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finance leased asset (Details)
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(Exact Name of Registrant as Specified in Its Charter)
iDelaware
i16-1171179
(State
or Other Jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or Organization)
i200 E. Randolph Street, Suite 7700
iChicago, iIllinoisi60601-7702
(Address of Principal Executive Offices, Including Zip Code)
(i312) i274-2000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, $0.001 par value per share
iSP
iThe NASDAQ Stock Market LLC
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. iYesý No o
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYesý No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
iLarge Accelerated Filer
ý
Accelerated
Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging Growth Company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐
No ý
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
SP Plus Corporation (the "Company") facilitates the efficient movement of people, vehicles and personal belongings with the goal of enhancing the consumer experience while improving bottom line results for our clients. The Company provides professional parking management, ground transportation, remote baggage check-in and handling, facility maintenance, security, event logistics, and other technology-driven mobility solutions to aviation, commercial, hospitality, healthcare and government clients across North America. The
Company typically enters into contractual relationships with property owners or managers as opposed to owning facilities.
i
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 Condensed Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Stockholders' Equity 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 nine month periods ended September 30, 2019 are not necessarily indicative of the results that might be expected for any
other interim period or the fiscal year ending December 31, 2019. 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 February 27, 2019.
i
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 $i0.4 million and $i1.7
million as of September 30, 2019 and December 31, 2018, respectively, and are included within Cash and cash equivalents within the Condensed Consolidated Balance Sheets.
/
i
Financial Instruments
The
carrying values of cash, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these financial instruments. Book overdrafts of $i26.0 million and $i34.0 million
are included within Accounts payable within the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, respectively. Long-term debt has a carrying value that approximates fair value because these instruments bear interest at variable market rates.
/
i
Equity
Investments in Unconsolidated Entities
The Company has ownership interests in i30 active partnerships, joint ventures or similar arrangements that operate parking facilities, of which i25
are consolidated under the VIE or voting interest models and i5 are unconsolidated 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 Condensed 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 Services revenue - lease type contracts within the Condensed Consolidated Statements of Income. The equity earnings in these related investments were $i0.8
million and $i0.7 million for the three months ended September 30, 2019 and 2018, respectively, and were $i2.4
million and $i1.9 million for the nine months ended September 30, 2019 and 2018, respectively.
In October 2014, the Company entered into an agreement to establish a joint venture with Parkmobile USA, Inc. and contributed all of the assets and liabilities of its proprietary Click and Park parking prepayment business in exchange for a i30% interest in the newly formed legal entity called Parkmobile, LLC
(“Parkmobile”). On January 3, 2018, the Company closed a transaction to sell the entire i30% interest in Parkmobile to Parkmobile USA, Inc. for a gross sale price of $i19.0
million and in the first quarter of 2018, the Company recognized a pre-tax gain of $i10.1 million,
net of closing costs, and included in Equity in earnings from investment in unconsolidated entity within the Condensed Consolidated Statements of Income for the nine months ended September 30, 2018. The Company historically accounted for its investment in the Parkmobile joint venture using the equity method of accounting, and its underlying share of equity in Parkmobile was included in Equity investments in unconsolidated entities within the Condensed Consolidated Balance Sheets. The equity losses (earnings) in the Parkmobile joint venture were historically included in Equity in earnings from investment in unconsolidated entity within the Condensed Consolidated Statements of Income.
i
Noncontrolling
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 the Condensed Consolidated Financial Statements.
i
Recently
Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Topic 842 requires lessees to record most leases on the balance sheet and recognize expense on the income statement. Additionally, the classification criteria and the accounting for sales-type and direct financing leases is modified for lessors. Under Topic 842, all entities are required to recognize "right-of-use" ("ROU") assets and lease liabilities on the balance sheet for all leases classified as either operating or finance leases. Lease classification will determine recognition of lease-related revenue and expense. Since the release of Topic 842, the FASB also issued the following
additional ASUs updating the topic:
•
In January 2018, the FASB issued ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842
•
In July 2018, the FASB issued ASU No. 2018-11, Lease (Topic 842): Targeted Improvements
•
In
July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases
•
In December 2018, the FASB issued ASU No. 2018-20, Narrow Scope Improvements for Lessors
•
In March 2019, the FASB issued ASU No. 2019-01, Codification Improvements
Topic 842 and its related ASUs are effective for interim and annual reporting periods
beginning after December 15, 2018.
The Company adopted the provisions of Topic 842 on January 1, 2019 under the modified retrospective approach and has used the effective date as the initial application date. Therefore, comparative periods have not been recast and continue to be reported under the accounting standards in effect for those prior periods presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the
Company to carry forward the historical lease classification.
The standard had a material impact in our Condensed Consolidated Balance Sheet, but did not have a material impact in the Company's Condensed Consolidated Income Statement and no impact in the Condensed Consolidated Statement of Cash Flow. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged.
(a) Represents
prepaid rent reclassified to Right-of-use assets
(b) Represents capitalization of operating lease assets and reclassification of prepaid and deferred rent, lease incentives, favorable
and unfavorable acquired lease contracts, net and cost of contract balances on operating leases
(c) Represents favorable acquired lease contracts, net reclassified to Right-of-use assets
(d) Represents cost of contract, net reclassified to Right-of-use
assets
(e) Represents short-term deferred rent reclassified to Right-of-use assets
(f) Represents the recognition of short-term operating lease liabilities
(g) Represents the recognition of long-term operating lease liabilities
(h) Represents unfavorable acquired lease contracts, net reclassified to Right-of-use assets
(i) Represents long-term deferred rent reclassified to Right-of-use assets
/
In
June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Under existing guidance, the accounting for nonemployee share-based payments differs from that applied to employee awards, particularly with regard to the measurement date and the impact of performance conditions. This ASU provides that existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. ASU No. 2018-07 is effective for all companies for fiscal
years beginning after December 15, 2018 and interim periods within those fiscal years. The Company adopted the standard as of January 1, 2019. The standard did not have an impact on the Company’s financial position, results of operations, cash flows and financial statement disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This Update modifies accounting guidance for hedge accounting by making more hedge strategies eligible for hedge accounting, amending
presentation and disclosure requirements, and changing how companies assess ineffectiveness. The intent is to simplify the application of hedge accounting and increase transparency of information about an entity’s risk management activities. The amended guidance is effective for annual periods beginning after December 15, 2018. The Company adopted the standard as of January 1, 2019. The standard did not have an impact on the Company’s financial position, results of operations, cash flows and financial statement disclosures.
In October 2018, the FASB issued ASU 2018-16, Derivatives and
Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes. This Update permits use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes. This Update is effective for fiscal years beginning after December 15, 2018. The Company adopted the standard as of January 1, 2019. The standard did not have an impact on the Company’s financial position, results of operations, cash flows and financial statement disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The new guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment
test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. ASU No. 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests. The standard is not expected to have an impact on the Company’s financial position, results of operations, cash flows and financial statement disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326).
The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for interim and annual reporting periods beginning after December 15, 2019. 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 August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal - Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (ASC)
350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The standard is effective for interim and annual reporting periods beginning after December 15, 2019. The standard is not expected to have an impact on the Company’s financial position, results of operations, cash flows and financial statement disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (Topic 820). This standard modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The standard is effective for interim and annual reporting periods beginning after December 15, 2019. The standard is not expected to have an impact on the Company’s financial position, results of operations, cash flows and financial statement disclosures.
2.
iiLeases/
The
Company leases parking facilities, office space, warehouses, vehicles and equipment and determines if an arrangement is a lease at inception. The Company rents or subleases certain real estate to third parties. The Company's sublease portfolio consists of operating leases for space within our leased parking facilities.
Prior to January 1, 2019, the Company recognized lease expense related to operating leases on a straight-line basis over the terms of the leases and, accordingly, recorded the difference between cash rent payments and recognition of rent expense as a deferred rent liability or prepaid rent. Landlord-funded
leasehold improvements were also recorded as deferred rent liabilities and were amortized as a reduction of rent expense over the noncancelable term of the related operating lease. For leases that included one or more options to renew, the exercise of such renewal options is at the Company's sole discretion or mutual agreement. Certain of the Company's lease agreements included variable rent consisting primarily of payments that are a percentage of parking services revenue based on contractual levels and rental payments adjusted periodically for inflation.
Upon adoption of Topic 842, ROU assets represent the Company's
"right-of-use" over an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The ROU asset includes cumulative prepaid or accrued rent on adoption date, unamortized lease incentives, unamortized initial direct costs, unamortized favorable acquired lease contracts, net and unfavorable acquired lease contracts, net initially recognized prior to adoption of Topic 842. The short term lease exception has been applied to leases with an initial term of 12 months or less and these leases are not recorded on the balance sheet.
Service
concession arrangements within the scope of ASU No. 2017-10, Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services, are excluded from the scope of Topic 842. Lease costs associated with these arrangements is recorded as a reduction of revenue. See Note 5. Revenue for further discussion.
As most of the Company's leases do not provide an implicit rate, the
Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. Lease expense is recognized on a straight-line basis over the lease term.
For leases that include one or more options to renew, the exercise of such renewal options is at the Company's sole discretion or mutual agreement. Equipment and vehicle leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Variable
lease components comprising of payments that are a percentage of parking services revenue based on contractual levels and rental payments adjusted periodically for inflation are not included in lease liability. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
i
The components of leased assets and liabilities and classification on the Condensed Consolidated Balance Sheet as of September 30,
2019 were as follows:
Leasehold
improvements, equipment and construction in progress, net (a)
i17.7
Total leased assets
$
i462.2
Liabilities
Current
Operating
Short-term
lease liability
$
i117.1
Finance
Current portion of long-term obligations under credit facility and other long-term borrowings
i2.8
Noncurrent
Operating
Long-term
lease liability
i338.4
Finance
Other long-term borrowings
i15.1
Total
lease liabilities
$
i473.4
(a)Finance lease assets are recorded net of accumulated amortization of $i2.1
million as of September 30, 2019
/
The components of lease cost and classification on the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2019 were as follows:
Rent expense on operating leases was $i63.0
million and $i181.4 million for the three and nine months ended September 30, 2019, respectively. iThe following table presents information
on short term and variable lease costs:
Sublease
income generated during the three and nine months ended September 30, 2019 was not material.
The Company has entered into operating lease arrangements as of September 30, 2019 that are effective for future periods. The total amount of right-of-use assets and lease liabilities related to these arrangements are immaterial.
ii
Maturities
of lease liabilities as of September 30, 2019 were as follows:
(millions) (unaudited)
Operating Leases Liabilities
Finance Leases Liabilities
Total
2019
$
i36.0
$
i0.9
$
i36.9
2020
i131.0
i3.6
i134.6
2021
i100.9
i3.6
i104.5
2022
i80.6
i3.1
i83.7
2023
i54.1
i2.3
i56.4
After
2024
i126.0
i7.1
i133.1
Total
lease payments
i528.6
i20.6
i549.2
Less:
Imputed interest
i73.1
i2.7
i75.8
Present
value of lease liabilities
$
i455.5
$
i17.9
$
i473.4
//
Future
sublease income for the above periods shown was excluded as the amounts are not material.
i
Lease term and discount rate information was as follows:
On November 30, 2018, the Company acquired the outstanding shares (the "Acquisition") of ZWB Holdings, Inc. and Rynn's Luggage Corporation, their subsidiaries and affiliates
(collectively, "Bags"). Bags is a leading provider of baggage delivery, remote airline check in, and other related services, primarily to airline, airport and hospitality clients. Subject to the terms and conditions of the Stock Purchase Agreement, as consideration for the acquisition of Bags, SP Plus paid to the Sellers total consideration of approximately $i283.6 million. The consideration is comprised of $i275.0
million of contractual cash consideration, $i8.1 million related to the preliminary net working capital and cash acquired and $i0.5
million for certain individual taxes to be paid by the Seller (the “Cash Consideration”). As described in Note 17. Business Unit Segment Information, the Company integrated the Bags' operations into Segment Two (Aviation) for segment reporting purposes, effective November 30, 2018.
The Company's acquisition of Bags has been accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred, which is also generally measured
at fair value or the net acquisition date fair values of the assets acquired and the liabilities assumed. The results of operations are reflected in the consolidated financial statements of the Company from the date of acquisition.
The Company incurred certain acquisition and integration costs associated with the transaction that were expensed as incurred and are reflected in the Condensed Consolidated Statements of Income. See Note 4. Acquisition, Restructuring and Integration Costs.
The Company believes
that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. As a result, during the measurement period, which may be up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed will be recorded with corresponding adjustments to goodwill. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. The Company recorded measurement period adjustments
during the nine months ended September 30, 2019 related to an increase in assumed workers' compensation liabilities.
i
The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed:
Leasehold
improvements, equipment and construction in progress, net
i1.5
i—
i1.5
Other
intangible assets, net
i118.0
i—
i118.0
Goodwill
i154.1
i0.1
i154.2
Accounts
payable
(i6.5
)
i—
(i6.5
)
Accrued
expenses
(i4.1
)
(i0.1
)
(i4.2
)
Other
long-term liabilities
(i0.7
)
i—
(i0.7
)
Net
assets acquired and liabilities assumed
$
i283.6
$
i—
$
i283.6
/
Goodwill
amounting to $i154.2 million represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The goodwill recognized is attributable primarily to expanded revenue synergies and expanded opportunities in the aviation and hospitality businesses, and other benefits that the Company believes will result from combining
its operations with the operations of Bags. The goodwill acquired is deductible for tax purposes.
Other intangible assets, net acquired consist of the following:
(millions)
(unaudited)
Estimated Life (1)
Estimated Fair Value
Trade name
i5.0
Years
$
i5.6
Customer
relationships
12.4 - 15.8 Years
i100.4
Existing
technology
5.0 - 6.0 Years
i10.4
Non-compete
agreement
i5.0 Years
i1.6
Estimated
fair value of other intangible assets
$
i118.0
(1)
Represents preliminary estimated life of assets acquired.
/
The fair value estimate for all identifiable intangible assets is based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The estimated fair value of trade names was determined with the relief from royalty savings method, which is a commonly-used variation of the income approach. The Company considered the return on assets and market comparable methods when estimating an appropriate royalty rate for the trade names. The estimated fair value of acquired
customer relationships was determined with the excess earnings method, which is a variation of the income approach. This approach calculates the excess of the future cash inflows (i.e., revenue from customers generated from the relationships) over the related cash outflows (i.e., customer servicing expenses) generated over the useful life of the relationship. The estimated fair value of developed or existing technology was determined utilizing the relief from royalty savings method under the income approach with additional consideration given to asset deterioration rates.
The final determination of fair value of intangible assets, as well as estimated useful lives, remains subject to change. The finalization may have a material impact on the valuation of intangible assets and the purchase price allocation, which is expected to be finalized subsequent to the transaction but within
the measurement period.
Pro forma financial information
The following unaudited pro forma results of operations for the three and nine months ended September 30, 2019 and 2018, assumes the Acquisition was completed on January 1, 2018, and as such Bags pre-acquisition results have been added to the Company’s historical results. The historical consolidated financial information of the
Company and the acquisition have been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The pro forma results contained in the table below include adjustments for (i) amortization of acquired intangibles, (ii) reduced general and administrative expenses related to non-routine transaction expenses, (iii) increased interest expense related to the financing of the acquisition, and (iv) estimated income tax effect.
The unaudited pro forma condensed combined financial information is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily
indicative of the future results of the combined company. The unaudited pro forma condensed combined financial statements do not give effect to the potential impact of any anticipated benefits from revenue synergies, cost savings or operating synergies that may result from the Acquisition or to any future disynergies and integration related costs. Also, the unaudited pro forma condensed combined financial information does not reflect possible adjustments related to potential restructuring or integration activities that have yet to be determined or transaction or other costs following the combination that are not expected to have a continuing impact on the business of the combined company. Further, one-time transaction-related expenses anticipated to be incurred prior to, or concurrent with, the closing of the transaction are not included in the unaudited pro forma condensed combined statement of income as such transaction costs were determined not to be significant.
Additionally, the pro forma financial information does not reflect the costs which the Company has incurred or may incur to integrate Bags.
Services
revenue related to Bags in 2019 that is included in the Condensed Consolidated Statements of Income was $i46.3 million and $i132.7
million for the three and nine months ended September 30, 2019, respectively. Net income related to Bags in 2019 that is included in the Condensed Consolidated Statements of Income was $i3.1 million and $i9.9
million for the three and nine months ended September 30, 2019, respectively. Services revenue and net income are included in Services revenue - Management type contracts and Net income attributable to SP Plus Corporation, respectively.
4. Acquisition, Restructuring and Integration Costs
Acquisition,
Restructuring and Integration Costs
The Company has incurred certain acquisition, restructuring, and integration costs that were expensed as incurred, which include:
•
transaction costs and other acquisition related costs (primarily professional services and advisory services) primarily related to the Bags acquisition (included within General and administrative expenses within the Consolidated Statements of Income);
•
costs
(primarily severance and relocation costs) related to a series of Company initiated workforce reductions to increase organizational effectiveness and provide cost savings that can be reinvested in the Company's growth initiatives, during 2019 and 2018 (included within General and administrative expenses within the Condensed Consolidated Statements of Income); and
•
consulting costs for integration-related activities related to the Bags acquisition (included within General and administrative expenses within the Condensed Consolidated Statements of Income);
i
The
aggregate costs associated with the acquisition, restructuring, and integration related costs for the three and nine months ended September 30, 2019 and September 30, 2018 are summarized in the following table:
An
accrual for acquisition, restructuring and integration costs of $i0.2 million (of which, $i0.2 million
is included in Compensation and payroll withholdings within the Condensed Consolidated Balance Sheets) and $i3.3 million (of which, $i1.0
million is included in Compensation and payroll withholdings, $i2.1 million is included in Accrued Expenses and $i0.2
million is included in Other long-term liabilities within the Condensed Consolidated Balance Sheets) as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, all accruals for acquisition, restructuring, and integration are short-term in nature.
5. iRevenue
The Company accounts for revenue in accordance with Topics 606 and 853. Topic 606 requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
The Company accounts for a contract
when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Once a contract is identified, the Company evaluates whether the combined or single contract should be accounted for as more than one performance obligation. Substantially all of our revenues come from the following two types of arrangements: Lease type and Management type contracts.
Under lease type arrangements, the Company pays the property owner a fixed base rent or payment, percentage rent or payment that is tied to the facility’s financial performance, or a combination of both. The Company operates the parking facility and is responsible for most operating expenses, but typically is not responsible for major maintenance, capital expenditures or real estate taxes. Performance obligations for service revenues related to lease type contracts include parking for transient
and monthly parkers. Revenue is recognized over time as the Company provides services. Certain expenses, primarily rental expense for the contractual arrangements that meet the definition of service concession arrangements, are recorded as a reduction of revenue for the three and nine months ended September 30, 2019 and 2018.
Management type contract revenue consists of management fees, including both fixed and performance-based fees. In exchange for this consideration, the Company has a bundle of performance obligations that include services such as managing the parking facility as well as ancillary services such as accounting, equipment leasing, consulting, insurance and other value-added services. The Company believes that it can generally purchase required insurance for the facility and facility operations
at lower rates than clients can obtain on their own because the Company is effectively self-insured for all liability, worker's compensation and health care claims by maintaining a large per-claim deductible. As a result, the Company generates operating income on the insurance provided under our management type contracts by focusing on risk management efforts and controlling losses. Management type contract revenues do not include gross customer collections at the managed locations as these revenues belong to the property owners rather than to the
Company. Management type contracts generally provide the Company with management fees regardless of the operating performance of the underlying facilities. Revenue is recognized over time as the Company provides services.
Service concession arrangements
Service concession agreements within the scope of Topic 853 include both lease type and management type contracts. Revenue generated from service concession arrangements, is accounted
for under the guidance of Topics 606 and 853. For the three and nine months ended September 30, 2019 and 2018, respectively, certain expenses (primarily rental expense) related to service concession arrangements and depreciation and amortization, have been recorded as a reduction of Service revenue - lease type contracts.
Contracts
are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either changes the consideration due to the Company or creates new performance obligations or changes the existing scope of the contract and related performance obligations. Most contract modifications are for services that are not distinct from the existing contract
due to the fact that the Company is providing a bundle of performance obligations that are highly inter-related in the context of the contract, and are therefore accounted for as if they were part of that existing contract. Typically, modifications are accounted for prospectively as part of the existing contract.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, which are collected by the
Company from a customer, are excluded from revenue.
Reimbursed management type contract revenue and expense
The Company recognizes both revenues and expenses, in equal amounts, that are directly reimbursed from the property owner for operating expenses incurred under a management type contract. The Company has determined it is the principal in these transactions as the nature of our performance obligations is for the
Company to provide the services on behalf of the customer. As the principal to these related transactions, the Company has control of the promised services before they are transferred to the customer.
Disaggregation of revenue
The Company disaggregates its revenue from contracts with customers by type of arrangement for each of our reportable segments. The Company has concluded that such disaggregation of revenue
best depicts the overall economic nature, timing and uncertainty of the Company's revenue and cash flows affected by the economic factors of the respective contractual arrangement. See Note 17. Business Unit Segment Information for further information on disaggregation of our revenue by segment.
Performance obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer or client, and is the unit of account under Topic 606. The contract
transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company's contracts have a single performance obligation that is not separately identifiable from other promises in the contract and therefore not distinct, comprising the promise to provide a bundle of monthly performance obligations or parking services for transient or monthly parkers.
The contract price is generally deemed to be the transaction price. Some management type contracts
include performance incentives that are based on variable performance measures. These incentives are constrained at contract inception and recognized once the customer has confirmed that the Company has met the contractually agreed upon performance measures as defined in the contract.
The Company's performance obligations are primarily satisfied over time as the Company provides the related services. Typically, revenue is recognized over time on a straight-line basis as the
Company satisfies the related performance obligation. There are certain management type contracts where revenue is recognized based on costs incurred to date plus a reasonable margin. The Company has concluded this is a faithful depiction of how control is transferred to the customer. Performance obligations satisfied at a point in time for the three and nine months ended September 30, 2019 and 2018 were not significant.
The time between completion of the performance obligation and collection of cash is typically not more than 30 - 60 days. In certain contractual arrangements, such monthly parker contracts, cash is typically collected in advance of the Company commencing its performance obligations under the contractual arrangement.
On September 30, 2019, the Company had $i135.3
million related to performance obligations that were unsatisfied or partially unsatisfied for which the Company expects to recognize revenue. This amount excludes variable consideration primarily related to contracts where the Company and customer share the gross revenues or operating profit for the location and contracts where transaction prices include performance incentives that are constrained at contract inception. These performance incentives are based on measures that are ascertained exclusively
by future performance and therefore cannot be estimated at contract inception by the Company. The Company applies the practical expedient that permits exclusion of information about the remaining performance obligations that have original expected durations of one year or less. iThe
Company expects to recognize the remaining performance obligations as revenue in future periods as follows:
The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets and contract liabilities. Accounts receivable represent amounts where the Company has an unconditional right to the consideration and therefore only the passage of time is required for the Company to receive consideration due from the customer. Both lease type and management type contracts have customers and clients where amounts are billed as work progresses or
in advance in accordance with agreed-upon contractual terms. Billing may occur subsequent to or prior to revenue recognition, resulting in contract assets and contract liabilities. The Company, on occasion, receives advances or deposits from customers and clients, on both lease and management type contracts, before revenue is recognized, resulting in the recognition of contract liabilities.
Contract
assets and contract liabilities are reported on a contract-by-contract basis and are included in Notes and accounts receivable, net and Accrued expenses, respectively, on the Condensed Consolidated Balance Sheets. Impairment charges related to accounts receivable for the three and nine months ended September 30, 2019 and 2018, were not significant. There were ino
impairment charges recorded on contract assets and contract liabilities for the three and nine months ended September 30, 2019 and 2018.
i
The
following table provides information about accounts receivable, contract assets and contract liabilities with customers and clients as of September 30, 2019 (unaudited) and December 31, 2018:
Changes
in contract assets include recognition of additional consideration due from the customer are offset by reclassifications of contract asset balances to accounts receivable when the Company obtains an unconditional right to consideration, thereby establishing an accounts receivable. The following table provides information about changes to contract asset balances for the nine-month periods ended September 30, 2019 and 2018:
Changes in contract liability primarily include additional contract liabilities and liquidation of contract liabilities when revenue is recognized. The following table provides information about changes to contract liability balances for the nine-month periods ended September 30, 2019 and 2018:
Cost of contracts, net represents the cost of obtaining contractual rights associated with providing parking services for management type contracts. Incremental costs incurred to obtain service contracts are amortized on a straight line basis over the estimated life of the contracts, including anticipated renewals and terminations. This is consistent with the timing of when the
Company satisfies the related performance obligations. Estimated lives are based on the contract life or anticipated lives of the contract.
i
The table below shows amortization expense related to cost of contracts for the three and nine months ended September 30,
2019 and 2018. Amortization expense of cost of contracts related to service concession arrangements within the scope of Topic 853 and certain management type contracts are recorded as a reduction of revenue and were not significant for the three and nine months ended September 30, 2019 and 2018, respectively.
Amortization
expense related to cost of contract included in depreciation and amortization
$
i0.3
$
i0.8
$
i0.9
$
i2.3
/
As
of September 30, 2019 and December 31, 2018 cost of contracts net of accumulated amortization included on the Condensed Consolidated Balance Sheets under Cost of contract, net were $i4.5
million and $i9.2 million, respectively. iNo
impairment charges were recorded for the three and nine months ended September 30, 2019 and 2018.
6. iLegal and Other Commitments and Contingencies
The
Company is subject to litigation in the normal course of its business. The outcomes of legal proceedings and claims brought against it and other loss contingencies are subject to significant uncertainty. The Company accrues a charge against income when its management determines that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. In addition, the Company accrues for the authoritative judgments or assertions made against it by government agencies at the time of their rendering regardless of its intent to appeal. In addition, the Company is from time-to-time party to litigation, administrative proceedings and union grievances
that arise in the normal course of business, and occasionally pays non-material amounts to resolve claims or alleged violations of regulatory requirements. There are no "normal course" matters that separately or in the aggregate, would, in the opinion of management, have a material adverse effect on its operation, financial condition or cash flow.
In determining the appropriate accounting for loss contingencies, the Company considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of potential loss. The Company regularly evaluates current information available to determine whether an accrual should be established
or adjusted. Estimating the probability that a loss will occur and estimating the amount of a potential loss or a range of potential loss involves significant estimation and judgment.
(1)
Excludes the original cost and accumulated amortization of fully amortized intangible assets.
(2) Intangible assets have estimated remaining lives between four and ififteen years.
/
i
The
table below shows the amortization expense related to intangible assets for the three and nine months ended September 30, 2019 and September 30, 2018:
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, earnings 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 component.
The Company completed its annual goodwill impairment
test as of October 1, 2018, using a qualitative test (Step Zero), to determine the likelihood of impairment and if it was more likely than not that the fair value of the reporting units were less than the carrying value of the reporting unit. The Company 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 One). Generally, the more-likely-than-not threshold is a greater than a 50% likelihood that the fair value of a reporting unit is greater than the carrying value. As part of the October 1, 2018 goodwill assessment, the
Company engaged a third-party to estimate a discount rate, which is a primary driver in the valuation of the Company's reporting units' fair values. No impairment was recorded as a result of the goodwill impairment test performed. The Company monitors for indicators for goodwill impairment testing between annual tests. No adverse events occurred during the three and nine months ended September 30, 2019 that would cause the Company to test goodwill for impairment.
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.
i
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 September 30, 2019 and December 31,
2018:
The Company seeks to minimize risks from interest rate fluctuations through the use of interest rate collar contracts and hedge only exposures in the ordinary course of business. Interest rate collars are used to manage interest rate risk associated with our floating rate debt. Effective May 2019, the Company entered into ithree
zero cost interest rate collar contracts with an aggregate notional amount of $i222.3 million with maturity dates of April 2022. The notional amount amortizes consistent with the term loan portion of the Senior Credit Facility. See Note 10. Borrowing Arrangements for additional disclosure on interest rate collar contract
transactions. The Company accounts for its derivative instruments at fair value. 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, with any subsequent changes in fair value recognized currently in earnings.
The fair value of interest rate collars is a Level 2 fair value measurement,
based on quoted prices of similar items in active markets. The effective portion of the change in fair value of the interest rate collars 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. Gains and losses from cash flow hedging instruments reclassified from Accumulated other comprehensive income to earnings are reported as Cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The Company did not enter into derivative transactions during the nine months ended September 30, 2018.
See
Note 15. Comprehensive Income for amount of gain (loss) recognized in Other Comprehensive loss on the interest rate collars. iNo gain (loss) was reclassified from Accumulated Other Comprehensive loss during the three and nine months ended September 30, 2019.
iNo gain (loss) was recognized in income on the interest rate collars resulting from hedge ineffectiveness or exclusion from the assessment of hedge effectiveness.
Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are not 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 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 ino impairment charges for the nine months ended September 30, 2019 and 2018.
Financial
Instruments Not Measured at Fair Value
i
The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018:
Credit Facility, net of original discount on borrowings
and deferred financing costs
$
i351.0
$
i351.0
$
i371.2
$
i371.2
Other
obligations
$
i19.1
$
i19.1
$
i15.4
$
i15.4
/
The
fair value of the Restated Credit Facility and Other obligations approximates the carrying amount due to variable interest rates and would be classified as a Level 2. See Note 10. Borrowing Arrangements, for further information.
10. iBorrowing Arrangements
i
Long-term
borrowings, in order of preference, consist of:
On February 20, 2015, the Company amended and restated its credit facility (the "Former Restated Credit Facility") that permitted aggregate borrowings of $i400.0
million consisting of (i) a revolving credit facility of up to $i200.0 million at any time outstanding, which includes a $i100.0
million sublimit for letters of credit and a $i20.0 million sublimit for swing-line loans, and (ii) a term loan facility of $i200.0
million. The Former Restated Credit Facility was due to mature on February 20, 2020.
Senior Credit Facility
On November 30, 2018 (the "Closing Date") and in connection with the Acquisition, the Company entered into a credit agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”), as Administrative Agent, swing-line lender and a letter of credit issuer; Wells Fargo Bank, N.A., as syndication agent; BMO Harris Bank N.A., JPMorgan Chase Bank, N.A., KeyBank National Association and U.S. Bank National Association, as co-documentation agents; Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC,
as joint lead arrangers and joint bookrunners; 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 senior secured credit facility (the “Senior Credit Facility”) that permits aggregate borrowings of $i550.0 million consisting
of (i) a revolving credit facility of up to $i325.0 million at any time outstanding, which includes a letter of credit facility that is limited to $i100.0
million at any time outstanding, and (ii) a term loan facility of $i225.0 million. The Senior Credit Facility matures on November 30, 2023.
The entire amount of the term loan portion of the Senior Credit Facility was drawn by the
Company on the Closing Date and is subject to scheduled quarterly amortization of principal in installments equal to i1.25% of the initial aggregate principal amount of such term loan. The Company also borrowed $i174.8
million under the revolving credit facility on the Closing Date. The proceeds from these borrowings were used by the Company to pay the purchase price for the Acquisition (See Note 3. Acquisition), to pay other costs and expenses related to the acquisition of Bags and the related financing and to repay in full the obligations under the Former Restated Credit Facility. In addition, proceeds from the Senior Credit Facility may be used to finance working capital, capital expenditures and other acquisitions, payments and general corporate purposes.
Borrowings under the 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 i12-month period ending as of the last day of the immediately preceding fiscal quarter, determined in accordance with the applicable pricing levels set forth in the Credit Agreement (the “Applicable Margin”) for London Interbank Offered Rate (or a comparable or successor rate approved by Bank of America) (“U.S. dollar
LIBOR”) loans, plus the applicable U.S. dollar LIBOR rate or (ii) the Applicable Margin for base rate loans plus the highest of (x) the federal funds rate plus i0.5%, (y) the Bank of America prime rate and (z) a daily rate equal to the applicable U.S. dollar LIBOR rate plus i1.0%.
Under
the terms of the Credit Agreement, the Company is required to maintain a maximum consolidated total debt to EBITDA ratio of not greater than i4.25:1.0 with certain step-downs described in the Credit Agreement. In addition, the
Company is required to maintain a minimum consolidated fixed charge coverage ratio of not less than i3.50:1.0 (with certain step-ups described in the Credit Agreement).
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 Administrative Agent can, with the consent of the required Lenders, among others (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.
Each wholly owned domestic subsidiary of the Company
(subject to certain exceptions set forth in the Credit Agreement) has guaranteed all existing and future indebtedness and liabilities of the other guarantors and the Company arising under the Credit Agreement. The Company’s obligations under the Credit Agreement and such domestic subsidiaries’ guaranty obligations are secured by substantially all of their respective assets.
At September 30,
2019, the Company had $i53.6 million of letters of credit outstanding under the Senior Credit Facility, borrowings against the Senior Credit Facility aggregated to $i354.0
million.
The weighted average interest rate on our Senior Credit Facility and Former Restated Credit Facility was i3.5% and i4.0%
for the periods ended September 30, 2019 and December 31, 2018, respectively. The rate includes all outstanding U.S. dollar LIBOR contracts and letters of credit. The weighted average interest rate on outstanding borrowings, not including letters of credit, was i3.8%
and i4.3%, respectively, at September 30, 2019 and December 31, 2018.
In connection with and effective upon the execution and delivery of the Credit Agreement on November 30, 2018, the
Company recognized losses on extinguishment of debt relating to debt discount and debt issuance costs. These losses were not significant.
In May 2019, the Company entered into three-year interest rate collar contracts with an aggregate $i222.3
million notional amount. Interest rate collars are used to manage interest rate risk associated with variable interest rate borrowings under the Credit Agreement. The collars establish a range where the Company will pay the counterparties if the one-month U.S. dollar LIBOR rate falls below the established floor rate, and the counterparties will pay the Company if the one-month U.S. dollar LIBOR rate exceeds the established ceiling rate of i2.5%.
The collars settle monthly through the termination date of April 2022. No payments or receipts are exchanged on the interest rate collar contracts unless interest rates rise above or fall below the pre-determined ceiling or floor rates. The notional amount amortizes consistent with the term loan portion of the Senior Credit Facility. These interest rate collars are classified as cash flow hedges, and the Company calculates the effectiveness of the hedge on a monthly basis. See Note 9. Fair Value Measurement for additional disclosure on interest rate collar contract transactions. As of December 31,
2018, the Company had no ongoing derivative transactions.
Subordinated Convertible Debentures
The Company acquired Subordinated Convertible Debentures ("Convertible Debentures") as a result of a prior acquisition. The subordinated debenture holders have the right to redeem the Convertible Debentures for $i19.18
per share upon their stated maturity (April 1, 2028) or upon acceleration or earlier repayment of the Convertible Debentures. There were no redemptions of Convertible Debentures during the periods ended September 30, 2019 and December 31, 2018, respectively. The approximate redemption value of the Convertible Debentures outstanding at September 30, 2019 and December 31, 2018 is $i1.1
million and $i1.1 million, respectively.
11. iShare
Repurchase Plan
In May 2016, the Company's Board of Directors authorized the Company to repurchase, on the open market, shares of its outstanding common stock in an amount not to exceed $i30.0 million in aggregate. In July
2019, the Company's Board of Director's authorized a new program to repurchase, on the open market, shares of its outstanding common stock in an amount not to exceed $i50.0 million in aggregate. Purchases of the Company's common stock may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block
trades, or by other means in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934. The share repurchase program does not obligate the Company to repurchase any particular amount of common stock, and has no fixed termination date.
Under this program, the Company has repurchased i1,263,642
shares of common stock through September 30, 2019. iThe table below summarizes share repurchase activity during the three and nine months ended September 30, 2019.
Three
Months Ended
Nine Months Ended
(millions, except for share and per share data) (unaudited)
The Company entered into a i25-year
agreement with the State of Connecticut (“State”) that expires on April 6, 2025, under which it operates the surface parking and i3,500 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 $i3.6
million in contract year 2002 to approximately $i4.5 million in contract
year 2025. Annual guaranteed minimum payments to the State increase from approximately $i8.3 million in contract year 2002 to approximately $i13.2
million in contract year 2024. The annual minimum guaranteed payment to the State by the trustee for the twelve months ended December 31, 2019 and 2018 is $i12.0 million and
was $i11.8 million, 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 i10%
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 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.
i
The
total deficiency repayments (net of payments made) from the State as of September 30, 2019 (unaudited) are as follows:
The
total deficiency repayments (net of payments made), interest and premium received and recognized for the three and nine months ended September 30, 2019 and 2018 are as follows:
Deficiency
payments made are recorded as an increase in Cost of services - management type contracts and deficiency repayments, interest and premium received are recorded as reductions to Cost of services - management type contracts. The reimbursement of principal, interest and premium are recognized when received.
There were ino
amounts of estimated deficiency payments accrued as of September 30, 2019 and December 31, 2018, 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 i60% to the Company and i40%
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), and after the repayment of all deficiency payments, including interest and premium. Cumulative management fees of approximately $i19.5 million and $i18.7
million have not been recognized as of September 30, 2019 and December 31, 2018, respectively, and ino management fees were recognized as revenue for the three and nine months ended September 30,
2019 and 2018.
13. iStock-Based Compensation
Stock Grants
There
were i14,076 and i12,736
stock grants granted during the nine months ended September 30, 2019 and 2018, respectively. The Company recognized $i0.5 million of stock-based compensation expense related to stock grants
for the three and nine months ended September 30, 2019 and 2018, respectively.
Restricted Stock Units
During the nine months ended September 30, 2019 and 2018, i37,235andi52,306restricted stock units were authorized by the Company, respectively. During the nine months ended September 30,
2019 and 2018, i76,875 and i129,706
restricted stock units vested, respectively. During the nine months ended September 30, 2019 and 2018, i7,978
and i6,456 restricted stock units were forfeited under the Company's Long-Term Incentive Plan, as Amended and Restated (the "Plan") and became available
for reissuance, respectively.
i
The table below shows the Company's stock-based compensation expense related to the restricted stock units for the three and nine months ended September 30,
2019 and 2018, respectively, and is included in General and administrative expenses within the Condensed Consolidated Statements of Income:
As
of September 30, 2019, there was $i2.0 million of unrecognized stock-based compensation costs related to the restricted stock units that are expected to be recognized over a weighted
average remaining period of approximately i2.0 years.
Performance Share Units
In September 2014, the Board of Directors authorized a performance-based incentive program under the
Company’s Plan (“Performance-Based Incentive Program”), whereby the Company will issue performance share units to certain executives 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 executives with the opportunity to earn vested common stock if certain performance targets for pre-tax free cash flow are achieved over a ithree
years 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 ithree
years period.
During the nine months ended September 30, 2019 and 2018, the Company granted i144,097
and i28,060 performance share units to certain executives, respectively. The grants during the nine months ended September 30, 2019
included an increase during the three months ended September 30, 2019 of i18,865 shares that
are expected to be awarded based on the revised estimate of performance shares that are expected to vest. The grants during the nine months ended September 30, 2018 included a decrease during the three months ended September 30, 2018 of i70,661
shares based on the revised estimate of performance shares that are no longer expected to vest. iNo performance share units vested during the nine months ended
September 30, 2019. During the nine months ended September 30, 2018, i6,874
performance share units vested related to certain participating executives being eligible for retirement. During the nine months ended September 30, 2019 and 2018, i11,819
and i10,572 performance share units were forfeited under the Plan and became available for reissuance, respectively.
The table below shows the Company's stock-based compensation expense (reduction of expense) related to the Performance-Based Incentive Program for the three and nine months ended September 30, 2019 and 2018, respectively, and is included in General and administrative expenses within the Condensed Consolidated Statements of Income:
Future
compensation expense for currently outstanding awards under the Performance-Based Incentive Program could reach a maximum of $i15.0 million. Stock-based compensation for the Performance-Based Incentive Program is expected to be recognized over a weighted average period of i1.9
years.
14. iNet 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.
i
A reconciliation of the weighted average basic common shares outstanding to the weighted average diluted common shares outstanding is as follows:
Three
Months Ended
Nine Months Ended
(millions, except share and per share data) (unaudited)
Diluted
weighted average common shares outstanding
i22,038,905
i22,626,746
i22,411,965
i22,607,274
Net
income per common share
Basic
$
i0.64
$
i0.60
$
i1.79
$
i1.97
Diluted
$
i0.64
$
i0.60
$
i1.78
$
i1.95
/
For
the three and nine months ended September 30, 2019 and 2018, unvested performance share units were excluded from the computation of weighted average diluted common share outstanding because the number of shares ultimately issuable is contingent on the Company's performance goals, which were not achieved as of the reporting date.
There are ino
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.
15. iComprehensive Income
i
Comprehensive
income consists of the following components, net of tax:
Accumulated other comprehensive loss is comprised of foreign currency translation adjustments and the effective portion of unrealized loss on cash flow hedges. iThe components of changes in accumulated comprehensive loss, net of tax, for the nine months ended September 30, 2019 were as follows:
(millions)
(unaudited)
Foreign Currency Translation Adjustments
Effective Portion of Unrealized Loss on Cash Flow Hedge
For the three months ended September 30, 2019, the Company recognized an income tax expense of $i5.7
million on pre-tax earnings of $i20.7 million compared to $i5.6
million income tax expense on pre-tax earnings of $i20.1 million for the three months ended September 30, 2018. For the nine months ended September 30,
2019, the Company recognized an income tax expense of $i14.6 million on pre-tax earnings of $i56.8
million compared to $i16.9 million income tax expense on pre-tax earnings of $i63.5
million for the nine months ended September 30, 2018. The effective tax rate was approximately i25.7% for the nine months ended September 30, 2019 compared to i26.6%
for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 decreased primarily due to a decrease in state income taxes.
As of September 30, 2019, 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 September 30, 2019 are shown below:
2016 – 2018 United States — federal income tax
2012 – 2018 United States — state and local income tax
Segment information is presented in accordance with a “management approach,” which designates the internal reporting used by the Company's 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 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 CODM. The CODM is the Company’s chief executive officer.
Each of the operating segments are directly responsible for revenue and expenses related to
their operations including direct segment administrative costs. Finance, information technology, human resources, and legal are shared functions that are not allocated back to the itwo 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.
The operating segments are internally reported to the Company's CODM as Segment One (Commercial) and Segment Two (Aviation).
•
Segment One (Commercial) encompasses our services in healthcare facilities, municipalities, including meter revenue collection and enforcement services, government facilities, hotels, commercial real
estate, residential communities, retail, colleges and universities, as well as ancillary services such as shuttle and ground transportation services, valet services, taxi and livery dispatch services and event planning, including shuttle and transportation services.
•
Segment Two (Aviation) encompasses our services in aviation (i.e., airports, airline and certain hospitality clients with baggage and parking services) as well as ancillary services, which include shuttle and ground transportation services, valet services, baggage handling, baggage repair and replacement, remote airline check-in services, wheelchair assist services and other services.
•
"Other"
consists of ancillary revenue that is not specifically identifiable to Segments One or Two and certain unallocated items, such as and including prior year insurance reserve adjustments/costs and other corporate items.
The business is managed based on segments administered by executive officers.
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 condensed consolidated financial statements and the notes thereto contained
in this Quarterly Report on Form 10-Q and the condensed consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.
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. 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, 2018 and Item 1A. Risk Factors included in this Quarterly Report, 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.
Explanatory Note
On November 30, 2018, we completed the acquisition of ZWB Holdings, Inc. and Rynn's Luggage Corporation, their subsidiaries and affiliates (collectively, "Bags") and our consolidated results of operations for the three and nine months ended September 30, 2019 includes the results of operations related to Bags. Our consolidated
operations for the three and nine months ended September 30, 2018 do not include amounts related to the Bags' results of operations. See Note 3. Acquisition, which is included in Part I, Item 1. "Financial Statements"for further discussion of the Bags acquisition.
Overview
Our Business
We facilitate the efficient movement of people, vehicles and personal belongings with the goal of enhancing the consumer experience while improving bottom line results for our clients. We provide professional parking management,
ground transportation, remote baggage check-in and handling, facility maintenance, security, event logistics, and other technology-driven mobility solutions to aviation, commercial, hospitality, healthcare and government clients across North America. We typically enter into contractual relationships with property owners or managers as opposed to owning facilities.
We operate under two types of arrangements: management type contracts and lease type contracts. Under a management type contract, we typically receive a fixed and/or variable monthly fee for providing our services, and we may also receive an incentive fee based on the achievement of certain performance
objectives. We also receive fees for ancillary services. Typically, all of the underlying revenue and expenses under a standard management type contract flow through to our client rather than to us. However, some management type contracts, which are referred to as “reverse” management type contracts, usually provide for larger management fees and require us to pay various costs. Under a lease type contract, we generally pay to the client either a fixed annual rent, a percentage of gross customer collections, or a combination of both. Under a lease type contract,
we collect all revenue and are responsible for most operating expenses, but typically are not responsible for major maintenance, capital expenditures or real estate taxes. Margins for lease type 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 September 30, 2019, we operated approximately 81% of our locations under management type contracts and approximately 19% under lease type contracts.
In evaluating our financial condition and operating performance, management’s primary focus is on our gross profit and total general and administrative expense. Revenue from lease type contracts includes all gross customer collections derived from our leased locations (net of local parking taxes), whereas revenue from management type contracts only includes our contractually agreed upon management fees and amounts attributable to ancillary services. Gross customer collections at facilities under management type contracts, therefore, are not included in our revenue. Revenue from lease type contracts
also includes a reduction of Services revenue - lease type contracts pursuant to ASU No. 2017-10, Service Concession Arrangements(Topic 853): Determining the Customer of the Operation Services, which requires rental expense be presented as a reduction of Services revenue - lease type contracts for those facilities (and corresponding contracts) that meet the criteria and definition of a service concession arrangement. Accordingly, while a change in the proportion of our operating agreements that are structured as lease type contracts
versus management type 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 September 30, 2019, approximately 81% of our business was operating under management type contracts and 81% of our gross profit for the nine months ended September 30, 2019 was derived from management type contracts.
Only 56% of total revenue (excluding reimbursed management type contract revenue), however, was from management type 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.
Bags Acquisition
On November 30, 2018, we acquired the outstanding shares of Bags for an all-cash purchase price of $277.9
million, net of $5.9 million of cash acquired. Bags is a leading provider of baggage services, remote airline check-in, and other related services, primarily to airline, airport and hospitality clients. Bags provides these services by combining exceptional customer service with innovative technologies. Based in Orlando, Florida, Bags operates in over 250 cities in North America with approximately 3,000 employees. Its clients include major airlines, airports, sea ports, cruise lines, and leading hotels and resorts. Bags handles more than 5.0 million checked bags annually.
General Business Trends
We believe that sophisticated clients (which also include property owners) recognize the potential for parking services, parking management, ground transportation services, baggage handling and other ancillary services to be a profit generator
and/or a service differentiator to their customers. By outsourcing these services, they are able to capture additional profit and improve customer experience by leveraging the unique operational skills and controls that an experienced services company can offer. Our ability to consistently deliver a uniformly high level of services to our clients, including the use of various technological enhancements, allows us to maximize the profit and/or customer experience to our clients and improves our ability to win contracts and retain existing clients. Our focus on customer service and satisfaction is a key driver of our high retention rate, which was approximately 92% and 89% for both twelve-month periods ended September 30,
2019 and 2018, respectively. This retention rate captures facilities in Segment One (Commercial).
Summary of Segment One (Commercial) Facilities
The following table reflects our Segment One (Commercial) facilities (by contractual type) operated at the end of the years indicated:
(1)
Includes partial ownership in one leased facility.
Revenue
We recognize services revenue from lease and management type contracts as the related services are provided. Substantially all of our revenue comes from the following two sources:
Services revenue—lease type contracts. Services revenue related to lease type contracts consists of all revenue received at a lease type locations, including gross receipts
(net of local taxes), consulting and real estate development fees, gains on sales of contracts and payments for exercising termination rights.
Services revenue—management type contracts. Management type contract revenue consists of management fees, including fixed, variable and/or performance-based fees, and
amounts attributable to ancillary services such as accounting, equipment leasing, baggage services, remote air check-in services, payments received for exercising termination rights, consulting, developmental fees, gains on sales of contracts, insurance and other value-added services with respect to management type contracts. 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 workers' compensation and health care claims by maintaining a large per-claim deductible. As a result, we have generated operating income on the insurance provided under our management type contracts by focusing
on our risk management efforts and controlling losses. Management type contract revenues do not include gross customer collections at managed type contracts as these revenues belong to the client rather than to us. Management type contracts generally provide us with a management fee regardless of the operating performance of the underlying management type contract.
Reimbursed
management type contract revenue consists of the direct reimbursement from the property owner for operating expenses incurred under a management type contract, which are reflected in our revenue.
Cost of Services
Our cost of services consists of the following:
Cost of services—lease type contracts. The cost of services under a lease type arrangement consists of contractual rents or fees paid to the client and all
operating expenses incurred in connection with operating the leased facility. Contractual rents or fees paid to the client are generally based on either a fixed contractual amount or a percentage of gross revenue or a combination thereof. Generally, under a lease type arrangement we are not responsible for major capital expenditures or real estate taxes.
Cost of services—management type contracts. The cost of services under a management type contract is generally the responsibility of the client. As a result, these costs are not included in our results of operations. However, our reverse management type contracts,
which typically provide for larger management fees, do require us to pay for certain costs and these costs are included in results of operations.
Reimbursed management type contract expense consists of direct reimbursed costs incurred on behalf of property owners under a management type 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 and management type 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.
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.
The operating segments are internally reported to our CODM as Segment One (Commercial) and Segment Two (Aviation).
•
Segment One (Commercial) encompasses our services in healthcare facilities, municipalities, including meter revenue collection and enforcement services, government facilities, hotels, commercial real estate, residential communities, retail, colleges and universities, as well as ancillary services such as ground transportation services,
valet services, taxi and livery dispatch services and event planning, including shuttle and transportation services.
•
Segment Two (Aviation) encompasses our services in aviation (e.g., airports, airline and certain hospitality clients with baggage and parking services) as well as ancillary services, which includes ground transportation services, valet services, baggage handling, baggage repair and replacement, remote airline check-in services and other services.
•
"Other"
consists of ancillary revenue that is not specifically identifiable to Segments One or Two and certain unallocated items, such as and including prior year insurance reserve adjustments/costs and other corporate items.
The following tables are a summary of revenues (excluding reimbursed management type contract revenue), cost of services and gross profit by segment for the three months ended September 30, 2019 and 2018:
Revenue
associated with existing business represents business that has been operating for at least one year and operating for the entire period in the comparative period being presented. Revenue associated with expired business relates to contracts that have expired, however, we were operating the location in the comparative period presented.
Services revenue—lease type contracts. Lease type contract revenue decreased $0.1 million, or 0.1%, to $104.6 million
for the three months ended September 30, 2019, compared to $104.7 million for the three months ended September 30, 2018. The decrease in lease type contract revenue resulted primarily from a decrease of $5.6 million from expired business and $0.2 million from locations that converted from management type contracts during the periods presented, partially offset by increases
of $3.1 million from existing business and $2.6 million from new/acquired business. Existing business revenue increased $3.1 million, or 3.2%, primarily due to monthly parking revenue and transient revenue.
From a reporting segment perspective, lease type contract revenue decreased primarily due to expired business in Segment One and conversions in Segment One, partially offset by increases in existing business in Segment One, Two, and Other, and new/acquired business in Segment One and Two. The Other amounts in existing business represent revenues not specifically identifiable to Segments One or Two.
Services revenue—management type contracts. Management type contract revenue increased $50.0 million, or 60.5%, to $132.6 million for the three months ended September 30, 2019, compared to $82.6 million for the three months ended September 30, 2018. The
increase in management type contract revenue resulted primarily from an increase of $53.6 million from new/acquired business, primarily due to the Bags acquisition, $0.2 million from existing business, and $0.1 million from conversions, partially offset by a decrease of $3.9 million from expired business. Existing business increased $0.2 million, or 0.3%, primarily due to an increased management fees.
From a reporting segment perspective, management type contract revenue
increased primarily due to increases from new/acquired business in Segment One and Two, existing business in Segment One and Other, expired business in Segment Two, and conversions in Segment One, partially offset by decreases in revenue from expired business in Segment One. The Other amounts in existing business represent revenues not specifically identifiable to Segment One or Two.
Reimbursed management type contract revenue. Reimbursed management type contract revenue increased $6.6 million, or 3.8%, to $181.4 million for the three
months ended September 30, 2019, compared to $174.8 million for the three months ended September 30, 2018. This increase resulted from an increase in reimbursements for costs incurred on behalf of owners.
Segment cost of services information is summarized as follows:
Cost
of services associated with existing business represents locations that have been operating for at least one year and operating for the entire period in the comparative period being presented. Cost of services associated with expired business relates to contacts that have expired, however, we were operating the location in the comparative period presented.
Cost of services—lease type contracts. Cost of services for lease type contracts decreased $1.2 million, or 1.3%, to $93.0 million for the three
months ended September 30, 2019, compared to $94.2 million for the three months ended September 30, 2018. The decrease in cost of services for lease type contracts resulted primarily from a decrease of $5.7 million from expired business and $0.1 million from locations that converted from management type contracts during the periods presented, partially offset by increases of $2.4 million
from new/acquired business and $2.2 million from existing business. Existing business costs increased $2.2 million, or 2.6%, primarily due to an increase in rent expense as a result of higher revenues for existing business and an increase in compensation and benefit costs, partially offset by a decrease in overall net operating costs.
From a reporting segment perspective, cost of services for lease type contracts decreased primarily from expired business in Segment One, existing business in Other, and conversions in Segment One, partially offset by new/acquired business in Segment One and Two and existing business in Segment One and Two. The Other
segment amounts in existing business represent costs not specifically identifiable to Segment One or Two.
Cost of services—management type contracts. Cost of services for management type contracts increased $37.4 million, or 77.8%, to $85.5 million for the three months ended September 30, 2019, compared to $48.1 million for the three
months ended September 30, 2018. The increase in cost of services for management type contracts resulted primarily from increases of $41.2 million from new/acquired business, primarily due to the Bags acquisition, and $0.1 million from locations that converted from lease type contracts during the periods presented, partially offset by a decrease of $2.6 million from expired business and $1.3 million from existing business. Existing business decreased $1.3 million, or
2.9%, primarily due to a decrease in overall net operating costs, partially offset by an increase in compensation and benefit costs.
From a reporting segment perspective, cost of services for management type contracts increased primarily due to new/acquired business in Segment One and Two, and conversions in Segment One, partially offset by a decrease in expired business in Segment One, and existing business in Segment One and Two. The Other segment amounts in existing
business represent costs not specifically identifiable to Segment One or Two.
Reimbursed management type contract expense. Reimbursed management type contract expense increased $6.6 million, or 3.8%, to $181.4 million for the three months ended September 30, 2019, compared to $174.8 million for the three months
ended September 30, 2018. This increase resulted from an increase in reimbursements for costs incurred on behalf of owners.
Segment gross profit/gross profit percentage information is summarized as follows:
Gross
profit percentage management type contracts:
New/acquired
business
37.8
%
33.3
%
20.9
%
—
%
—
%
—
%
23.2
%
33.3
%
Expired
business
33.3
%
36.2
%
100.0
%
100.0
%
—
%
—
%
55.6
%
37.5
%
Existing
business
42.0
%
40.9
%
35.2
%
31.4
%
172.7
%
176.2
%
43.9
%
42.0
%
Conversions
50.0
%
100.0
%
—
%
—
%
—
%
—
%
50.0
%
100.0
%
Total
gross profit percentage
41.4
%
40.6
%
25.7
%
31.8
%
172.7
%
176.2
%
35.5
%
41.8
%
Gross
profit associated with existing business represents locations that have been operating for at least one year and operating for the entire period in the comparative period being presented. Gross profit associated with expired business relates to contracts that have expired, however, we were operating the location in the comparative period presented.
Gross profit—lease type contracts. Gross profit for lease type contracts increased $1.1 million, or 10.5%, to $11.6 million
for the three months ended September 30, 2019, compared to $10.5 million for three months ended September 30, 2018. Gross profit percentage for lease type contracts increased to 11.1% for the three months ended September 30, 2019, compared to 10.0% for the three months ended September 30,
2018. Gross profit for lease type contracts increased as a result of increases in gross profit for existing business, new/acquired business, and expired business, partially offset by decreases locations that converted from management type contracts during the periods presented. Gross profit for existing business increased primarily due to increases in monthly parking revenue and transient revenue and a decrease in overall net operating costs, partially offset by an increase in compensation and benefit costs and rent expense.
From a reporting segment perspective, gross profit for lease type contracts
increased primarily due to increases in new/acquired business in Segment Two, existing business in Segment One, Two, and Other, and expired business in Segment One, partially offset by decreases in gross profit from new/acquired business in Segment One, and conversions in Segment One. The Other amounts in existing business represent gross profit not specifically identifiable to Segment One or Two.
Gross profit—management type contracts. Gross profit for management type contracts
increased $12.6 million, or 36.5%, to $47.1 million for the three months ended September 30, 2019, compared to $34.5 million for the three months ended September 30, 2018. Gross profit percentage for management type contracts decreased to 35.5% for three months ended September 30,
2019, compared to 41.8% for three months ended September 30, 2018. Gross profit for management type contracts increased as a result of increases in gross profit for new/acquired business, primarily due to the Bags acquisition, and existing business, partially offset by a decrease in expired business. Existing business gross profit increased $1.5 million, or 4.6%, primarily due to increased management fees.
From a reporting segment perspective, gross profit for management type contracts
increased primarily due to new/acquired business in Segment One and Two, existing business in Segment One, Two, and Other, and expired business in Segment Two, partially offset by decreases in expired business in Segment One. The Other amounts in existing business represent gross profit not specifically identifiable to Segment One or Two.
General and administrative expenses. General and administrative expenses increased $7.3 million, or 39.0%, to $26.0 million for the three months ended September 30, 2019, compared to $18.7 million
for the three months ended September 30, 2018. The increase in General and administrative expenses was primarily related to the Bags acquisition and higher compensation and benefit costs, including costs associated with our performance-based compensation program.
Depreciation and amortization. Depreciation and amortization increased $3.1 million, or 73.8%, to $7.3 million for the three months ended September 30, 2019, compared to $4.2
million for the three months ended September 30, 2018. This increase was primarily a result of additional amortization relating to intangible assets recognized in the acquisition of Bags.
Interest expense. Interest expense increased $2.7 million, or 128.6%, to $4.8 million for the three months ended September 30, 2019, compared to $2.1 million for the three
months ended September 30, 2018. This increase resulted primarily from an increase in borrowings used to fund the acquisition of Bags, partially offset by a decrease in the weighted average interest rate.
Interest income. Interest income was $0.1 million for the three months ended September 30, 2019 and 2018.
Equity in earnings from investment in unconsolidated entity. There were no Equity in earnings from investment in unconsolidated entity for the three
months ended September 30, 2019 and 2018.
Income tax expense. Income tax expense increased $0.1 million to $5.7 million for the three months ended September 30, 2019, as compared to $5.6 million for the three months ended September 30, 2018. Our effective tax rate was 27.5% for the three months ended
September 30, 2019 and 27.7% for the three months ended September 30, 2018. The effective tax rate for the three months ended September 30, 2019 decreased primarily due to a decrease in state income taxes.
Revenue
associated with existing business represents business that has been operating for at least one year and operating for the entire period in the comparative period being presented. Revenue associated with expired business relates to contracts that have expired, however, we were operating the location in the comparative period presented.
Services revenue—lease type contracts. Lease type contracts revenue decreased $4.0 million, or 1.3%, to $307.6 million
for the nine months ended September 30, 2019, compared to $311.6 million for the nine months ended September 30, 2018. The decrease in lease type contracts revenue resulted primarily from decreases of $20.4 million from expired business, partially offset by an increase of $8.7 million from existing business, $7.6 million from new/acquired business, and $0.1 million from business that converted from management type contracts
during the periods presented. Existing business revenue increased $8.7 million, or 3.2%, primarily due to an increase in fees for transient revenue.
From a reporting segment perspective, lease type contract revenue decreased primarily due to expired business in Segment One, partially offset by increases from existing business in Segment One, Two, and Other, new/acquired business in Segment One and Two, and conversions in Segment One. The Other segment amounts in existing business represent revenue not specifically identifiable to Segment One or Two.
Services revenue—management type contracts.
Management type contract revenue increased $130.6 million, or 49.3%, to $395.4 million for the nine months ended September 30, 2019, compared to $264.8 million for the nine months ended September 30, 2018. The increase in management type contract revenue resulted primarily from an increase of $147.8 million
from new/acquired business primarily due to the Bags acquisition and $0.1 million from conversions, partially offset by a decrease of $14.3 million from expired business and $3.0 million from existing business. Existing business decreased $3.0 million, or 1.3%, primarily due to change in contract terms for certain management type contracts, whereby the contract terms converted from a "reverse" management type contract to a management type contract,
which typically has lower management fees from the facility owner but do not require us to pay certain operating costs associated with the facilities operation, partially offset by increased management fees.
From a reporting segment perspective, management type contract revenue increased primarily due to increases from new/acquired business in Segment One and Segment Two, existing business in Segment One, expired business in Segment Two, and conversions in Segment One, partially offset by decreases in revenue from expired business in Segment One and existing business in Segment Two and Other. The Other amounts in existing business represent revenues not specifically identifiable to Segment One or Segment Two.
Reimbursed
management type contract revenue. Reimbursed management type contract revenue increased $24.4 million, or 4.7%, to $539.2 million for the nine months ended September 30, 2019, compared to $514.8 million for the nine months ended September 30, 2018. This increase resulted from an increase in reimbursements
for costs incurred on behalf of owners.
Cost
of services associated with existing business represents business that has been operating for at least one year and operating for the entire period in the comparative period being presented. Cost of services associated with expired business relates to contacts that have expired, however, we were operating the location in the comparative period presented.
Cost of services—lease type contracts. Cost of services for lease type contracts decreased $8.7 million, or 3.1%, to $274.5 million for the nine
months ended September 30, 2019, compared to $283.2 million for the nine months ended September 30, 2018. The decrease in cost of services for lease type contracts resulted primarily from a decrease of $21.8 million from expired business, partially offset by increases of $7.0 million from new/acquired business, $5.5 million from existing business, and $0.6 million from business that converted from management type contracts
during the periods presented. Existing business costs increased $5.5 million, or 2.2%, primarily due to an increase in rent expense as a result of higher revenues for existing business and an increase in compensation and benefits costs, partially offset by a decrease in overall net operating costs.
From a reporting segment perspective, cost of services for lease type contracts decreased primarily from expired business in Segment One and existing business in Other, partially offset by new/acquired business in Segment One and Two, existing business in Segment One and Two and conversions in Segment One. The Other segment amounts in existing business represent costs not specifically identifiable to Segment
One or Two.
Cost of services—management type contracts. Cost of services for management type contracts increased $97.1 million, or 61.6%, to $254.7 million for the nine months ended September 30, 2019, compared to $157.6 million for the nine months ended September 30,
2018. The increase in cost of services for management type contracts resulted primarily from increases of $113.2 million from new/acquired business, primarily due to the Bags acquisition, and $0.1 million from locations that converted from lease type contracts during the periods presented, partially offset by a decrease of $11.5 million from expired business and $4.7 million from existing business. Existing business decreased $4.7 million, or 3.3%, primarily due to a decrease in overall net
operating costs, change in contract terms for certain management type contracts, whereby the contract terms converted from a "reverse" management type contract to a management type contract, which typically has lower management fees from the facility owner but do not require us to pay certain operating costs associated with the facilities operation, partially offset by an increase in compensation and benefit costs.
From
a reporting segment perspective, cost of services for management type contracts increased primarily due to new/acquired business in Segment One and Two, existing business in Segment One, and conversions in Segment One, partially offset by a decrease in expired business in Segment One and Two, and existing business in Segment Two and Other. The Other segment amounts in existing business represent costs not specifically identifiable to Segment One or Two.
Reimbursed management type contract expense. Reimbursed management type contract expense increased $24.4 million,
or 4.7%, to $539.2 million for the nine months ended September 30, 2019, compared to $514.8 million for the nine months ended September 30, 2018. This increase resulted from an increase in reimbursements for costs incurred on behalf of owners.
Gross
profit percentage management type contracts:
New/acquired
business
41.8
%
40.7
%
21.2
%
16.7
%
—
%
—
%
23.7
%
36.4
%
Expired
business
33.3
%
33.3
%
100.0
%
37.5
%
—
%
—
%
59.0
%
33.5
%
Existing
business
37.8
%
37.9
%
35.0
%
30.7
%
234.9
%
201.3
%
42.3
%
41.1
%
Conversions
66.7
%
80.0
%
—
%
—
%
—
%
—
%
66.7
%
80.0
%
Total
gross profit percentage
38.2
%
37.6
%
26.7
%
30.7
%
234.9
%
201.3
%
35.6
%
40.5
%
Gross
profit associated with existing business represents business that has been operating for at least one year and operating for the entire period in the comparative period being presented. Gross profit associated with expired business relates to contracts that have expired, however, we were operating the location in the comparative period presented.
Gross profit—lease type contracts. Gross profit for lease type contracts increased $4.7 million, or 16.5%, to $33.1 million for the nine months ended September 30,
2019, compared to $28.4 million for nine months ended September 30, 2018. Gross profit percentage for lease type contracts increased to 10.8% for the nine months ended September 30, 2019, compared to 9.1% for the nine months ended September 30, 2018. Gross profit for lease type contracts increased as a result of increases in gross profit for
existing business, new/acquired business, and expired business, partially offset by decreases in business that converted from management type contracts during the periods presented. Gross profit for existing business increased primarily due to increases in transient revenue, partially offset by an increase in compensation and benefit costs and rent expense.
From a reporting segment perspective, gross profit for lease type contracts increased primarily due to increases in existing business in Segment One, Two, and Other, new/acquired business in Segment Two, and expired business in Segment One, partially offset by decreases in gross profit from conversions in Segment One. The Other amounts in existing
business represent gross profit not specifically identifiable to Segment One or Two.
Gross profit—management type contracts. Gross profit for management type contracts increased $33.5 million, or 31.3%, to $140.7 million for the nine months ended September 30, 2019, compared to $107.2 million for the nine months ended September 30, 2018. Gross profit percentage for management type contracts
decreased to 35.6% for nine months ended September 30, 2019, compared to 40.5% for nine months ended September 30, 2018. Gross profit for management type contracts increased as a result of increases in gross profit for new/acquired business, primarily due to the Bags acquisition, and existing business, partially offset by a decrease in expired business. Existing business gross profit increased $1.7 million, or 1.7%, primarily due to decreases in net operating costs and increased management fees.
From a reporting segment perspective, gross profit for management type contracts increased primarily due to new/acquired business in Segment One and Segment Two, existing business in Segment One and Two, and expired business in Segment Two, partially offset by decreases in expired business in Segment One, and existing business in Other.
General and administrative expenses. General and administrative expenses increased $17.5 million, or 27.6%, to $80.8 million for the nine months ended September 30,
2019, compared to $63.3 million for the nine months ended September 30, 2018. The increase in General and administrative expenses was primarily related to the Bags acquisition, a $1.7 million cost recovery from a vendor partner recognized in the second quarter of 2018, and higher compensation and benefit costs, including costs associated with our performance-based compensation program.
Depreciation and amortization. Depreciation and amortization increased $9.1 million, or 71.7%, to $21.8 million for the nine
months ended September 30, 2019, compared to $12.7 million for the nine months ended September 30, 2018. This increase was primarily a result of additional amortization relating to intangible assets recognized in the acquisition of Bags.
Interest expense. Interest expense increased $8.2 million, or 126.2%, to $14.7 million for the nine months ended September 30,
2019, compared to $6.5 million for the nine months ended September 30, 2018. This increase resulted primarily from an increase in borrowings used to fund the acquisition of Bags, partially offset by a decrease in the weighted average interest rate.
Interest income. Interest income was $0.3 million for the nine months ended September 30, 2019 and 2018.
Equity
in earnings from investment in unconsolidated entity. There were no Equity in earnings from investment in unconsolidated entity for the nine months ended September 30, 2019. Equity in earnings from investment in unconsolidated entity was $10.1 million for the nine months ended September 30, 2018. The decrease in earnings were primarily related to our $10.1 million net gain on the sale of our entire 30% equity interest in Parkmobile during the nine months ended September 30, 2018.
Income tax expense. Income tax expense decreased $2.3 million to $14.6
million for the nine months ended September 30, 2019, as compared to $16.9 million for the nine months ended September 30, 2018. Our effective tax rate was 25.7% for the nine months ended September 30, 2019 and 26.6% for the nine months ended September 30, 2018.
The effective tax rate for the nine months ended September 30, 2019 decreased primarily due to a decrease in state income taxes.
We continually project anticipated cash requirements
for our operating, investing, and financing needs as well as cash flows generated from operating activities available to meet these needs. Our operating needs can include, among other items, commitments for cost of services, operating leases, payroll payments, insurance claims payments, interest payments and legal settlements. Our investing and financing spending can include payments for acquired businesses, joint ventures, capital expenditures, cost of contracts purchased, commitments for capital leases, distributions to noncontrolling interests and payments on our outstanding indebtedness.
$351.0 million under our Senior Credit Facility, net of original discount on borrowings of $1.3 million and deferred financing costs of $1.8
million; and
▪
$19.1 million of other debt including finance lease obligations, obligations on seller notes and other indebtedness.
Former Amended and Restated Credit Facility
On February 20, 2015, we amended and restated our credit facility (the "Former Restated Credit Facility") that permitted aggregate borrowings of $400.0 million consisting of (i) a revolving credit facility of up to $200.0 million at any time outstanding, which includes
a $100.0 million sublimit for letters of credit and a $20.0 million sublimit for swing-line loans, and (ii) a term loan facility of $200.0 million. The Former Restated Credit Facility was due to mature on February 20, 2020.
Senior Credit Facility
On November 30, 2018 (the "Closing Date") and in connection with the Acquisition, we entered into a credit agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”), as Administrative Agent, swing-line lender and a letter of credit issuer; Wells Fargo Bank, N.A., as syndication agent; BMO Harris Bank N.A., JPMorgan Chase Bank, N.A., KeyBank National Association
and U.S. Bank National Association, as co-documentation agents; Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; 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 us a new senior secured credit facility (the “Senior Credit Facility”) that permits aggregate borrowings of $550.0 million consisting of (i) a revolving credit facility of up to $325.0 million at any time outstanding, which includes a letter of credit facility that is limited to $100.0 million at any time outstanding, and (ii) a term loan facility of $225.0 million. The Senior Credit Facility matures on November
30, 2023.
The entire amount of the term loan portion of the Senior Credit Facility was drawn by us on the Closing Date and is subject to scheduled quarterly amortization of principal in installments equal to 1.25% of the initial aggregate principal amount of such term loan. We also borrowed $174.8 million under the revolving credit facility on the Closing Date. The proceeds from these borrowings were used by us to pay the purchase price for the Acquisition (See Note 3. Acquisition), to pay other costs and expenses related to the acquisition of Bags and the related financing and to repay in full the obligations under the Former Restated Credit Facility. In addition, proceeds from the Senior Credit Facility may be used to finance working capital, capital expenditures and other acquisitions,
payments and general corporate purposes.
Borrowings under the Senior Credit Facility bear interest, at our option, (i) at a rate per annum based on our 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 applicable pricing levels set forth in the Credit Agreement (the “Applicable Margin”) for London Interbank Offered Rate (or a comparable or successor rate selected by the parties) (“U.S. dollar LIBOR”) loans, plus the applicable U.S. dollar LIBOR rate or (ii) the Applicable Margin for base rate loans 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 the applicable U.S. dollar LIBOR rate plus 1.0%.
Under
the terms of the Credit Agreement, we are required to maintain a maximum consolidated total debt to EBITDA ratio of not greater than 4.25:1.0 with certain step-downs described in the Credit Agreement. In addition, we are required to maintain a minimum consolidated fixed charge coverage ratio of not less than 3.50:1.0 (with certain step-ups described in the Credit Agreement).
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 Administrative Agent can, with the consent of the required Lenders, among others
(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.
Each wholly owned domestic subsidiary of ours (subject to certain exceptions set forth in the Credit Agreement) has guaranteed all existing and future indebtedness and liabilities of the other guarantors and us arising under
the Credit Agreement. Our obligations under the Credit Agreement and such domestic subsidiaries’ guaranty obligations are secured by substantially all of their respective assets.
We are in compliance with the covenants under the Credit Agreement as of September 30, 2019.
As of September 30, 2019, we had $133.9 million of borrowing availability under the Senior Credit Facility. Our borrowing availability under the Credit Agreement is limited only as of our fiscal quarter-end by the covenant restrictions described above. At September 30,
2019, we had $53.6 million letters of credit outstanding under the Senior Credit Facility and borrowings against the Senior Credit Facility aggregated $354.0 million (excluding debt discount of $1.3 million and deferred financing costs of $1.8 million).
Contractual Obligations and Commitments
As of September 30, 2019, other than changes related to adoption of the new lease accounting standard as described in Note 1. Significant Accounting Policies and Practices, there were no material changes to our contractual obligations and commitments
outside the ordinary course of business since December 31, 2018, as reported in our 2018 Form 10-K. See Note 2. Leases, for further information regarding our contractual obligations and commitments.
Share Repurchases
In May 2016, our Board of Directors authorized us to repurchase shares of our common stock in the open market of up to $30.0 million in aggregate. Purchases of our common stock may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or by other means in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934. The share repurchase program does not obligate us to repurchase any particular amount
of common stock, and has no fixed termination date.
Under this program, the Company has repurchased 1,263,642 shares of common stock through September 30, 2019. The table below summarizes share repurchase activity during the three and nine months ended September 30, 2019.
Three
Months Ended
Nine Months Ended
(millions, except for share and per share data) (unaudited)
In
May 2019, we entered into three-year interest rate collar contracts with an aggregate $222.3 million notional amount. Interest rate collars are used to manage interest rate risk associated with variable interest rate borrowings under the Credit Agreement. The collars establish a range where the Company will pay the counterparties if the one-month U.S. dollar LIBOR rate falls below the established floor rate, and the counterparties will pay the Company if the one-month U.S. dollar LIBOR rate exceeds the established ceiling rate of 2.5%. The collars settle monthly through the termination date of April 2022. No payments
or receipts are exchanged on the interest rate collar contracts unless interest rates rise above or fall below the pre-determined ceiling or floor rates. The notional amount amortizes consistent with pay down of the term loan portion of the Senior Credit Facility. These interest rate collars are classified as cash flow hedges, and the Company calculates the effectiveness of the hedge on a monthly basis. As of December 31, 2018, the Company had no ongoing derivative transactions.
We do not enter into derivative instruments
for any purpose other than for cash flow hedging purposes.
Pursuant to our obligations with respect to the parking garage operations at Bradley International Airport, we are required to make certain deficiency payments for the benefit of the State of Connecticut and for holders of special facility revenue bonds. The deficiency payments represent contingent interest bearing advances to the trustee to cover operating cash flow requirements. As of September 30,
2019, we had received $1.1 million of cumulative deficiency repayments from the trustee, net of payments. Deficiency payments made are recorded as increases to cost of services and the reimbursements are recorded as reductions to cost of services. We believe these advances to be fully recoverable and will recognize the principal, interest and premium payments related to these deficiency payments when they are received. We do not directly guarantee the payment of any principal or interest on any debt obligations of the State of Connecticut or the trustee.
The total deficiency repayments (net of payments made), interest and premium received and recognized for the three and nine months ended September 30,
2019 and 2018 are as follows:
As a result of day-to-day activity at our parking locations, we collect significant amounts of cash. Lease type contract revenue is generally deposited into our local bank accounts, with a portion remitted to our clients in the form of rental payments according to the terms of the leases. Under management type contracts, clients may require us to deposit the daily receipts into one of our local bank accounts, with the cash in excess of our operating expenses and management fees remitted to the clients at negotiated intervals. Other clients require us to deposit the daily receipts into client designated bank accounts and the clients then reimburse us for operating expenses and pay
our management fee subsequent to month-end or may require segregated bank accounts for the receipts and disbursements at locations. Our working capital and liquidity may be adversely affected if a significant number of our clients require us to deposit all parking revenues into their respective accounts.
Our liquidity also fluctuates on an intra-month and intra-year basis depending on the contract mix and timing of significant cash payments. Additionally, our ability to utilize cash deposited into our local accounts is dependent upon the availability and movement of that cash into our corporate account. For all these reasons, from time to time, we carry a significant cash balance, while also utilizing our credit facility.
Net cash (used in) provided by investing activities
$
(8.2
)
$
12.0
Net
cash used in financing activities
$
(56.9
)
$
(49.8
)
Operating Activities
Our primary sources of funds are cash flows from operating activities and changes in operating assets and liabilities.
Net cash provided by operating activities
totaled $54.8 million for the nine months ended September 30, 2019. Cash provided by operating activities for the first nine months of 2019 included $69.5 million from operations, partially offset by changes in operating assets and liabilities that resulted in a use of $14.7 million. The net increase in operating assets and liabilities was a result of (i) a decrease in notes and accounts receivable of $0.2 million primarily related to timing of collections; (ii) a $7.6 million decrease in accounts payable primarily due to timing of payments to our clients as described under "Daily Cash Collections"; (iii) a net increase in prepaid and other assets of $0.7 million primarily due to increases in prepaid insurance and the value of Company-owned
life insurance policies; (iv) a $95.4 million decrease in right-of-use assets due to the amortization of Right-of-use assets; (v) a $99.0 million decrease in long-term lease liabilities due to operating lease payments; and (vi) a $3.0 decrease in accrued liabilities primarily due to timing of payments.
Net cash provided by operating activities totaled $35.6 million for the nine months ended September 30, 2018. Cash provided by operating activities for the first nine months of 2018 included $52.4 million from operations, partially offset by changes in
operating assets and liabilities that resulted in a cash use of $16.8 million. The net decrease in operating assets and liabilities was a result of (i) an increase in notes and accounts receivable of $14.4 million due to recognizing a contract asset upon adoption of Topic 606 (effective January 1, 2018) and timing of collections; (ii) a net decrease in prepaid and other assets of $1.7 million mainly due to decreases in prepaid taxes, partially offset by increases in prepaid insurance and prepaid rent; (iii) a $9.2 million decrease in accounts payable due to timing of payments to our clients as described under "Daily Cash Collections", partially offset by recognizing a contract liability upon the adoption of Topic 606 (effective January
1, 2018) and (iv) a $5.1 million increase in accrued liabilities primarily related to timing of payments.
Investing Activities
Net cash used in investing activities totaled $8.2 million for the nine months ended September 30, 2019. Cash used in investing activities for the nine months ended September 30, 2019 included (i) $6.4 million primarily for capital investments needed to secure and/or extend lease facilities and investments in information system enhancements
and infrastructure and (ii) $2.1 million for cost of contract purchases, partially offset by (iii) $0.3 million of proceeds from the sale of assets and contract terminations.
Net cash provided by investing activities totaled $12.0 million for the nine months ended September 30, 2018. Cash provided by investing activities for the nine months ended September 30, 2018 included (i) $19.3 million of proceeds received from the sale of equity method investments, and (ii) $0.2 million of proceeds from the sale of equipment and contract
terminations, partially offset by (iii) $6.7 million for capital investments needed to secure and/or extend lease facilities and investments in information system enhancements and infrastructure and (ii) $0.8 million for cost of contract purchases.
Financing Activities
Net cash used in financing activities totaled $56.9 million in the nine months ended September 30, 2019. Cash used in financing activities for the nine months ended September 30,
2019 included (i) $20.9 million net payments on the credit facility; (ii) $32.0 million on payments for the repurchase of common stock; (iii) $1.6 million for payments on other long-term debt obligations; and (iv) $2.4 million of distributions to noncontrolling interest.
Net cash used in financing activities totaled $49.8 million in the nine months ended September 30, 2018. Cash used in financing activities for the nine months ended September 30, 2018 included (i) $3.2 million net proceeds on the Restated Credit Facility; (ii) $50.0 million for payments on the Restated Credit Facility term loan; (iii) $2.6 million of distributions to noncontrolling interest; (iv) $0.3 million for payments on other long-term debt obligations; and (v) $0.1 million on payments
for debt issuance costs.
Cash and Cash Equivalents
We had Cash and cash equivalents of $29.6 million and $39.9 million at September 30, 2019 and December 31, 2018, respectively. Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements were $0.4 million and $1.7 million as of September 30,
2019 and December 31, 2018, respectively, and are included within Cash and cash equivalents within the Condensed Consolidated Balance Sheets.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Form 10-K for the year-ended December 31, 2018.
As of the end of the period covered by this quarterly report, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and senior vice president and corporate controller, of the effectiveness of the design and operation of our disclosure controls and procedures (the "Evaluation") at a reasonable assurance level as of the last day of the period covered by this Form 10-Q.
Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange
Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosures.
Based on the Evaluation, our chief executive officer and senior vice president, corporate controller concluded that our disclosure controls and
procedures were effective as of September 30, 2019.
Management's assessment of internal control over financial reporting as of December 31, 2018 excludes internal control over financial reporting related to Bags (acquired on November 30, 2018).
Changes in Internal Controls Over Financial Reporting
There have been no significant changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019,
which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new lease accounting standard, Topic 842, that the Company adopted on January 1, 2019. There were no significant changes to our internal control over financial reporting due to the adoption of the standard.Management's assessment and conclusions on the effectiveness of internal control over financial reporting did not
include the internal controls of Bags, which is included in the three and nine months ended September 30, 2019 Quarterly Financial Statements of SP Plus Corporation. We will incorporate Bags into our annual evaluation of internal control over financial reporting for the year ending December 31, 2019.
Inherent limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations
of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
We are subject to claims and litigation in the normal course of our business.
The outcomes of claims and legal proceedings brought against us and other loss contingencies are subject to significant uncertainty. We accrue a charge when our management determines that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and disclose the estimated range. We do not record liabilities for reasonably possible loss contingencies, but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. In addition, we accrue for the authoritative judgments or assertions made against us by government
agencies at the time of their rendering regardless of our intent to appeal. We regularly evaluate current information available to us to determine whether an accrual should be established or adjusted. Estimating the probability that a loss will occur and estimating the amount of a loss or a range of loss involves significant estimation and judgment.
Item 1A. Risk Factors
Investors should carefully consider the discussion of risks factors and the other information described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. New risks may emerge at any time and we cannot predict such risks or estimate
the extent to which they may affect our financial performance. The following risk factor supplements and/or updates risk factors previously disclosed and should be considered in conjunction with the other information included in, or incorporated by reference in, this quarterly report on Form 10-Q.
The phase-out of the London Interbank Offered Rate (“LIBOR”) could affect interest rates under our existing credit facility agreement, hedging activity, as well as our ability to seek future debt financing.
LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rates on loans globally. We generally use U.S. dollar LIBOR as a reference rate to calculate interest rates under our credit
facility agreement (the “Senior Credit Facility”) and to establish the floor and ceiling ranges for the interest rate collar contracts that the Company has entered into to manage interest rate risk associated with the Senior Credit Facility.
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. Regulators in various jurisdictions have been working to replace LIBOR and other interbank offered rates with reference interest rates that are more firmly based on actual transactions. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, has identified the
Secured Overnight Financing Rate (“SOFR”) that is calculated using short-term repurchase agreements backed by Treasury securities, as its preferred alternative to U.S. dollar LIBOR. The Financial Accounting Standards Board ("FASB") added the Overnight Index Swap Rate based on the SOFR to the list of U.S. benchmark interest rates eligible to be hedged under US GAAP and has issued a proposal for consideration that would help facilitate the market transition from existing reference interest rates to alternatives.
It is expected that a transition away from the widespread use of U.S. dollar LIBOR to alternative rates will occur over the course of the next few years. If a published U.S. dollar LIBOR is unavailable after 2021, the interest rates under our Senior Credit Facility which is indexed to LIBOR will be determined using various alternative methods, any of which may not be as favorable to us as those in effect
prior to any LIBOR phase-out. In addition, the transition process to an alternative method may involve, among other things, increased volatility or illiquidity in markets for instruments that currently rely on U.S. dollar LIBOR and may also result in reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. Any such effects of the transition away from U.S. dollar LIBOR, as well as other unforeseen effects, may result in expenses, difficulties, complications or delays in connection with future financing efforts, which could have a material adverse impact on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity and Use of Proceeds
The following table provides information about purchases we made during the quarter ended September 30, 2019 of equity securities that are registered by us pursuant Section 12 of the Exchange Act:
(millions, except for share and per share data) (unaudited)
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan
Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan
07/01/2019 through 07/31/2019
193,094
$
33.64
193,094
$
52.4
08/01/2019
through 08/31/2019
180,724
34.58
180,724
46.2
09/01/2019 through 09/30/2019
162,925
36.51
162,925
40.2
Total
536,743
$
34.83
536,743
$
40.2
In
May 2016, our Board of Directors authorized us to repurchase in the open market shares of our outstanding common stock in an amount not to exceed $30.0 million. In July 2019, the Company's Board of Director's authorized a new program to repurchase, on the open market, shares of its outstanding common stock in an amount not to exceed $50.0 million in aggregate. Purchases of the Company's common stock may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or by other means in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934 at time and prices considered to be appropriate at the discretion of the
Company. The share repurchase program does not obligate the Company to repurchase any particular amount of common stock, has no fixed termination date and the program may be suspended at any time at the Company's discretion.
During the third quarter of 2019, we repurchased 536,743 shares in the open market at an average price of $34.83 per share and average commissions of $0.03 per share. The total value of the third quarter transactions was $18.7 million. At September 30, 2019, 1,263,642 shares were held as treasury
stock.
As of September 30, 2019, $40.2 million remained available for repurchase under the July 2019 stock repurchase program. The share repurchase program has no fixed termination date.
XBRL
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
