, security and accounting and revenue control functions necessary to facilitate the operation of clients’ parking 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.

 

2. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of SP Plus Corporation (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 Sheet, Statements of Income, and Comprehensive Income (Loss) 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 month period ended March 31, 2014 are not necessarily indicative of the results that might be expected for any other interim period or the fiscal year ended December 31, 2014. 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 13, 2014.

 

Adopted Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This update requires additional disclosures about offsetting and related arrangements on assets and liabilities to enable users of financial statements to understand the effect of such arrangements on an entity’s financial position as reported. This amendment is effective for fiscal 2014 and retrospective application is required.  The adoption of this guidance on January 1, 2014 did not have an impact to the Company’s financial position, results of operations or cash flows or financial statement disclosures.

 

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” to eliminate diversity in practice. Under this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit that exists at the reporting date, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if certain criteria are met. This amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2013.  The adoption of this guidance on January 1, 2014 did not have an impact to the Company’s financial position, results of operations or cash flows or financial statement disclosures.

 

3. Legal and Other Contingencies

 

The Company is subject to 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 expense recognition associated with legal claims against the Company. Management uses guidance 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 (defined in Note 5. Acquisition) include provisions allocating to the Company responsibility for all structural repairs required on the property, including repairs arising as a result of ordinary wear and tear. The Company may incur costs for certain structural repair obligations during 2014 and future years, the Company is unable to estimate an amount or range of estimated liability for these repairs in any particular year or in the aggregate. As a result, the Company has not recognized a liability for these costs in the accompanying consolidated financial statements. Additionally, the applicable indemnity pursuant to the Agreement and Plan of Merger dated February 12, 2012, and further discussed in Note 5. Acquisition, may not cover all such obligations, and there

 

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will be timing differences between the Company’s payments to satisfy these obligations and the receipt of indemnification thereof, and some indemnification obligations may be satisfied through the surrender of shares of the Company’s common stock.

 

4. Intangible Assets, net

 

The following presents a summary of intangible assets, net, as of March 31, 2014 and December 31, 2013:

 

		March 31, 2014			December 31, 2013
		(Unaudited)
Covenant not to compete		$	933		$	933
Trade names and trademarks		9,820			9,820
Proprietary know how		34,650			34,650
Management contract rights		81,000			81,000
Accumulated amortization		(23,983		)	(20,181		)
Intangible assets, net		$	102,420		$	106,222

 

Amortization expense related to intangible assets included in depreciation and amortization was $3,801 and $3,957 for the three months ended March 31, 2014 and 2013, respectively.

 

5. 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 (“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 of $27,000 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 12, 2012 (the “Merger Agreement).  The Company financed the acquisition through additional borrowings under the Senior Credit Facility (defined in Note 9. Borrowing Arrangements).

 

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 working capital (as determined in accordance with the Merger Agreement) (the “Net Debt Working Capital”) exceeded $285,000 as of September 30, 2012 and (ii) for certain defined adverse consequences as set forth in the Merger Agreement.  Pursuant to the Merger Agreement, Central’s former stockholders are required to satisfy certain indemnity obligations, which are capped at $27,000 cash consideration (the “Capped Items”) only through a reduction of the $27,000 cash consideration.  For certain other indemnity obligations set forth in the Merger Agreement which are not capped at the $27,000 cash consideration (the “Uncapped Items”), including the Net Debt Working Capital indemnity obligations described above, Central’s former stockholders may satisfy their indemnity obligations as follows (provided the Company reserves the right to reject the cash and stock alternatives and choose to reduce the $27,000 cash consideration):

 

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

 

·                  Central’s former stockholders can elect to pay the applicable amount with the Company’s common stock (valued at $23.64 per share); or

 

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

 

The Company has determined that the Net Debt Working Capital was $298,729 as of September 30, 2012 and that, accordingly, the Net Debt Working Capital exceeded the threshold by $13,729. In addition, the Company has determined that it currently has indemnity claims for certain defined adverse consequences, which would reduce the cash consideration payable in three years by $6,580. 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 the payment of any Uncapped Items.  The Company expects that it will have additional indemnity claims against the former stockholders of Central.

 

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

 

Central Net Debt Working Capital at September 30, 2012 as defined in the Merger Agreement		$	(298,729	)
Threshold		285,000
Excess over the threshold		(13,729		)
Indemnification of certain defined adverse consequences, net		(6,237		)
Cash consideration payable in three years		27,000
Settled cash consideration		$	7,034
Present value of cash consideration as of March 31, 2014		$	5,940
Present value of cash consideration at the acquisition date		$	8,943

 

Accordingly, the fair value of the final consideration transferred to acquire all of Central’s outstanding stock at the acquisition date is as follows:

 

Stock consideration		$	140,726
Present value of cash consideration to be issued as of March 31, 2014		5,940
Total consideration transferred		$	146,666

 

The acquisition 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

 

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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 2013, which resulted in revision to the previously reported preliminary amounts and were applied retrospectively back to the date of the acquisition.

 

The Company has incurred certain acquisition and integration costs associated with the transaction that have been expensed as incurred and reflected in the Consolidated Statements of Income. The Company recognized $1,505 and $4,213 of these costs in the Consolidated Statement of Income for the three months ended March 31, 2014 and 2013, respectively, in General and Administrative Expenses.

 

6. Stock-Based Compensation

 

Stock Options and Grants

 

There were no options granted during the three months ended March 31, 2014 and 2013. The Company recognized no stock-based compensation expense related to stock options for the three months ended March 31, 2014 and 2013, as all options previously granted were fully vested. As of March 31, 2014, there were no unrecognized compensation costs related to unvested options.

 

Restricted Stock Units

 

In March 2014, the Company authorized a one-time grant of 7,518 restricted stock units to an executive that vest in March 2019.  During the three months ended March 31, 2014, no restricted stock units vested. During the three months ended March 31, 2013, 5,000 restricted stock units vested. No restricted stock units were forfeited in the three months ended March 31, 2014 and 2013.

 

The Company recognized $796 and $1,042 of stock-based compensation expense related to restricted stock units for the three months ended March 31, 2014 and 2013, respectively, which is included in General and Administrative Expenses. As of March 31, 2014, there was $6,654 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 3.9 years.

 

7. Net Income (Loss) 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.

 

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 March 31,
		2014			2013
Weighted average common basic shares outstanding		21,977,836			21,870,771
Effect of dilutive stock options and restricted stock units		374,009			—
Weighted average common diluted shares outstanding		22,351,845			21,870,771
Net income (loss) per share:
Basic		$	0.20		$	(0.01	)
Diluted		$	0.19		$	(0.01	)

 

Stock options and restricted stock units not included in the computation of diluted loss per share for those periods because their inclusion was anti-dilutive were as follows (unaudited):

 

		Three Months Ended March 31,
		2014		2013
Stock options and restricted stock units		—		300,033

 

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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 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, 2014 and 2013 is $10,815 and was $10,593, 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, net of reimbursements, as of March 31, 2014 (unaudited) are as follows:

 

		2014
Balance at January 1, 2014		$	14,649
Deficiency payments made		25
Deficiency repayment received		(117		)
Balance at March 31, 2014		$	14,557

 

During the three months ended March 31, 2014, the Company received deficiency repayments (net of payments made) of $92 and received and recorded premium of $14, with the net of these amounts recorded as reduction in Cost of Parking Services within the Consolidated Statement of Income. During the three months ended March 31, 2013, the Company made deficiency payments of $403 and did not receive or record any interest or premium payments, with the deficiency payments made being recorded as additional Cost of Parking Services within the Consolidated Statement 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 March 31, 2014, as the Company concluded that the potential for future deficiency payments did not meet the criteria of both probable and estimable. The Company accrued $100 of estimated deficiency payments as of December 31, 2013.

 

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

 

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Company and 40% to an un-affiliated entity and the annual management fee will be paid to the extent funds are available for the trustee to make 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 $13,983 and $13,733 have not been recognized as of March 31, 2014 and December 31, 2013, respectively, and no management fees were recognized as revenue for the three months ended March 31, 2014 and 2013.

 

9. Borrowing Arrangements

 

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

 

				Amount Outstanding
		Maturity Date		March 31, 2014			December 31, 2013
				(Unaudited)
Senior Credit Facility, net of discount		October 2, 2017		$	302,320		$	286,672
Other obligations		Various		1,951			1,994
Total debt				304,271			288,666
Less current portion				26,537			24,632
Total long-term debt				$	277,734		$	264,034

 

Senior Credit Facility

 

On October 2, 2012, the Company entered into a Credit Agreement with Bank of America, as administrative agent, Wells Fargo Bank, N.A. (“Wells Fargo Bank”) 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 (the “Lenders”).

 

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

 

The Company may be required 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 the event the Company is required to make mandatory repayments of principal pursuant to the Credit Agreement, the aggregate borrowings available under the Senior Credit Facility are reduced by the amount of mandatory principal repayments made by the Company.  In March 2014, the Company made a mandatory principal repayment of $7,940, as provided under the Credit Agreement.  There were no mandatory repayments of principal required under the Credit Agreement in 2013.

 

Events of default under the 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 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 Credit Agreement have the right, among others, to (i) terminate the commitments under the Credit Agreement, (ii) accelerate and require the Company to repay all the outstanding amounts owed under the Credit Agreement and (iii) require the Company to cash collateralize any outstanding letters of credit.

 

Under the terms of the Credit Agreement, as of March 31, 2014 and June 30, 2014, we are required to maintain a maximum consolidated total debt to EBITDA ratio of not greater than 4.0:1.0.  There are certain future step downs as described in the Credit Agreement; decreasing to 3.75:1.0 as of the end of each fiscal-quarter ending after July 1, 2014 through and including the quarter ending June 30, 2015, 3.5:1.0 as of the end of each fiscal quarter ending after July 1, 2015 through and including June 30, 2016 and 3.25:1.0 as of the end of each fiscal quarter ending after July 1, 2016.   In addition, as of March 31, 2014 and June 30, 2014, we are required to maintain a minimum consolidated fixed charge coverage ratio of not less than 1.25:1.0., decreasing to 1.35:1.0 as of the end of each fiscal quarter ending after July 1, 2014.

 

The Company was in compliance with all covenants as of March 31, 2014.

 

At March 31, 2014, the Company had $46,683 of borrowing availability under the Credit Agreement, of which the Company could have borrowed $8,701 on March 31, 2014 and remained in compliance with the above described covenants as of such date.  The additional borrowing availability under the Credit Agreement is limited only as of the Company’s fiscal quarter-end by the covenant restrictions described above.   At March 31, 2014, the Company had $56,167 of letters of credit outstanding under the Senior Credit Facility, with aggregate borrowings against the Senior Credit Facility of $305,460 (excluding debt discount of $3,140.)

 

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Interest Rate Swap Transactions

 

On October 25, 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 an effective date of October 31, 2012 and 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 we calculate 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 March 31, 2014, no ineffectiveness of the hedge has been recognized. See Note 12. Fair Value Measurement for the fair value of the interest rate swap as of March 31, 2014 and December 31, 2013.

 

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

 

10. Comprehensive Income (Loss)

 

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

 

		For the three months ended
		March 31, 2014			March 31, 2013
Net income		$	4,790		$	309
Effective portion of cash flow hedge		(12		)	153
Effect of foreign currency translation		28			(135		)
Comprehensive income		4,806			327
Less: comprehensive income attributable to noncontrolling interest		487			569
Comprehensive income (loss) attributable to SP Plus Corporation		$	4,319		$	(242	)

 

Accumulated other comprehensive income (loss) 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 taxes, for the three months ended March 31, 2014 were as follows (unaudited):

 

		Foreign Currency Translation Adjustments			Effective Portion of Unrealized Gain (Loss) on Derivative			Total Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2013		$	(368	)	$	486		$	118
Changes in other comprehensive income (loss)		28			(12		)	16
Balance at March 31, 2014		$	(340	)	$	474		$	134

 

11. Income Taxes

 

For the three months ended March 31, 2014, the Company recognized an income tax benefit of $7,438 compared to a $154 income tax benefit for the three months ended March 31, 2013.  The effective tax rate is a benefit of 280.9% for the three months ended March 31, 2014 compared to a benefit of 99.4% for the three months ended March 31, 2013. The effective tax rate for the three months ended March 31, 2014 was a benefit of 280.9%, primarily as a result of recognizing 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.  The valuation allowance was reversed in the first quarter of 2014 due to State of New York tax law changes effective March 31, 2014, which resulted in the Company determining that the future benefit of the net operating loss carryforwards were more likely than not to be realized.

 

As of March 31, 2014, 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.

 

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The tax years that remain subject to examination for the Company’s major tax jurisdictions at March 31, 2014 are shown below:

 

2009 - 2013		United States—federal income tax
2007 - 2013		United States—state and local income tax
2010 - 2013		Canada

 

12. 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.

 

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 table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at March 31, 2014 and December 31, 2013:

 

		Fair Value Measurement at March 31, 2014 (unaudited)								Fair Value Measurement at December 31, 2013
		Level 1		Level 2			Level 3			Level 1		Level 2			Level 3
Assets:
Prepaid expenses and other
Interest rate swap		—		$	804		—			—		$	824		—
Liabilities:
Accrued expenses
Contingent acquisition consideration		—		—			$	1,366		—		—			$	1,374
Other long term liabilities
Contingent acquisition consideration		—		—			$	195		—		—			$	163

 

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 Statement of Operations 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 Statement of Operations 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 the those related gains and losses

 

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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 three months ended March 31, 2014 and 2013.

 

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 5% to 100%, with a weighted average discount rate of 11%.

 

The following table 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, 2013		$	(1,537	)
Payment of contingent consideration		141
Change in fair value		(166		)
Balance at March 31, 2014		$	(1,562	)

 

For the three months ended March 31, 2014, the Company recognized an expense of $166 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. For the three months ended March 31, 2013, the Company recognized a benefit of $308 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 these businesses.

 

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 an 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 three months ended March 31, 2014 and 2013.

 

Financial instruments not measured at fair value

 

The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Consolidated Balance Sheet at March 31, 2014 (unaudited) and December 31, 2013:

 

		March 31, 2014						December 31, 2013
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents		$	24,271		$	24,271		$	23,158		$	23,158
Long-term debt—
Senior credit facility, net of discount		(302,320		)	(302,320		)	(286,672		)	(286,672		)
Other obligations		$	(1,951	)	$	(1,951	)	$	(1,994	)	$	(1,994	)

 

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.

 

Book overdrafts of $26,748 and $29,310 are included within Accounts Payable in the Consolidated Balance Sheet as of March 31, 2014 and December 31, 2013, respectively.

 

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

 

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reportable segments. The Company’s segments are organized in a manner consistent with which separate 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 four operating segments. The CODM assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest, taxes, and depreciation and amortization, 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.

 

On November 1, 2013, the Company changed its internal reporting segment information reported to its CODM. The Company now reports Ontario, Manitoba and Quebec in Region One and Missouri, Nebraska, North Carolina and South Carolina in Region Five. All prior periods presented have been restated to reflect the new internal reporting to the CODM.

 

The business is managed based on regions administered by executive vice presidents. The following is summary of revenues (excluding reimbursed management contract revenue) and gross profit by regions for the three months ended March 31, 2014 and 2013 (unaudited):

 

		Three Months Ended March 31, 2014			Gross Margin %		Three Months Ended March 31, 2013			Gross Margin %
Revenues(a):
Region One
Lease contracts		70,014					72,083
Management contracts (b)		24,988					28,447
Total Region One		95,002					100,530
Region Two
Lease contracts		1,197					1,326
Management contracts		12,720					10,215
Total Region Two		13,917					11,541
Region Three
Lease contracts		11,879					11,413
Management contracts		14,126					15,821
Total Region Three		26,005					27,234
Region Four
Lease contracts		11,350					11,265
Management contracts		26,528					24,728
Total Region Four		37,878					35,993
Region Five
Lease contracts		22,387					25,050
Management contracts		10,227					11,311
Total Region Five		32,614					36,361
Other
Lease contracts		(192		)			(52		)
Management contracts		1,366					(427		)
Total Other		1,174					(479		)
Reimbursed management contract revenue		169,178					159,477
Total revenues		375,768					370,657
Gross Profit
Region One
Lease contracts		(130		)	0	%	2,270			3	%
Management contracts		11,672			47	%	13,469			47	%
Total Region One		11,542					15,739
Region Two
Lease contracts		135			11	%	266			0	%
Management contracts		3,047			24	%	2,277			22	%
Total Region Two		3,182					2,543
Region Three
Lease contracts		599			5	%	778			7	%
Management contracts		5,186			37	%	5,888			37	%
Total Region Three		5,785					6,666
Region Four
Lease contracts		645			6	%	751			7	%
Management contracts		8,178			31	%	5,500			22	%
Total Region Four		8,823					6,251
Region Five
Lease contracts		3,447			15	%	4,885			20	%
Management contracts		3,901			38	%	4,772			42	%
Total Region Five		7,349					9,657
Other
Lease contracts		(145		)	76	%	17			100	%
Management contracts		(1,243		)	(91	)%	(548		)	128	%
Total Other		(1,388		)			(531		)
Total gross profit		35,292					40,325
General and administrative expenses		26,066					27,948
General and administrative expense percentage of gross profit		74		%			69		%
Depreciation and amortization		7,163					7,493
Operating income		2,063					4,884
Other expenses (income):
Interest expense		4,809					4,840
Interest income		(98		)			(111		)
		4,711					4,729
(Loss) income before income taxes		(2,648		)			155
Income tax (benefit)		(7,438		)			(154		)
Net income		4,790					309
Less: Net income attributable to noncontrolling interest		487					569
Net income (loss) attributable to SP Plus Corporation		$	4,303				$	(260	)

 

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(a)                                 Excludes reimbursed management contract revenue.

 

(b)                                 The three months ended March 31, 2013 included a net gain of $2,700 related to the sale of rights associated with certain contracts.

 

Region One encompasses operations in Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Virginia, West Virginia, Wisconsin and the Canadian provinces of Manitoba, Ontario, and Quebec.

 

Region Two encompasses event planning and transportation, and the Company’s technology-based parking and traffic management systems.

 

Region Three encompasses operations in Arizona, California, Colorado, Hawaii, New Mexico, Oregon, Utah, Washington and the Canadian province of Alberta.

 

Region Four encompasses all major airport and transportation operations nationwide.

 

Region Five encompasses Alabama, Florida, Georgia, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, and Texas.

 

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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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 our Form 10-K for the year ended December 31, 2013.

 

Important Information Regarding Forward-Looking Statements

 

This quarterly report on Form 10-Q is being filed by SP Plus Corporation (“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,” “expect,” “intend”, ‘will,” “predict,” “project,” “may,” “should,” “could,” “believe,” “would,” “might,” “anticipates,” 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 Form 10-K for the fiscal year ended December 31, 2013, 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 the United States, Puerto Rico and Canada. Our services include a comprehensive set of on-site parking management and ground transportation services, which consist of training, scheduling and supervising all service personnel as well as providing customer service, marketing, maintenance, security and accounting and revenue control functions necessary to facilitate the operation of clients’ parking facilities. We 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.

 

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 revenue 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 either a fixed annual rent, a percentage of gross customer collections or a combination thereof. We collect all revenue 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 March 31, 2014, we operated approximately 80% of our locations under management contracts and approximately 20% of our locations under leases. For the three months ended March 31, 2014, we derived approximately 89% of our gross profit under management contracts and approximately 11% of our gross profit under lease contracts.

 

In evaluating our financial condition and operating performance, management’s primary focus is gross profit, total general and administrative expenses and general and administrative expenses as a percentage of our gross profit. 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.

 

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