Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
General Overview
GP Strategies is a leading workforce transformation partner. The company provides custom workforce performance solutions for all levels of an organization. We believe our transformation focus, combined with a customer-centric approach, industry innovation and workforce expertise help clients achieve superior business and operational results by enabling higher levels of workforce effectiveness. For over 50 years, we have been providing solutions to optimize workforce performance. Our solutions include business consulting, leadership development, learning strategies & solutions, managed learning services, sales solutions, technology implementation & adoption solutions, and technical services.
We believe we are at our best when driving innovation—integrating leading technologies, developing new learning paradigms, and instituting fresh business processes and measurement approaches.
We built our workforce transformation business through internal growth and the acquisition of complementary businesses. Since 2006, we have completed over 30 acquisitions to strengthen our capabilities in specific service areas, expanded our global presence, and increased our customer base and market sector reach. As a result, we have added product sales training and leadership training, and strengthened our digital learning and content development expertise, while also expanding further internationally. Our acquisitions have expanded our market sector reach, added new customers and enhanced our service offerings through the addition of new complementary services. We also invested in global expansion through the establishment of over twenty new subsidiaries in select countries since 2013 to support new global outsourcing contracts. We believe our expanded infrastructure and the ability to deliver globally will allow us to better support our existing client base as well as win new business for our comprehensive service offerings.
Business Update Related to COVID-19 Pandemic
In March 2020, the World Health Organization declared COVID-19 a pandemic. Through the date of this report, the outbreak has adversely affected the economy in virtually every geography in which the Company operates, although the timing and severity of the adverse effects have varied across countries and regions. The pandemic has created uncertainty about the impact on the global economy. Governments have implemented various restrictions around the world, including closure of non-essential businesses, travel restrictions, shelter-in-place requirements and other restrictions.
The Company has taken a number of precautionary steps to safeguard its business and employees from COVID-19, including, but not limited to, implementing travel restrictions, arranging work from home capabilities and flexible work policies. During the year ending December 31, 2020, we were able to make the transition to a remote workforce in response to the COVID-19 pandemic and its effects without incurring material expenses by implementing existing business continuity plans using existing resources. The safety and well-being of our employees is our first priority.
Certain of our service lines are more impacted by the restrictions noted above than others. We have services that involve bringing together groups of employees for classroom training sessions or other types of meetings and events. These types of services have been most impacted by COVID-19, however, we are actively working with our customers to support the transition of live-instructor-led training to virtual instructor-led training (VILT) or eLearning modalities. We also have integrated outsourcing solutions and face-to-face consulting services globally. These services involve individuals spending some portion of their time interfacing directly with clients and participating in activities at the client’s location. To the extent client locations are closed, or our staff are not able to interface with clients virtually, these services have experienced some disruption from COVID-19.
The service lines that have been least impacted by COVID-19 are those that do not require face-to-face contact. These service lines include human capital management system implementation services, eLearning and VILT content development services, and technical consulting services. Overall, these service lines have seen comparatively less negative impacts from COVID-19 and have experienced positive momentum related to modality shifts for learning.
The Company estimates that the impact of COVID-19 on its revenue for the three months ended March 31, 2021 was at least $7.0 million. With the continued rollout of vaccines, we expect the negative effects of COVID-19 to decline sequentially over the remainder of 2021, but there may be regions, industries or our business lines that would be more significantly affected than others during this period.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.
The ultimate extent of the COVID-19 impact to the Company will depend on numerous evolving factors and future developments that we are not able to predict. Factors related to COVID-19 and its effects that could adversely affect our business and results of operations are outlined in “Item 1A - Risk Factors” in the Company’s Form 10-Q.
Business Segments
Effective July 1, 2020, we began managing our business under a new organizational structure on a regional basis through our three geographic markets, North America, EMEA and Emerging Markets (Latin America and Asia Pacific countries). Effective January 1, 2021 as a result of change in management, we transferred one of our businesses from our North America segment to our EMEA segment. In addition, we realigned some of our business between our North America OPS and North America TPS solutions to more accurately align with their focus industries. We have reclassified the segment financial information herein for the prior year periods to reflect the changes in our segment reporting and conform to the current year's presentation.
The reorganization was done to achieve the following:
•Unlock the potential of organic growth to achieve better business results for our clients and the Company.
•Simplify the matrix and empower rapid local decision making in service of our clients.
•Leverage global practice systems, processes, and intellectual property while enabling regional authority to better align and deliver to local client needs.
•Enable efficient use of our corporate infrastructure with regional resources.
Across our regional operating structure, the Company provides Workforce Transformation Services categorized into three primary solution sets:
•Organizational Performance Solutions (OPS) - focus is on managed learning services, digital learning strategies and content development, business consulting, and leadership development solutions
•Technical Performance Solutions (TPS) - focus is on engineering and technical services, enterprise technology adoption and HCM implementation services.
•Automotive Performance Solutions (APS) - provides sales enablement solutions, including custom product sales training and other customer loyalty and marketing relates services.
We have also identified four focus industries to deliver these services which include Automotive, Financial Services, Defense and Aerospace and Technology. Our three reportable segments are comprised of four operating segment under ASC Topic 280, Segment Reporting.
Significant Events
Divestiture
We did not have any divestitures during the quarter ending March 31, 2021.
Effective January 1, 2020, we sold our Alternative Fuels Division pursuant to an Asset Purchase Agreement with Cryogenic Industries, LLC. The upfront cash purchase price was $4.8 million, which consisted of an advance payment of $1.5 million received on December 31, 2019 and $3.5 million received on January 2, 2020, offset by a $0.2 million cash payment to the buyer in March 2020 in settlement of the final net working capital as defined in the asset purchase agreement. 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. As of March 31, 2021, this is not expected to be achieved and the loss on contingent consideration is reflected on the condensed consolidated statement of operations for the quarter. We recognized a pre-tax gain of $1.1 million, net of $1.3 million direct selling costs, on the sale of the business. The gain represents the difference between the purchase price and the carrying value of the business, which primarily included net working capital of $0.1 million and goodwill of $2.6 million. The Alternative Fuels Division was part of the North America segment.
Operating Highlights
Three Months ended March 31, 2021 Compared to the Three Months ended March 31, 2020
Our revenue decreased $13.7 million or 10.7% during the first quarter of 2021 compared to the first quarter of 2020. The net decrease is due to a $12.6 million decrease in our North America segment, a $1.9 million decrease in our EMEA segment partially offset by a $0.8 million increase in our Emerging Markets segment. Excluding the effects of COVID-19, divestitures, and foreign currency exchange rate changes, our revenue decreased $6.7 million for the first quarter of 2021 compared to the first quarter of 2020 primarily due to the timing of the shipment of North America APS publications from the first quarter of 2021 to the second quarter of 2021. We estimate that the impact of COVID-19 resulted in at least a $7.0 million decrease in our revenue in the first quarter of 2021 compared to the first quarter of 2020 primarily due to the postponement of certain training events and other delays in client projects. In addition, our revenue decreased $2.8 million during the first quarter of 2021 due to a divested revenue stream resulting from the sale of our IC Axon Division on October 1, 2020. Offsetting these decreases, the foreign currency exchange rate changes resulted in a $2.8 million increase in U.S. dollar reported revenue during the first quarter of 2021. The changes in revenue and gross profit are discussed in further detail below by segment.
Operating income (loss), the components of which are discussed below, increased $3.6 million to operating income of $3.2 million for the first quarter of 2021 compared to operating loss of $0.4 million for the first quarter of 2020. The net increase is primarily due to a $3.8 million increase in gross profit resulting from operating restructuring initiatives and our margin expansion focus implemented in fiscal year 2020. In addition, the increase resulted from a $2.4 million decrease in general and administrative expenses. These increases were partially offset by a $1.1 million gain on the sale of Alternative Fuels Division in the first quarter of 2020, a $0.7 million restructuring charges incurred in the first quarter of 2021, a $0.6 million increase in sales and marketing expenses and a $0.3 million loss on change in fair value of contingent consideration in the first quarter of 2021.
For the three months ended March 31, 2021, we had income before income tax expense of $2.2 million compared to a loss before income tax benefit of $1.9 million for the three months ended March 31, 2020. Net income was $1.7 million, or $0.09 earnings per diluted share, for the three months ended March 31, 2021, compared to a net loss of $1.3 million, or $(0.08) loss per diluted share, for the three months ended March 31, 2020. Diluted weighted average shares outstanding were 18.2 million for the first quarter of 2021 compared to 17.1 million for the first quarter of 2020.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Three months ended
|
|
March 31,
|
|
2021
|
|
2020
|
North America
|
$
|
72,329
|
|
|
$
|
84,936
|
|
EMEA
|
29,973
|
|
|
31,898
|
|
Emerging Markets
|
12,249
|
|
|
11,447
|
|
|
|
|
|
|
|
|
|
|
$
|
114,551
|
|
|
$
|
128,281
|
|
North America revenue decreased $12.6 million or 14.8% during the first quarter of 2021 compared to the first quarter of 2020. The revenue decrease is primarily due to the following:
•a $4.3 million decrease due to the cancellation or postponement of training events and other project related work due to COVID-19 shutdowns;
•a $1.2 million increase in our OPS practice primarily due to an increase in our managed learning services and content development business;
•a $3.8 million decrease in our TPS practice primarily due to a decline in disaster recovery services along with a reduction of certain government services due to contract completions;
•a $3.3 million decrease in our APS practice primarily due to the a shift of publication deliverables into the second quarter of 2021 partially offset by a previously announced material new contract with an automotive customer
•a $2.8 million decrease due to the divestiture of our IC Axon Division on October 1, 2020; and
•a $0.3 million increase in revenue due to changes in foreign currency exchange rates.
EMEA revenue decreased $1.9 million or 6.0% during the first quarter of 2021 compared to the first quarter of 2020. The revenue decrease is primarily due to the following:
•a $2.4 million decrease in revenue due to the cancellation or postponement of training events and other project related work due to COVID-19 shutdowns;
•a $1.8 million decrease in our OPS practice primarily due to a decline in our strategic consulting business;
•a $0.2 million decrease in our APS practice primarily due a reduction in services for automotive clients in the region; and
•a $2.4 million increase in revenue due to changes in foreign currency exchange rates.
Emerging Markets revenue increased $0.8 million or 7.0% during the first quarter of 2021 compared to the first quarter of 2020. The revenue increase is due to the following:
•a $0.3 million decrease in revenue due to the cancellation or postponement of training events and other project related work due to COVID-19 shutdowns;
•a $2.0 million increase in our OPS practice primarily due to increase in our managed learning service business; and
•a $0.9 million decrease in our APS practice primarily due closure of our body shop business in Thailand.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Three months ended
|
|
March 31,
|
|
2021
|
|
2020
|
|
|
|
% Revenue
|
|
|
|
% Revenue
|
North America
|
$
|
14,493
|
|
|
20.0
|
%
|
|
$
|
13,058
|
|
|
15.4
|
%
|
EMEA
|
5,050
|
|
|
16.8
|
%
|
|
3,776
|
|
|
11.8
|
%
|
Emerging Markets
|
1,898
|
|
|
15.5
|
%
|
|
780
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,441
|
|
|
18.7
|
%
|
|
$
|
17,614
|
|
|
13.7
|
%
|
North America gross profit of $14.5 million or 20.0% of revenue for the first quarter of 2021 increased by $1.4 million or 11.0% compared to gross profit of $13.1 million or 15.4% of revenue for the first quarter of 2020 primarily due to reduced costs and improved efficiencies. In addition there was also a license sale of $0.9 million in our TPS Energy services business and a $0.5 million license sale in our OPS Leadership practice in the three months ended March 31, 2021, respectively.
EMEA gross profit of $5.1 million or 16.8% of revenue for the first quarter of 2021 increased by $1.3 million or 33.7% compared to gross profit of $3.8 million or 11.8% of revenue for the first quarter 2020 primarily due to reduced costs and improved efficiencies.
Emerging Markets gross profit of $1.9 million or 15.5% of revenue for the first quarter of 2021 increased by $1.1 million or 143.3% compared to gross profit of $0.8 million or 6.8% of revenue for the first quarter 2020 primarily due to reduced costs and improved efficiencies.
General and Administrative Expenses
General and administrative expenses decreased $2.4 million or 14.2% from $17.3 million in the first quarter of 2020 to $14.8 million in the first quarter of 2021. The decrease in general and administrative expenses is primarily due to (i) a $2.8 million reduction in labor and expenses resulting from restructuring initiatives, (ii) a $0.7 million adjustment to the bad debt reserve, and (iii) a $0.5 million decrease in amortization expense resulting from the sale of the IC Axon Division. These decreases were partially off set by $0.9 million of legal costs associated with two businesses classified as held for sale and $0.7 million of various other one time outside costs.
Sales and Marketing Expenses
Sales and marketing expenses increased $0.6 million or 34.2% from $1.8 million in the first quarter of 2020 to $2.5 million in the first quarter of 2021 due to increased investment in global sales resources.
Restructuring Charges
During the first quarter of 2021, we incurred $0.6 million of restructuring charges resulting from consulting fees performed to assist with the implementation of opportunities to improve the efficiencies of our general and administrative support functions and $0.1 million of restructuring costs related to the loss on the sale of inventory resulting from the closing of our body shop in Thailand.
Loss on change in fair value of contingent consideration
During the first quarter of 2021, we incurred a $0.3 million loss on the change in fair value of a contingent consideration resulting from the sale of the Alternative Fuels Division as a result of certain milestones are not expected to be achieved under an assigned contract through the period ending December 31, 2021.
Interest Expense
Interest expense was $0.2 million for the first quarter of 2021 compared to $1.0 million for the first quarter of 2020. The decrease is due to lower borrowings and interest rates under the Company's credit facility as compared to the first quarter of 2020.
Other Expense
Other expenses was $0.8 million for the first quarter of 2021 compared to $0.5 million for the first of 2020 respectively. The increase in other expense is primarily due to a $0.7 million increase in foreign currency losses in the first quarter of 2021 and a $0.1 million impairment loss on an operating lease right-of-use asset, partially offset by a $0.4 million increase in income from a joint venture. Foreign currency gains and losses primarily relate 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 foreign subsidiaries.
Income Tax Expense (Benefit)
We had an income tax expense of $0.4 million for the first quarter of 2021 compared to an income tax benefit of $0.6 million for the first quarter of 2020. The effective income tax rate was 20.4% and 32.7% for the three months ended March 31, 2021 and 2020, respectively. The decrease in tax rate was primarily due to changes in the jurisdictional mix of earnings and the tax effects of an increase in pretax earnings. Income tax expense for the interim quarterly periods is based on an estimated annual effective tax rate which includes the U.S. federal, state and local, and non-U.S. statutory rates, permanent differences, and other items that may have an impact on income tax expense.
Liquidity and Capital Resources
Working Capital
Our working capital was $93.0 million at March 31, 2021 compared to $99.9 million at December 31, 2020. As of March 31, 2021, we had no long-term debt outstanding. We believe that cash generated from operations and borrowings available under our Credit Agreement ($87.1 million of available borrowings as of March 31, 2021 based on our consolidated leverage ratio) will be sufficient to fund our working capital and other requirements for at least the next twelve months. This belief does not take into account exacerbation of, or additional or prolonged disruptions caused by, the COVID-19 pandemic that result in a material adverse impact on our business, which are events beyond our control, or unanticipated uses of cash. The anticipated cash needs of our business could change significantly if events, including economic disruptions, arising from the COVID-19 pandemic worsen, or if other economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including material negative changes in the health and welfare of our employees or those of our clients, and the operating performance or financial results of our business. Any of these events or circumstances, including any new business opportunities, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:
•our future results of operations;
•the quality of our accounts receivable;
•our relative levels of debt and equity;
•the volatility and overall condition of the capital markets; and
•the market price of our securities.
Any new debt funding, if available, may be on terms less favorable to us than our Credit Facility. See “Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form 10-Q, and the information contained under the heading “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2020 and in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.
As of March 31, 2021, the amount of cash and cash equivalents held outside of the U.S. by foreign subsidiaries was $9.6 million. The 2017 Tax Cuts and Jobs 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 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.
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 three months ended March 31, 2021 and March 31, 2020, we did not repurchase shares of our common stock in the open market. As of March 31, 2021, there was approximately $1.9 million available for future repurchases under the buyback program.
Significant Customers & Concentration of Credit Risk
We have a market concentration of revenue in both the automotive sector and financial & insurance sector. Revenue from the automotive sector accounted for approximately 23% and 25% of our consolidated revenue for the three months ended March 31, 2021 and 2020, respectively. In addition, we have a concentration of revenue from a single automotive customer, which accounted for approximately 13% and 14% of our consolidated revenue for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, accounts receivable from a single automotive customer totaled $12.5 million, or 14%, of our consolidated accounts receivable balance.
Revenue from the financial & insurance sector accounted for approximately 17% and 16% of our consolidated revenue for the three months ended March 31, 2021 and 2020. In addition, we have a concentration of revenue from a single financial services customer, which accounted for approximately 9% of our consolidated revenue for the three-months ended March 31, 2021 and 2020. As of March 31, 2021, billed and unbilled accounts receivable from a single financial services customer totaled $10.4 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 for the three months ended March 31, 2021 or 2020 or consolidated accounts receivable balance as of March 31, 2021.
Cash Flows
Three Months ended March 31, 2021 Compared to the Three Months ended March 31, 2020
Our cash and cash equivalents balance decreased $12.3 million from $23.1 million as of December 31, 2020 to $10.8 million as of March 31, 2021. The decrease in cash and cash equivalents during the three months ended March 31, 2021 resulted from cash provided by operating activities of $0.6 million, cash used in investing activities of $0.5 million, cash used in financing activities of $12.9 million and a positive effect of foreign currency exchange rates changes on cash of $0.5 million.
Cash provided by operating activities was $0.6 million for the three months ended March 31, 2021 compared to $9.8 million for the same period in 2020. The decrease in cash from operations is primarily due to a net decrease in working capital balances during the three months ended March 31, 2021 compared to the same period in 2020.
Cash used in investing activities was $0.5 million for the three months ended March 31, 2021 compared to cash provided by investing activities of $2.8 million for the same period in 2020. The change in cash from investing activities is primarily due to a $3.3 million of cash proceeds from the sale of our Alternative Fuels Division on January 1, 2020.
Cash used in financing activities was $12.9 million for the three months ended March 31, 2021 compared to $11.7 million for the same period in 2020. The cash used in financing activities is primarily due to net repayments of borrowings under our Credit Agreement.
Debt
On November 30, 2018, we entered into a Credit Agreement with PNC Bank, National Association, as administrative agent and a syndicate of lenders, replacing the prior Credit Agreement with Wells Fargo dated December 21, 2016, as amended on April 28, 2018 and June 29, 2018. 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. 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 Adjusted LIBOR 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 Adjusted LIBOR, 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 May 7, 2020 we entered into an amendment to the Credit Agreement that increases the maximum leverage ratio we are required to maintain from 3.0 to 1.0 to 3.75 to 1.0 for the fiscal quarters ending June 30, 2020, September 30, 2020 and December 31, 2020, and 3.00 to 1.0 for fiscal quarters ending March 31, 2021 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 March 31, 2021, our leverage ratio was 0.0 to 1.0 and our interest expense ratio was 14.4 to 1.0, each of which was in compliance with the Credit Agreement. In addition, the amendment to the Credit Agreement reduced the borrowing limit under the credit facility from $200 million to $140 million.
As of March 31, 2021, there were no borrowings outstanding and $87.1 million of available borrowings under the revolving loan facility based on our Leverage Ratio. For the three months ended March 31, 2021 and 2020, the weighted average interest rate on our borrowings was 1.9% and 3.9%, respectively. As of March 31, 2021, the fair value of our borrowings under the Credit Agreement approximated its carrying value as it bears interest at variable rates. There were $1.0 million of unamortized debt issue costs related to the Credit Agreement as of March 31, 2021 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.
Off-Balance Sheet Commitments
As of March 31, 2021, we did not have any off-balance sheet commitments except for letters of credit entered into in the normal course of business.
Accounting Standards Issued
We discuss recently issued accounting standards in Note 2 to the accompanying condensed consolidated financial statements.
Non-GAAP Information
This Form 10-Q references Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization), a widely used non-GAAP financial measure of operating performance. It is presented as supplemental information that the Company believes is useful to investors to evaluate its results because it excludes certain items that are not directly related to the Company’s core operating performance. In particular, we believe that certain gains and charges, such as the gain on sale of business, legal acquisition/divestiture and transaction costs, restructuring charges and severance expense, while difficult to predict in the current environment, will vary significantly and make a quarter to quarter comparison of net income less useful to investors than a comparison of Adjusted EBITDA in understanding the impact of COVID-19 and related effects on our results of operations.
Adjusted EBITDA is calculated by adding back to net income interest expense, income tax expense (benefit), depreciation and amortization, non-cash stock compensation expense and other unusual or infrequently occurring items. For the periods presented, these other items are restructuring charges, severance expense, loss on change in fair value of contingent consideration, foreign currency transaction losses, legal acquisition/divestitures and transaction costs, impairment of operating lease right-of-use assets, and gain on sale of business.
Adjusted EBITDA should not be considered as a substitute either for net income, as an indicator of the Company’s operating performance, or for cash flow, as a measure of the Company’s liquidity. In addition, because Adjusted EBITDA may not be calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Non-GAAP Reconciliation – Adjusted EBITDA
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
|
|
|
|
|
|
2021
|
2020
|
|
|
Net income (loss)
|
$
|
1,724
|
|
$
|
(1,294)
|
|
|
|
Interest expense
|
181
|
|
978
|
|
|
|
Income tax expense (benefit)
|
441
|
|
(629)
|
|
|
|
Depreciation and amortization
|
1,472
|
|
2,177
|
|
|
|
EBITDA
|
3,818
|
|
1,232
|
|
|
|
Adjustments:
|
|
|
|
|
Non-cash stock compensation expense
|
1,667
|
|
1,256
|
|
|
|
|
|
|
|
|
Restructuring charges
|
699
|
|
—
|
|
|
|
Severance expense
|
539
|
|
211
|
|
|
|
|
|
|
|
|
Loss on change in fair value of contingent consideration
|
269
|
|
—
|
|
|
|
|
|
|
|
|
Foreign currency transaction losses
|
1,249
|
|
496
|
|
|
|
Legal acquisition/divestitures and transaction costs
|
850
|
|
1,038
|
|
|
|
Impairment of operating lease right-of-use asset
|
103
|
|
255
|
|
|
|
Gain on sale of business
|
—
|
|
(1,064)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
9,194
|
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$
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3,424
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Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements about the anticipated effects of the COVID-19 pandemic and related events on our business and results of operations. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements. Forward–looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results. We use words such as “expects,” “intends,” “believes,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “plans” and similar expressions to indicate forward-looking statements, but their absence does not mean a statement is not forward-looking. Because these forward-looking statements are based upon management’s expectations and assumptions and are subject to risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including, but not limited to, impact of the COVID-19 pandemic and related events that are beyond our control and difficult to predict, and the other factors set forth in Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and Part II, Item 1A – Risk Factors of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (including but not limited to Risks Related to COVID-19) and those other risks and uncertainties detailed in our periodic reports and registration statements filed with the Securities and Exchange Commission (the "SEC"). We caution that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the effect, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ from those expressed or implied by these forward-looking statements.
If any one or more of these expectations and assumptions proves incorrect, actual results will likely differ materially from those contemplated by the forward-looking statements. Even if all of the foregoing assumptions and expectations prove correct, actual results may still differ materially from those expressed in the forward-looking statements as a result of factors we may not anticipate or that may be beyond our control. While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. We do not undertake to update any forward-looking statements made by us, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.