Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K
2018-11-06
Earnings, Exhibits
8-K
2018-11-06
Enter Agreement, Other Events
8-K
2018-08-08
Shareholder Vote
8-K
2018-08-08
Officers
8-K
2018-08-02
Officers, Exhibits
8-K
2018-07-31
Earnings, Exhibits
8-K
2018-06-29
Enter Agreement, Off-BS Arrangement, Exhibits
8-K
2018-06-20
Officers
8-K
2018-04-20
Officers
8-K
2018-03-06
Other Events
Comparables
WBA
Walgreens Boots Alliance
50,140
PRU
Prudential Financial
42,480
OGS
One Gas
4,580
QTNA
Quantenna Communications
930
SIBN
SI-BONE
406
ARCW
Arc Group Worldwide
20
OBLN
Obalon Therapeutics
12
UAVS
Ageagle Aerial Systems
5
XSPL
Xspand Products Lab
0
CBBT
Cerebain Biotech
0
GPX 2018-09-30
Content
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Exhibits
EX-10.1
exhibit1012018stip.htm
EX-31.1
exhibit311-gpx93018.htm
EX-31.2
exhibit312-gpx93018.htm
EX-32.1
exhibit321-gpx93018.htm
GP Strategies Earnings 2018-09-30
GPX 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 gpx-20180930.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
or
¨ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-7234
GP STRATEGIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
52-0845774
(State of Incorporation)
(I.R.S. Employer Identification No.)
70 Corporate Center
11000 Broken Land Parkway, Suite 200, Columbia, MD
21044
(Address of principal executive offices)
(Zip Code)
(443) 367-9600
Registrant’s telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer ¨
Smaller reporting company
¨
Emerging growth company
¨
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the registrant’s common stock as of October 30, 2018 was as follows:
Accounts and other receivables, less allowance for doubtful accounts of $2,190 in 2018 and $2,492 in 2017
127,649
119,335
Unbilled revenue
36,866
42,958
Prepaid expenses and other current assets
18,452
14,212
Total current assets
193,290
200,117
Property, plant and equipment
20,909
21,466
Accumulated depreciation
(15,310
)
(16,343
)
Property, plant and equipment, net
5,599
5,123
Goodwill
174,975
144,835
Intangible assets, net
17,463
8,363
Other assets
10,170
6,569
$
401,497
$
365,007
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings
$
69,044
$
37,696
Current portion of long-term debt
12,000
12,000
Accounts payable and accrued expenses
71,422
78,280
Deferred revenue
23,499
22,356
Total current liabilities
175,965
150,332
Long-term debt
25,000
16,000
Other noncurrent liabilities
11,334
10,621
Total liabilities
212,299
176,953
Stockholders’ equity:
Common stock, par value $0.01 per share
172
172
Additional paid-in capital
107,300
107,256
Retained earnings
115,654
106,599
Treasury stock at cost
(15,710
)
(11,118
)
Accumulated other comprehensive loss
(18,218
)
(14,855
)
Total stockholders’ equity
189,198
188,054
$
401,497
$
365,007
See accompanying notes to condensed consolidated financial statements.
1
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Revenue
$
123,566
$
124,097
$
382,289
$
377,705
Cost of revenue
104,367
105,451
322,838
317,236
Gross profit
19,199
18,646
59,451
60,469
General and administrative expenses
12,227
14,160
40,207
39,536
Sales and marketing expenses
1,297
393
3,128
1,249
Restructuring charges
—
—
2,930
—
Gain on change in fair value of contingent consideration, net
526
268
3,972
369
Operating income
6,201
4,361
17,158
20,053
Interest expense
1,095
511
1,631
1,483
Other (expense) income
(760
)
74
(1,912
)
(108
)
Income before income tax expense
4,346
3,924
13,615
18,462
Income tax expense
1,102
643
4,164
5,232
Net income
$
3,244
$
3,281
$
9,451
$
13,230
Basic weighted average shares outstanding
16,536
16,750
16,555
16,736
Diluted weighted average shares outstanding
16,628
16,896
16,647
16,856
Per common share data:
Basic earnings per share
$
0.20
$
0.20
$
0.57
$
0.79
Diluted earnings per share
$
0.20
$
0.19
$
0.57
$
0.78
See accompanying notes to condensed consolidated financial statements.
2
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Net income
$
3,244
$
3,281
$
9,451
$
13,230
Foreign currency translation adjustments
(457
)
2,575
(3,662
)
7,051
Change in fair value of interest rate cap, net of tax
47
(28
)
252
(137
)
Change in fair value of interest rate swap, net of tax
(12
)
21
$
47
$
(2
)
Comprehensive income
$
2,822
$
5,849
$
6,088
$
20,142
See accompanying notes to condensed consolidated financial statements.
3
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2018 and 2017
(Unaudited, in thousands)
2018
2017
Cash flows from operating activities:
Net income
$
9,451
$
13,230
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on change in fair value of contingent consideration, net
(3,972
)
(369
)
Depreciation and amortization
5,670
5,153
Deferred income taxes
(610
)
(421
)
Non-cash compensation expense
3,501
4,876
Changes in other operating items:
Accounts and other receivables
(4,644
)
11,805
Unbilled revenue
6,344
(11,670
)
Prepaid expenses and other current assets
(5,131
)
(6,232
)
Accounts payable and accrued expenses
(5,527
)
8,145
Deferred revenue
(2,215
)
(3,203
)
Other
643
(140
)
Net cash provided by operating activities
3,510
21,174
Cash flows from investing activities:
Additions to property, plant and equipment
(2,267
)
(2,324
)
Acquisitions, net of cash acquired
(42,872
)
(11,112
)
Other investing activities
(3,229
)
(981
)
Net cash used in investing activities
(48,368
)
(14,417
)
Cash flows from financing activities:
Proceeds from short-term borrowings
31,410
9,749
Proceeds from long-term debt
18,000
—
Repayment of long-term debt
(9,000
)
(9,000
)
Contingent consideration payments
—
(967
)
Change in negative cash book balance
723
(2,813
)
Tax withholding payments for employee stock-based compensation in exchange for shares surrendered
(103
)
(604
)
Repurchases of common stock in the open market
(8,485
)
(2,419
)
Premium paid for interest rate cap
—
(474
)
Other financing activities
(24
)
120
Net cash provided by (used in) financing activities
32,521
(6,408
)
Effect of exchange rate changes on cash and cash equivalents
(952
)
1,325
Net increase (decrease) in cash
(13,289
)
1,674
Cash at beginning of period
23,612
16,346
Cash at end of period
$
10,323
$
18,020
Supplemental disclosures of cash flow information:
Cash paid during the period for interest
$
2,465
$
1,381
Cash paid during the period for income taxes
3,320
4,874
Accrued contingent consideration
905
5,613
See accompanying notes to condensed consolidated financial statements.
4
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
(1)
Basis of Presentation
GP Strategies Corporation is a global performance improvement solutions provider of training, digital learning solutions, management consulting and engineering services. References in this report to “GP Strategies,” the “Company,” “we” and “our” are to GP Strategies Corporation and its subsidiaries, collectively.
The accompanying condensed consolidated balance sheet as of September 30, 2018 and the condensed consolidated statements of operations, comprehensive income and cash flows for the nine months ended September 30, 2018 and 2017 have not been audited, but have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the 2018 interim period are not necessarily indicative of results to be expected for the entire year.
The condensed consolidated financial statements include the operations of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform with the current year presentation. Beginning in the second quarter of 2018, sales and marketing expenses have been presented separately from general administrative expenses on the condensed consolidated statements of operations, whereas in prior period these amounts were included in one caption titled "selling, general and administrative expenses."
(2)
Recent Accounting Standards
Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases which establishes new accounting and disclosure requirements for leases. This standard will require leases to be recognized on the balance sheet as a right-of-use asset and a lease liability. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. Lessees must apply a modified retrospective transition approach for leases existing at, or entered info after, the beginning of the earliest comparative period presented in the financial statements. The FASB issued additional guidance in July 2018 which provides for an additional (and optional) transition method by allowing entities to apply the transition provisions of the new standard, including its disclosure requirements, at its adoption date instead of at the beginning of the earliest comparative period presented and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We plan to adopt the standard effective January 1, 2019 using the additional transition method. We plan to make an accounting policy election to account for certain short-term leases (with a term of one year or less) using a method similar to the current operating lease model and elect the package of practical expedients. The adoption of this standard is expected to increase the assets and liabilities recorded on our condensed consolidated balance sheet and increase the level of disclosures related to leases. We also expect that adoption of the new standard will require changes to our internal controls to support recognition and disclosure requirements under the new standard. We are currently evaluating our population of leased assets in order to assess the impact of the ASU on our lease portfolio, and designing and implementing new processes and controls. Until this effort is completed, we cannot determine the effect of the ASU on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The standard will remove step 2 from the goodwill impairment test. Under the ASU, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public companies for annual reporting periods beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed
5
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
on testing dates after January 1, 2017. We are currently evaluating ASU 2017-04 and the impact of its adoption on our consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The standard will ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. ASU 2017-12 is effective for public companies for annual reporting periods beginning after December 15, 2018 but early adoption is permitted. We are currently evaluating ASU 2017-12 and the impact of its adoption on our consolidated financial statements.
Accounting Standard Adopted
In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 amends current guidance to align the accounting for costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs associated with developing or obtaining internal-use software. Capitalized implementation costs must be expensed over the term of the hosting arrangement and presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement. Both internal and external costs for activities to develop or obtain software that allow for access to or conversion of old data by new system, as well as coding and testing during the application development stage are capitalizable. Training activities and data conversion activities will continue to be expensed as incurred. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, and the Company early adopted the ASU during the third quarter of 2018, effective July 1, 2018 on a prospective basis. In connection with the adoption of ASU 2018-15, the Company capitalized $0.9 million of implementation costs relating to a new enterprise resource planning (ERP) system that went live in October 2018.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification (ASC) Topic 606), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method. Under this transition method, we applied the new standard to contracts that were not completed as of the adoption date and recognized a cumulative effect adjustment which reduced retained earnings by $0.4 million on January 1, 2018. The comparative prior period information has not been restated and continues to be presented according to accounting standards in effect for those periods. The primary impact of ASU No. 2014-09 on our financial statements is a change in revenue recognition on a small portion of our contracts from a proportional performance method, where revenue was previously recognized over contract performance, to a point in time method, where revenue is now recognized upon completion of our performance obligations. While we don't believe the adoption of ASU 2014-09 will materially impact our overall financial statements, the change in timing of revenue recognition on certain contracts could result in quarter to quarter fluctuations in revenue. See Note 3 for further details regarding our revenue recognition accounting policies and other required disclosures.
The cumulative effect of the changes made to our January 1, 2018 balance sheet for the adoption of the new revenue standard was as follows (in thousands):
Balance at December 31, 2017
Adjustments due to ASC Topic 606
Balance at January 1, 2018
Assets:
Prepaid expenses and other current assets
$
14,212
$
2,059
$
16,271
Other assets
6,569
132
6,701
Liabilities and Stockholders’ Equity:
Deferred revenue
22,356
2,587
24,943
Retained earnings
106,599
(396
)
106,203
6
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
The following tables summarize the current period impacts of adopting ASC Topic 606 on our unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018.
Selected condensed consolidated statement of operations line items, which were impacted by the adoption of the new standard, are as follows for the three months ended September 30, 2018 (in thousands):
As reported
Balances without Adoption of Topic 606
Effect of Adoption - Higher (Lower)
Revenue
$
123,566
$
123,727
$
(161
)
Cost of revenue
104,367
104,732
(365
)
Gross profit
19,199
18,995
204
Income tax expense
1,102
1,051
51
Net income
3,244
3,091
153
Per common share data:
Basic earnings per share
$
0.20
$
0.19
$
0.01
Diluted earnings per share
$
0.20
$
0.19
$
0.01
Selected condensed consolidated statement of operations line items, which were impacted by the adoption of the new standard, are as follows for the nine months ended September 30, 2018 (in thousands):
As reported
Balances without Adoption of Topic 606
Effect of Adoption - Higher (Lower)
Revenue
$
382,289
$
381,135
$
1,154
Cost of revenue
322,838
322,349
489
Gross profit
59,451
58,786
665
Income tax expense
4,164
3,992
172
Net income
9,451
8,958
493
Per common share data:
Basic earnings per share
$
0.57
$
0.54
$
0.03
Diluted earnings per share
$
0.57
$
0.54
$
0.03
The adoption of ASC Topic 606 did not have a significant impact on our condensed consolidated statement of comprehensive income for the three or nine months ended September 30, 2018.
7
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
Selected condensed consolidated balance sheet line items, which were impacted by the adoption of the new standard, are as follows as of September 30, 2018 (in thousands):
As reported
Balances without adoption of ASC Topic 606
Effect of Adoption - Higher (Lower)
Assets:
Prepaid expenses and other current assets
$
18,452
$
16,816
$
1,636
Other assets
10,170
10,210
(40
)
Total assets
401,497
399,901
1,596
Liabilities and Stockholders’ Equity:
Accounts payable and accrued expenses
71,422
70,933
489
Deferred revenue
23,499
22,489
1,010
Retained earnings
115,654
115,557
97
Total liabilities and stockholders' equity
401,497
399,901
1,596
The adoption of ASC Topic 606 did not impact our total cash flows from operating, investing or financing activities. In addition, the impact to the individual line items within the operating activities section of our condensed consolidated statement of cash flows was not significant for the nine months ended September 30, 2018.
8
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
(3)
Revenue
Significant Accounting Policy
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (ASC Topic 606), which we adopted on January 1, 2018, using the modified retrospective method. Revenue is measured based on the consideration specified in a contract with a customer. Most of our contracts with customers contain transaction prices with fixed consideration, however, some contracts may contain variable consideration in the form of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties and other similar items. When a contract includes variable consideration, we evaluate the estimate of variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. This can result in recognition of revenue over time as we perform services or at a point in time when the deliverable is transferred to the customer, depending on an evaluation of the criteria for over time recognition in ASC Topic 606. Further details regarding our revenue recognition for various revenue streams are discussed below.
Nature of goods and services
Over 90% of our revenue is derived from services provided to our customers for training, consulting, technical, engineering and other services. Less than 10% of our revenue is derived from various other offerings including custom magazine publications and assembly of glovebox portfolios for automotive manufacturers, licenses of software and other intellectual property, and software as a service (SaaS) arrangements.
Our primary contract vehicles are time-and-materials, fixed price (including fixed-fee per transaction) and cost-reimbursable contracts. Each contract has different terms based on the scope, deliverables and complexity of the engagement, requiring us to make judgments and estimates about recognizing revenue.
Under time-and-materials and cost-reimbursable contracts, the contractual billing schedules are based on the specified level of resources we are obligated to provide. Revenue under these contract types are recognized over time as services are performed as the client simultaneously receives and consumes the benefits provided by our performance throughout the engagement. The time and materials incurred for the period is the measure of performance and, therefore, revenue is recognized in that amount.
For fixed price contracts which typically involve a discrete project, such as development of training content and materials, design of training processes, software implementation, or engineering projects, the contractual billing schedules are not necessarily based on the specified level of resources we are obligated to provide. These discrete projects generally do not contain milestones or other measures of performance. The majority of our fixed price contracts meet the criteria in ASC Topic 606 for over time revenue recognition. For these contracts, revenue is recognized using a percentage-of-completion method based on the relationship of costs incurred to total estimated costs expected to be incurred over the term of the contract. We believe this methodology is a reasonable measure of proportional performance since performance primarily involves personnel costs and services provided to the customer throughout the course of the projects through regular communications of progress toward completion and other project deliverables. In addition, the customer is required to pay us for the proportionate amount of our fees in the event of contract termination. A small portion of our fixed price contracts do not meet the criteria in ASC Topic 606 for over time revenue recognition. For these projects, we defer revenue recognition until the performance obligation is satisfied, which is generally when the final deliverable is provided to the client. The direct costs related to these projects are capitalized and then recognized as cost of revenue when the performance obligation is satisfied.
For fixed price contracts, when total direct cost estimates exceed revenues, the estimated losses are recognized immediately. The use of the percentage-of-completion method requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in estimated salaries and other costs. Estimates of total contract costs are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract progresses.
9
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
When revisions in estimated contract revenues and costs are determined, such adjustments are recorded in the period in which they are first identified. Adjustments to our fixed price contracts in the aggregate resulted in a net increase to revenue of $0.3 million and $1.3 million for the three and nine months ended September 30, 2018 respectively.
For certain fixed-fee per transaction contracts, such as delivering training courses or conducting workshops, revenue is recognized during the period in which services are delivered in accordance with the pricing outlined in the contracts.
For certain fixed-fee per transaction and fixed price contracts in which the output of the arrangement is measurable, such as for the shipping of publications and print materials, revenue is recognized at the point in time at which control is transferred which is upon delivery.
Taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue-producing transaction, that we collect from a customer, are excluded from revenue.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. As of September 30, 2018, we had $264.4 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize over 95 percent of our remaining performance obligations as revenue within the next twelve months. We did not apply any of the practical expedients permitted by ASC Topic 606 in determining the amount of our performance obligations as of September 30, 2018.
10
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
Revenue by Category
The following series of tables presents our revenue disaggregated by various categories (dollars in thousands).
Three Months Ended September 30,
Workforce
Excellence
Business Transformation Services
Consolidated
2018
2017
2018
2017
2018
2017
Revenue by type of service:
Managed learning services
$
51,387
$
52,524
$
—
$
—
$
51,387
$
52,524
Engineering & technical services
29,129
24,498
—
—
29,129
24,498
Sales enablement
—
—
19,944
22,768
19,944
22,768
Organizational development
—
—
23,106
24,307
23,106
24,307
$
80,516
$
77,022
$
43,050
$
47,075
$
123,566
$
124,097
Revenue by geographic region:
Americas
$
56,064
$
48,382
$
35,380
$
40,641
$
91,444
$
89,023
Europe Middle East Africa
21,153
25,540
8,906
7,183
30,059
32,723
Asia Pacific
8,205
8,255
109
76
8,314
8,331
Eliminations
(4,906
)
(5,155
)
(1,345
)
(825
)
(6,251
)
(5,980
)
$
80,516
$
77,022
$
43,050
$
47,075
$
123,566
$
124,097
Revenue by client market sector:
Automotive
$
2,738
$
2,399
$
20,531
$
22,777
$
23,269
$
25,176
Financial & Insurance
22,364
23,583
2,692
3,929
25,056
27,512
Manufacturing
7,558
8,874
3,734
3,428
11,292
12,302
Energy / Oil & Gas
9,113
8,457
1,188
465
10,301
8,922
U.S. Government
7,673
6,220
2,102
2,352
9,775
8,572
U.K. Government
4,456
6,858
—
—
4,456
6,858
Information & Communication
3,315
3,785
2,330
2,509
5,645
6,294
Aerospace
6,705
5,582
1,160
1,678
7,865
7,260
Electronics Semiconductor
3,719
4,016
241
150
3,960
4,166
Life Sciences
4,892
1,822
1,932
2,273
6,824
4,095
Other
7,983
5,426
7,140
7,514
15,123
12,940
$
80,516
$
77,022
$
43,050
$
47,075
$
123,566
$
124,097
11
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
Nine Months Ended September 30,
Workforce
Excellence
Business Transformation Services
Consolidated
2018
2017
2018
2017
2018
2017
Revenue by type of service:
Managed learning services
$
156,244
$
152,713
$
—
$
—
$
156,244
$
152,713
Engineering & technical services
82,800
75,523
—
—
82,800
75,523
Sales enablement
—
—
73,566
75,756
73,566
75,756
Organizational development
—
—
69,679
73,713
69,679
73,713
$
239,044
$
228,236
$
143,245
$
149,469
$
382,289
$
377,705
Revenue by geographic region:
Americas
$
158,935
$
147,423
$
120,814
$
131,567
$
279,749
$
278,990
Europe Middle East Africa
69,248
73,078
27,408
20,854
96,656
93,932
Asia Pacific
24,405
22,328
298
332
24,703
22,660
Eliminations
(13,544
)
(14,593
)
(5,275
)
(3,284
)
(18,819
)
(17,877
)
$
239,044
$
228,236
$
143,245
$
149,469
$
382,289
$
377,705
Revenue by client market sector:
Automotive
$
8,614
$
7,175
$
73,134
$
75,967
$
81,748
$
83,142
Financial & Insurance
67,522
64,066
9,010
12,438
76,532
76,504
Manufacturing
25,621
26,762
11,606
11,970
37,227
38,732
Energy / Oil & Gas
27,769
26,275
3,318
1,896
31,087
28,171
U.S. Government
20,704
18,528
6,742
6,910
27,446
25,438
U.K. Government
14,889
21,789
—
—
14,889
21,789
Information & Communication
11,027
12,785
6,953
7,948
17,980
20,733
Aerospace
21,619
16,003
2,408
4,774
24,027
20,777
Electronics Semiconductor
11,228
12,371
521
610
11,749
12,981
Life Sciences
9,743
5,912
7,143
7,171
16,886
13,083
Other
20,308
16,570
22,410
19,785
42,718
36,355
$
239,044
$
228,236
$
143,245
$
149,469
$
382,289
$
377,705
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled revenue (contract assets), and deferred revenue (contract liabilities) on the condensed consolidated balance sheet. Amounts charged to our clients become billable according to the contract terms, which usually consider the passage of time, achievement of milestones or completion of the project. When billings occur after the work has been performed, such unbilled amounts will generally be billed and collected within 60 to 120 days but typically no longer than over the next twelve months. When we advance bill clients prior to the work being performed, generally, such amounts will be earned and recognized in revenue within the next twelve months. These assets and liabilities are reported on the condensed consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the nine-month period ended September 30, 2018 were not materially impacted by any other factors.
Revenue recognized for the nine months ended September 30, 2018, that was included in the contract liability balance at the beginning of the year was $18.6 million, and primarily represented revenue from services performed during the current period for which we received advance payment from clients in a prior period.
12
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
Contract Costs
Costs to fulfill contracts which do not meet the over time revenue recognition criteria are capitalized and recognized to cost of revenue when the performance obligation is satisfied and revenue is recognized. Such costs are included in prepaid expenses and other current assets on the condensed consolidated balance sheet and totaled $1.6 million as of September 30, 2018. Recognition of such contract costs totaled $0.7 million and $4.7 million for the three and nine months ended September 30, 2018, respectively, and is included in cost of revenue on the condensed consolidated statements of operations.
Applying the practical expedient in ASC Topic 606, we recognize the incremental costs of obtaining contracts (i.e. sales commissions) as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. Substantially all of our sales commission arrangements have an amortization period of one year or less. As of September 30, 2018, we did not have any capitalized sales commissions.
(4)
Significant Customers & Concentration of Credit Risk
We have a market concentration of revenue in both the automotive sector and financial & insurance sector. Revenue from the automotive sector accounted for approximately 21% and 22% of our consolidated revenue for the nine months ended September 30, 2018 and 2017, respectively. In addition, we have a concentration of revenue from a single automotive customer, which accounted for approximately 14% and 13% of our consolidated revenue for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, accounts receivable from a single automotive customer totaled $13.2 million, or 10%, of our consolidated accounts receivable balance.
Revenue from the financial & insurance sector accounted for approximately 20% of our consolidated revenue for both of the nine-month periods ended September 30, 2018 and 2017. In addition, we have a concentration of revenue from a single financial services customer, which accounted for approximately 14% of our consolidated revenue for both of the nine-month periods ended September 30, 2018 and 2017. As of September 30, 2018, billed and unbilled accounts receivable from a single financial services customer totaled $26.4 million, or 16%, of our consolidated accounts receivable and unbilled revenue balances.
No other single customer accounted for more than 10% of our consolidated revenue for the nine months ended September 30, 2018 or 2017 or consolidated accounts receivable balance as of September 30, 2018.
13
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
(5)
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
Our dilutive common stock equivalent shares consist of stock options and restricted stock units computed under the treasury stock method, using the average market price during the period. Performance-based restricted stock unit awards are included in the computation of diluted shares based on the probable outcome of the underlying performance conditions being achieved. The following table presents instruments which were not dilutive and were excluded from the computation of diluted EPS in each period, as well as the dilutive common stock equivalent shares which were included in the computation of diluted EPS:
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
(In thousands)
Non-dilutive instruments
108
—
85
17
Dilutive common stock equivalents
92
146
92
120
(6)
Acquisitions
TTi (Europe) Limited
On August 7, 2018, we acquired the entire share capital of TTi (Europe) Limited, a subsidiary of TTi Global, Inc. (TTi Europe), a provider of training and research services primarily for the automotive industry located in the United Kingdom. The upfront purchase price was $3.0 million in cash. The preliminary purchase price allocation is subject to change and is expected to be finalized in the fourth quarter of 2018. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the Company. None of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired TTi Europe business is included in the Business Transformation Services segment and the results of its operations have been included in the condensed consolidated financial statements beginning August 7, 2018. The pro-forma impact of the acquisition is not material to our results of operations.
14
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
The following table summarizes the purchase price allocation for the acquisition (dollars in thousands).
Amortization
Purchase price allocation:
Period
Cash
$
125
Accounts receivable and other current assets
3,651
Fixed assets
9
Customer-related intangible assets
600
5 years
Goodwill
1,944
Total assets
6,329
Accounts payable and accrued expenses
$
3,130
Deferred revenue
126
Deferred tax liability
73
Total liabilities
3,329
Net assets acquired
$
3,000
IC Axon
On May 1, 2018, we acquired the entire share capital of IC Acquisition Corporation, a Delaware corporation, and its subsidiary, IC Axon Inc., a Canadian corporation (IC Axon). IC Axon develops science-driven custom learning solutions for pharmaceutical and life science customers. The upfront purchase price was $30.5 million in cash. In addition, the purchase agreement requires up to an additional $3.5 million of consideration, contingent upon the achievement of an earnings target during a twelve-month period subsequent to the closing of the acquisition. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the company. None of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired IC Axon business is included in the Workforce Excellence segment and the results of its operations have been included in the condensed consolidated financial statements beginning May 1, 2018. The pro-forma impact of the acquisition is not material to our results of operations.
15
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
The following table summarizes the purchase price allocation for the acquisition (dollars in thousands).
Cash purchase price
$
30,535
Fair value of contingent consideration
905
Total purchase price
$
31,440
Amortization
Purchase price allocation:
Period
Cash
$
538
Accounts receivable and other current assets
3,072
Fixed assets
368
Customer-related intangible assets
10,365
8 years
Marketing-related intangible assets
239
3 years
Goodwill
21,657
Total assets
36,239
Accounts payable and accrued expenses
989
Deferred revenue
979
Deferred tax liability
2,831
Total liabilities
4,799
Net assets acquired
$
31,440
Hula Partners
On January 2, 2018 we acquired the business and certain assets of Hula Partners, a provider of SAP Success Factors Human Capital Management (HCM) implementation services. The purchase price was $10.0 million which was paid in cash at closing. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the Company. All of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired Hula Partners business is included in the Business Transformation Services segment and the results of its operations have been included in the condensed consolidated financial statements beginning January 2, 2018. The pro-forma impact of the acquisition is not material to our results of operations.
The following table summarizes the purchase price allocation for the acquisition (dollars in thousands).
Amortization
Purchase price allocation:
Period
Customer-related intangible assets
$
1,367
4 years
Marketing-related intangible assets
106
2 years
Goodwill
8,527
Total assets
$
10,000
16
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
Contingent Consideration
ASC Topic 805 requires that contingent consideration be recognized at fair value on the acquisition date and be re-measured each reporting period with subsequent adjustments recognized in the condensed consolidated statement of operations. We estimate the fair value of contingent consideration liabilities using an appropriate valuation methodology, typically either an income-based approach or a simulation model, such as the Monte Carlo model, depending on the structure of the contingent consideration arrangement. Contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. We believe our estimates and assumptions are reasonable; however, there is significant judgment involved. At each reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisitions are reflected in income or expense in the condensed consolidated statements of operations, and could cause a material impact to, and volatility in, our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates and changes in the timing and amount of revenue and/or earnings projections.
Below is a summary of the potential maximum contingent consideration we may be required to pay in connection with completed acquisitions as of September 30, 2018 (dollars in thousands):
Acquisition:
Original range of potential undiscounted payments
As of September 30, 2018 Maximum contingent consideration due in
2018
2019
2020
Total
IC Axon
$0 - $3,500
$
—
$
3,500
$
—
$
3,500
McKinney Rogers
$0 - $18,000
—
4,000
4,000
8,000
$
—
$
7,500
$
4,000
$
11,500
Below is a summary of the changes in the recorded amount of contingent consideration liabilities from December 31, 2017 to September 30, 2018 (dollars in thousands):
Liability as of
December 31,
Change in
Fair Value of
Contingent
Foreign
Currency
Liability as of
September 30,
Acquisition:
2017
Additions
Payments
Consideration
Translation
2018
IC Axon
$
—
$
905
$
—
$
45
$
—
$
950
Maverick
1,979
—
—
(1,979
)
—
—
McKinney Rogers
1,501
—
—
(1,308
)
—
193
Emantras
76
—
—
(76
)
—
—
CLS
669
—
—
(654
)
(15
)
—
Total
$
4,225
$
905
$
—
$
(3,972
)
$
(15
)
$
1,143
As of September 30, 2018 and December 31, 2017, contingent consideration considered a current liability and included in accounts payable totaled $1.0 million and $2.7 million, respectively. As of September 30, 2018 and December 31, 2017 we also had accrued contingent consideration totaling $0.2 million and $1.5 million respectively, related to acquisitions which are included in other long-term liabilities on the condensed consolidated balance sheets and represent the portion of contingent consideration estimated to be payable greater than twelve months from the balance sheet date.
17
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
(7)
Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by reportable business segment for the nine months ended September 30, 2018 were as follows (in thousands):
Workforce Excellence
Business Transformation Services
Total
Balance as of December 31, 2017
$
105,764
$
39,071
$
144,835
Acquisitions
21,657
10,471
32,128
Foreign currency translation
(1,476
)
(512
)
(1,988
)
Balance as of September 30, 2018
$
125,945
$
49,030
$
174,975
Intangible Assets Subject to Amortization
Intangible assets with finite lives are subject to amortization over their estimated useful lives. The primary assets included in this category and their respective balances were as follows (in thousands):
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
September 30, 2018
Customer relationships
$
22,558
$
(7,717
)
$
14,841
Intellectual property and other
4,301
(1,679
)
2,622
$
26,859
$
(9,396
)
$
17,463
December 31, 2017
Customer relationships
$
16,330
$
(11,140
)
$
5,190
Intellectual property and other
4,298
(1,125
)
3,173
$
20,628
$
(12,265
)
$
8,363
(8)
Stock-Based Compensation
We recognize compensation expense for stock-based compensation awards issued to employees on a straight-line basis over the requisite service period. Compensation cost is based on the fair value of awards as of the grant date.
The following table summarizes the pre-tax stock-based compensation expense included in reported net income (in thousands):
Three months ended September 30,
Nine months ended September 30,
2018
2017
2018
2017
Non-qualified stock options
$
—
$
1
$
—
$
6
Restricted stock units
196
891
1,173
2,569
Board of Directors stock grants
51
93
171
248
Total stock-based compensation expense
$
247
$
985
$
1,344
$
2,823
Pursuant to our 2011 Stock Incentive Plan (the “2011 Plan”), we may grant awards of non-qualified stock options, incentive stock options, restricted stock, stock units, performance shares, performance units and other incentives payable in cash or in shares of our common stock to officers, employees or members of the Board of Directors. As of September 30, 2018, we had non-qualified stock options and restricted and performance stock units outstanding under these plans.
18
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
(9)
Debt and Financial Instruments
On June 29, 2018 we entered into a Second Amendment to Fifth Amended and Restated Financing and Security Agreement (the "Credit Agreement"). The Credit Agreement provides for an extension of the expiration date of the existing revolving credit facility in the maximum principal amount of $100 million, from December 31, 2021 to June 1, 2023, and a new term loan in the principal amount of $40 million maturing on October 1, 2021. The Credit Agreement is secured by substantially all of our assets.
The maximum interest rate on the Credit Agreement is the daily one-month LIBOR market index rate (for borrowings in Dollars and Sterling) or the daily one month EURIBOR (for borrowings in Euros) plus 2.50%. Based on our financial performance, the interest rate can be reduced to a minimum rate of the daily one-month LIBOR market index rate plus 1.25%, with the rate being determined based on our maximum leverage ratio for the preceding four quarters. Each unpaid advance on the revolving loan will bear interest until repaid. The term loan is payable in monthly installments of principal in the amount of $1.0 million plus applicable interest, beginning on July 1, 2018. We may prepay the term loan or the revolving loan, in whole or in part, at any time without premium or penalty, subject to certain conditions. Amounts repaid or prepaid on the term loan may not be reborrowed.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict our and our subsidiaries’ (subject to certain exceptions) ability to, among other things, grant liens, make investments, incur indebtedness, merge or consolidate, dispose of assets or make acquisitions. We are also required to maintain compliance with a minimum fixed charge coverage ratio and a maximum leverage ratio. We were in compliance with all of the financial covenants under the Credit Agreement as of September 30, 2018. As of September 30, 2018, our total long-term debt outstanding under the term loan was $37.0 million. In addition, there were $69.0 million of borrowings outstanding and $26.3 million of available borrowings under the Credit Agreement. For the nine months ended September 30, 2018, the weighted average interest rate on our borrowings was 3.8%.
In March 2017, we entered into an interest rate swap agreement which effectively fixed our interest rate on the remaining $37 million outstanding on our term loan to a fixed LIBOR of 1.59% plus the applicable margin under the Credit Agreement. We have designated the interest rate swap, which expires on April 1, 2020, as a cash flow hedge and have applied hedge accounting. The fair value of the derivative asset associated with the interest rate swap was $0.2 million and $0.1 million as of September 30, 2018 and December 31, 2017, respectively, and is included in other assets on the condensed consolidated balance sheet. The derivative asset is classified within Level 2 of the fair value hierarchy in which fair value is measured using quoted prices in active markets for similar assets and liabilities.
In April 2017, we entered into an interest rate cap agreement and paid a premium of $0.5 million which caps the daily one-month LIBOR at 2.0% for an aggregate notional amount of $20.0 million of our variable rate debt under our credit facility. The interest rate cap agreement matures on December 31, 2021. We have designated the interest rate cap as a cash flow hedge and have applied hedge accounting. The fair value of the derivative asset associated with the interest rate cap was $0.6 million and $0.3 million as of September 30, 2018 and December 31, 2017, respectively, and is included in other assets on the condensed consolidated balance sheet. The derivative asset is classified within Level 2 of the fair value hierarchy in which fair value is measured using quoted prices in active markets for similar assets and liabilities.
19
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
(10)
Income Taxes
Income tax expense was $4.2 million, or an effective income tax rate of 30.6%, for the nine months ended September 30, 2018 compared to $5.2 million, or an effective income tax rate of 28.3%, for the nine months ended September 30, 2017. The increase in the effective income tax rate in 2018 compared to 2017 is primarily due to a $0.4 million increase to the provisional estimate recorded in the fourth quarter of 2017 relating to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, imposed by the Tax Cuts and Jobs Act (the "Tax Act") that was enacted on December 22, 2017. The increase is partially offset by a decrease in the U.S. statutory tax rate from 35% to 21% and other discrete items. Income tax expense for the interim quarterly periods is based on an estimated annual effective tax rate which includes the U.S. federal, state and local, and non-U.S. statutory rates, permanent differences, and other items that may have an impact on income tax expense.
The increase to the provisional estimate of the one-time transition tax on the mandatory deemed repatriation of cumulative
foreign earnings during the nine months ended September 30, 2018 is the result of further analysis of earnings and profits related to the calculation of the transition tax. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts.
The Tax Act creates a new requirement that Global Intangible Low-Taxed Income (“GILTI”) earned by a controlled foreign corporation (“CFC”) must be included in the gross income of the U.S. shareholder. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate these provisions of the Tax Act and whether taxes due on future U.S. inclusions related to GILTI should be recorded as a current-period expense when incurred, or factored into the company’s measurement of its deferred taxes. At September 30, 2018, because the Company is still evaluating the GILTI provisions, the Company has included tax expense related to GILTI for the current year in its estimated annual effective tax rate and has not provided additional GILTI on deferred items.
An uncertain tax position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense. As of September 30, 2018, we had no uncertain tax positions reflected on our condensed consolidated balance sheet. The Company files income tax returns in U.S. federal, state and local jurisdictions, and various non-U.S. jurisdictions, and is subject to audit by tax authorities in those jurisdictions. Tax years 2015 through 2017 remain open to examination by these tax jurisdictions, and earlier years remain open to examination in certain of these jurisdictions which have longer statutes of limitations.
20
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
(11)
Stockholders’ Equity
Changes in stockholders’ equity during the nine months ended September 30, 2018 were as follows (in thousands):
Common
stock
Additional
paid-in
capital
Retained
earnings
Treasury
stock
at cost
Accumulated
other
comprehensive
loss
Total
stockholders’
equity
Balance at December 31, 2017
$
172
$
107,256
$
106,599
$
(11,118
)
$
(14,855
)
$
188,054
Cumulative effect adjustment of adopting ASU 2014-09
—
—
(396
)
—
—
(396
)
Adjusted balance at December 31, 2017
172
107,256
106,203
(11,118
)
(14,855
)
187,658
Net income
—
—
9,451
—
—
9,451
Foreign currency translation adjustment
—
—
—
—
(3,662
)
(3,662
)
Change in fair value of interest rate cap, net of tax
—
—
—
—
252
252
Change in fair value of interest rate swap, net of tax
—
—
—
—
47
47
Repurchases of common stock
—
—
—
(7,956
)
—
(7,956
)
Stock-based compensation expense
—
1,344
—
—
—
1,344
Issuance of stock for employer contributions to retirement plan
—
(298
)
—
2,455
—
2,157
Net issuances of stock pursuant to stock compensation plans and other
—
(1,002
)
—
909
—
(93
)
Balance at September 30, 2018
$
172
$
107,300
$
115,654
$
(15,710
)
$
(18,218
)
$
189,198
Stock Repurchase Program
We have a share repurchase program under which we may repurchase shares of our common stock from time to time in the open market, subject to prevailing business and market conditions and other factors. During the nine months ended September 30, 2018 and 2017, we repurchased approximately 350,000 and 101,000 shares, respectively, of our common stock in the open market for a total cost of approximately $8.0 million and $2.4 million, respectively. As of September 30, 2018, there was approximately $3.8 million available for future repurchases under the buyback program.
21
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
(12)
Restructuring
The following table shows the balances and activity for our restructuring liability (in thousands):
Employee Severance and Related Benefits
Excess Facilities and Other Costs
Total
Liability as of December 31, 2017
$
2,840
$
—
$
2,840
Additional restructuring charges
1,678
1,252
2,930
Payments
(2,791
)
(360
)
(3,151
)
Liability as of September 30, 2018
$
1,727
$
892
$
2,619
In December 2017, we announced a new organizational structure and plan to improve operating results by increasing organic growth and reducing operating costs. During the fourth quarter of 2017, we initiated restructuring and transition activities to improve operational efficiency, reduce costs and better position the company to drive future revenue growth and we recorded restructuring charges, consisting primarily of severance expense of $3.3 million for the fourth quarter ended December 31, 2017. During the second quarter of 2018, the Company downsized its headquarters office from three floors to two floors, vacated certain other under-utilized field offices and incurred additional severance expense.
For the nine months ended September 30, 2018, we recorded an additional $2.9 million of restructuring charges which is included in restructuring charges on the condensed consolidated statements of operations. The total remaining liability under these restructuring activities was $2.6 million as of September 30, 2018, of which $2.0 million is included in accounts payable and accrued expenses and $0.6 million is included in other noncurrent liabilities on the condensed consolidated balance sheet. These restructuring activities were substantially complete as of June 30, 2018.
(13)
Business Segments
As of September 30, 2018, we operated through two reportable business segments: (i) Workforce Excellence and (ii) Business Transformation Services. In December 2017, we announced a new organizational structure and plan to improve operating results by increasing organic growth and reducing operating costs. Effective January 1, 2018, we re-organized into two operating segments aligned by complementary service lines and supported by a new business development organization aligned by industry sector. The Workforce Excellence segment includes the majority of the former Learning Solutions and Professional & Technical Services segments. The Business Transformation Services segment includes the majority of the former Performance Readiness Solutions and Sandy Training & Marketing segments. Certain business units transferred between the
former operating segments to better align with the service offerings of the two new segments. In addition, effective July 1, 2018, we transferred the management responsibility of certain additional business units between the two operating segments primarily to consolidate our non-technical content design and development businesses into one global digital learning strategies and solutions service line. We have reclassified the segment financial information herein for the prior year periods to reflect the changes in our segment reporting during 2018 and conform to the current year's presentation.
Each of our two reportable segments represents an operating segment under ASC Topic 280, Segment Reporting. We test our goodwill at the reporting unit level, or one level below an operating segment, under ASC Topic 350, Intangibles - Goodwill and Other. In connection with the new organizational structure that went into effect on January 1, 2018, we determined that we have four reporting units for purposes of goodwill impairment testing, which represent our four practices which are one level below the operating segments, as discussed below.
Our two segments each consist of two global practice areas which are focused on providing similar and/or complementary products and services across our diverse customer base and within targeted markets. Within each practice are various service lines having specific areas of expertise. Marketing and communications, sales, accounting, finance, legal, human resources,
22
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
information systems and other administrative services are organized at the corporate level. Business development and sales resources are aligned by industry sector to support existing customer accounts and new customer development across both segments. Further information regarding our business segments is discussed below.
Workforce Excellence. The Workforce Excellence segment advises and partners with leading organizations in designing, implementing, operating and supporting their talent management and workforce strategies, enabling them to gain greater competitive edge in their markets. This segment consists of two practices:
•
Managed Learning Services - this practice focuses on creating value for our customers by delivering a suite of talent management and learning design, development, operational and support services that can be delivered as large scale outsourcing arrangements, managed services contracts and project-based service engagements. The Managed Learning Services offerings include strategic learning and development consulting services, digital learning content design and development solutions and a suite of managed learning operations services, including: managed facilitation and delivery, managed training administration and logistics, help desk support, tuition reimbursement management services, event management and vendor management.
•
Engineering & Technical Services - this practice focuses on capital intensive, inherently hazardous and/or highly complex technical services in support of both U.S. government and global commercial industries. Our products and services include design, development and delivery of technical work-based learning, CapEx (plant launch) initiatives, engineering design and construction management, fabrication, and management services, operational excellence consulting, chemical demilitarization services, homeland security services, emergency management support services along with all forms of technical documentation. We deliver world-class asset management and performance improvement consulting to a host of industries. Our proprietary EtaPRO® Performance and Condition Monitoring System provides a suite of real-time digital solutions for hundreds of facilities and is installed in power-generating units around the world. We also provide thousands of technical courses in a web-based off the shelf delivery format through our GPiLEARN+™ portal.
Business Transformation Services. The Business Transformation Services segment works with organizations to execute complex business strategies by linking business systems, process and people’s performance to clear and measurable results. We have a holistic methodology to establishing direction and closing the gap between strategy and execution. Our approach equips business leaders and teams with the tools and capability to deliver high-performance results. This segment consists of two practices:
•
Sales Enablement - this practice provides custom product sales training and service technical training, primarily to automotive manufacturers, designed to better educate the customer salesforces as well as the service technicians with respect to new product features and designs, in effect rapidly increasing the salesforce and technicians knowledge base and enabling them to address retail customer needs. Furthermore, this segment helps our clients assess their customer relationship marketing strategy and connect with their customers on a one-to-one basis, including custom print and digital publications. We have been a custom product sales and service technical training provider and leader in serving manufacturing customers in the U.S. automotive industry for over 40 years.
•
Organizational Development - this practice works with organizations to design and execute an integrated people performance system. This translates to helping organizations set strategy, carry that strategy through every level of the organization and ensure that their people have the right skills, knowledge, tools, processes and technology to enable the transformation and achieve business results. Solutions include strategy, leadership, employee engagement and culture consulting, enterprise technology implementation and adoption solutions, and organization design and business performance consulting.
We do not allocate the following items to the segments: general & administrative expenses, sales & marketing expenses, restructuring charges, other expense, interest expense, gain on change in fair value of contingent consideration and income tax expense.
23
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated income before income tax expense (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Revenue:
Workforce Excellence
$
80,516
$
77,022
$
239,044
$
228,236
Business Transformation Services
43,050
47,075
143,245
149,469
$
123,566
$
124,097
$
382,289
$
377,705
Gross profit:
Workforce Excellence
$
13,400
$
11,892
$
39,682
$
39,324
Business Transformation Services
5,799
6,754
19,769
21,145
Total gross profit
19,199
18,646
59,451
60,469
General and administrative expenses
12,227
14,160
40,207
39,536
Sales and marketing expenses
1,297
393
3,128
1,249
Restructuring charges
—
—
2,930
—
Gain on change in fair value of contingent consideration, net
526
268
3,972
369
Operating income
6,201
4,361
17,158
20,053
Interest expense
1,095
511
1,631
1,483
Other (expense) income
(760
)
74
(1,912
)
(108
)
Income before income tax expense
$
4,346
$
3,924
$
13,615
$
18,462
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
General Overview
We are a global performance improvement solutions provider of training, digital learning solutions, management consulting and engineering services that seeks to improve the effectiveness of organizations by providing services and products that are customized to meet the specific needs of clients. Clients include Fortune 500 companies and governmental and other commercial customers in a variety of industries. We believe we are a global leader in performance improvement, with over five decades of experience in providing solutions to optimize workforce performance.
As of September 30, 2018, we operated through two reportable business segments: (i) Workforce Excellence and (ii) Business Transformation Services. In December 2017, we announced a new organizational structure and plan to improve operating results by increasing organic growth and reducing operating costs. Effective January 1, 2018, we re-organized into two operating segments aligned by complementary service lines and supported by a new business development organization aligned by industry sector. The Workforce Excellence segment includes the majority of the former Learning Solutions and Professional & Technical Services segments. The Business Transformation Services segment includes the majority of the former Performance Readiness Solutions and Sandy Training & Marketing segments. Certain business units transferred between the former operating segments to better align with the service offerings of the two new segments. In addition, effective July 1, 2018, we transferred the management responsibility of certain additional business units between the two operating segments primarily to consolidate our non-technical content design and development businesses into one global digital learning strategies and solutions service line. We have reclassified the segment financial information herein for the prior year periods to reflect the changes in our segments and conform to the current year's presentation.
Each of our two reportable segments represents an operating segment under ASC Topic 280, Segment Reporting. We test our goodwill at the reporting unit level, or one level below an operating segment, under ASC Topic 350, Intangibles - Goodwill and Other. In connection with the new organizational structure that went into effect on January 1, 2018, we determined that we have four reporting units for purposes of goodwill impairment testing, which represent our four practices which are one level below the operating segments, as discussed below.
Our two segments each consist of two global practice areas which are focused on providing similar and/or complementary products and services across our diverse customer base and within targeted markets. Within each practice are various service lines having specific areas of expertise. Marketing and communications, sales, accounting, finance, legal, human resources, information systems and other administrative services are organized at the corporate level. Business development and sales resources are aligned by industry sector to support existing customer accounts and new customer development across both segments. Further information regarding our business segments is discussed below.
Workforce Excellence. The Workforce Excellence segment advises and partners with leading organizations in designing, implementing, operating and supporting their talent management and workforce strategies, enabling them to gain greater competitive edge in their markets. This segment consists of two practices:
•
Managed Learning Services - this practice focuses on creating value for our customers by delivering a suite of talent management and learning design, development, operational and support services that can be delivered as large scale outsourcing arrangements, managed services contracts and project-based service engagements. The Managed Learning Services offerings include strategic learning and development consulting services, digital learning content design and development solutions and a suite of managed learning operations services, including: managed facilitation and delivery, managed training administration and logistics, help desk support, tuition reimbursement management services, event management and vendor management.
•
Engineering & Technical Services - this practice focuses on capital intensive, inherently hazardous and/or highly complex technical services in support of both U.S. government and global commercial industries. Our products and services include design, development and delivery of technical work-based learning, CapEx (plant launch) initiatives, engineering design and construction management, fabrication, and management services, operational excellence consulting, chemical demilitarization services, homeland security services, emergency management support services along with all forms of technical documentation. We deliver world-class asset management and performance improvement consulting to a host of industries. Our proprietary EtaPRO® Performance and Condition Monitoring System provides a suite of real-time digital solutions for hundreds of facilities and is installed in power-generating
25
units around the world. We also provide thousands of technical courses in a web-based off the shelf delivery format through our GPiLEARN+™ portal.
Business Transformation Services. The Business Transformation Services segment works with organizations to execute complex business strategies by linking business systems, process and people’s performance to clear and measurable results. We have a holistic methodology to establishing direction and closing the gap between strategy and execution. Our approach equips business leaders and teams with the tools and capability to deliver high-performance results. This segment consists of two practices:
•
Sales Enablement - this practice provides custom product sales training and service technical training, primarily to automotive manufacturers, designed to better educate the customer salesforces as well as the service technicians with respect to new product features and designs, in effect rapidly increasing the salesforce and technicians knowledge base and enabling them to address retail customer needs. Furthermore, this segment helps our clients assess their customer relationship marketing strategy and connect with their customers on a one-to-one basis, including custom print and digital publications. We have been a custom product sales and service technical training provider and leader in serving manufacturing customers in the U.S. automotive industry for over 40 years.
•
Organizational Development - this practice works with organizations to design and execute an integrated people performance system. This translates to helping organizations set strategy, carry that strategy through every level of the organization and ensure that their people have the right skills, knowledge, tools, processes and technology to enable the transformation and achieve business results. Solutions include strategy, leadership, employee engagement and culture consulting, enterprise technology implementation and adoption solutions, and organization design and business performance consulting.
Acquisitions
TTi (Europe)
On August 7, 2018, we acquired the entire share capital of TTi (Europe) Limited, a subsidiary of TTi Global, Inc. (TTi Europe), a provider of training and research services primarily for the automotive industry located in the United Kingdom. The upfront purchase price was $3.0 million in cash. The preliminary purchase price allocation is subject to change and is expected to be finalized in the fourth quarter of 2018. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the company. None of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired TTi Europe business is included in the Business Transformation Services segment and the results of its operations have been included in the condensed consolidated financial statements beginning August 7, 2018. The pro-forma impact of the acquisition is not material to our results of operations.
IC Axon
On May 1, 2018, we acquired the entire share capital of IC Acquisition Corporation, a Delaware corporation, and its subsidiary, IC Axon Inc., a Canadian corporation (IC Axon). IC Axon develops science-driven custom learning solutions for pharmaceutical and life science customers. The upfront purchase price was $30.5 million in cash. In addition, the purchase agreement requires up to an additional $3.5 million of consideration, contingent upon the achievement of an earnings target during a twelve-month period subsequent to the closing of the acquisition. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the company. None of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired IC Axon business is included in the Workforce Excellence segment and the results of its operations have been included in the condensed consolidated financial statements beginning May 1, 2018. The pro-forma impact of the acquisition is not material to our results of operations.
Hula Partners
On January 2, 2018, we acquired the business and certain assets of Hula Partners, a provider of SAP Success Factors Human Capital Management (HCM) implementation services. The purchase price was $10.0 million which was paid in cash at closing. The goodwill recognized is due to the expected synergies from combining operations of the acquiree with the Company. All of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired Hula Partners business is included in the Business Transformation Services segment and the results of its operations have been included in the consolidated financial statements beginning January 2, 2018. The pro-forma impact of the acquisition is not material to our results of operations.
YouTrain
On August 31, 2017, we acquired the entire share capital of YouTrain Limited ("YouTrain"), an independent training company
delivering IT, digital and life sciences skills training in Scotland and North West England. The upfront purchase price was $4.9 million which was paid in cash at closing and a completion accounts payment of $0.2 million which was paid to the sellers during the fourth quarter of 2017. The acquired YouTrain business is included in the Workforce Excellence segment and the results of its
26
operations have been included in the consolidated financial statements beginning September 1, 2017. The pro-forma impact of the acquisition is not material to our results of operations.
CLS Performance Solutions Limited
On August 31, 2017, we acquired the business and certain assets of CLS Performance Solutions Limited ("CLS"), an independent provider of Enterprise Resource Planning (ERP) end user adoption and training services in the United Kingdom. The upfront purchase price was $0.4 million which was paid in cash at closing. In addition, the purchase agreement requires up to an additional $2.2 million of consideration contingent upon the achievement of certain earnings targets during the twelve-month period following the completion of the acquisition. No earnout was payable for the twelve-month period following the acquisition as the earnings target was not achieved. The acquired CLS business is included in the Business Transformation Services segment, and the results of its operations have been included in the consolidated financial statements beginning September 1, 2017. The pro-forma impact of the acquisition is not material to our results of operations.
Emantras
Effective April 1, 2017, we acquired the business and certain assets of Emantras, a digital education company that provides engaging learning experiences and effective knowledge delivery through award-winning digital and mobile solutions with offices in Fremont, California and Chennai, India. This acquisition strengthens our eLearning development capabilities, allowing us to better serve our customer base with the latest digital learning solutions. The upfront purchase price was $3.2 million in cash. In addition, the purchase agreement requires up to an additional $0.3 million of consideration, contingent upon the achievement of an earnings target during the twelve-month period ending June 30, 2018, plus a percentage of any earnings in excess of the specified earnings target. No contingent consideration was payable with respect to the twelve-month period following the acquisition as the earnings target was not achieved. The acquired Emantras business is included in the Workforce Excellence segment, and the results of its operations have been included in the consolidated financial statements beginning April 1, 2017. The pro-forma impact of the acquisition is not material to our results of operations.
McKinney Rogers
On February 1, 2017, we acquired the business and certain assets of McKinney Rogers, a provider of strategic consulting services with offices in New York and London. This acquisition expands our solutions offerings, giving us the ability to leverage McKinney Rogers' intellectual property and consulting methodologies to help our global client base meet strategic business goals. The upfront purchase price was $3.3 million in cash. In addition, the purchase agreement requires up to an additional $18.0 million of consideration, $6.0 million of which was contingent upon the achievement of certain earnings targets during the five-month period ended April 30, 2017 and $12.0 million of which is contingent upon the achievement of certain earnings targets during the three twelve-month periods following completion of the acquisition. In July 2017, we paid the seller $1.0 million in respect of the contingent consideration for the five-month period ended April 30, 2017. For the twelve-month period ended January 31, 2018, McKinney Rogers did not achieve the minimum earnings target and therefore, there was zero contingent consideration payable in respect of the first twelve-month period following completion of the acquisition. The acquired McKinney Rogers business is included in the Business Transformation Services segment and the results of its operations have been included in the consolidated financial statements beginning February 1, 2017. The pro-forma impact of the acquisition is not material to our results of operations.
Operating Highlights
Three Months ended September 30, 2018 Compared to the Three Months ended September 30, 2017
Our revenue decreased $0.5 million or 0.4% during the third quarter of 2018 compared to the third quarter of 2017. The net decrease is due to a $4.0 million decline in our Business Transformation Services segment offset by a $3.5 million increase in our Workforce Excellence segment. Foreign currency exchange rate changes resulted in a total $0.6 million decrease in U.S. dollar reported revenue during the third quarter of 2018. The changes in revenue and gross profit are discussed in further detail below by segment.
Operating income, the components of which are discussed below, increased $1.8 million or 42.2% to $6.2 million for the third quarter of 2018 compared to $4.4 million for the third quarter of 2017. The net increase in operating income is primarily due to a$0.6 million increase in gross profit, a $1.9 million decrease in general and administrative expenses, and a $0.3 million increase in the gain on change in fair value of contingent consideration, partially offset by a $0.9 million increase in sales and marketing expenses.
For the three months ended September 30, 2018, we had income before income tax expense of $4.3 million compared to $3.9 million for the three months ended September 30, 2017. Net income was $3.2 million, or $0.20 per diluted share, for the three months ended September 30, 2018, compared to net income of $3.3 million, or $0.19 per diluted share, for the three months ended
27
September 30, 2017. Diluted weighted average shares outstanding were 16.6 million for the third quarter of 2018 compared to 16.9 million for the third quarter of 2017.
Revenue
(Dollars in thousands)
Three months ended
September 30,
2018
2017
Workforce Excellence
$
80,516
$
77,022
Business Transformation Services
43,050
47,075
$
123,566
$
124,097
Workforce Excellence revenue increased $3.5 million or 4.5% during the third quarter of 2018 compared to the third quarter of 2017. The revenue increase is due to the following: