GP STRATEGIES CORPORATION 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.
Recent Developments
OnJuly 15, 2021 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Learning Technologies Group plc, a public limited company incorporated inEngland andWales ("LTG"),Learning Technologies Acquisition Corporation , aDelaware corporation and a direct wholly owned subsidiary of LTG ("US Holdco"), andGravity Merger Sub, Inc. , aDelaware corporation and a wholly owned subsidiary of US Holdco ("Merger Sub"). The Merger Agreement provides, subject to its terms and conditions, for the acquisition of the Company by LTG at a price of$20.85 in cash for each share of the Company's common stock (each, a "Share"), without interest thereon and subject to deduction for any required withholding tax (the "Merger Consideration"), through the merger of Merger Sub with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned, indirect subsidiary of LTG (the "Surviving Corporation").
Pursuant to the Merger Agreement, at the effective time of the Merger (the "Effective Time"):
•each Share that is issued and outstanding immediately prior to the Effective Time (other than (i) Shares held in the treasury of the Company or owned by the Company, any subsidiary of the Company, LTG, US Holdco, Merger Sub or any other subsidiary of LTG immediately prior to the Effective Time, all of which will be canceled, and (ii) Shares held by stockholderswho do not vote in favor of the Merger andwho properly exercise their appraisal rights under, and comply in all respects with applicable provisions of,Delaware law) will be automatically cancelled and converted into the right to receive the Merger Consideration; •each restricted stock unit granted by the Company that is subject only to time-based vesting conditions and is outstanding and unvested at the Effective Time will automatically be cancelled and converted into the right to receive from theSurviving Corporation an amount of cash equal to the product of (a) the number of Shares then underlying such restricted stock unit, multiplied by (b) the Merger Consideration; and •each restricted stock unit granted by the Company that is subject to performance-based vesting conditions and is outstanding and unvested at the Effective Time will automatically be cancelled and converted into the right to receive from theSurviving Corporation an amount of cash equal to the product of (a) the number of Shares that vest upon a "Sale of the Company" (as defined in theGP Strategies Corporation 2021 Long-Term Incentive Program) pursuant to the terms of the grant of such restricted stock unit, multiplied by (b) the Merger Consideration. 23
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Pursuant to the Merger Agreement, theGP Strategies Corporation 2011 Stock Incentive Plan will be terminated immediately prior the Effective Time, and participants in theGP Strategies Corporation 2011 Stock Incentive Plan will not have any rights thereunder following the Effective Time, except for the right to receive the payments described above. Completion of the Merger is subject to customary closing conditions, including (i) adoption of the Merger Agreement by the Company's stockholders (the "Stockholder Approval"), (ii) the absence of governmental orders, stays, decrees, judgments or injunctions, and of statutes, rules or regulations, prohibiting the Merger, (iii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and (iv) clearance of the Merger by theCommittee on Foreign Investment inthe United States . In addition, the obligation of each of the Company and LTG to consummate the Merger is conditioned upon, among other things, the accuracy of the representations and warranties of the other (subject to certain materiality exceptions), and material compliance by the other with its covenants under the Merger Agreement. LTG's obligation to consummate the Merger is also conditioned upon there not occurring after the date of the Merger Agreement any effect, development, circumstance or change that has, or would reasonably be expected to have, a "Company Material Adverse Effect" (as defined in the Merger Agreement) and upon the admission of the new ordinary shares of LTG to be issued in connection with the Share Issue (as hereinafter defined) to trading on the Alternative Investment Market operated by theLondon Stock Exchange . The Merger Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature. Until the earlier of termination of the Merger Agreement and the Effective Time, the Company has agreed to operate its business in the ordinary course of business in all material respects and has agreed to certain other operating covenants and to not take certain specified actions prior to the consummation of the Merger, as set forth more fully in the Merger Agreement. The Company has also agreed to convene and hold a meeting of its stockholders for the purpose of obtaining the Stockholder Approval. In addition, the Merger Agreement requires that, subject to certain exceptions, the Board of Directors (the "Board") recommend that the Company's stockholders adopt the Merger Agreement. The Merger Agreement contains certain termination rights for the Company and LTG, including, among others, the right of (i) the Company to terminate the Merger Agreement prior to receipt of the Stockholder Approval, if the Company receives an alternative acquisition proposal that constitutes a "Superior Proposal" (as defined in the Merger Agreement), the Company complies with it covenants in the Merger Agreement relating to such proposal, and, substantially concurrently with termination, the Company pays a termination fee to LTG and enters into a definitive agreement to consummate such proposal and (ii) LTG to terminate the Merger Agreement if the Board changes its recommendation with respect to the Merger Agreement. The Merger Agreement also provides that under specified circumstances, the Company may be required to pay LTG a termination fee of$12,000,000 or reimburse LTG for its expenses incurred in connection with the merger agreement and the merger up to a maximum of$1,200,000 , or LTG may be obligated to payGP Strategies a termination fee of$12,000,000 plus reimbursement ofGP Strategies' expenses incurred during fiscal year 2021 in connection with the merger agreement, up to$5,000,000 (or, if lower, the difference of 1% of LTG's market capitalization as of the date of termination minus$12,000,000 ).
Business Update Related to COVID-19 Pandemic
InMarch 2020 , theWorld 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 endingDecember 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 24 -------------------------------------------------------------------------------- Table of Contents 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 six months endedJune 30, 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 emergence of variants of the virus may counter the benefits from vaccination efforts in certain regions, particularly regions with lower vaccination rates. 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".
Business Segments
EffectiveJuly 1, 2020 , we began managing our business under a new organizational structure on a regional basis through our 3 geographic markets,North America , EMEA and Emerging Markets (Latin America andAsia Pacific countries). EffectiveJanuary 1, 2021 as a result of change in management, we transferred one of our businesses from ourNorth 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 includeAutomotive, Financial Services ,Defense and Aerospace and Technology. Our three reportable segments are comprised of four operating segment under ASC Topic 280, Segment Reporting. 25 --------------------------------------------------------------------------------
Table of Contents Significant Events Divestiture As ofJune 30, 2021 , we sold aUnited Kingdom business outside of our focus industries, which we had previously classified as held for sale. The related assets previously held for sale were primarily composed of$1.1 million of operating lease right-of-use assets,$0.3 million of fixed assets,$0.1 million of goodwill, and$0.1 million of other current assets. The related liabilities held for sale are primarily composed of$1.2 million of operating lease liabilities. We received proceeds on the sale of this business of$0.4 million and recorded a loss on the sale of business of$0.4 million . Transaction costs related to the sale totaled$0.4 million . This business was part of the EMEA segment. EffectiveJanuary 1, 2020 , we sold our Alternative Fuels Division pursuant to an Asset Purchase Agreement withCryogenic Industries, LLC . The upfront cash purchase price was$4.8 million , which consisted of an advance payment of$1.5 million received onDecember 31, 2019 and$3.5 million received onJanuary 2, 2020 , offset by a$0.2 million cash payment to the buyer inMarch 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 periodDecember 31, 2021 . As ofMarch 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 theNorth America segment.
Operating Highlights
Three Months ended
Our revenue increased$22.6 million , or 21.3%, during the second quarter of 2021 compared to the second quarter of 2020. The net increase is due to a$10.1 million increase in ourNorth America segment, a$8.2 million increase in our EMEA segment and a$4.4 million increase in our Emerging Markets segment. Excluding the effects of divestitures, and foreign currency exchange rate changes, our revenue increased$21.8 million for the second quarter of 2021 compared to the second quarter of 2020. Our revenue decreased$2.9 million during the second quarter of 2021 due to a divested revenue stream resulting from the sale of our IC Axon Division onOctober 1, 2020 . The foreign currency exchange rate changes resulted in a$3.7 million increase inU.S. dollar reported revenue during the second 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$4.7 million to operating income of$3.7 million for the second quarter of 2021 compared to an operating loss of$1.0 million for the second quarter of 2020. The net increase is primarily due to a$7.9 million increase in gross profit resulting from increased revenue and operating restructuring initiatives and our margin expansion focus implemented in fiscal year 2020. This increase was partially offset by a$1.3 million increase in general and administrative expenses, a$0.9 million increase in restructuring charges, a$0.7 million increase in sales and marketing expenses and a$0.4 million loss on the sale of a business in theUnited Kingdom in the second quarter of 2021. For the three months endedJune 30, 2021 , we had income before income tax expense of$3.3 million compared to a loss before income tax benefit of$1.8 million for the three months endedJune 30, 2020 . Net income was$2.5 million , or$0.14 earnings per diluted share, for the three months endedJune 30, 2021 , compared to a net loss of$0.6 million , or a$(0.04) loss per diluted share, for the three months endedJune 30, 2020 . Diluted weighted average shares outstanding were 18.3 million for the second quarter of 2021 compared to 17.2 million for the second quarter of 2020. 26
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Revenue
(Dollars in thousands) Three months ended
June 30,
2021 2020
North America $ 82,999 $ 72,913
EMEA 31,831 23,680
Emerging Markets 13,952 9,551
$ 128,782 $ 106,144 •a$3.3 million increase in our OPS practice primarily due to our managed learning services and content development businesses; •a$0.1 million increase in our TPS practice; •a$8.9 million increase in our APS practice primarily due to the timing of shipment of publication deliverables; •a$2.9 million decrease due to the divestiture of our IC Axon Division onOctober 1, 2020 ; and •a$0.7 million increase in revenue due to changes in foreign currency exchange rates. EMEA revenue increased$8.2 million , or 34.4%, during the second quarter of 2021 compared to the second quarter of 2020. The revenue increase is primarily due to the following: •a$0.7 million increase in our OPS practice primarily due to an increase in managed learning services; •a$4.2 million increase in our TPS practice primarily due to our platform adoption services and engineering services; •a$0.5 million increase in our APS practice primarily due to increases in automotive services in our middle east region; and •a$2.8 million increase in revenue due to changes in foreign currency exchange rates. Emerging Markets revenue increased$4.4 million , or 46.1%, during the second quarter of 2021 compared to the second quarter of 2020. The revenue increase is due to the following: •a$2.8 million increase in our OPS practice primarily due to increases in managing learning services in our APAC region; •a$0.2 million increase in our TPS practice; •a$1.2 million increase in our APS practice primarily due to an increase of$0.7 million in our APAC region and an increase of$0.5 million in our LATAM region; and •a$0.2 million increase in revenue due to changes in foreign currency exchange rates. Gross Profit (Dollars in thousands) Three months ended June 30, 2021 2020 % Revenue % Revenue North America$ 16,676 20.1 %$ 13,527 18.6 % EMEA 4,993 15.7 % 1,393 5.9 % Emerging Markets 2,159 15.5 % 977 10.2 %$ 23,828 18.5 %$ 15,897 15.0 %North America gross profit of$16.7 million , or 20.1%, of revenue for the second quarter of 2021 increased by$3.1 million , or 23.3%, compared to gross profit of$13.5 million , or 18.6%, of revenue for the second quarter of 2020. EMEA gross profit of$5.0 million , or 15.7%, of revenue for the second quarter of 2021 increased by$3.6 million , or 258.4%, compared to gross profit of$1.4 million , or 5.9%, of revenue for the second quarter 2020.
Emerging Markets gross profit of
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The improved margins in all our business segments was the result of increasing
revenues, restructuring activities and strategic focus on margin expansion.
General and Administrative Expenses
General and administrative expenses increased$1.3 million , or 8.9%, from$14.2 million in the second quarter of 2020 to$15.4 million in the second quarter of 2021. The increase is primarily due to a$1.8 million increase in legal fees and$0.5 million increase in outside accounting fees partially offset by a$0.6 million decrease in bad debt, a$0.5 million decrease in amortization expense resulting from the sale of the IC Axon Division and a$0.3 million reduction in labor and expenses resulting from restructuring initiatives. Sales and Marketing Expenses Sales and marketing expenses increased$0.7 million , or 38.0%, from$1.9 million in the second quarter of 2020 to$2.6 million in the second quarter of 2021 due to increased marketing efforts compared to a pause in activities in the second quarter of 2020 due to the COVID-19 disruption.
Restructuring Charges
During the second quarter of 2021, we continued to execute various activities to improve our general and administrative functions and as a result we incurred$0.6 million of consulting costs. As a result of this review, we incurred$0.3 million in severance costs related to personnel reductions in our general and administrative support functions. In addition, we incurred a$0.9 million impairment cost as a result of the closure of certain operations in theUnited Kingdom . During the second quarter of 2020, we initiated restructuring and transition activities to improve operational efficiency, reduce costs and better position the company to drive future revenue growth. We recorded severance expense of$0.9 million for the three months endedJune 30, 2020 .
Loss on sale of business
As ofJune 30, 2021 , we sold aUnited Kingdom business outside of our focus industries, which we had previously classified as held for sale. The related assets previously held for sale were primarily composed of$1.1 million of operating lease right-of-use assets,$0.3 million of fixed assets,$0.1 million of goodwill, and$0.1 million of other current assets. The related liabilities held for sale were primarily composed of$1.2 million of operating lease liabilities. We received proceeds on the sale of this business of$0.4 million and recorded a loss on the sale of business of$0.4 million . Transaction costs related to the sale totaled$0.4 million . This business was part of the EMEA segment. Interest Expense Interest expense was$0.2 million for the second quarter of 2021 compared to$0.6 million for the second quarter of 2020. The decrease is due to lower borrowings and interest rates under the Company's credit facility as compared to the second quarter of 2020. Other Expense
Other expenses were
We had an income tax expense of$0.8 million for the second quarter of 2021 compared to an income tax benefit of$(1.2) million for the second quarter of 2020. The effective income tax rate was 24.7% and 66.2% for the three months endedJune 30, 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 theU.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. 28
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Six Months ended
Our revenue increased$8.9 million , or 3.8%, during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The net increase in revenue is due to a$6.2 million increase in our EMEA segment and a$5.2 million increase in our Emerging Markets segment partially offset by a$2.5 million decrease in ourNorth America segment. Excluding the effects of foreign currency exchange rate changes, COVID-19 and divestitures, our revenue increased$14.8 million for the six months endedJune 30, 2021 compared to the same period of 2020. Foreign currency exchange rate changes resulted in a total$6.8 million increase inU.S. dollar reported revenue during the six months endedJune 30, 2021 . We estimate that the impact of COVID-19 resulted in an approximately$7.0 million decrease in our revenue in the six months endedJune 30, 2021 compared to the same period of 2020. In addition, our revenue decreased$5.7 million during the six months endedJune 30, 2021 due to a divested revenue stream resulting from the sale of our IC Axon Division onOctober 1, 2020 . The changes in revenue and gross profit are discussed in further detail below by segment. Operating income (loss), the components of which are discussed in detail below, increased$8.3 million to operating income of$6.9 million for the six months endedJune 30, 2021 compared to an operating loss of$(1.4) million for the same period in 2020. The net increase in operating income is primarily due to a$11.8 million net increase in gross profit and a$1.2 million decrease in general and administrative expenses partially offset by a$1.3 million increase in sales and marketing expenses, a$1.6 million increase in restructuring cost, a$0.3 million loss on change in fair value of contingent consideration. In addition, we incurred a$0.4 million loss on the sale of a business in theUnited Kingdom in the six months endedJune 30, 2021 compared to a$1.1 million gain on the sale our Alternative fuels Division in the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 , we had income before income taxes of$5.5 million compared to a loss before income tax benefit of$(3.7) million for the six months endedJune 30, 2020 . Net income was$4.2 million , or$0.23 per diluted share, for the six months endedJune 30, 2021 , compared to a net loss of$(1.9) million , or$(0.11) per diluted share, for the six months endedJune 30, 2020 . Diluted weighted average shares outstanding were 18.2 million and 17.2 million for the six months endedJune 30, 2021 and 2019, respectively. Revenue (Dollars in thousands) Six months ended June 30, 2021 2020 North America$ 155,328 $ 157,849 EMEA 61,804 55,578 Emerging Markets 26,201 20,998$ 243,333 $ 234,425 North America revenue decreased$2.5 million , or 1.6%, during the six months endedJune 30, 2021 compared to the same period in 2020. The revenue decrease is primarily due to the following: •a$4.2 million decrease in the first quarter of 2021 due to the cancellation or postponement of training events and other project related work due to COVID-19 shutdowns; •a$5.7 million decrease due to divestiture of our Alternative Fuels Division onJanuary 1, 2020 ; •a$4.5 million net increase in our OPS practice primarily due to our managed learning services and content development businesses; •a$3.8 million net decrease in our TPS practice primarily due to a decline in our disaster recovery services along with a reduction of certain government services due to contract completions; •a$5.6 million net increase in our APS practice primarily due to a new contract award in June of 2020; and •a$1.1 million increase in revenue due to changes in foreign currency exchange rates. EMEA revenue increased$6.2 million , or 11.2%, during the six months endedJune 30, 2021 compared to the same period in 2020. The revenue increase 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$1.2 million net decrease in our OPS practice primarily due to our managed learning services and content development businesses; 29 -------------------------------------------------------------------------------- Table of Contents •a$4.1 million net increase in our TPS practice primarily due to an increase in platform adoption services and engineering services; •a$0.3 million net increase in our APS practice; and •a$5.5 million net increase in revenue due to changes in foreign currency exchange rates. Emerging Markets revenue increased$5.2 million , or 24.8%, during the six months endedJune 30, 2021 compared to the same period in 2020. The revenue increase is due to the following: •a$0.4 million decrease in revenue due to the cancellation or postponement of training events and other project related work due to COVID-19 shutdowns; •a$4.8 million net increase in our OPS practice primarily due to increases in managing learning services in our APAC region; •a$0.2 million net increase in our TPS practice; •a$0.4 million net increase in our APS practice; and •a$0.2 million net increase in revenue due to changes in foreign currency exchange rates. Gross Profit (Dollars in thousands) Six months ended June 30, 2021 2020 % Revenue % Revenue North America$ 31,169 20.1 %$ 26,585 16.8 % EMEA 10,043 16.2 % 5,169 9.3 % Emerging Markets 4,057 15.5 % 1,757 8.4 %$ 45,269 18.6 %$ 33,511 14.3 %North America gross profit of$31.2 million , or 20.1%, of revenue for the six months endedJune 30, 2021 increased by$4.6 million ,or 17.2%, when compared to gross profit of$26.6 million , or 16.8%, of revenue for the same period in 2020.
EMEA gross profit of
Emerging Markets gross profit of$4.1 million , or 15.5%, of revenue for the six months endedJune 30, 2021 increased by$2.3 million , or 130.9%, when compared to gross profit of$1.8 million , or 8.4%, of revenue for the same period in 2020.
The improved margins in all our business segments was the result of increasing revenues, restructuring activities and strategic focus on margin expansion.
General and Administrative Expenses
General and administrative expenses decreased$1.2 million , or 3.8%, from$31.5 million for the six months endedJune 30, 2020 to$30.3 million for the same period in 2021. The decrease is primarily due to (i) a$1.2 million decrease in bad debt, (ii) a$1.0 million decrease in amortization expense resulting from the sale of the IC Axon Division, (iii) a$0.8 million reduction in labor and expenses resulting from restructuring initiatives, (iv) a$0.6 million reduction in information technology cost and (v) a$0.4 million reduction in facility costs partially offset by a$2.8 million increase in legal fees.
Sales and Marketing Expenses
Sales and marketing expenses increased$1.3 million , or 36.1%, from$3.7 million for the six months endedJune 30, 2020 to$5.0 million for the same period in 2021 primarily due to increased sales and marketing efforts.
Restructuring Charges
During the first half of 2021, we executed various activities to improve our general and administrative functions and as a result recorded a$1.2 million consulting cost. As a result of this review, we incurred$0.3 million in severance costs related to 30 -------------------------------------------------------------------------------- Table of Contents personnel reductions in our general and administrative support functions. In addition, we incurred a$0.9 million impairment cost as a result of the closure of certain operations in theUnited Kingdom . We permanently closed our body shop operations inThailand and as result incurred a$0.1 million restructuring cost related to the loss on the sale of inventory associated with the business. During the second quarter of 2020, we initiated restructuring and transition activities to improve operational efficiency, reduce costs and better position the company to drive future revenue growth. We recorded severance expense of$0.9 million for the three months endedJune 30, 2020 .
Loss on Change in Fair Value of Contingent Consideration
During the first half 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 endingDecember 31, 2021 .
Gain (Loss) on Sale of Business
As ofJune 30, 2021 , we sold a business outside of our focus industries, which we had previously classified as held for sale. The related assets previously held for sale were primarily composed of$1.1 million of operating lease right-of-use assets,$0.3 million of fixed assets, and$0.1 million of goodwill. The related liabilities held for sale were primarily composed of$1.2 million of operating lease liabilities. We received proceeds on the sale of this business of$0.4 million and recorded a loss on the sale of business of$0.4 million . Transaction costs related to the sale totaled$0.4 million . This business was part of the EMEA segment. EffectiveJanuary 1, 2020 , we sold our Alternative Fuels Division pursuant to an Asset Purchase Agreement withCryogenic Industries, LLC . We recognized a pre-tax gain of$1.1 million , net of$1.3 million direct selling costs, on the sale of the business. Interest Expense
Interest expense decreased
Other Expense
Other expense was
Income Tax Expense (Benefit)
Income tax expense was$1.3 million for the six months endedJune 30, 2021 compared to income tax benefit of$(1.8) million for the same period in 2020. The effective income tax rate was 23.0% and 48.8% for the six months endedJune 30, 2021 and 2020, respectively. The change 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 theU.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$107.3 million atJune 30, 2021 compared to$99.9 million atDecember 31, 2020 . As ofJune 30, 2021 , we had$9.0 million of long-term debt. We believe that cash generated from operations and borrowings available under our Credit Agreement ($91.7 million of available borrowings as ofJune 30, 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 31 -------------------------------------------------------------------------------- Table of Contents 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 endedDecember 31, 2020 and in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter endedJune 30, 2021 . As ofJune 30, 2021 , the amount of cash and cash equivalents held outside of theU.S. by foreign subsidiaries was$12.1 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 noU.S. deferred tax liability had been accrued have now been subject toU.S. tax. Notwithstanding theU.S. taxation of these amounts, we intend to continue to invest these earnings, as well as our capital in these subsidiaries, indefinitely outside of theU.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 six months endedJune 30, 2021 and 2020, we did not repurchase shares of our common stock in the open market. As ofJune 30, 2021 , there was approximately$1.9 million available for future repurchases under the buyback program. Pursuant to the terms of the Merger Agreement, we are prohibited from repurchasing shares of our common stock without LTG's prior written consent.
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 25% and 24% of our consolidated revenue for the six months endedJune 30, 2021 and 2020, respectively. In addition, we have a concentration of revenue from a single automotive customer, which accounted for approximately 15% and 13% of our consolidated revenue for the six months endedJune 30, 2021 and 2020, respectively. As ofJune 30, 2021 , accounts receivable from a single automotive customer totaled$20.5 million , or 20%, of our consolidated accounts receivable balance. Revenue from the financial & insurance sector accounted for approximately 17% and 16% of our consolidated revenue for the six months endedJune 30, 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 six-months endedJune 30, 2021 and 2020. As ofJune 30, 2021 , billed and unbilled accounts receivable from a single financial services customer totaled$9.5 million , or 7%, of our consolidated accounts receivable and unbilled revenue balances.
No other single customer accounted for more than 10% of our consolidated revenue
for the six months ended
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Six Months ended
Our cash and cash equivalents balance decreased$7.6 million from$23.1 million as ofDecember 31, 2020 to$15.5 million as ofJune 30, 2021 . The decrease in cash and cash equivalents during the six months endedJune 30, 2021 resulted from cash used in operating activities of$3.4 million , cash used in investing activities of$0.6 million , cash used in financing activities of$4.5 million , and a positive effect of foreign currency exchange rates changes on cash of$0.9 million . Cash used in operating activities was$3.4 million for the six months endedJune 30, 2021 compared to cash provided by operating activities of$32.8 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 six months endedJune 30, 2021 compared to the same period in 2020. Cash used in investing activities was$0.6 million for the six months endedJune 30, 2021 compared to cash provided by investing activities of$2.2 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 onJanuary 1, 2020 . Cash used in financing activities was$4.5 million for the six months endedJune 30, 2021 compared to$30.4 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 OnNovember 30, 2018 , we entered into a Credit Agreement withPNC Bank, National Association , as administrative agent and a syndicate of lenders, replacing the prior Credit Agreement with Wells Fargo datedDecember 21, 2016 , as amended onApril 28, 2018 andJune 29, 2018 . The Credit agreement provides for a revolving credit facility, which expires onNovember 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. OnMay 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 endingJune 30, 2020 ,September 30, 2020 andDecember 31, 2020 , and 3.00 to 1.0 for fiscal quarters endingMarch 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 ofJune 30, 2021 , our leverage ratio was 0.3 to 1.0 and our interest expense ratio was 19.5 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 . 33
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As ofJune 30, 2021 , there were no borrowings outstanding and$91.7 million of available borrowings under the revolving loan facility based on our Leverage Ratio. For the six months endedJune 30, 2021 and 2020, the weighted average interest rate on our borrowings was 1.6% and 3.2%, respectively. As ofJune 30, 2021 , the fair value of our borrowings under the Credit Agreement approximated its carrying value as it bears interest at variable rates. There were$0.9 million of unamortized debt issue costs related to the Credit Agreement as ofJune 30, 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
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.
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GP STRATEGIES CORPORATION AND SUBSIDIARIES
Non-GAAP Reconciliation - Adjusted EBITDA
(In thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net income (loss) $ 2,479 $ (606) $ 4,203 $ (1,900)
Interest expense 197 607 378 1,585
Income tax expense (benefit) 812 (1,185) 1,253 (1,814)
Depreciation and amortization 1,487 2,077 2,959 4,254
EBITDA 4,975 893 8,793 2,125
Adjustments:
Non-cash stock compensation expense 1,620 1,536 3,287 2,792
Restructuring charges 1,763 855 2,462 855
Severance expense 585 2,354 1,124 2,565
Loss on change in fair value of contingent consideration - - 269 -
Foreign currency transaction losses 372 346 1,621 842
Legal acquisition/divestitures and transaction costs 1,408 - 2,258 1,038
Impairment of operating lease right-of-use asset - - 103 255
Loss (gain) on sale of business 377 - 377 (1,064)
Adjusted EBITDA $ 11,100 $ 5,984 $ 20,294 $ 9,408
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Table of Contents 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, the impact of the COVID-19 pandemic and related events that are beyond our control and difficult to predict, risks associated with the Merger Agreement and the pending Merger, 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 endedDecember 31, 2020 and Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q for the quarter endedJune 30, 2021 (including but not limited to Risks Related to COVID-19 and Risks Related to the Merger Agreement) and those other risks and uncertainties detailed in our periodic reports and registration statements filed with theSecurities 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.
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