Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2019 which are located in Item 8 of this report.
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 December 31, 2019, we operated through two reportable business segments: (i) Workforce Excellence and (ii) Business Transformation Services. We are organized into two operating segments aligned by complementary service lines and supported by a business development organization aligned by industry sector. 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:
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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, event management and vendor management.
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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.
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Business Transformation Services. The Business Transformation Services segment works with organizations to execute complex business strategies by linking business systems, processes and workforce 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:
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Sales Enablement - this practice provides custom product sales training and service technical training, primarily to automotive manufacturers, designed to better educate customer salesforces as well as service technicians with respect to new product features and designs, in effect rapidly increasing the salesforce and technician 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.
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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 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.
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We discuss our business in more detail in Item 1. Business and the risk factors affecting our business in Item 1A. Risk Factors.
Business Strategy
We seek to increase shareholder value by pursuing the following strategies:
Continuously enhance our learning services offerings and capabilities. We believe the demand for learning and development services will continue to increase. In a knowledge based economy, this demand is driven by ever increasing technology, processes, products, and turnover of personnel. The rate and effectiveness of the transfer of knowledge to the workforce of our clients, their partners, and even their customers can positively impact their performance. We plan to meet this demand by continuously expanding our services and capabilities through organic growth initiatives based upon our technical expertise as well as through targeted acquisitions. Our acquisitions in recent years have added automotive industry training and platform adoption capabilities to our services offerings, strengthened our digital learning and custom training content development services in both the commercial and government sectors, and expanded our geographical reach. We believe that the breadth of our service and product offerings allows us to effectively compete for customers by offering a comprehensive solution for custom training, consulting, engineering and technical services. We will continue to focus on increasing our capabilities to drive incremental growth from new, as well as existing, clients.
Develop and maintain strong client relationships. We plan to preserve and grow our business by cross-selling our services and capabilities across and within our existing client base. We have a successful track record of increasing our share of wallet with a number of our clients, many of whom we estimate currently outsource only a fraction of their training expenditures. We believe that as our clients benefit from the efficient, cost-effective and flexible training solutions and services that we provide, many of them will find it beneficial to increase the scope of training services that they outsource to third party providers. We believe that the strength of our relationships with our existing clients, including the insight and knowledge into their operations that we have developed through these relationships, when combined with the broad range of our service and product offerings, provide us with an advantage when competing for these additional expenditures.
Leverage managed learning capabilities. We have a demonstrated ability to provide training services across a wide spectrum of learning engagements from transactional multi-week assignments focused on a single aspect of a learning process to multi-year contracts where we manage the learning infrastructure of our customer. Integrated managed learning engagements typically require us to assume responsibility for the development, delivery and administration of learning functions and are generally carried out under multi-year agreements. We intend to leverage our managed learning capabilities to expand the customers and markets we serve.
Expand global platform. We believe international markets offer growth opportunities for our services. We established over twenty new subsidiaries in select countries since 2013 to support new global outsourcing contracts.We intend to leverage our enhanced infrastructure as well as to further establish our global platform in order to deliver our comprehensive offerings to new and existing clients on a global basis. In our experience, many of our clients are seeking access to additional international markets and as such we intend to enhance our international capabilities. In order to support their business expansion we are providing employee training solutions across organizations in different countries and different languages, while maintaining quality and consistency in the overall training program. By moving into specific international markets with our existing clients, we are able to not only deepen our relationships with those clients, but are also able to develop expertise in those markets that we can leverage to additional customers. We believe that following this strategy provides us with opportunities to gain access to international markets with established client relationships in those markets.
Significant Events
Restructuring Plan
In December 2017, we announced a new organizational structure and plan to improve operating results by increasing organic growth and reducing operating costs. We also hired a chief sales officer in January 2018 to establish a structured and more centralized business development capability that will align our diverse market sector expertise with our service offerings. In connection with the reorganization, we initiated restructuring and transition activities to improve operational efficiency, reduce costs and better position the Company to drive future revenue growth. During the fourth quarter of 2017, we incurred restructuring charges of $3.3 million consisting primarily of severance costs and during the year ended December 31, 2018, we incurred restructuring charges of $2.9 million, consisting primarily of facility consolidation costs and severance expense. These restructuring activities were complete as of June 30, 2018. The total remaining liability under this restructuring plan was $0.1 million and $1.9 million as of December 31, 2019 and 2018, respectively.
In connection with the acquisition of TTi Global, Inc. in December 2018, we initiated restructuring and transition activities in the first quarter of 2019 to reduce costs and eliminate redundant positions to realize synergies with the acquired business. For the year ended December 31, 2019, we recorded $1.6 million of restructuring charges in connection with these activities. The total remaining liability under these restructuring activities was $0.2 million as of December 31, 2019. These restructuring activities associated with the TTi Global acquisition were substantially complete as of December 31, 2019.
Divestitures
Sale of Tuition Program Management Business
On October 1, 2019, we sold our tuition program management business pursuant to an Asset Purchase Agreement with Bright Horizons Children's Centers LLC (the "buyer"). The purchase price was $20.0 million which was paid on closing, other than $1.5 million which is being held in escrow to secure possible indemnification claims pursuant to the terms of an escrow agreement which expires October 1, 2020. An additional $0.1 million was paid to the buyer in January 2020 based on the final calculation of assumed liabilities as defined in the asset purchase agreement. We recognized a pre-tax gain of $12.1 million, net of $0.1 million of direct selling costs, on the sale of the business. The gain recorded represents the difference between the purchase price and the carrying value of the business, which primarily included goodwill of $7.7 million.
Sale of Alternative Fuels Division
Effective January 1, 2020, we closed the sale of our Alternative Fuels Division pursuant to an Asset Purchase Agreement with Cryogenic Industries, LLC. The purchase price is up to $6.0 million, subject to adjustment based on a final calculation of net working capital as defined in the asset purchase agreement. Of the total purchase consideration, we received an advance payment of $1.5 million on December 31, 2019 and the remaining upfront consideration of $3.5 million on January 2, 2020 based on the estimated net working capital. In addition, up to $0.5 million of the purchase price is subject to the achievement of certain milestones under an assigned contract through the period December 31, 2021. The purchase price adjustment for closing net working capital is expected to be finalized during the first quarter of 2020.
Acquisitions
Below is a summary of the acquisitions we completed during 2018 and 2017. We did not complete any acquisitions in 2019. See Note 3 to the accompanying Consolidated Financial Statements for further details, including the purchase price allocations.
2018 Acquisitions
TTi Global
On November 30, 2018, we entered into a Share Purchase Agreement with TTi Global, Inc. ("TTi Global") and its stockholders and acquired all of the outstanding shares of TTi Global. The transaction under the Share Purchase Agreement includes the acquisition of TTi Global’s subsidiaries (except for its UK and Spain subsidiaries and dormant entities) and certain affiliated companies. The Company purchased TTi Global’s UK and Spain subsidiaries in a separate transaction in August 2018 which is discussed further below. TTi Global is a provider of training, staffing, research and consulting solutions to industries across various sectors with automotive as a core focus. The total upfront purchase price for TTi Global was $14.2 million of cash paid upon closing on November 30, 2018, subject to reduction based on a minimum working capital requirement, as defined in the Share
Purchase Agreement. During the third quarter of 2019, the seller paid us $0.9 million in settlement of the working capital adjustment. The acquired TTi Global business is included in the Business Transformation Services segment and the results of its operations have been included in the consolidated financial statements beginning December 1, 2018. The pro-forma impact of the acquisition is not material to our results of operations.
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 acquired TTi Europe business is included in the Business Transformation Services segment and the results of its operations have been included in the 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. No contingent consideration was payable as the earnings target was not achieved. The acquired IC Axon business is included in the Workforce Excellence segment and the results of its operations have been included in the 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 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.
2017 Acquisitions
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 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. The acquired YouTrain business is included in our acquiring United Kingdom subsidiary and its functional currency is the British Pound Sterling.
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 required 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 contingent consideration was paid as the earnings targets were 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. The acquired CLS business is included in our acquiring United Kingdom subsidiary and its functional currency is the British Pound Sterling.
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 required up to an additional $0.3 million of consideration, contingent upon the achievement of an earnings target during the twelve-month period following completion of the acquisition, plus a percentage of any earnings in excess of the specified earnings target. No contingent consideration was paid 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. The India-based operations of the acquired Emantras business is included in our India subsidiary and its functional currency is the Indian Rupee.
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 required 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. No contingent consideration was paid with respect to the two twelve-month periods following the acquisition as the earnings targets for those periods were not achieved. In July 2019, we entered into an amendment to the asset purchase agreement that implemented certain changes, including the elimination of the third year earnout for the period ended January 31, 2020. 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.
Share 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 year ended December 31, 2019 we did not repurchase shares and during the years ended December 31, 2018 and 2017, we repurchased approximately 354,000 and 182,000 shares, respectively, of our common stock in the open market for a total cost of approximately $8.0 million and $4.3 million, respectively. As of December 31, 2019, there was approximately $3.8 million available for future repurchases under the buyback program. There is no expiration date for the repurchase program.
Results of Operations
Operating Highlights
Year ended December 31, 2019 compared to the year ended December 31, 2018
During the year ended December 31, 2019, our revenue increased $68.1 million, or 13.2%, to $583.3 million compared to $515.2 million for the year ended December 31, 2018. The revenue increase was comprised of a $13.0 million increase in our Workforce Excellence segment and a $55.1 million increase in our Business Transformation Services segment. Foreign currency exchange rate changes resulted in a total $7.5 million decrease in U.S. dollar reported revenue during 2019. The changes in revenue and gross profit are discussed in further detail below by segment.
Operating income, the components of which are discussed in detail below, increased $8.4 million or 42.9% during the year ended December 31, 2019. The increase in operating income is largely due to a $12.1 million pre-tax gain on the sale of our tuition program management business in October 2019. In addition, we had a $11.5 million increase in gross profit and a $1.3 million decrease in restructuring charges during 2019 compared to 2018. These increases in operating income were partially offset by a $9.6 million increase in general and administrative expenses, a $3.1 million increase in sales and marketing expense, and a $3.8 million decrease in the gain on change in fair value of contingent consideration during 2019 compared to 2018.
For the year ended December 31, 2019, we had income before income taxes of $22.4 million compared to $14.8 million for the year ended December 31, 2018. Net income was $15.2 million, or $0.90 per diluted share, for the year ended December 31, 2019 compared to $9.8 million, or $0.59 per diluted share, for 2018. Diluted weighted average shares outstanding were $16.9 million for the year ended December 31, 2019 compared to $16.7 million for the year ended December 31, 2018.
Revenue
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Years ended December 31,
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2019
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2018
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(Dollars in thousands)
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Workforce Excellence
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$
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329,795
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$
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316,814
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Business Transformation Services
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253,495
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198,346
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$
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583,290
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$
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515,160
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Workforce Excellence revenue increased $13.0 million or 4.1% during the year ended December 31, 2019 compared to 2018. The increase in revenue is comprised of the following:
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a $16.6 million net increase in revenue in our Managed Learning Services practice primarily due to the following:
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a $5.1 million increase in revenue from the IC Axon business acquired on May 1, 2018;
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a $10.2 million net increase in revenue for managed learning and training content development services primarily due to new training outsourcing contracts; and
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a $1.3 million increase in vocational skills training services provided to the UK government.
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a $1.9 million net increase in revenue in our Engineering & Technical Services practice primarily due to an increase in chemical demilitarization training services for the U.S. government and an increase in disaster relief services, partially offset by a net decrease in engineering and technical training services.
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These increases were offset by a $5.5 million net decrease in revenue due to changes in foreign currency exchange rates.
Business Transformation Services revenue increased $55.1 million or 27.8% during the year ended December 31, 2019 compared to 2018. The net increase in revenue is comprised of the following:
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a $57.7 million net increase in our Sales Enablement practice primarily due to the following:
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a $49.1 million increase due to incremental revenue contributed by the TTi Global and TTi Europe acquisitions completed on December 1, 2018 and August 7, 2018, respectively; and
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a $8.6 million net increase in automotive sales training services largely due to new vehicle launch events and other new projects for automotive clients.
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a $0.6 million net decrease in revenue in our Organizational Development practice primarily due to a decline in human capital management system implementation services, partially offset by an increase in strategic consulting services.
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These revenue increases were offset by a $2.0 million net decrease in revenue due to changes in foreign currency exchange rates.
Gross profit
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Years ended December 31,
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2019
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2018
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% Revenue
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% Revenue
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(Dollars in thousands)
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Workforce Excellence
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$
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55,855
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16.9%
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$
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50,875
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16.1%
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Business Transformation Services
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33,358
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13.2%
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26,868
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13.5%
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$
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89,213
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15.3%
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$
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77,743
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15.1%
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Workforce Excellence gross profit of $55.9 million, or 16.9%, of revenue for the year ended December 31, 2019 increased by $5.0 million, or 9.8%, compared to gross profit of $50.9 million or 16.1% of revenue for the year ended December 31, 2018. The net increase in gross profit is primarily due to the following:
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a $4.3 million net increase in gross profit in our Managed Learning Services practice primarily due to the revenue increases noted above, partially offset by a decline in gross profit for our vocational skills training services provided to the UK government due to a change in the funding model; and
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a $1.6 million net increase in gross profit in our Engineering & Technical Services practice primarily due to the revenue increases noted above, as well as improved profitability in our alternative fuels business; partially offset by
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a $0.9 million net decrease in gross profit due to changes in foreign currency exchange rates.
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Business Transformation Services gross profit of $33.4 million, or 13.2%, of revenue for the year ended December 31, 2019 increased by $6.5 million, or 24.2%, when compared to gross profit of $26.9 million, or 13.5%, of revenue for the year ended December 31, 2018. The increase is primarily due to $4.6 million of gross profit contributed by the acquired TTi business, a $0.6 million increase in gross profit in our Sales Enablement practice, and a $1.3 million increase in gross profit in our Organizational Development practice.
General and administrative expenses
General and administrative expenses increased $9.6 million or 17.6% from $54.8 million for the year ended December 31, 2018 to $64.5 million for the year ended December 31, 2019. The increase in general and administrative expenses is primarily due to a $4.5 million increase in G&A expense associated with the acquired TTi businesses and a $2.0 million increase due to internal labor costs that were capitalized in connection with our financial system implementation in 2018 but that are included in G&A expense in 2019. In addition, there was a $2.8 million increase in bad debt expense primarily due to an additional reserve of $2.2 million recognized in the fourth quarter of 2019 resulting from a settlement agreement relating to outstanding accounts receivable on a contract that was previously terminated by a foreign oil and gas client in 2017. There was also a $0.3 million net increase in miscellaneous other G&A expenses largely due to an increase in external accounting and tax consulting fees.
Sales and marketing expenses
Sales and marketing expenses increased $3.1 million or 64.1% from $4.8 million for the year ended December 31, 2018 to $7.9 million for the year ended December 31, 2019. The increase in sales and marketing expenses is primarily due to labor and benefits expense relating to the hiring of additional business development personnel as well as marketing personnel, some of which represents new investments and some of which results from centralizing marketing resources that were previously recorded in cost of revenue.
Restructuring charges
Restructuring expense were $1.6 million and $2.9 million for the years ended December 31, 2019 and 2018, respectively. In connection with the acquisition of TTi Global, Inc. in December 2018, we initiated restructuring and transition activities in the first quarter of 2019 to reduce costs and eliminate redundant positions to realize synergies with the acquired business. We recognized restructuring charges of $1.6 million during the year ended December 31, 2019 relating to these restructuring activities. During the year ended December 31, 2018, we recognized $2.9 million of restructuring charges in connection with the reorganization that was initiated in December 2017.
Gain on change in fair value of contingent consideration, net
During the years ended December 31, 2019 and 2018, we recognized a net gain of $0.7 million and $4.4 million, respectively, on the change in fair value of contingent consideration related to acquisitions. The gains are due to lower earnings for the acquired businesses compared to our original forecasts, resulting in a reversal of the contingent consideration liabilities. See Note 3 to the Consolidated Financial Statements for a detailed discussion of the accounting for the changes in fair value of contingent consideration during the year ended December 31, 2019.
Interest expense
Interest expense increased $3.1 million to $6.1 million for the year ended December 31, 2019 compared to $2.9 million for the year ended December 31, 2018. The net increase is due to a $2.0 million increase in interest expense due to both an increase in interest rates and higher borrowings under the Credit Agreement, as well as a $1.1 million non-recurring reversal of an interest accrual during the second quarter of 2018 related to an unremitted value-added tax associated with prior year client billings which was favorably settled during the second quarter of 2018.
Other income (expense)
Other income was $0.4 million compared to other expense of $1.9 million for the years ended December 31, 2019 and 2018, respectively. The increase in other income was primarily due to a $1.6 million decrease in foreign currency losses primarily related to the effect of exchange rates on intercompany receivables and payables and third party receivables and payables that are denominated in currencies other than the functional currency of our legal entities. There was also a net $0.8 million improvement in other income due to a $0.5 million gain in the third quarter of 2019 related to a divested business for which a $0.3 million loss on disposal was included in other expense during the third quarter of 2018. In addition, there was a $0.4 million increase in miscellaneous other income. Partially offsetting these improvements was a $0.4 million loss on a litigation settlement, including legal costs, during the fourth quarter of 2019, which is included in other income (expense).
Gain on sale of business
On October 1, 2019, we sold our tuition program management business pursuant to an Asset Purchase Agreement with Bright Horizons Children's Centers LLC (the "buyer"). The purchase price was $20.0 million which was paid on closing, other than $1.5 million which is being held in escrow to secure possible indemnification claims pursuant to the terms of an escrow agreement which expires October 1, 2020. An additional $0.1 million was paid to the buyer in January 2020 based on the final calculation of assumed liabilities as defined in the asset purchase agreement. We recognized a pre-tax gain of $12.1 million, net of $0.1 million of direct selling costs, on the sale of the business. The gain recorded represents the difference between the purchase price and the carrying value of the business, which primarily included goodwill of $7.7 million.
Income taxes
Income tax expense was $7.2 million for the year ended December 31, 2019 compared to $4.9 million for the year ended December 31, 2018. Our effective income tax rate was 32.1% and 33.4% for the years ended December 31, 2019 and 2018, respectively. The decrease in the effective income tax rate in 2019 compared to 2018 is primarily due to a change in the mix of income from higher to lower taxing jurisdictions. See Note 10 to the accompanying Consolidated Financial Statements for further information regarding income taxes.
Results of Operations for Fiscal 2018 compared to 2017
For a comparison of our results of operations for the years ended December 31, 2018 and 2017, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on April 1, 2019.
Liquidity and Capital Resources
Working Capital
For the year ended December 31, 2019, our working capital decreased $11.0 million from $103.9 million at December 31, 2018 to $92.9 million at December 31, 2019. We believe that cash generated from operations and borrowings available under our Credit Agreement ($25.8 million of available borrowings as of December 31, 2019 based on our consolidated leverage ratio) will be sufficient to fund our working capital and other requirements for at least the next twelve months.
As of December 31, 2019, the amount of cash held outside of the U.S. by foreign subsidiaries was $7.6 million. The Tax Cuts and Jobs Act of 2017 includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest these earnings, as well as our capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant, additional taxes related to such amounts.
Share 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. Repurchases are made at management’s discretion in accordance with applicable federal securities law. The amount and timing of share repurchases depend on a variety of factors, including market conditions and prevailing stock prices. The share repurchase authorization does not obligate us to acquire any specific number of shares in any period, and may be modified, suspended or discontinued at any time at the discretion of our Board of Directors. During the year ended December 31, 2019, we did not repurchase shares of our common stock in the open market. During the years ended 2018 and 2017, we repurchased approximately 354,000 and 182,000 shares, respectively, of our common stock in the open market for a total cost of approximately $8.0 million and $4.3 million respectively. As of December 31, 2019, there was approximately $3.8 million available for future repurchases under the current buyback program. There is no expiration date for the repurchase program.
Acquisition-Related Payments
As of December 31, 2019, we didn't have any remaining contingent consideration liabilities outstanding in connection with previously completed acquisitions.
Proceeds from Divestitures
In connection with the sale of our tuition program management business which is discussed further in Note 4 to the Consolidated Financial Statements, we received cash proceeds of $18.7 million in October 2019. In addition, $1.5 million of the purchase price is being held in escrow to secure possible indemnification claims pursuant to the terms of an escrow agreement which expires October 1, 2020.
In connection with the sale of our Alternative Fuels Division effective January 1, 2020, we received upfront cash proceeds of $1.5 million on December 31, 2019 and $3.5 million of cash proceeds on January 2, 2020. In addition, up to $0.5 million of the purchase price is subject to the achievement of certain milestones under an assigned contract through the period December 31, 2021. The purchase price is also subject to adjustment for closing net working capital which is expected to be finalized during the first quarter of 2020.
Significant Customers & Concentration of Credit Risk
We have a market concentration of revenue in both the automotive sector and the financial services & insurance sector. Revenue from the automotive industry accounted for approximately 28%, 23% and 22% of our consolidated revenue for the years ended December 31, 2019, 2018 and 2017, respectively. In addition, we have a concentration of revenue from a single automotive customer, which accounted for approximately 13%, 14% and 13% of our consolidated revenue for the years ended December 31, 2019 , 2018 and 2017, respectively. As of December 31, 2019, accounts receivable from a single automotive customer totaled $17.2 million, or 13% of our consolidated accounts receivable balance.
Revenue from the financial services & insurance industry accounted for approximately 16%, 19% and 20% of our consolidated revenue for the years ended December 31, 2019, 2018 and 2017, respectively. In addition, we have a concentration of revenue from a single financial services customer, which accounted for approximately 10%, 13% and 14% of our consolidated revenue for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, billed and unbilled accounts receivable from a single financial services customer totaled $15.4 million, or 8%, of our consolidated accounts receivable and unbilled revenue balances. No other single customer accounted for more than 10% of our consolidated revenue in 2019 or consolidated accounts receivable balance as of December 31, 2019.
Cash Flows
Year ended December 31, 2019 compared to the year ended December 31, 2018
Our cash balance decreased $5.3 million from $13.4 million as of December 31, 2018 to $8.2 million as of December 31, 2019. The decrease in cash during the year ended December 31, 2019 resulted from cash provided by operating activities of $13.4 million, cash provided by investing activities of $16.0 million, cash used in financing activities of $32.3 million and a $2.3 million negative effect due to exchange rate changes on cash.
Cash provided by operating activities was $13.4 million for the year ended December 31, 2019 compared to $11.2 million in 2018. The increase in cash provided by operating activities is primarily due to an increase in net income and non-cash add backs to net income and favorable changes in working capital accounts during 2019 compared to 2018.
Cash provided by investing activities was $16.0 million for the year ended December 31, 2019 compared to cash used in investing activities of $61.8 million in 2018. The increase in cash from investing activities is due to $20.0 million of cash proceeds from divestitures in 2019 compared to $55.3 million of cash used to complete acquisitions in 2018. In addition, there was $0.9 million decrease in capitalized software development costs in 2019 compared to 2018.
Cash used in financing activities was $32.3 million for the year ended December 31, 2019 compared to cash provided by financing activities of $40.0 million in 2018. The decrease in cash from financing activities is primarily due to $33.6 million of net repayments of borrowings under our Credit Agreement in 2019 compared to $50.9 million of net borrowings on our line of credit during 2018 to fund acquisitions. In addition, there was a $8.5 million decrease in cash used for open market share repurchases in 2019 compared to 2018 and a $3.2 million change in negative cash book balances during 2019 compared to 2018.
Cash Flow Comparison for Fiscal 2018 compared to 2017
For a comparison of our cash flows for the years ended December 31, 2018 and 2017, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on April 1, 2019.
Debt
On November 30, 2018, we entered into a Credit Agreement with PNC Bank, National Association, as administrative agent for a syndicate of lenders (the “Credit Agreement”), replacing the prior credit agreement with Wells Fargo dated December 21, 2016, as amended on April 28, 2018 and June 29, 2018 (the "Original Credit Agreement"). The Credit Agreement provides for a revolving credit facility, which expires on November 29, 2023, and consists of: a revolving loan facility with a borrowing limit of $200 million, including a $20 million sublimit for foreign borrowings; an accordion feature allowing the Company to request increases in commitments to the credit facility by up to an additional $100 million; a $20 million letter of credit sublimit; and a swingline loan credit sublimit of $20 million. The obligations under the Credit Agreement are guaranteed by certain of the Company's subsidiaries (the "Guarantors"). As collateral security under the Credit Agreement and the guarantees thereof, the Company and
the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in substantially all of their tangible and intangible assets. The proceeds of the Credit Agreement were used, in part, to repay in full all outstanding borrowings under the Original Credit Agreement, and additional proceeds of the revolving credit facility are expected to be used for working capital and other general corporate purposes of the Company and its subsidiaries, including the issuance of letters of credit and Permitted Acquisitions, as defined.
Borrowings under the Credit Agreement may be in the form of Base Rate loans or Euro-Rate loans, at the option of the borrowers, and bear interest at the Base Rate plus 0.25% to 1.25% or the Daily LIBOR Rate plus 1.25% to 2.25% respectively. Base Rate loans will bear interest at a fluctuating per annum Base Rate equal to the highest of (i) the Overnight Bank Funding Rate, plus 0.5%, (ii) the Pime Rate, and (iii) the Daily LIBOR Rate, plus 100 basis points (1.0%); plus an Applicable Margin. Determination of the Applicable Margin is based on a pricing grid that is generally dependent upon the Company's Leverage Ratio (as defined) as of the end of the fiscal quarter for which consolidated financial statements have been most recently delivered. We may prepay the revolving loan, in whole or in part, at any time without premium or penalty, subject to certain conditions.
The Credit Agreement contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stock dividends, and (vii) certain other restrictive agreements. On June 28, 2019, we entered into an amendment to the Credit Agreement that requires the company to maintain compliance with a maximum leverage ratio of 3.75 to 1.0 for the fiscal quarter ended June 30, 2019, 3.5 to 1.0 for the fiscal quarter ending September 30, 2019 and 3.0 to 1.0 for the fiscal quarters ended December 31, 2019 and thereafter, and a minimum interest expense coverage ratio of 3.0 to 1.0. The leverage ratio is computed by dividing our Funded Debt by our Consolidated EBITDA, as those terms are defined in the Credit Agreement, for the trailing four fiscal quarters, and the interest coverage ratio is computed by dividing our Consolidated EBITDA by our Consolidated Interest Expense for the trailing four fiscal quarters. As of December 31, 2019, our leverage ratio was 2.3 to 1.0 and our interest expense ratio was 6.1 to 1.0, each of which was in compliance with the Credit Agreement.
As of December 31, 2019, we had $82.9 million of borrowings outstanding and $25.8 million of available borrowings under the revolving credit facility based on our consolidated leverage ratio. For the years ended December 31, 2019 and 2018, the weighted average interest rate on our borrowings was 4.5% and 4.0%, respectively. There were $1.2 million of unamortized debt issue costs related to the Credit Agreement as of December 31, 2019 which are being amortized to interest expense over the term of the Credit Agreement and are included in Other assets on our consolidated balance sheet.
Contractual Payment Obligations
We enter into various agreements that result in contractual obligations in connection with our business activities. These obligations primarily relate to debt and interest payments under our Credit Agreement, operating leases and purchase commitments under non-cancelable contracts for certain products and services. The following table summarizes our total contractual payment obligations as of December 31, 2019 (in thousands):
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Payments due in
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2020
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2021-2022
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2023-2024
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After
2024
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|
Total
|
Operating lease commitments
|
|
8,411
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|
|
11,703
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|
|
8,268
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|
|
6,060
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|
|
34,442
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|
Purchase commitments (1)
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|
8,175
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|
|
9,252
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|
|
1,878
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|
|
—
|
|
|
19,305
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|
Total
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|
$
|
16,586
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|
|
$
|
20,955
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|
|
$
|
10,146
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|
|
$
|
6,060
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|
|
$
|
53,747
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|
|
|
|
(1)
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Excludes purchase orders for goods and services entered into by us in the ordinary course of business, which are non-binding and subject to amendment or termination within a reasonable notification period.
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Off-Balance Sheet Commitments
As of December 31, 2019, we had outstanding letters of credit totaling approximately $0.1 million, which expire in 2022. In addition, as of December 31, 2019, we had three outstanding performance bonds totaling $12.4 million primarily for contracts in our alternative fuels business. We do not have any off-balance sheet financing except for short-term operating leases and letters of credit entered into in the normal course of business.
Management Discussion of Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, impairment of intangible assets, including goodwill, valuation of contingent consideration for business acquisitions, and income taxes, which are summarized below. In addition, Note 1 to the accompanying Consolidated Financial Statements includes further discussion of our significant accounting policies.
Revenue Recognition
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. 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 (decrease) to revenue of $1.8 million, $1.5 million, and $(0.8) million for the years ended December 31, 2019, 2018 and 2017, 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.
Contract Related Assets and Liabilities
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 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 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 year ended December 31, 2019 were not materially impacted by any other factors, except for a significant decrease in unbilled revenue as of December 31, 2019 compared to 2018 due to a delay in billings at the end of 2018 in connection with the implementation of a new ERP system in the fourth quarter of 2018.
Impairment of Intangible Assets, Including Goodwill
We review goodwill for impairment annually as of October 1st and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We test goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP. We have four reporting units for purposes of goodwill impairment testing, which represent our four practices which are one level below our operating segments.
Our goodwill balances as of December 31, 2019 for each reporting unit were as follows (in thousands):
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Reporting Unit
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|
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Managed Learning Services
|
$
|
75,209
|
|
Engineering & Technical Services
|
42,804
|
|
Sales Enablement
|
7,516
|
|
Organizational Development
|
46,034
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|
|
$
|
171,563
|
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ASC 350 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. Under ASC 350, an entity is not required to perform a quantitative goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount. For our annual goodwill impairment tests as of October 1, 2019 and 2018, we performed a quantitative goodwill impairment test and concluded that the fair values of each of our reporting units exceeded their respective carrying values. Each of the reporting units had a significant excess fair value over its respective carrying value, with the exception of the Organizational Development reporting unit which had a fair value that exceeded its carrying value by 11% as of the October 1, 2019 testing date. The Organizational Development reporting unit has a significant amount of goodwill attributable to previously completed acquisitions. If it continues to experience declines, fails to meet its financial
projections, or if other adverse market conditions occur which would lower the fair value of the business, we could incur material goodwill and other intangible asset impairment charges in the future.
In the quantitative impairment test, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we record an impairment loss equal to the difference, however, the loss recognized would not exceed the total amount of goodwill allocated to the reporting unit.
We determine the fair value of our reporting units using both an income approach and a market approach, and weigh both approaches to determine the fair value of each reporting unit. Under the income approach, we perform a discounted cash flow analysis which incorporates management’s cash flow projections over a five-year period and a terminal value is calculated by applying a capitalization rate to terminal year projections based on an estimated long-term growth rate. The five-year projected cash flows and calculated terminal value are discounted using a weighted average cost of capital (“WACC”) which takes into account the costs of debt and equity. The cost of equity is based on the risk-free interest rate, equity risk premium, industry and size equity premiums and any additional market equity risk premiums as deemed appropriate for each reporting unit. To arrive at a fair value for each reporting unit, the terminal value is discounted by the WACC and added to the present value of the estimated cash flows over the discrete five-year period. There are a number of other variables which impact the projected cash flows, such as expected revenue growth and profitability levels, working capital requirements, capital expenditures and related depreciation and amortization. Under the market approach, we perform a comparable public company analysis and apply revenue and earnings multiples from the identified set of companies to the reporting unit’s actual and forecasted financial performance to determine the fair value of each reporting unit. We evaluate the reasonableness of the fair value calculations of our reporting units by reconciling the total of the fair values of all of our reporting units to our total market capitalization, and adjusting for an appropriate control premium. In addition, we make certain judgments in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.
Valuation of Contingent Consideration for Business Acquisitions
Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these 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. We believe our estimates and assumptions are reasonable; however, there is significant judgment involved. At each reporting date, the contingent consideration obligation are revalued to estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to 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.
Income Taxes
We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The measurement of deferred taxes often involves an exercise of judgment related to the computation and realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken, and the resulting tax basis, are more likely than not to be sustained if they are audited by taxing authorities. We establish accruals for uncertain tax positions taken or expected to be taken in a tax return 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. A number of years may elapse before a particular matter, for which we have or have not established an accrual, is audited and finally resolved. Favorable or unfavorable adjustment of the accrual for any particular issue would be recognized as an increase or decrease to our income tax expense in the period of a change in facts and circumstances.
In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets may not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future income during the periods in which temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon these factors, we believe it is more likely than not that we will realize the benefits of our deferred tax assets, net of the valuation allowance. The valuation allowance primarily relates to both foreign and domestic net operating loss carryforwards for which we do not believe the benefits may be realized.
The above matters, and others, involve the exercise of significant judgment. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.
Accounting Standards Issued and Adopted
We discuss recently issued and adopted accounting standards in Note 1 to the accompanying Consolidated Financial Statements.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
Our primary exposure to market risk relates to changes in interest rates and foreign currency exchange rates.
Interest Rate Risk
We are exposed to interest rate risk related to our outstanding debt obligations. On November 30, 2018, we entered into a new credit agreement with a bank which provides for a five-year secured revolving loan facility in an aggregate principal amount of up to $200.0 million. As of December 31, 2019, we had $82.9 million outstanding under the credit facility. We may draw funds from our revolving credit facility under interest rates based on either the Federal Funds Rate or the Adjusted London Interbank Offered Rate (“LIBOR rate”). If these rates increase significantly, our costs to borrow these funds will also increase. In an effort to manage our exposure to this risk, we have entered into interest rate derivative contracts. As of December 31, 2019, we did not have any interest rate hedging instruments in place but may enter into new hedging instruments in the future to mitigate our exposure to interest rate risk.
We estimate that the fair value of our borrowings under our revolving credit facility approximates its carrying value as of December 31, 2019 as it bears interest at variable rates.
Foreign Currency Exchange Rate Risk
We operate in various foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our foreign currency exposure primarily relates to intercompany receivables and payables and third party receivables and payables that are denominated in currencies other than the functional currency of our legal entities. Our largest foreign currency exposure is unsettled intercompany payables and receivables which are reviewed on a regular basis. Gains and losses from foreign currency transactions are included in "Other income (expense)" on our Consolidated Statements of Operations. We had foreign currency transaction losses totaling $0.7 million, $2.3 million and $0.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Most of our foreign subsidiaries operate in a currency other than the United States dollar; therefore, increases or decreases in the value of the U.S. dollar against other major currencies will affect our operating results and the value of our balance sheet items denominated in foreign currencies. Our most significant exposures to translation risk relates to functional currency assets and liabilities that are denominated in the British Pound Sterling, Euro and Canadian dollar. The changes in the net investments of foreign subsidiaries whose currencies are denominated in currencies other than the U.S. dollar are reflected in "Foreign currency translation adjustments” on our Consolidated Statements of Comprehensive Income. We have not used any exchange rate hedging programs to mitigate the effect of exchange rate fluctuations.
Item 8: Financial Statements and Supplementary Data
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Page
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Financial Statements of GP Strategies Corporation and Subsidiaries:
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Reports of Independent Registered Public Accounting Firm
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Consolidated Balance Sheets – December 31, 2019 and 2018
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Consolidated Statements of Operations – Years ended December 31, 2019, 2018 and 2017
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Consolidated Statements of Comprehensive Income – Years ended December 31, 2019, 2018 and 2017
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Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2019, 2018 and 2017
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Consolidated Statements of Cash Flows – Years ended December 31, 2019, 2018 and 2017
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Notes to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
GP Strategies Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of GP Strategies Corporation and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2020 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Notes 1 and 14 to the consolidated financial statements, effective January 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, Leases. This change was adopted using the modified retrospective method.
As discussed in Notes 1 and 2 to the consolidated financial statements, effective January 1, 2018, the Company adopted FASB ASC Topic 606, Revenue from Contracts with Customers. This change was adopted using the modified retrospective method.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We or our predecessor firms have served as the Company’s auditor since 1970.
Baltimore, Maryland
March 10, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
GP Strategies Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited GP Strategies Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 10, 2020 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses were identified and included in management’s assessment:
Our risk assessment process was not effective in considering changes to the business operations, personnel and other factors affecting certain financial reporting processes, and we did not have sufficient resources available to perform the risk assessment process and implement controls in the requisite timeframe. This resulted in:
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•
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Ineffective program change management controls over program and data changes affecting the enterprise resource planning (ERP) financial IT applications. Specifically, the change management process was not designed properly to demonstrate the completeness and approval of all configuration changes that have occurred. The related detective control to monitor changes was not implemented. Also, the control over access to migrate changes into the production environment was determined to be ineffective.
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•
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Ineffective user access controls to adequately restrict user access to financial applications and related data commensurate with job responsibilities. Management did not perform appropriate user access reviews.
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•
|
Ineffective general information technology controls over the ERP system resulting in ineffective automated controls and manual controls that are dependent upon the completeness and accuracy of information derived from the ERP system. This includes automated and manual controls over all significant accounts presented in the consolidated financial statements.
|
|
|
•
|
Ineffective risk assessment to ensure controls were designed and implemented to respond to the risks within the revenue and human resources processes company-wide as well as other processes specific to only TTi Global, Inc., which was acquired on November 30, 2018.
|
The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Baltimore, Maryland
March 10, 2020
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2019 and 2018
(In thousands, except shares and par value per share)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
8,159
|
|
|
$
|
13,417
|
|
Accounts and other receivables, less allowance for doubtful accounts of $1,132 in
2019 and $2,034 in 2018
|
|
131,852
|
|
|
107,673
|
|
Unbilled revenue
|
|
57,229
|
|
|
80,764
|
|
Prepaid expenses and other current assets
|
|
19,115
|
|
|
19,048
|
|
Total current assets
|
|
216,355
|
|
|
220,902
|
|
Property, plant and equipment, net
|
|
5,803
|
|
|
5,859
|
|
Operating lease right-of-use assets
|
|
27,251
|
|
|
—
|
|
Goodwill
|
|
171,563
|
|
|
176,124
|
|
Intangible assets, net
|
|
16,344
|
|
|
20,933
|
|
Deferred tax assets
|
|
1,121
|
|
|
1,077
|
|
Other assets, net
|
|
10,465
|
|
|
9,843
|
|
|
|
$
|
448,902
|
|
|
$
|
434,738
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
92,332
|
|
|
93,254
|
|
Current portion of operating lease liability
|
|
7,871
|
|
|
—
|
|
Deferred revenue
|
|
23,234
|
|
|
23,704
|
|
Total current liabilities
|
|
123,437
|
|
|
116,958
|
|
Long-term debt
|
|
82,870
|
|
|
116,500
|
|
Long-term portion of operating lease liability
|
|
22,159
|
|
|
—
|
|
Deferred tax liabilities
|
|
7,439
|
|
|
8,817
|
|
Other noncurrent liabilities
|
|
3,083
|
|
|
5,894
|
|
Total liabilities
|
|
238,988
|
|
|
248,169
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share;
|
|
|
|
|
|
|
Authorized 10,000,000 shares; no shares issued
|
|
—
|
|
|
—
|
|
Common stock, par value $0.01 per share; Authorized 35,000,000 shares;
issued 17,222,781 shares in 2019 and 2018
|
|
172
|
|
|
172
|
|
Additional paid-in capital
|
|
102,319
|
|
|
105,850
|
|
Retained earnings
|
|
131,228
|
|
|
116,039
|
|
Treasury stock, at cost (190,115 shares in 2019 and 603,041 shares in 2018)
|
|
(4,070
|
)
|
|
(13,802
|
)
|
Accumulated other comprehensive loss
|
|
(19,735
|
)
|
|
(21,690
|
)
|
Total stockholders’ equity
|
|
209,914
|
|
|
186,569
|
|
|
|
$
|
448,902
|
|
|
$
|
434,738
|
|
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2019, 2018 and 2017
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Revenue
|
|
$
|
583,290
|
|
|
$
|
515,160
|
|
|
$
|
509,208
|
|
Cost of revenue
|
|
494,077
|
|
|
437,417
|
|
|
427,181
|
|
Gross profit
|
|
89,213
|
|
|
77,743
|
|
|
82,027
|
|
General and administrative expenses
|
|
64,492
|
|
|
54,848
|
|
|
55,753
|
|
Sales and marketing expenses
|
|
7,875
|
|
|
4,798
|
|
|
1,666
|
|
Restructuring charges
|
|
1,639
|
|
|
2,930
|
|
|
3,317
|
|
Gain on change in fair value of contingent consideration, net
|
|
677
|
|
|
4,438
|
|
|
1,620
|
|
Gain on sale of business
|
|
12,126
|
|
|
—
|
|
|
—
|
|
Operating income
|
|
28,010
|
|
|
19,605
|
|
|
22,911
|
|
Interest expense
|
|
6,058
|
|
|
2,945
|
|
|
3,132
|
|
Other income (expense) (including interest income of $50 in 2019, $8 in 2018 and $43 in 2017)
|
|
417
|
|
|
(1,897
|
)
|
|
(90
|
)
|
Income before income taxes
|
|
22,369
|
|
|
14,763
|
|
|
19,689
|
|
Income tax expense
|
|
7,180
|
|
|
4,927
|
|
|
6,798
|
|
Net income
|
|
$
|
15,189
|
|
|
$
|
9,836
|
|
|
$
|
12,891
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
16,827
|
|
|
16,608
|
|
|
16,748
|
|
Diluted weighted average shares outstanding
|
|
16,861
|
|
|
16,696
|
|
|
16,873
|
|
|
|
|
|
|
|
|
Per common share data:
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.90
|
|
|
$
|
0.59
|
|
|
$
|
0.77
|
|
Diluted earnings per share
|
|
$
|
0.90
|
|
|
$
|
0.59
|
|
|
$
|
0.76
|
|
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2019, 2018 and 2017
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
|
$
|
15,189
|
|
|
$
|
9,836
|
|
|
$
|
12,891
|
|
Foreign currency translation adjustments
|
|
1,955
|
|
|
(6,914
|
)
|
|
6,686
|
|
Change in fair value of interest rate cap, net of tax
|
|
—
|
|
|
142
|
|
|
(142
|
)
|
Change in fair value of interest rate swap, net of tax
|
|
—
|
|
|
(63
|
)
|
|
63
|
|
Comprehensive income
|
|
$
|
17,144
|
|
|
$
|
3,001
|
|
|
$
|
19,498
|
|
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years ended December 31, 2019, 2018 and 2017
(In thousands, except for par value per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
($0.01 par)
|
|
Additional
paid-in capital
|
|
Retained
earnings
|
|
Treasury
stock at cost
|
|
Accumulated
other
comprehensive
loss
|
|
Total
stockholders’
equity
|
Balance at December 31, 2016
|
|
$
|
172
|
|
|
$
|
106,803
|
|
|
$
|
93,708
|
|
|
$
|
(11,628
|
)
|
|
$
|
(21,462
|
)
|
|
$
|
167,593
|
|
Net income
|
|
—
|
|
|
—
|
|
|
12,891
|
|
|
—
|
|
|
—
|
|
|
12,891
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,686
|
|
|
6,686
|
|
Change in fair value of interest rate cap, net of tax
|
|
|
|
|
|
|
|
|
|
(142
|
)
|
|
(142
|
)
|
Change in fair value of interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
63
|
|
|
63
|
|
Repurchases of common stock in the open market
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,302
|
)
|
|
—
|
|
|
(4,302
|
)
|
Stock-based compensation expense
|
|
—
|
|
|
3,589
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,589
|
|
Shares withheld in exchange for tax withholding payments on stock-based compensation
|
|
—
|
|
|
(1,168
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,168
|
)
|
Issuance of stock for employer contributions to retirement plan
|
|
—
|
|
|
40
|
|
|
—
|
|
|
2,685
|
|
|
—
|
|
|
2,725
|
|
Net issuances of stock pursuant to stock compensation plans and other
|
|
—
|
|
|
(2,008
|
)
|
|
—
|
|
|
2,127
|
|
|
—
|
|
|
119
|
|
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
|
|
—
|
|
|
—
|
|
|
9,836
|
|
|
—
|
|
|
—
|
|
|
9,836
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,914
|
)
|
|
(6,914
|
)
|
Change in fair value of interest rate cap, net of tax
|
|
|
|
|
|
|
|
|
|
142
|
|
|
142
|
|
Change in fair value of interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
(63
|
)
|
Repurchases of common stock in the open market
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,993
|
)
|
|
—
|
|
|
(7,993
|
)
|
Stock-based compensation expense
|
|
—
|
|
|
1,350
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,350
|
|
Shares withheld in exchange for tax withholding payments on stock-based compensation
|
|
—
|
|
|
(416
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(416
|
)
|
Issuance of stock for employer contributions to retirement plan
|
|
—
|
|
|
(867
|
)
|
|
—
|
|
|
3,827
|
|
|
—
|
|
|
2,960
|
|
Net issuances of stock pursuant to stock compensation plans and other
|
|
—
|
|
|
(1,473
|
)
|
|
—
|
|
|
1,482
|
|
|
—
|
|
|
9
|
|
Balance at December 31, 2018
|
|
$
|
172
|
|
|
$
|
105,850
|
|
|
$
|
116,039
|
|
|
$
|
(13,802
|
)
|
|
$
|
(21,690
|
)
|
|
$
|
186,569
|
|
Net income
|
|
—
|
|
|
—
|
|
|
15,189
|
|
|
—
|
|
|
—
|
|
|
15,189
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,955
|
|
|
1,955
|
|
Stock-based compensation expense
|
|
—
|
|
|
2,617
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,617
|
|
Shares withheld in exchange for tax withholding payments on stock-based compensation
|
|
—
|
|
|
(278
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(278
|
)
|
Issuance of stock for employer contributions to retirement plan
|
|
—
|
|
|
(2,251
|
)
|
|
—
|
|
|
5,229
|
|
|
—
|
|
|
2,978
|
|
Net issuances of stock pursuant to stock compensation plans and other
|
|
—
|
|
|
(3,619
|
)
|
|
—
|
|
|
4,503
|
|
|
—
|
|
|
884
|
|
Balance at December 31, 2019
|
|
$
|
172
|
|
|
$
|
102,319
|
|
|
$
|
131,228
|
|
|
$
|
(4,070
|
)
|
|
$
|
(19,735
|
)
|
|
$
|
209,914
|
|
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2019, 2018 and 2017
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,189
|
|
|
$
|
9,836
|
|
|
$
|
12,891
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Gain on change in fair value of contingent consideration, net
|
|
(677
|
)
|
|
(4,438
|
)
|
|
(1,620
|
)
|
Gain on sale of business
|
|
(12,126
|
)
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
9,482
|
|
|
7,921
|
|
|
6,974
|
|
Non-cash compensation expense
|
|
5,595
|
|
|
4,310
|
|
|
6,314
|
|
Deferred income taxes
|
|
(1,086
|
)
|
|
876
|
|
|
(313
|
)
|
Changes in other operating items, net of acquired amounts:
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables
|
|
(23,803
|
)
|
|
23,092
|
|
|
(10,977
|
)
|
Unbilled revenue
|
|
23,473
|
|
|
(36,868
|
)
|
|
(1,893
|
)
|
Prepaid expenses and other current assets
|
|
421
|
|
|
705
|
|
|
(2,297
|
)
|
Accounts payable, accrued expenses and net change in
operating leases
|
|
(4,859
|
)
|
|
8,110
|
|
|
15,392
|
|
Deferred revenue
|
|
(326
|
)
|
|
(2,094
|
)
|
|
2,520
|
|
Contingent consideration payments in excess of fair value on
acquisition date
|
|
—
|
|
|
—
|
|
|
(408
|
)
|
Other
|
|
2,117
|
|
|
(240
|
)
|
|
(323
|
)
|
Net cash provided by operating activities
|
|
13,400
|
|
|
11,210
|
|
|
26,260
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(2,315
|
)
|
|
(2,834
|
)
|
|
(2,734
|
)
|
Proceeds from sale of business
|
|
20,048
|
|
|
—
|
|
|
—
|
|
Acquisitions, net of cash acquired
|
|
850
|
|
|
(55,290
|
)
|
|
(11,111
|
)
|
Capitalized software development costs
|
|
(2,632
|
)
|
|
(3,544
|
)
|
|
(1,313
|
)
|
Other investing activities
|
|
—
|
|
|
(86
|
)
|
|
(295
|
)
|
Net cash provided by (used in) investing activities
|
|
15,951
|
|
|
(61,754
|
)
|
|
(15,453
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from (repayment of) short-term borrowings
|
|
—
|
|
|
(37,577
|
)
|
|
19,864
|
|
Proceeds from long-term debt
|
|
178,750
|
|
|
146,000
|
|
|
—
|
|
Repayments of long-term debt
|
|
(212,380
|
)
|
|
(57,500
|
)
|
|
(12,000
|
)
|
Contingent consideration payments
|
|
—
|
|
|
—
|
|
|
(4,657
|
)
|
Change in negative cash book balance
|
|
1,932
|
|
|
(1,278
|
)
|
|
(2,138
|
)
|
Repurchases of common stock
|
|
—
|
|
|
(8,522
|
)
|
|
(3,773
|
)
|
Tax withholding payments for employee stock-based compensation in
exchange for shares surrendered
|
|
(278
|
)
|
|
(416
|
)
|
|
(1,168
|
)
|
Premium paid on interest rate cap
|
|
—
|
|
|
—
|
|
|
(474
|
)
|
Cash proceeds from termination of interest rate derivatives
|
|
—
|
|
|
544
|
|
|
—
|
|
Payment of debt issuance costs
|
|
(303
|
)
|
|
(1,231
|
)
|
|
—
|
|
Other financing activities
|
|
—
|
|
|
10
|
|
|
120
|
|
Net cash provided by (used in) financing activities
|
|
(32,279
|
)
|
|
40,030
|
|
|
(4,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(2,330
|
)
|
|
319
|
|
|
685
|
|
Net change in cash
|
|
(5,258
|
)
|
|
(10,195
|
)
|
|
7,266
|
|
Cash at beginning of year
|
|
13,417
|
|
|
23,612
|
|
|
16,346
|
|
Cash at end of year
|
|
$
|
8,159
|
|
|
$
|
13,417
|
|
|
$
|
23,612
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,831
|
|
|
$
|
3,741
|
|
|
$
|
1,841
|
|
Income taxes
|
|
$
|
4,327
|
|
|
$
|
4,528
|
|
|
$
|
6,256
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
Accrued share repurchases
|
|
$
|
—
|
|
|
$
|
(529
|
)
|
|
$
|
529
|
|
Accrued contingent consideration
|
|
$
|
—
|
|
|
$
|
905
|
|
|
$
|
5,613
|
|
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
(1)
|
Description of Business and Significant Accounting Policies
|
Business
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.
FASB Codification
We follow generally accepted accounting principles (“GAAP”) set by the Financial Accounting Standards Board (“FASB”). References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as ASC.
Basis of Consolidation
The consolidated financial statements include the operations of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Significant Customers & Concentration of Credit Risk
We have a market concentration of revenue in both the automotive sector and financial services & insurance sector. Revenue from the automotive industry accounted for approximately 28%, 23% and 22% of our consolidated revenue for the years ended December 31, 2019, 2018 and 2017, respectively. In addition, we have a concentration of revenue from a single automotive customer, which accounted for approximately 13%, 14% and 13% of our consolidated revenue for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019 accounts receivable from a single automotive customer totaled $17.2 million, or 13%, of our consolidated accounts receivable balance.
Revenue from the financial services and insurance industry accounted for approximately 16%, 19% and 20% of our consolidated revenue for the years ended December 31, 2019, 2018 and 2017, respectively. In addition, we have a concentration of revenue from a single financial services customer, which accounted for approximately 10%, 13% and 14% of our consolidated revenue for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, billed and unbilled accounts receivable from a single financial services customer totaled $15.4 million, or 8%, of our consolidated accounts receivable and unbilled revenue balances.
No other single customer accounted for more than 10% of our consolidated revenue in 2019 or consolidated accounts receivable balance as of December 31, 2019.
Cash
We maintain our cash balances in bank accounts at various financial institutions. Outstanding checks which have been issued but not presented to the banks for payment in excess of amounts on deposit may create negative book cash balances. We transfer cash on an as-needed basis to fund these items as they clear the bank in subsequent periods. Such negative cash balances are included in accounts payable and accrued expenses and totaled $3.7 million and $1.8 million as of December 31, 2019 and 2018, respectively. Changes in negative book cash balances from period to period are reported as a financing activity in the consolidated statement of cash flows.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Allowance for Doubtful Accounts Receivable
Trade accounts receivable are recorded at invoiced amounts. We evaluate the collectability of trade accounts receivable based on a combination of factors. When we are aware that a specific customer may be unable to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, we evaluate the need to record a specific reserve for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due, historical collection experience and trends of past due accounts, write-offs and specific identification and review of past due accounts. Actual collections of trade receivables could differ from management’s estimates due to changes in future economic or industry conditions or specific customers’ financial conditions.
Activity in our allowance for doubtful accounts was comprised of the following for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
Beginning balance
|
|
$
|
2,034
|
|
|
$
|
2,492
|
|
|
$
|
1,091
|
|
Additions
|
|
2,871
|
|
|
234
|
|
|
1,720
|
|
Deductions
|
|
(3,773
|
)
|
|
(692
|
)
|
|
(319
|
)
|
Ending balance
|
|
$
|
1,132
|
|
|
$
|
2,034
|
|
|
$
|
2,492
|
|
During the fourth quarter ended December 31, 2017, we recognized a $1.3 million bad debt reserve related to accounts receivable on a contract with a foreign oil and gas client which was terminated. During the third quarter of 2017, we also recognized a $2.6 million revenue and gross profit reduction related to this contract due to a performance dispute resulting in an increase in estimated costs to complete the project. During the fourth quarter of 2019, we entered into a settlement agreement with the client and recognized an additional bad debt reserve of $2.2 million to reflect the accounts receivable at its recoverable amount as of December 31, 2019. The remaining accounts receivable, net of the reserve, totaling $1.6 million was collected in January 2020.
Foreign Currency Translation
The functional currencies of our international operations are the respective local currencies of the countries in which we operate. The translation of the foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rates prevailing during the year. The unrealized gains and losses resulting from such translation are included as a component of comprehensive income. Transaction gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in “Other income (expense)" on our Consolidated Statements of Operations. We had foreign currency transaction losses totaling $0.7 million, $2.3 million and $0.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Revenue Recognition
On January 1, 2018, we adopted FASB Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("Topic 606") 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. Further information regarding our revenue recognition, including our full accounting policy description, can be found in Note 2.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Contract Related Assets and Liabilities
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 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 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 twelve-month period ended December 31, 2019 were not materially impacted by any other factors, except for a significant decrease in unbilled contract receivables as of December 31, 2019 compared to 2018 due to higher unbilled balances at December 31, 2018 resulting from a delay in billings at the end of 2018 in connection with the implementation of a new ERP system in the fourth quarter of 2018.
Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, and the change in fair value of interest rate derivatives, net of tax.
Other Current Assets
Prepaid expenses and other current assets on our consolidated balance sheet include prepaid expenditures for goods or services before the goods are used or the services are received, inventories and work in progress on customer contracts. Prepaid expenses are charged to expense in the periods the benefits are realized. Inventories are stated at lower of cost or market. Provision is made to reduce excess and obsolete inventories to their estimated net realizable value. Costs included in work in progress on customer contracts are recognized to cost of revenue when the performance obligation is satisfied and revenue is recognized.
Property, Plant and Equipment
Property, plant and equipment are carried at cost (or fair value at acquisition date for assets obtained through business combinations). Major additions and improvements are capitalized, while maintenance and repairs which do not extend the lives of the assets are expensed as incurred. Gain or loss on the disposition of property, plant and equipment is recognized in operations when realized.
Depreciation of property, plant and equipment is recognized on a straight-line basis over the following estimated useful lives:
|
|
|
|
Class of assets
|
|
Useful life
|
Buildings and improvements
|
|
5 to 40 years
|
Machinery, equipment, and furniture and fixtures
|
|
3 to 10 years
|
Leasehold improvements
|
|
Shorter of asset life or term of lease
|
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized at the amount by which the carrying amount of the asset exceeds the fair value of the asset. Impairment of long-lived assets is assessed at the lowest level for which there are identifiable cash flows that are independent from other groups of assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Goodwill and Intangible Assets
Our intangible assets include amounts recognized in connection with acquisitions, including customer relationships, tradenames, technology and intellectual property. Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. Except for goodwill, we do not have any intangible assets with indefinite useful lives.
Goodwill represents the excess of costs over fair value of assets of businesses acquired. We review our goodwill for impairment annually as of October 1 and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We test goodwill at the reporting unit level.
ASC 350 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. Under ASC 350, an entity is not required to perform a quantitative goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount. For our annual goodwill impairment tests as of both October 1, 2019 and 2018, we performed quantitative goodwill impairment tests and concluded that the fair values of each of our reporting units exceeded their respective carrying values.
In the quantitative impairment test, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we record an impairment loss equal to the difference, however, the loss recognized would not exceed the total amount of goodwill allocated to the reporting unit.
We determine the fair value of our reporting units using both an income approach and a market approach, and weigh both approaches to determine the fair value of each reporting unit. Under the income approach, we perform a discounted cash flow analysis which incorporates management’s cash flow projections over a five-year period and a terminal value is calculated by applying a capitalization rate to terminal year projections based on an estimated long-term growth rate. The five-year projected cash flows and calculated terminal value are discounted using a weighted average cost of capital (“WACC”) which takes into account the costs of debt and equity. The cost of equity is based on the risk-free interest rate, equity risk premium, industry and size equity premiums and any additional market equity risk premiums as deemed appropriate for each reporting unit. To arrive at a fair value for each reporting unit, the terminal value is discounted by the WACC and added to the present value of the estimated cash flows over the discrete five-year period. There are a number of other variables which impact the projected cash flows, such as expected revenue growth and profitability levels, working capital requirements, capital expenditures and related depreciation and amortization. Under the market approach, we perform a comparable public company analysis and apply revenue and earnings multiples from the identified set of companies to the reporting unit’s actual and forecasted financial performance to determine the fair value of each reporting unit. We evaluate the reasonableness of the fair value calculations of our reporting units by reconciling the total of the fair values of all of our reporting units to our total market capitalization, and adjusting for an appropriate control premium. In addition, we make certain judgments in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Contingent Consideration for Business Acquisitions
Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these 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. At each reporting date, the contingent consideration obligation is revalued to estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to 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.
Other Assets
Other assets primarily include an investment in a joint venture, certain software development costs, and unamortized debt issuance costs relating to our revolving credit facility. We account for a 10% interest in a joint venture partnership under the equity method of accounting because significant influence exists due to certain factors, including representation on the partnership’s Management Board and voting rights. We capitalize the cost of internal-use software in accordance with ASC Topic 350-40, Internal-Use Software and ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. These costs consist of internal labor costs and payments made to third parties for software development and implementation and are amortized using the straight-line method over their estimated useful lives, ranging from three to eight years. We amortize debt issuance costs to interest expense on a straight-line basis over the term of our revolving credit facility.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We establish accruals for uncertain tax positions taken or expected to be taken in a tax return 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. Favorable or unfavorable adjustment of the accrual for any particular issue would be recognized as an increase or decrease to income tax expense in the period of a change in facts and circumstances. Interest and penalties related to income taxes are accounted for as income tax expense.
Earnings per Share
Basic earnings per share (“EPS”) are computed by dividing earnings by the weighted average number of common shares outstanding during the periods. 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 outstanding under our stock-based incentive plans and are 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 weighted average dilutive common stock equivalent shares which were included in the computation of diluted EPS:
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
Non-dilutive instruments
|
|
103
|
|
|
82
|
|
|
13
|
|
Dilutive common stock equivalents
|
|
34
|
|
|
88
|
|
|
125
|
|
Stock-Based Compensation
Pursuant to our stock-based incentive plans which are described more fully in Note 12, we grant stock options, restricted stock units, performance-based stock units (PSU's) and equity to officers, employees, and members of the Board of Directors. We compute compensation expense for all equity-based compensation awards issued to employees using the fair-value measurement method. We recognize compensation expense on a straight-line basis over the requisite service period for stock-based compensation awards with both graded and cliff vesting terms. We recognize forfeitures as they occur with a reduction in compensation expense in the period of forfeiture. We do not capitalize any material portion of our stock-based compensation.
We recognize compensation expense for PSU's on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PSU's expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we will make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.
We estimate the fair value of our stock options on the date of grant using the Black-Scholes option pricing model, which requires various assumptions such as expected term, expected stock price volatility and risk-free interest rate. We estimate the expected term of stock options granted taking into consideration historical data related to stock option exercises. We use historical stock price data in order to estimate the expected volatility factor of stock options granted. The risk-free interest rate for the periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate the estimates used, including but not limited to those related to revenue recognition, the allowance for doubtful accounts receivable, impairments of goodwill and other intangible assets, valuation of intangible assets acquired and contingent consideration liabilities assumed in business acquisitions, valuation of stock-based compensation awards and income taxes. Actual results could differ from these estimates.
Fair Value Estimates
ASC Topic 820, Fair Value Measurements and Disclosure (“Topic 820”), defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The guidance within Topic 820 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels as follows:
|
|
•
|
Level 1 – unadjusted quoted prices for identical assets or liabilities in active markets;
|
|
|
•
|
Level 2 – quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation; and
|
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
•
|
Level 3 – unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability.
|
The carrying value of financial instruments including cash, accounts receivable and accounts payable approximate estimated market values because of short-term maturities and interest rates that approximate current rates. In addition, the fair value of our long-term debt approximated its carrying value as of December 31, 2019 as it bears interest at variable rates. Our fair value measurements related to goodwill, intangible assets and contingent consideration are recognized in connection with acquisitions and are valued using Level 3 inputs. Our interest rate derivatives are valued using Level 2 inputs.
Leases
On January 1, 2019, we adopted FASB Accounting Standards Update ("ASU") 2016-02, Leases ("Topic 842") and all the related amendments. The impact of adoption is discussed below under the "Recent Accounting Standards" section. Further information regarding our lease accounting, including our full accounting policy description, can be found in Note 14.
Legal Expenses
We are involved, from time to time, in litigation and proceedings arising out of the ordinary course of business. Costs for legal services rendered in the course of these proceedings are charged to expense as they are incurred.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
Recent Accounting Standards
On January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), which requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize on the balance sheet assets and liabilities arising from operating leases. We adopted Topic 842 using the modified retrospective method of adoption applying the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these financial statements. As a result, prior period information has not been restated.
The new standard provides several optional practical expedients for use in transition. We elected to use what the FASB has deemed the “package of practical expedients,” which allows us not to reassess our previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs. The ASU also provides several optional practical expedients for the ongoing accounting for leases. We have elected the short-term lease recognition exemption for all leases that qualify, meaning that for leases with terms of twelve months or less, we will not recognize right-of-use (ROU) assets or lease liabilities on our consolidated balance sheet. Additionally, we have elected to use the practical expedient to not separate lease and non-lease components for leases of real estate, meaning that for these leases, the non-lease components are included in the associated ROU asset and lease liability balances on our consolidated balance sheet.
The most significant effects of adopting Topic 842 on our consolidated financial statements were (1) the recognition of new ROU assets and lease liabilities for our operating leases of $31.1 million and $34.9 million , respectively on January 1, 2019, which included reclassifying accrued rent as a component of the ROU asset, and 2) significant new disclosures about our leasing activities, which are provided in Note 14. Topic 842 did not have a material impact on our results of operations or cash flows.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to record an allowance for expected credit losses over the contractual term of financial assets, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. Upon adoption of the new standard on January 1, 2020, we began recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to our financial assets. Based on our analysis of Topic 326 and due to the nature and extent of our financial instruments in scope of this ASU (primarily accounts receivable) and the historical, current and expected credit quality of our customers, we do not expect this ASU to have a material impact on our consolidated results of operations and financial condition.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements. The guidance promotes a framework to help improve the effectiveness of disclosures in the notes and is effective for annual and interim periods beginning after December 15, 2019, although early adoption is permitted. The new standard will impact our disclosures but is not anticipated to impact on our operating results, financial position or cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The standard removes step two 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 on testing dates after January 1, 2017. We adopted the standard on January 1, 2019. The adoption of the ASU did not have an effect on our results of operations, financial condition or cash flows.
(2) 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.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
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. 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 (decrease) to revenue of $1.8 million, $1.5 million, and $(0.8) million for the years ended December 31, 2019, 2018 and 2017, 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 December 31, 2019 we had $349.8 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 85 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 December 31, 2019.
Contract Balances
Revenue recognized for the years ended December 31, 2019 and 2018, that was included in the contract liability balance at the beginning of the year was $18.9 million and $20.0 million, respectively, and primarily represented revenue from services performed during the current period for which we received advance payment from clients in a prior period.
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 consolidated balance sheet and totaled $0.6 million and $1.6 million as of December 31, 2019 and 2018, respectively.
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 December 31, 2019 and 2018, we did not have any capitalized sales commissions.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Revenue by Category
The following series of tables presents our revenue disaggregated by various categories (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Workforce
Excellence
|
|
Business Transformation Services
|
|
Consolidated
|
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
Revenue by type of service:
|
|
|
|
|
|
|
|
|
|
|
|
Managed learning services
|
$
|
218,730
|
|
206,388
|
|
207,007
|
|
|
$
|
—
|
|
—
|
|
—
|
|
|
$
|
218,730
|
|
206,388
|
|
207,007
|
|
Engineering & technical services
|
111,065
|
|
110,426
|
|
101,252
|
|
|
—
|
|
—
|
|
—
|
|
|
111,065
|
|
110,426
|
|
101,252
|
|
Sales enablement
|
—
|
|
—
|
|
—
|
|
|
161,295
|
|
103,740
|
|
101,196
|
|
|
161,295
|
|
103,740
|
|
101,196
|
|
Organizational development
|
—
|
|
—
|
|
—
|
|
|
92,200
|
|
94,606
|
|
99,753
|
|
|
92,200
|
|
94,606
|
|
99,753
|
|
|
$
|
329,795
|
|
316,814
|
|
308,259
|
|
|
$
|
253,495
|
|
198,346
|
|
200,949
|
|
|
$
|
583,290
|
|
515,160
|
|
509,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
230,236
|
|
213,938
|
|
198,653
|
|
|
$
|
193,129
|
|
165,807
|
|
175,027
|
|
|
$
|
423,365
|
|
379,745
|
|
373,680
|
|
Europe Middle East Africa
|
91,947
|
|
91,764
|
|
100,296
|
|
|
50,160
|
|
38,171
|
|
30,461
|
|
|
142,107
|
|
129,935
|
|
130,757
|
|
Asia Pacific
|
34,300
|
|
30,688
|
|
29,828
|
|
|
25,354
|
|
2,634
|
|
376
|
|
|
59,654
|
|
33,322
|
|
30,204
|
|
Eliminations
|
(26,688
|
)
|
(19,576
|
)
|
(20,518
|
)
|
|
(15,148
|
)
|
(8,266
|
)
|
(4,915
|
)
|
|
(41,836
|
)
|
(27,842
|
)
|
(25,433
|
)
|
|
$
|
329,795
|
|
316,814
|
|
308,259
|
|
|
$
|
253,495
|
|
198,346
|
|
200,949
|
|
|
$
|
583,290
|
|
515,160
|
|
509,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by client market sector:
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
$
|
10,024
|
|
10,646
|
|
10,102
|
|
|
$
|
155,105
|
|
105,431
|
|
101,285
|
|
|
$
|
165,129
|
|
116,077
|
|
111,387
|
|
Financial & Insurance
|
82,434
|
|
87,813
|
|
86,718
|
|
|
10,715
|
|
12,303
|
|
16,339
|
|
|
93,149
|
|
100,116
|
|
103,057
|
|
Manufacturing
|
34,154
|
|
33,055
|
|
35,795
|
|
|
21,894
|
|
16,156
|
|
17,134
|
|
|
56,048
|
|
49,211
|
|
52,929
|
|
Energy / Oil & Gas
|
35,604
|
|
37,088
|
|
34,195
|
|
|
5,693
|
|
4,752
|
|
2,429
|
|
|
41,297
|
|
41,840
|
|
36,624
|
|
U.S. Government
|
39,432
|
|
29,584
|
|
25,254
|
|
|
7,964
|
|
8,782
|
|
9,475
|
|
|
47,396
|
|
38,366
|
|
34,729
|
|
U.K. Government
|
18,153
|
|
18,733
|
|
27,734
|
|
|
—
|
|
—
|
|
—
|
|
|
18,153
|
|
18,733
|
|
27,734
|
|
Information & Communication
|
14,294
|
|
14,083
|
|
18,123
|
|
|
7,913
|
|
9,510
|
|
10,490
|
|
|
22,207
|
|
23,593
|
|
28,613
|
|
Aerospace
|
27,511
|
|
25,989
|
|
22,142
|
|
|
7,754
|
|
3,683
|
|
6,549
|
|
|
35,265
|
|
29,672
|
|
28,691
|
|
Electronics Semiconductor
|
13,906
|
|
15,070
|
|
16,449
|
|
|
1,495
|
|
857
|
|
1,069
|
|
|
15,401
|
|
15,927
|
|
17,518
|
|
Life Sciences
|
19,560
|
|
15,009
|
|
8,420
|
|
|
6,370
|
|
8,750
|
|
9,377
|
|
|
25,930
|
|
23,759
|
|
17,797
|
|
Other
|
34,723
|
|
29,744
|
|
23,327
|
|
|
28,592
|
|
28,122
|
|
26,802
|
|
|
63,315
|
|
57,866
|
|
50,129
|
|
|
$
|
329,795
|
|
316,814
|
|
308,259
|
|
|
$
|
253,495
|
|
198,346
|
|
200,949
|
|
|
$
|
583,290
|
|
515,160
|
|
509,208
|
|
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
We did not complete any acquisitions in 2019. Below is a summary of the acquisitions we completed during 2018 and 2017 respectively.
2018 Acquisitions
The following table summarizes the purchase prices and purchase price allocations for the acquisitions completed during the year ended December 31, 2018. A description of the acquired businesses is summarized below the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired company
|
|
TTi Global
|
|
TTi Europe
|
|
IC Axon
|
|
Hula
|
|
|
|
|
|
|
|
|
|
Acquisition date
|
|
11/30/2018
|
|
|
8/7/2018
|
|
|
5/1/2018
|
|
|
1/2/2018
|
|
|
|
|
|
|
|
|
|
|
Cash purchase price
|
|
$
|
14,195
|
|
|
$
|
3,000
|
|
|
$
|
30,535
|
|
|
$
|
10,000
|
|
Fair value of contingent consideration
|
|
—
|
|
|
—
|
|
|
905
|
|
|
—
|
|
Working capital adjustment
|
|
(850
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total purchase price
|
|
$
|
13,345
|
|
|
$
|
3,000
|
|
|
$
|
31,440
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,780
|
|
|
$
|
125
|
|
|
$
|
538
|
|
|
$
|
—
|
|
Accounts receivable and other assets
|
|
14,218
|
|
|
1,684
|
|
|
3,110
|
|
|
—
|
|
Fixed assets
|
|
300
|
|
|
9
|
|
|
368
|
|
|
—
|
|
Customer-related intangible assets
|
|
4,428
|
|
|
762
|
|
|
10,365
|
|
|
1,367
|
|
Marketing-related intangible assets (tradename)
|
|
454
|
|
|
45
|
|
|
239
|
|
|
106
|
|
Goodwill
|
|
4,655
|
|
|
2,179
|
|
|
21,613
|
|
|
8,527
|
|
Total assets
|
|
25,835
|
|
|
4,804
|
|
|
36,233
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
10,066
|
|
|
1,609
|
|
|
983
|
|
|
—
|
|
Deferred revenue
|
|
219
|
|
|
126
|
|
|
979
|
|
|
—
|
|
Deferred tax liability
|
|
2,205
|
|
|
69
|
|
|
2,831
|
|
|
—
|
|
Total liabilities
|
|
12,490
|
|
|
1,804
|
|
|
4,793
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
13,345
|
|
|
$
|
3,000
|
|
|
$
|
31,440
|
|
|
$
|
10,000
|
|
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
TTi Global
On November 30, 2018, we entered into a Share Purchase Agreement with TTi Global, Inc. ("TTi Global") and its stockholders and acquired all of the outstanding shares of TTi Global. The transaction under the Share Purchase Agreement includes the acquisition of TTi Global’s subsidiaries (except for its UK and Spain subsidiaries and dormant entities) and certain affiliated companies. The Company purchased TTi Global’s UK and Spain subsidiaries in a separate transaction in August 2018 which is discussed further below. TTi Global is a provider of training, staffing, research and consulting solutions to industries across various sectors with automotive as a core focus. The total upfront purchase price for TTi Global was $14.2 million of cash paid at closing on November 30, 2018. The final purchase price allocation above was adjusted during 2019 based on the finalization of the working capital adjustment, as defined in the Share Purchase Agreement, and other purchase accounting adjustments identified during the measurement period. During the third quarter of 2019, the seller paid us $0.9 million in settlement of the working capital adjustment. The purchase price allocation for the acquisition includes $4.4 million of a customer-related intangible asset which is being amortized over nine years and $0.5 million of a marketing-related intangible asset which was amortized over one year from the acquisition date. 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 Global business is included in the Business Transformation Services segment and the results of its operations have been included in the consolidated financial statements beginning December 1, 2018. The pro-forma impact of the acquisition is not material to our results of operations.
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 purchase price allocation for the acquisition primarily includes $0.8 million of a customer-related intangible asset which is being amortized over nine years from the acquisition date. 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 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 purchase price allocation for the acquisition includes $10.4 million of a customer-related intangible asset which is being amortized over eight years and $0.2 million of a marketing-related intangible assets being amortized over three years from the acquisition date. 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 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. The purchase price allocation for the acquisition includes $1.4 million of a customer-related intangible asset which is being amortized over four years and $0.1 million of a marketing-related intangible asset which is being amortized over two years from the acquisition date. 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.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
2017 Acquisitions
The following table summarizes the purchase prices and purchase price allocations for the acquisitions completed during the year ended December 31, 2017. A description of the acquired businesses is summarized below the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired company
|
|
YouTrain
|
|
CLS
|
|
Emantras
|
|
McKinney Rogers
|
|
|
|
|
|
|
|
|
|
Acquisition date
|
|
8/31/2017
|
|
|
8/31/2017
|
|
|
4/1/2017
|
|
|
2/1/2017
|
|
|
|
|
|
|
|
|
|
|
Cash purchase price
|
|
$
|
4,898
|
|
|
$
|
436
|
|
|
$
|
3,191
|
|
|
$
|
3,259
|
|
Fair value of contingent consideration
|
|
—
|
|
|
888
|
|
|
220
|
|
|
4,505
|
|
Working capital adjustment
|
|
180
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total purchase price
|
|
$
|
5,078
|
|
|
$
|
1,324
|
|
|
$
|
3,411
|
|
|
$
|
7,764
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
673
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accounts receivable and other assets
|
|
234
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed assets
|
|
215
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Technology-related intangible assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,704
|
|
Customer-related intangible assets
|
|
1,313
|
|
|
253
|
|
|
818
|
|
|
653
|
|
Marketing-related intangible assets (tradename)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
121
|
|
Goodwill
|
|
3,268
|
|
|
1,090
|
|
|
3,156
|
|
|
5,196
|
|
Total assets
|
|
5,703
|
|
|
1,343
|
|
|
4,024
|
|
|
8,674
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
348
|
|
|
19
|
|
|
558
|
|
|
44
|
|
Deferred revenue
|
|
28
|
|
|
—
|
|
|
55
|
|
|
866
|
|
Deferred tax liability
|
|
249
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
|
625
|
|
|
19
|
|
|
613
|
|
|
910
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
5,078
|
|
|
$
|
1,324
|
|
|
$
|
3,411
|
|
|
$
|
7,764
|
|
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 was paid to the sellers during the fourth quarter of 2017. The purchase price allocation for the acquisition includes $1.3 million of a customer-related intangible asset which is being amortized over five years from the acquisition date. 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 YouTrain business is included in the Workforce Excellence 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. The acquired YouTrain business is included in our acquiring United Kingdom subsidiary and its functional currency is the British Pound Sterling.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
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 required 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 contingent consideration was payable as the earnings target was not achieved for the twelve-month period subsequent to the acquisition. The purchase price allocation for the acquisition includes $0.3 million of a customer-related intangible asset which is being amortized over three years from the acquisition date. 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 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. The acquired CLS business is included in our acquiring United Kingdom subsidiary and its functional currency is the British Pound Sterling.
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 required up to an additional $0.3 million of consideration, contingent upon the achievement of an earnings target during the twelve-month period following completion of the acquisition, plus a percentage of any earnings in excess of the specified earnings target. No contingent consideration was paid as the earnings target for the twelve-month period subsequent to the acquisition was not achieved. The purchase price allocation for the acquisition includes $0.8 million of a customer-related intangible asset which is being amortized over four years from the acquisition date. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the Company. The portion of the goodwill recorded for financial statement purposes that is deductible for tax purposes is $0.8 million. 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. The India-based operations of the acquired Emantras business is included in our India subsidiary and its functional currency is the Indian Rupee.
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 required 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 2017, we paid the seller $1.0 million in respect of the contingent consideration for the five-month period ended April 30, 2017. No contingent consideration was payable with respect to the two twelve-month periods following completion of the acquisition as the earnings targets were not achieved. In July 2019, we entered into an amendment to the asset purchase agreement that implemented certain changes, including the elimination of the third year earnout for the period ended January 31, 2020.
The purchase price allocation for the acquisition includes $2.7 million of a technology-related intangible asset and $0.7 million of a customer-related intangible asset which are both being amortized over five years and $0.1 million of a marketing-related intangible asset which is being amortized over three years from the acquisition date. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the Company. The portion of the goodwill recorded for financial statement purposes that is deductible for tax purposes is $1.6 million. 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.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Contingent Consideration
Contingent consideration is recognized at fair value on the acquisition date and is re-measured each reporting period with subsequent adjustments recognized in the 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 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 changes in the recorded amount of contingent consideration liabilities from December 31, 2018 to December 31, 2019 for each acquisition (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
|
|
2019
Additions
|
|
Change in
Fair Value of
Contingent
|
|
Foreign
Currency
|
|
2019
Payments
|
|
Liability as of
|
Acquisition:
|
|
Dec. 31, 2018
|
|
|
Consideration
|
|
Translation
|
|
|
Dec. 31, 2019
|
IC Axon
|
|
$
|
594
|
|
|
$
|
—
|
|
|
$
|
(594
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
McKinney Rogers
|
|
83
|
|
|
—
|
|
|
(83
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
677
|
|
|
$
|
—
|
|
|
$
|
(677
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As of December 31, 2019, there were no remaining contingent consideration liabilities. As of December 31, 2018, contingent consideration included in accounts payable and accrued expenses on the consolidated balance sheet totaled $0.6 million and we also had accrued contingent consideration totaling $0.1 million included in other long-term liabilities on the consolidated balance sheet which represented the portion of contingent consideration estimated to be payable greater than twelve months from the balance sheet date.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
(4)
|
Divestitures & Assets Held for Sale
|
Sale of Tuition Program Management Business
On October 1, 2019, we sold our tuition program management business pursuant to an Asset Purchase Agreement with Bright Horizons Children's Centers LLC (the "buyer"). The purchase price was $20.0 million which was paid on closing, other than $1.5 million which is being held in escrow to secure possible indemnification claims pursuant to the terms of an escrow agreement which expires October 1, 2020. An additional $0.1 million was paid to the buyer in January 2020 based on the final calculation of assumed liabilities as defined in the asset purchase agreement. We recognized a pre-tax gain of $12.1 million, net of $0.1 million of direct selling costs, on the sale of the business. The gain recorded represents the difference between the purchase price and the carrying value of the business, which primarily included goodwill of $7.7 million. The tuition program management business was part of the Workforce Excellence segment.
Sale of Alternative Fuels Division
Effective January 1, 2020, we sold our Alternative Fuels Division pursuant to an Asset Purchase Agreement with Cryogenic Industries, LLC. The purchase price is up to $6.0 million, subject to adjustment based on a final calculation of net working capital as defined in the asset purchase agreement. Of the total purchase consideration, we received an advance payment of $1.5 million on December 31, 2019 and the remaining upfront consideration of $3.5 million on January 2, 2020 based on the estimated net working capital. In addition, up to $0.5 million of the purchase price is subject to the achievement of certain milestones under an assigned contract through the period December 31, 2021. The purchase price adjustment for closing net working capital is expected to be finalized during the first quarter of 2020.
The major classes of assets and liabilities sold in connection with our Alternative Fuels Division included accounts receivable, net of $0.9 million, other current assets of $0.9 million, estimated goodwill of approximately $2.7 million, deferred revenue of $1.3 million and other current liabilities of $0.2 million as of December 31, 2019. The Alternative Fuels Division was part of the Workforce Excellence segment.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
(5)
|
Goodwill & Other Intangible Assets
|
Goodwill
Changes in the carrying amount of goodwill by reportable business segment for the years ended December 31, 2019 and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
Workforce
|
|
Transformation
|
|
|
|
|
Excellence
|
|
Services
|
|
Total
|
Net book value at
|
|
|
|
|
|
|
|
|
|
January 1, 2018
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
114,814
|
|
|
$
|
45,438
|
|
|
$
|
160,252
|
|
Accumulated impairment losses
|
|
(9,050
|
)
|
|
(6,367
|
)
|
|
(15,417
|
)
|
Total
|
|
105,764
|
|
|
39,071
|
|
|
144,835
|
|
2018 Activity:
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
21,613
|
|
|
14,033
|
|
|
35,646
|
|
Foreign currency translation
|
|
(3,459
|
)
|
|
(898
|
)
|
|
(4,357
|
)
|
Net book value at
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
132,968
|
|
|
58,573
|
|
|
191,541
|
|
Accumulated impairment losses
|
|
(9,050
|
)
|
|
(6,367
|
)
|
|
(15,417
|
)
|
Total
|
|
123,918
|
|
|
52,206
|
|
|
176,124
|
|
2019 Activity:
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments
|
|
—
|
|
|
1,327
|
|
|
1,327
|
|
Divestitures
|
|
(7,681
|
)
|
|
—
|
|
|
(7,681
|
)
|
Foreign currency translation
|
|
1,776
|
|
|
17
|
|
|
1,793
|
|
Net book value at
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
127,063
|
|
|
59,917
|
|
|
186,980
|
|
Accumulated impairment losses
|
|
(9,050
|
)
|
|
(6,367
|
)
|
|
(15,417
|
)
|
Total
|
|
$
|
118,013
|
|
|
$
|
53,550
|
|
|
$
|
171,563
|
|
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
Accumulated
|
|
Net Carrying
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
Customer relationships
|
|
$
|
22,348
|
|
|
$
|
(7,473
|
)
|
|
$
|
14,875
|
|
Intellectual property and other
|
|
3,915
|
|
|
(2,446
|
)
|
|
1,469
|
|
|
|
$
|
26,263
|
|
|
$
|
(9,919
|
)
|
|
$
|
16,344
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
26,524
|
|
|
$
|
(8,547
|
)
|
|
$
|
17,977
|
|
Intellectual property and other
|
|
4,936
|
|
|
(1,980
|
)
|
|
2,956
|
|
|
|
$
|
31,460
|
|
|
$
|
(10,527
|
)
|
|
$
|
20,933
|
|
Amortization expense for intangible assets was $5.0 million, $4.6 million and $4.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Estimated future amortization expense for intangible assets included in our consolidated balance sheet as of December 31, 2019 is as follows (in thousands):
|
|
|
|
|
Fiscal year ending:
|
|
|
2020
|
$
|
3,908
|
|
2021
|
3,290
|
|
2022
|
2,086
|
|
2023
|
1,852
|
|
2024
|
1,852
|
|
Thereafter
|
3,356
|
|
Total
|
$
|
16,344
|
|
As of December 31, 2019, our intangible assets with definite lives had a weighted average remaining useful life of 5.7 years. We have no amortizable intangible assets with indefinite useful lives.
|
|
(6)
|
Property, Plant and Equipment
|
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Machinery, equipment and vehicles
|
|
$
|
17,170
|
|
|
$
|
18,121
|
|
Furniture and fixtures
|
|
3,530
|
|
|
3,779
|
|
Leasehold improvements
|
|
2,725
|
|
|
2,369
|
|
Buildings
|
|
321
|
|
|
311
|
|
|
|
23,746
|
|
|
24,580
|
|
Accumulated depreciation and amortization
|
|
(17,943
|
)
|
|
(18,721
|
)
|
|
|
$
|
5,803
|
|
|
$
|
5,859
|
|
Depreciation expense was $2.4 million, $2.2 million and $2.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
On November 30, 2018, we entered into a Credit Agreement with PNC Bank, National Association, as administrative agent and a syndicate of lenders (the “Credit Agreement”), replacing the prior credit agreement with Wells Fargo dated December 21, 2016, as amended on April 28, 2018 and June 29, 2018 (the "Original Credit Agreement"). The Credit agreement provides for a revolving credit facility, which expires on November 29, 2023, and consists of: a revolving loan facility with a borrowing limit of $200 million, including a $20 million sublimit for foreign borrowings; an accordion feature allowing the Company to request increases in commitments to the credit facility by up to an additional $100 million; a $20 million letter of credit sublimit; and a swingline loan credit sublimit of $20 million. The obligations under the Credit Agreement are guaranteed by certain of the Company's subsidiaries (the "Guarantors"). As collateral security under the Credit Agreement and the guarantees thereof, the Company and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in substantially all of their tangible and intangible assets. The proceeds of the Credit Agreement were used, in part, to repay in full all outstanding borrowings under the Original Credit Agreement, and additional proceeds of the revolving credit facility are expected to be used for working capital and other general corporate purposes of the Company and its subsidiaries, including the issuance of letters of credit and Permitted Acquisitions, as defined.
Borrowings under the Credit Agreement may be in the form of Base Rate loans or Euro-Rate loans, at the option of the borrowers, and bear interest at the Base Rate plus 0.25% to 1.25% or the Daily LIBOR Rate plus 1.25% to 2.25% respectively. Base Rate loans will bear interest at a fluctuating per annum Base Rate equal to the highest of (i) the Overnight Bank Funding Rate, plus 0.5%, (ii) the Prime Rate, and (iii) the Daily LIBOR Rate, plus 100 basis points (1.0%); plus an Applicable Margin. Determination of the Applicable Margin is based on a pricing grid that is generally dependent upon the Company's Leverage Ratio (as defined) as of the end of the fiscal quarter for which consolidated financial statements have been most recently delivered. We may prepay the revolving loan, in whole or in part, at any time without premium or penalty, subject to certain conditions.
The Credit Agreement contains customary representations, warranties and affirmative covenants. The Credit Agreement also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stock dividends, and (vii) certain other restrictive agreements. The Credit Agreement also requires the Company to maintain compliance with the following financial covenants; (i) a maximum leverage ratio, and (ii) a minimum interest expense coverage ratio. On June 28, 2019 we entered into an amendment to the Credit Agreement that modified the maximum leverage ratio requirements for 2019. We were in compliance with each of these financial covenants under the Credit Agreement, as amended, as of December 31, 2019.
As of December 31, 2019, there were $82.9 million of borrowings outstanding and $25.8 million of available borrowings under the revolving loan facility based on our Leverage Ratio.
For the years ended December 31, 2019 and 2018, the weighted average interest rate on our borrowings was 4.5% and 4.0%, respectively. As of December 31, 2019, the fair value of our borrowings under the Credit Agreement approximated its carrying value as it bears interest at variable rates. There were $1.2 million of unamortized debt issue costs related to the Credit Agreement as of December 31, 2019 which are being amortized to interest expense over the term of the Credit Agreement and are included in Other Assets on our consolidated balance sheet.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
(8)
|
Accounts Payable and Accrued Expenses
|
Accounts payable and accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Trade accounts payable
|
|
$
|
37,792
|
|
|
$
|
40,969
|
|
Accrued salaries, vacation and benefits
|
|
22,322
|
|
|
21,550
|
|
Other accrued expenses
|
|
28,517
|
|
|
28,372
|
|
Accrued contingent consideration
|
|
—
|
|
|
594
|
|
Negative cash book balance
|
|
3,701
|
|
|
1,769
|
|
|
|
$
|
92,332
|
|
|
$
|
93,254
|
|
|
|
(9)
|
Employee Benefit Plan
|
We offer the GP Retirement Savings Plan (the “Plan”) to our employees in the United States. Eligible employees are automatically enrolled unless they elect to not participate in the Plan, and contributions begin as soon as administratively feasible after enrollment. The Plan permits pre-tax contributions to the Plan by participants pursuant to Section 401(k) of the Internal Revenue Code (IRC). We make matching contributions at our discretion. In 2019, 2018 and 2017, we contributed 219,427, 162,572, and 104,751 shares, respectively, of our common stock directly to the Plan which had a value of approximately $3.0 million, $3.0 million and $2.7 million, respectively, and is recognized as compensation expense in the consolidated statements of operations for matching contributions to the Plan.
We also maintain several defined contribution pension plans for our employees in the United States, United Kingdom and other countries. We contributed to these plans $2.7 million, $2.7 million and $2.5 million during the years ended December 31, 2019, 2018 and 2017, respectively.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
The components of income before income taxes and income tax expense for the years ended December 31, 2019, 2018 and 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
12,814
|
|
|
$
|
5,577
|
|
|
$
|
2,901
|
|
Foreign
|
|
9,555
|
|
|
9,186
|
|
|
16,788
|
|
Total income before income taxes
|
|
$
|
22,369
|
|
|
$
|
14,763
|
|
|
$
|
19,689
|
|
|
|
|
|
|
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,634
|
|
|
$
|
388
|
|
|
$
|
3,210
|
|
State and local
|
|
586
|
|
|
378
|
|
|
256
|
|
Foreign
|
|
5,046
|
|
|
3,285
|
|
|
3,645
|
|
Total current
|
|
8,266
|
|
|
4,051
|
|
|
7,111
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
(338
|
)
|
|
813
|
|
|
(241
|
)
|
State and local
|
|
(99
|
)
|
|
258
|
|
|
(176
|
)
|
Foreign
|
|
(649
|
)
|
|
(195
|
)
|
|
104
|
|
Total deferred
|
|
(1,086
|
)
|
|
876
|
|
|
(313
|
)
|
Total income tax expense
|
|
$
|
7,180
|
|
|
$
|
4,927
|
|
|
$
|
6,798
|
|
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Federal income tax rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State and local taxes net of federal benefit
|
|
3.0
|
|
|
1.9
|
|
|
0.2
|
|
Domestic production deduction
|
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
Valuation allowance
|
|
6.3
|
|
|
0.4
|
|
|
0.9
|
|
Foreign tax credits
|
|
(5.0
|
)
|
|
—
|
|
|
—
|
|
Foreign tax rate differential
|
|
4.1
|
|
|
1.8
|
|
|
(8.8
|
)
|
Permanent differences
|
|
3.5
|
|
|
2.7
|
|
|
(6.2
|
)
|
Other
|
|
(1.0
|
)
|
|
2.2
|
|
|
(1.8
|
)
|
Global Intangible Low-taxed Income
|
|
0.2
|
|
|
1.5
|
|
|
—
|
|
Tax Cuts and Jobs Act of 2017
|
|
—
|
|
|
1.9
|
|
|
16.3
|
|
Effective tax rate
|
|
32.1
|
%
|
|
33.4
|
%
|
|
34.5
|
%
|
The Tax Cuts and Jobs Act of 2017 created a 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. The FASB Staff Q&A Topic 740, No. 5, “Accounting for Global Intangible Low-Taxed Income” states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis difference expected to reverse as GILTI in future years, or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI as a current period expense when incurred.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Income tax expense was $7.2 million for the year ended December 31, 2019 compared to $4.9 million for the year ended December 31, 2018. Our effective income tax rate was 32.1% and 33.4% for the years ended December 31, 2019 and 2018, respectively. The decrease in the effective income tax rate compared to 2018 is primarily due to a change in the mix of income from higher to lower taxing jurisdiction.
Uncertain Tax Positions
As of December 31, 2019 and 2018, we had no uncertain tax positions reflected on our 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 2016 through 2019 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.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
291
|
|
|
$
|
531
|
|
Accrued liabilities and other
|
|
2,066
|
|
|
2,564
|
|
Stock-based compensation expense
|
|
297
|
|
|
296
|
|
Net federal, state and foreign operating loss carryforwards
|
|
2,825
|
|
|
1,953
|
|
Foreign tax credit carryforwards
|
|
1,379
|
|
|
266
|
|
Deferred tax assets
|
|
6,858
|
|
|
5,610
|
|
Valuation allowance on deferred tax assets
|
|
(4,025
|
)
|
|
(1,385
|
)
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Other
|
|
182
|
|
|
1,181
|
|
Intangible assets, property and equipment, principally
due to difference in depreciation and amortization
|
|
8,969
|
|
|
10,784
|
|
Net deferred tax liabilities
|
|
$
|
(6,318
|
)
|
|
$
|
(7,740
|
)
|
As of December 31, 2019, we had foreign and U.S. state net operating loss carryforwards of $11.5 million for tax purposes, which will be available to offset future taxable income. If not used, these carryforwards will expire beginning in 2020.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets may not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon these factors, management placed a valuation allowance of $4.0 million and $1.4 million as of the years ended December 31, 2019 and 2018, respectively, against certain deferred tax assets, including net operating loss carryforwards, due to the uncertainty of future profitability in foreign jurisdictions. Management believes it is more likely than not that the Company will realize the benefits of the remaining deferred tax assets.
Foreign Income
The 2017 Tax Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest these earnings, as well as the capital invested in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant, additional taxes related to such amounts. The Company has not provided for any additional outside basis difference inherent in its foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis difference in these entities is not practicable.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
(11) 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, 2018
|
|
$
|
1,266
|
|
|
$
|
591
|
|
|
$
|
1,857
|
|
Additional restructuring charges
|
|
1,639
|
|
|
—
|
|
|
1,639
|
|
Reclassification to operating lease liabilities
|
|
—
|
|
|
(554
|
)
|
|
(554
|
)
|
Payments
|
|
(2,675
|
)
|
|
(9
|
)
|
|
(2,684
|
)
|
Liability as of December 31, 2019
|
|
$
|
230
|
|
|
$
|
28
|
|
|
$
|
258
|
|
In December 2017, we announced a new organizational structure and plan to improve operating results by increasing organic growth and reducing operating costs, and we initiated restructuring and transition activities to improve operational efficiency, reduce costs and better position the company to drive future revenue growth. These restructuring activities were completed by June 30, 2018. The total remaining liability under this restructuring plan was $0.1 million as of December 31, 2019 and $1.9 million as of December 31, 2018. As of December 31, 2019, $0.1 million is included in accounts payable and accrued expenses. As of December 31, 2018, $1.5 million was included in accounts payable and accrued expenses and $0.4 million was included in other noncurrent liabilities.
In connection with the acquisition of TTi Global, Inc. in December 2018, we initiated restructuring and transition activities in the first quarter of 2019 to reduce costs and eliminate redundant positions to realize synergies with the acquired business. For the year ended December 31, 2019, we recorded $1.6 million of restructuring charges in connection with these activities. The total remaining liability under these restructuring activities was $0.2 million as of December 31, 2019 which is included in accounts payable and accrued expenses. These restructuring activities were substantially complete as of December 31, 2019.
|
|
(12)
|
Stock-Based Compensation
|
Under 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. We are authorized to grant an aggregate of 2,205,764 shares under the 2011 Plan. As of December 31, 2019, there were 827,855 shares available for issuance of future grants of awards under the 2011 Plan and 568,812 shares representing outstanding awards under the 2011 Plan. We may issue new shares or use shares held in treasury to deliver shares to employees for our equity grants or upon exercise of non-qualified stock options.
The following table summarizes the pre-tax stock-based compensation expense included in reported net income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Cost of revenue
|
|
$
|
1,995
|
|
|
$
|
992
|
|
|
$
|
2,832
|
|
General and administrative expenses
|
|
622
|
|
|
358
|
|
|
757
|
|
Total stock-based compensation expense
|
|
$
|
2,617
|
|
|
$
|
1,350
|
|
|
$
|
3,589
|
|
We recognized a deferred income tax benefit of $0.4 million, $0.3 million and $1.2 million, respectively, during the years ended December 31, 2019, 2018, and 2017 associated with the compensation expense recognized in our consolidated financial statements. As of December 31, 2019, we had restricted stock units outstanding under these plans as discussed below.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Non-Qualified Stock Options
Non-qualified stock options are granted with an exercise price not less than the fair market value of our common stock at the date of grant, vest over a period up to ten years, and expire at various terms up to ten years from the date of grant. There were no outstanding stock options as of December 31, 2019. We received cash for the exercise price associated with stock options exercised of less than $0.1 million during the year ended December 31, 2018 and $0.1 million during the year ended December 31, 2017. During the year ended December 31, 2017, we settled 55,050 outstanding stock options held by our employees by issuing 13,482 fully vested shares which represented the fair value of those stock options upon settlement, net of required income tax withholdings. The total intrinsic value realized by participants on stock options exercised and/or settled was less than $0.1 million and $0.7 million during the years ended December 31, 2018 and 2017 respectively.
Restricted Stock Units
In addition to stock options, we issue restricted stock units to key employees and members of the Board of Directors based on meeting certain service goals. The stock units vest to the recipients at various dates, up to five years, based on fulfilling service requirements. We recognize the value of the market price of the underlying stock on the date of grant to compensation expense over the requisite service period. Upon vesting, the stock units are settled in shares of our common stock. Summarized share information for our restricted stock units is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2019
|
|
Weighted
average
grant date
fair value
|
|
|
(In shares)
|
|
(In dollars)
|
Outstanding and unvested, beginning of period
|
|
132,753
|
|
|
$
|
20.91
|
|
Granted
|
|
132,394
|
|
|
15.52
|
|
Vested
|
|
(161,584
|
)
|
|
18.00
|
|
Forfeited
|
|
(11,462
|
)
|
|
21.53
|
|
Outstanding and unvested, end of period
|
|
92,101
|
|
|
$
|
18.19
|
|
The total intrinsic value realized by participants upon the vesting of restricted stock units was $2.3 million, $1.3 million and $2.7 million during the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, we had unrecognized compensation cost of $1.8 million related to the unvested portion of our outstanding restricted stock units to be recognized over a weighted average remaining service period of 1.3 years. During the years ended December 31, 2019, 2018, and 2017, we realized excess income tax benefits (deficiencies) of $(0.1) million, $(0.3) million and $0.1 million respectively, related to stock option exercises or expirations and restricted stock vesting.
We have a long-term incentive program (LTIP) which provides for the issuance of performance-based stock units under the 2011 Plan to certain executives. Under the LTIP, a target level of equity compensation is set for each officer. Under the program, the Compensation Committee typically sets the performance-based goals within the first 90 days of each year. Vesting of the performance-based stock units (PSU's) is contingent upon the employee's continued employment and the Company's achievement of certain performance goals during a three-year performance period. The performance goals are established by the Compensation Committee for a three-year performance period based on certain financial targets. We recognize compensation expense, net of estimated forfeitures, for PSU's on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PSU's expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
Summarized share information for our performance-based restricted stock units is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2019
|
|
Weighted
average
grant date
fair value
|
|
|
(In shares)
|
|
(In dollars)
|
Outstanding and unvested, beginning of period
|
|
266,963
|
|
|
$
|
23.80
|
|
Granted
|
|
270,572
|
|
|
15.41
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(60,824
|
)
|
|
26.66
|
|
Outstanding and unvested, end of period
|
|
476,711
|
|
|
$
|
18.67
|
|
As of December 31, 2019, we had unrecognized compensation cost of $1.6 million related to the unvested portion of our outstanding performance-based restricted stock units to be recognized over a weighted average remaining service period of 2.0 years.
The holders of common stock are entitled to one vote per share. As of December 31, 2019, there were 17,032,666 shares of common stock issued and outstanding. In addition, as of December 31, 2019, there were 568,812 shares reserved for issuance under outstanding equity compensation awards for unvested restricted stock units and an additional 827,855 shares available for issuance for future grants of awards under the 2011 Plan.
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 year ended December 31, 2019 we did not repurchase shares and during the years ended December 31, 2018 and 2017, we repurchased approximately 354,000 and 182,000 shares, respectively, of our common stock in the open market for a total cost of approximately $8.0 million and $4.3 million, respectively. As of December 31, 2019, there was approximately $3.8 million available for future repurchases under the buyback program. There is no expiration date for the repurchase program.
Securities Purchase Agreement
On December 30, 2009, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with a single accredited investor, Sagard Capital Partners, L.P. (“Sagard”), pursuant to which we sold to Sagard, in a private placement, an aggregate of 2,857,143 shares (the “Shares”) of our common stock, par value $0.01, at a price of $7.00 per share (the “Offering”), for an aggregate purchase price of $20.0 million. The Offering closed on December 30, 2009. The Purchase Agreement prohibits Sagard from acquiring beneficial ownership of more than 23% of our common stock (calculated on a fully diluted basis). As of December 31, 2019, Sagard beneficially owned 3,639,367 shares or 21.4% of our outstanding common stock.
In connection with the Offering, on December 30, 2009, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with Sagard. Pursuant to the Registration Rights Agreement, we filed a registration statement with the Securities and Exchange Commission (the “SEC”) for purposes of registering the resale of the Shares and any shares of common stock issued pursuant to the preemptive rights under Section 4(l) of the Purchase Agreement (or any shares of common stock issuable upon exercise, conversion or exchange of securities issued pursuant to the preemptive rights). We filed the registration statement with the SEC on September 27, 2010 and it was declared effective by the SEC on October 8, 2010. If we fail to meet filing or effectiveness deadlines with respect to any additional registration statements required by the Registration Rights Agreement, or fail to keep any registration statements continuously effective (with limited exceptions), we will be obligated to pay to the holders of the Shares liquidated damages in the amount of 1% of the purchase price for the Shares per month, up to a maximum of $2.4 million. We also agreed, among other things, to indemnify the selling holders under the registration statements from certain liabilities and to pay all fees and expenses (excluding underwriting discounts and selling commissions and all legal fees of the selling holders in excess of $25,000) incident to our obligations under the Registration Rights Agreement.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
We determine at its inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. We have elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Certain of our leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments. As most of our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate on the commencement date to calculate the present value of future payments.
Some of our leases include future rent escalations that are based on the Consumer Price Index (CPI) or other similar indices. These future rent escalations are not included in the calculation of the ROU asset and lease liability because they be cannot be forecasted at the lease inception date. These are considered variable lease payments and are expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any lease pre-payments and initial direct costs of obtaining the lease, such as commissions.
In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. For our real estate leases, we apply a practical expedient to include these non-lease components in calculating the ROU asset and lease liability. For all other types of leases, non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred.
We have operating leases for office facilities, vehicles and computer and office equipment. We do not have any material finance leases.
Lease expense is included in Cost of Revenue and General & Administrative Expenses on the consolidated statements of operations, and is recorded net of immaterial sublease income. The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Operating lease cost
|
|
$
|
9,148
|
|
Short-term lease cost
|
|
1,695
|
|
Total lease costs
|
|
$
|
10,843
|
|
Supplemental information related to leases was as follows (dollars in thousands):
|
|
|
|
|
|
Year Ended December 31, 2019
|
Operating lease right-of-use assets
|
$
|
27,251
|
|
|
|
Current portion of operating lease liabilities
|
$
|
7,871
|
|
Non-current portion of operating lease liabilities
|
22,159
|
|
Total operating lease liabilities
|
$
|
30,030
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
10,137
|
|
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
$
|
4,353
|
|
|
|
Weighted-average remaining lease term for operating leases (years)
|
5.5 years
|
|
|
|
Weighted-average discount rate for operating leases
|
4.7
|
%
|
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
The following is a reconciliation of future undiscounted cash flows to the operating lease liabilities on our consolidated balance sheet as of December 31, 2019 (in thousands):
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2020
|
|
$
|
8,411
|
|
2021
|
|
6,583
|
|
2022
|
|
5,120
|
|
2023
|
|
4,276
|
|
2024
|
|
3,992
|
|
Thereafter
|
|
6,060
|
|
Total future lease payments
|
|
34,442
|
|
Less: imputed interest
|
|
(4,412
|
)
|
Present value of future lease payments
|
|
30,030
|
|
Less: current portion of lease liabilities
|
|
(7,871
|
)
|
Long-term lease liabilities
|
|
$
|
22,159
|
|
Under Topic 840, our future minimum payments for all operating lease obligations as of December 31, 2018 were as follows (in thousands):
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
$
|
10,646
|
|
2020
|
|
7,833
|
|
2021
|
|
5,520
|
|
2022
|
|
4,528
|
|
2023
|
|
3,898
|
|
Thereafter
|
|
8,671
|
|
Total
|
|
$
|
41,096
|
|
Rent expense was approximately $10.9 million and $11.0 million for the years ended December, 31, 2018 and 2017, respectively.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
(15) Business Segments
As of December 31, 2019, we operated through two reportable business segments: (i) Workforce Excellence and (ii) Business Transformation Services. We are organized into two operating segments aligned by complementary service lines and supported by a business development organization aligned by industry sector. 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. We have four reporting units for purposes of goodwill impairment testing, which represent our four practices which are one level below our 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, 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, processes and workforce 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 customer salesforces as well as service technicians with respect to new product features and designs, in effect rapidly increasing the salesforce and technician 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.
|
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
•
|
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 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 income (expense), interest expense, gain on change in fair value of contingent consideration, net and income tax expense.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Workforce Excellence
|
|
$
|
329,795
|
|
|
$
|
316,814
|
|
|
$
|
308,259
|
|
Business Transformation Services
|
|
253,495
|
|
|
198,346
|
|
|
200,949
|
|
|
|
$
|
583,290
|
|
|
$
|
515,160
|
|
|
$
|
509,208
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
Workforce Excellence
|
|
$
|
55,855
|
|
|
$
|
50,875
|
|
|
$
|
52,958
|
|
Business Transformation Services
|
|
33,358
|
|
|
26,868
|
|
|
29,069
|
|
Total gross profit
|
|
89,213
|
|
|
77,743
|
|
|
82,027
|
|
General and administrative expenses
|
|
64,492
|
|
|
54,848
|
|
|
55,753
|
|
Sales and marketing expenses
|
|
7,875
|
|
|
4,798
|
|
|
1,666
|
|
Restructuring charges
|
|
1,639
|
|
|
2,930
|
|
|
3,317
|
|
Gain on change in fair value of contingent consideration, net
|
|
677
|
|
|
4,438
|
|
|
1,620
|
|
Gain on sale of business
|
|
12,126
|
|
|
—
|
|
|
—
|
|
Operating income
|
|
28,010
|
|
|
19,605
|
|
|
22,911
|
|
Interest expense
|
|
6,058
|
|
|
2,945
|
|
|
3,132
|
|
Other income (expense)
|
|
417
|
|
|
(1,897
|
)
|
|
(90
|
)
|
Income before income tax expense
|
|
$
|
22,369
|
|
|
$
|
14,763
|
|
|
$
|
19,689
|
|
Additional information relating to our business segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Identifiable assets:
|
|
|
|
|
|
|
Workforce Excellence
|
|
$
|
290,465
|
|
|
$
|
283,039
|
|
Business Transformation Services
|
|
158,437
|
|
|
151,699
|
|
Total assets
|
|
$
|
448,902
|
|
|
$
|
434,738
|
|
Corporate and other assets which consist primarily of cash, other assets, and deferred tax assets and liabilities are allocated to the segments based on their respective percentage of consolidated revenues.
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Additions to property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
Workforce Excellence
|
|
$
|
1,657
|
|
|
$
|
1,321
|
|
|
$
|
1,609
|
|
Business Transformation Services
|
|
395
|
|
|
625
|
|
|
184
|
|
Corporate and other
|
|
263
|
|
|
888
|
|
|
941
|
|
|
|
$
|
2,315
|
|
|
$
|
2,834
|
|
|
$
|
2,734
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
Workforce Excellence
|
|
$
|
3,865
|
|
|
$
|
3,664
|
|
|
$
|
2,643
|
|
Business Transformation Services
|
|
3,641
|
|
|
2,827
|
|
|
2,770
|
|
Corporate and other
|
|
1,976
|
|
|
1,430
|
|
|
1,561
|
|
|
|
$
|
9,482
|
|
|
$
|
7,921
|
|
|
$
|
6,974
|
|
Information about our revenue in different geographic regions, which is attributable to our operations located primarily in the United States, United Kingdom and other countries is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
374,017
|
|
|
$
|
344,720
|
|
|
$
|
350,632
|
|
United Kingdom
|
|
86,511
|
|
|
92,059
|
|
|
100,466
|
|
Other
|
|
122,762
|
|
|
78,381
|
|
|
58,110
|
|
|
|
$
|
583,290
|
|
|
$
|
515,160
|
|
|
$
|
509,208
|
|
Information about our total assets in different geographic regions is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
United States
|
|
$
|
255,649
|
|
|
$
|
248,657
|
|
United Kingdom
|
|
72,939
|
|
|
72,048
|
|
Canada
|
|
43,503
|
|
|
41,974
|
|
Other
|
|
76,811
|
|
|
72,059
|
|
|
|
$
|
448,902
|
|
|
$
|
434,738
|
|
|
|
(16)
|
Fair Value Measurements
|
Our financial instruments measured at fair value include contingent consideration in connection with business combinations. The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018, and the level they fall within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Fair Value
|
|
December 31,
|
Financial Instrument
|
|
Financial Statement Classification
|
|
Hierarchy
|
|
2019
|
|
2018
|
Contingent consideration
|
|
Accounts payable and accrued expenses
|
|
Level 3
|
|
$
|
—
|
|
|
$
|
594
|
|
Contingent consideration
|
|
Other noncurrent liabilities
|
|
Level 3
|
|
—
|
|
|
83
|
|
GP STRATEGIES CORPORATION
Notes to Consolidated Financial Statements
|
|
(17)
|
Commitments, Guarantees, and Contingencies
|
As of December 31, 2019, we had outstanding letters of credit totaling $0.1 million, which expire in 2022. In addition, as of December 31, 2019, we had three outstanding performance bonds totaling $12.4 million primarily for contracts in our alternative fuels business.
|
|
(18)
|
Quarterly Information (unaudited)
|
Our quarterly financial information has not been audited but, in management’s opinion, includes all adjustments necessary for a fair presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three months ended
|
|
Year ended
|
2019
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
December 31
|
Revenue
|
|
$
|
139,473
|
|
|
$
|
149,413
|
|
|
$
|
139,005
|
|
|
$
|
155,399
|
|
|
$
|
583,290
|
|
Gross profit
|
|
21,278
|
|
|
22,959
|
|
|
21,667
|
|
|
23,309
|
|
|
89,213
|
|
Net income
|
|
334
|
|
|
3,219
|
|
|
2,141
|
|
|
9,495
|
|
(a)
|
15,189
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.19
|
|
|
$
|
0.13
|
|
|
$
|
0.56
|
|
|
$
|
0.90
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.19
|
|
|
$
|
0.13
|
|
|
$
|
0.56
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
125,032
|
|
|
$
|
133,691
|
|
|
$
|
123,566
|
|
|
$
|
132,871
|
|
|
$
|
515,160
|
|
Gross profit
|
|
17,679
|
|
|
22,573
|
|
|
19,199
|
|
|
18,292
|
|
|
77,743
|
|
Net income
|
|
2,632
|
|
|
3,575
|
|
|
3,244
|
|
|
385
|
|
|
9,836
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
0.02
|
|
|
$
|
0.59
|
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
0.02
|
|
|
$
|
0.59
|
|
The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects of rounding and dilution as a result of issuing common shares during the year.
|
|
(a)
|
Includes a $12.1 million pre-tax gain on the sale of our tuition program management business on October 1, 2019 which is described more fully in Note 4 to the Consolidated Financial Statements.
|