Acquisition, Restructuring and Integration Costs

9 Months Ended

Sep. 30, 2019

Acquisition, Restructuring and Integration Costs

Acquisition

On November 30, 2018, the Company acquired the outstanding shares (the "Acquisition") of ZWB Holdings, Inc. and Rynn's Luggage Corporation, their subsidiaries and affiliates (collectively, "Bags"). Bags is a leading provider of baggage delivery, remote airline check in, and other related services, primarily to airline, airport and hospitality clients. Subject to the terms and conditions of the Stock Purchase Agreement, as consideration for the acquisition of Bags, SP Plus paid to the Sellers total consideration of approximately $283.6 million. The consideration is comprised of $275.0 million of contractual cash consideration, $8.1 million related to the preliminary net working capital and cash acquired and $0.5 million for certain individual taxes to be paid by the Seller (the “Cash Consideration”). As described in Note 17. Business Unit Segment Information, the Company integrated the Bags' operations into Segment Two (Aviation) for segment reporting purposes, effective November 30, 2018.

The Company's acquisition of Bags has been accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred, which is also generally measured at fair value or the net acquisition date fair values of the assets acquired and the liabilities assumed. The results of operations are reflected in the consolidated financial statements of the Company from the date of acquisition.

The Company incurred certain acquisition and integration costs associated with the transaction that were expensed as incurred and are reflected in the Condensed Consolidated Statements of Income. See Note 4. Acquisition, Restructuring and Integration Costs.

The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. As a result, during the measurement period, which may be up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed will be recorded with corresponding adjustments to goodwill. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. The Company recorded measurement period adjustments during the nine months ended September 30, 2019 related to an increase in assumed workers' compensation liabilities.

The following estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed:



(millions) (unaudited)	As Initially Reported November 30, 2018			Preliminary Measurement Period Adjustments			As Adjusted November 30, 2018
Cash and cash equivalents	$	5.9		$	—		$	5.9
Notes and accounts receivable	13.2			—			13.2
Prepaid expenses and other	2.0			—			2.0
Advances and deposits	0.2			—			0.2
Leasehold improvements, equipment and construction in progress, net	1.5			—			1.5
Other intangible assets, net	118.0			—			118.0
Goodwill	154.1			0.1			154.2
Accounts payable	(6.5		)	—			(6.5		)
Accrued expenses	(4.1		)	(0.1		)	(4.2		)
Other long-term liabilities	(0.7		)	—			(0.7		)
Net assets acquired and liabilities assumed	$	283.6		$	—		$	283.6

Goodwill amounting to $154.2 million represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The goodwill recognized is attributable primarily to expanded revenue synergies and expanded opportunities in the aviation and hospitality businesses, and other benefits that the Company believes will result from combining its operations with the operations of Bags. The goodwill acquired is deductible for tax purposes.

Other intangible assets, net acquired consist of the following:



(millions) (unaudited)	Estimated Life ⁽¹⁾	Estimated Fair Value
Trade name	5.0 Years	$	5.6
Customer relationships	12.4 - 15.8 Years	100.4
Existing technology	5.0 - 6.0 Years	10.4
Non-compete agreement	5.0 Years	1.6
Estimated fair value of other intangible assets		$	118.0

⁽¹⁾ Represents preliminary estimated life of assets acquired.

The fair value estimate for all identifiable intangible assets is based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The estimated fair value of trade names was determined with the relief from royalty savings method, which is a commonly-used variation of the income approach. The Company considered the return on assets and market comparable methods when estimating an appropriate royalty rate for the trade names. The estimated fair value of acquired customer relationships was determined with the excess earnings method, which is a variation of the income approach. This approach calculates the excess of the future cash inflows (i.e., revenue from customers generated from the relationships) over the related cash outflows (i.e., customer servicing expenses) generated over the useful life of the relationship. The estimated fair value of developed or existing technology was determined utilizing the relief from royalty savings method under the income approach with additional consideration given to asset deterioration rates.

The final determination of fair value of intangible assets, as well as estimated useful lives, remains subject to change. The finalization may have a material impact on the valuation of intangible assets and the purchase price allocation, which is expected to be finalized subsequent to the transaction but within the measurement period.

Pro forma financial information

The following unaudited pro forma results of operations for the three and nine months ended September 30, 2019 and 2018, assumes the Acquisition was completed on January 1, 2018, and as such Bags pre-acquisition results have been added to the Company’s historical results. The historical consolidated financial information of the Company and the acquisition have been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The pro forma results contained in the table below include adjustments for (i) amortization of acquired intangibles, (ii) reduced general and administrative expenses related to non-routine transaction expenses, (iii) increased interest expense related to the financing of the acquisition, and (iv) estimated income tax effect.

The unaudited pro forma condensed combined financial information is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company. The unaudited pro forma condensed combined financial statements do not give effect to the potential impact of any anticipated benefits from revenue synergies, cost savings or operating synergies that may result from the Acquisition or to any future disynergies and integration related costs. Also, the unaudited pro forma condensed combined financial information does not reflect possible adjustments related to potential restructuring or integration activities that have yet to be determined or transaction or other costs following the combination that are not expected to have a continuing impact on the business of the combined company. Further, one-time transaction-related expenses anticipated to be incurred prior to, or concurrent with, the closing of the transaction are not included in the unaudited pro forma condensed combined statement of income as such transaction costs were determined not to be significant. Additionally, the pro forma financial information does not reflect the costs which the Company has incurred or may incur to integrate Bags.



	Three Months Ended				Nine Months Ended
(millions) (unaudited)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Total services revenue	$	418.6	$	407.2	$	1,242.2	$	1,215.0
Net income attributable to SP Plus Corporation	14.2		13.6		40.0		44.7

Services revenue related to Bags in 2019 that is included in the Condensed Consolidated Statements of Income was $46.3 million and $132.7 million for the three and nine months ended September 30, 2019, respectively. Net income related to Bags in 2019 that is included in the Condensed Consolidated Statements of Income was $3.1 million and $9.9 million for the three and nine months ended September 30, 2019, respectively. Services revenue and net income are included in Services revenue - Management type contracts and Net income attributable to SP Plus Corporation, respectively.Acquisition, Restructuring and Integration Costs

Acquisition, Restructuring and Integration Costs

The Company has incurred certain acquisition, restructuring, and integration costs that were expensed as incurred, which include:


•	transaction costs and other acquisition related costs (primarily professional services and advisory services) primarily related to the Bags acquisition (included within General and administrative expenses within the Consolidated Statements of Income);


•	costs (primarily severance and relocation costs) related to a series of Company initiated workforce reductions to increase organizational effectiveness and provide cost savings that can be reinvested in the Company's growth initiatives, during 2019 and 2018 (included within General and administrative expenses within the Condensed Consolidated Statements of Income); and


•	consulting costs for integration-related activities related to the Bags acquisition (included within General and administrative expenses within the Condensed Consolidated Statements of Income);

The aggregate costs associated with the acquisition, restructuring, and integration related costs for the three and nine months ended September 30, 2019 and September 30, 2018 are summarized in the following table:



	Three Months Ended				Nine Months Ended
(millions) (unaudited)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
General and administrative expenses	$	—	$	0.6	$	1.3	$	3.4

An accrual for acquisition, restructuring and integration costs of $0.2 million (of which, $0.2 million is included in Compensation and payroll withholdings within the Condensed Consolidated Balance Sheets) and $3.3 million (of which, $1.0 million is included in Compensation and payroll withholdings, $2.1 million is included in Accrued Expenses and $0.2 million is included in Other long-term liabilities within the Condensed Consolidated Balance Sheets) as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, all accruals for acquisition, restructuring, and integration are short-term in nature.