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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

Commission file number: 000-50796

SP Plus Corporation

(Exact Name of Registrant as Specified in Its Charter)

200 E. Randolph Street, Suite 7700

Chicago, Illinois 60601-7702

(Address of Principal Executive Offices, Including Zip Code)

(312) 274-2000

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and
Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

As of August 1, 2014, there were 21,996,678 shares of common stock of the registrant outstanding.

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SP PLUS CORPORATION

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SP PLUS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share and per share data)

See Notes to Condensed Consolidated Interim Financial Statements.

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SP PLUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except for share and per share data, unaudited)

See Notes to Condensed Consolidated Interim Financial Statements.

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SP PLUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, unaudited)

See Notes to Condensed Consolidated Interim Financial Statements.

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SP PLUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

See Notes to Condensed Consolidated Interim Financial Statements.

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SP PLUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands except share and per share data, unaudited)

1. The Company

SP Plus Corporation (the “Company”) provides parking management, ground transportation and other ancillary services to commercial, institutional and municipal clients in the United States, Puerto Rico and Canada. Its services include a comprehensive set of on-site parking management and ground transportation services, which consist of training, scheduling and supervising all service personnel as well as providing customer service, marketing, maintenance, security and accounting and revenue control functions necessary to facilitate the operation of clients’ parking facilities. The Company also provides a range of ancillary services such as airport shuttle operations, valet services, taxi and livery dispatch services and municipal meter revenue collection and enforcement services.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and disclosures normally included in the Consolidated Balance Sheet, Statements of Income, and Comprehensive Income and Cash Flows prepared in conformity with U.S. GAAP have been condensed or omitted as permitted by such rules and regulations

In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results that might be expected for any other interim period or the fiscal year ended December 31, 2014. The financial statements presented in this report should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed on March 13, 2014.

Adopted Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. This update requires additional disclosures about offsetting and related arrangements on assets and liabilities to enable users of financial statements to understand the effect of such arrangements on an entity’s financial position as reported. This amendment is effective for fiscal 2014 and retrospective application is required.  The adoption of this guidance on January 1, 2014 did not have an impact to the Company’s financial position, results of operations or cash flows or financial statement disclosures.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists to eliminate diversity in practice. Under this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit that exists at the reporting date, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if certain criteria are met. This amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2013.  The adoption of this guidance on January 1, 2014 did not have an impact to the Company’s financial position, results of operations or cash flows or financial statement disclosures.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The amendments in ASU No. 2014-09 create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry specific revenue recognition guidance. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, and create a new Subtopic 340-40, Other Assets and Deferred Costs — Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The amendments are effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2016. Early adoption is not permitted. The Company is currently assessing the impact on the Company’s financial position, results of operations, cash flows and financial statement disclosures.

3. Commitments and Contingencies

The Company is subject to litigation and other claims in the normal course of its business. The Company applies the provisions as defined in the guidance related to accounting for contingencies in determining the recognition and measurement of expense associated with legal claims against the Company. Management uses guidance from internal and external legal counsel on the potential outcome of litigation in determining the need to record liabilities for potential losses and the disclosure of pending legal claims.

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The Company has contractual provisions under certain lease contracts to complete structural or other improvements to leased properties and incur repair costs, including improvements and repairs arising as a result of ordinary wear and tear.  The Company evaluates the nature of those costs when incurred and either capitalizes the costs as leasehold improvements, as applicable, or recognizes the costs as repair expenses within Cost of Parking Services-Leases within the Consolidated Statements of Income.

Certain lease contracts acquired in the Central Merger (defined in Note 5. Acquisition) include provisions allocating to the Company responsibility for all or a defined portion of structural or other improvement and repair costs required on the leased property, including improvement and repair costs arising as a result of ordinary wear and tear. During the three and six months ended June 30, 2014, we recorded $841 and $942, respectively, of costs (net of expected recovery of 80% of the total cost through the applicable indemnity discussed further below and in Note 5. Acquisition) in Cost of Parking Services-Leases within the Consolidated Statement of Income for structural and other improvement and repair costs related to certain lease contracts acquired in the Central Merger, whereby the Company has expensed repair costs for certain leases and has engaged a third-party general contractor to complete certain defined structural and other improvement and repair projects. The Company expects to incur substantial additional costs for certain structural or other improvement and repair costs pursuant to the contractual requirements of certain lease contracts acquired in the Central Merger.    Based on information available at this time, the Company currently estimates the total structural and other improvement and repair costs related to these lease contracts acquired in the Central Merger to be between $12,000 and $23,000; however, the Company is still in the process of determining the full extent of the required repairs and improvements required and estimated costs associated with these lease contracts acquired in the Central Merger.  The Company currently expects to recover at least 80% of the total costs incurred prior to October 1, 2015 through the applicable indemnity discussed further below and in Note 5. Acquisition.  While the Company is unable to estimate with certainty when such costs will be incurred, it is expected that all or a substantial majority of these costs will be incurred in early- to mid-calendar year 2015 and prior to October 1, 2015.

4. Intangible Assets, net

The following presents a summary of intangible assets, net, as of June 30, 2014 and December 31, 2013:

Amortization expense related to intangible assets included in depreciation and amortization was $3,796 and $5,020 for the three months ended June 30, 2014 and 2013, respectively, and $7,597 and $8,975 for the six months ended June 30, 2014 and 2013, respectively.

5. Acquisition

On October 2, 2012 (“Closing Date”), the Company completed its acquisition (the “Central Merger” or “Merger”) of 100% of the outstanding common shares of KCPC Holdings, Inc., which was the ultimate parent of Central Parking Corporation (collectively, “Central”), for 6,161,332 shares of Company common stock and the assumption of approximately $217,675 of Central’s debt, net of cash acquired. Additionally, Central’s former stockholders will be entitled to receive cash consideration of $27,000 to be paid three years after closing, to the extent the $27,000 is not used to satisfy seller indemnity obligations pursuant to the Agreement and Plan of Merger dated February 28, 2012 (the “Merger Agreement”).  The Company financed the acquisition through the issuance of its common stock and borrowings under the Senior Credit Facility (defined in Note 9. Borrowing Arrangements).

Pursuant to the Merger Agreement, the Company is entitled to indemnification from Central’s former stockholders (i) if and to the extent Central’s combined net debt and the absolute value of Central’s negative working capital (as determined in accordance with the Merger Agreement) (the “Net Debt Working Capital”) exceeded $285,000 as of September 30, 2012 and (ii) for certain defined adverse consequences as set forth in the Merger Agreement.  Pursuant to the Merger Agreement, Central’s former stockholders are required to satisfy certain indemnity obligations, which are capped at $27,000 cash consideration (the “Capped Items”) only through a reduction of the $27,000 cash consideration.  For certain other indemnity obligations set forth in the Merger Agreement which are not capped at the $27,000 cash consideration (the “Uncapped Items”), including the Net Debt Working Capital indemnity obligations

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described above, Central’s former stockholders may satisfy their indemnity obligations as follows (provided that the Company reserves the right to reject the cash and stock alternatives and choose to reduce the $27,000 cash consideration):

·                  Central’s former stockholders can elect to pay the applicable amount with cash;

·                  Central’s former stockholders can elect to pay the applicable amount with the Company’s common stock (valued at $23.64 per share, the market value as of the closing date of the Merger Agreement); or

·                  Central’s former stockholders can elect to reduce the $27,000 cash consideration by the applicable amount, subject to the condition that the cash consideration remains at least $17,000 to cover Capped Items.

The Company has determined and concluded that the Net Debt Working Capital was $299,979 as of September 30, 2012 and that; accordingly, the Net Debt Working Capital exceeded the threshold by $14,979.  In addition, the Company has determined that it currently has indemnity claims for certain defined adverse consequences, which would reduce the cash consideration payable in three years from the acquisition date by $9,432. In addition, the Company expects to have additional indemnity claims in the future as new matters arise. The Company has periodically given Central’s former stockholders notice regarding indemnification matters since the closing date of the Merger and has made adjustments for known matters, although Central’s former stockholders have not agreed to such adjustments nor made any elections with respect to the payment of any Uncapped Items. Furthermore, following the Company’s notices of indemnification matters, the representative of Central’s former stockholders has indicated that they may make additional inquiries and potentially raise issues with respect to the Company’s indemnification claims (including, specifically, as to the Company’s Net Debt Working Capital calculation) and that they may assert various claims of their own relating to the Merger Agreement.  Under the Merger Agreement, all post-closing claims and disputes, including as to indemnification matters, are ultimately subject to resolution through binding arbitration or, in the case of a dispute as to the calculation of Net Debt Working Capital, resolution by an independent public accounting firm.  The Company intends to pursue these dispute resolution processes, as applicable, in a timely manner.

In determining the Net Debt Working Capital as of September 30, 2012 of $14,979 and the indemnity claims for certain defined adverse consequences of $9,432, the Company has evaluated the nature of the costs and related indemnity claims and has concluded that it is probable that such indemnified claims will sustain any challenge from Central’s former stockholders. Additionally and as previously discussed in Note 3. Legal and Other Contingencies, certain lease contracts acquired in the Central Merger include provisions allocating to the Company responsibility for all or a defined portion of structural or other improvement and repair costs required on the property, including improvement and repair costs arising as a result of ordinary wear and tear.  As the Company incurs structural and other improvement and repair costs for these lease contracts acquired in the Central Merger, the Company will seek indemnification for a significant portion of these costs pursuant to the Merger Agreement and reduces the cash consideration payable in three years from the acquisition date by such amounts.

The following table sets forth the adjustments to the cash consideration payable by the Company to the former stockholders of Central, based upon the foregoing determinations:

The acquisition has been accounted for using the acquisition method of accounting (in accordance with the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations), which requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The purchase price has been allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. The Company finalized the purchase price allocation during the third quarter of 2013, which resulted in revision to the previously reported preliminary amounts, applied retrospectively back to the date of the acquisition.

The Company has incurred certain acquisition and integration costs associated with the transaction that have been expensed as incurred and reflected in the Consolidated Statements of Income. The Company recognized $537 and $3,093 of these costs in the Consolidated Statement of Income for the three months ended June 30, 2014 and 2013, respectively, in General and Administrative Expenses. The Company recognized $2,042 and $7,317 of these costs in the Consolidated Statement of Income for the six months ended June 30, 2014 and 2013, respectively, in General and Administrative Expenses.

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6. Stock-Based Compensation

Stock Options and Grants

There were no stock options granted during the six months ended June 30, 2014 and 2013. The Company recognized no stock-based compensation expense related to stock options for the six months ended June 30, 2014 and 2013, as all stock options previously granted were fully vested. As of June 30, 2014, there were no unrecognized compensation costs related to unvested stock options.

On April 22, 2014, the Company authorized vested stock grants to certain directors totaling 19,336 common shares. The total value of the grant, based on the fair value of common stock on the grant date, was $491 and is included in General and Administrative Expenses within the Consolidated Statement of Income.  On April 24, 2013, the Company authorized vested stock grants to certain directors totaling 21,949 common shares. The total value of the grant, based on the fair value of common stock on the grant date, was $465 and is included in General and Administrative Expenses within the Consolidated Statement of Income.

Restricted Stock Units

During the six months ended June 30, 2014, the Company authorized a one-time grant of 7,518 restricted stock units to an executive that vest in March 2019.  During the six months ended June 30, 2014 and 2013, 1,416 restricted stock units and 27,000 restricted stock units vested, respectively. During the six months ended June 30, 2014, 4,124 restricted stock units were forfeited under the amended and restated Long-Term Incentive Plan and became available for reissuance. No restricted stock units were forfeited in the six months ended June 30, 2013.

The Company recognized $721 and $1,017 of stock-based compensation expense related to the restricted stock units for the three months ended June 30, 2014 and 2013, respectively, which is included in General and Administrative Expenses within the Consolidated Statement of Income.  The Company recognized $1,450 and $2,059 of stock-based compensation expenses related to restricted stock units for the six months ended June 30, 2014 and 2013, respectively, which is included in General and Administrative expenses within the Consolidated Statements of Income.  As of June 30, 2014, there was $5,845 of unrecognized stock-based compensation costs, net of estimated forfeitures, related to the restricted stock units that are expected to be recognized over a weighted average remaining period of approximately 3.8 years.

7. Net Income (Loss) Per Common Share

Basic net income per share is computed by dividing net income by the weighted daily average number of shares of common stock outstanding during the period. Diluted net income per share is based upon the weighted daily average number of shares of common stock outstanding for the period plus dilutive potential common shares, including stock options and restricted stock units using the treasury-stock method. A reconciliation of the weighted average basic common shares outstanding to the weighted average diluted common shares outstanding is as follows (unaudited):

There are no additional securities that could dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share, other than those disclosed.

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8. Bradley Agreement

The Company entered into a 25-year agreement with the State of Connecticut (“State”) that expires on April 6, 2025, under which it operates the surface parking and 3,500 garage parking spaces at Bradley International Airport (“Bradley”) located in the Hartford, Connecticut metropolitan area.

The parking garage was financed through the issuance of State of Connecticut special facility revenue bonds and provides that the Company deposits, with the trustee for the bondholders, all gross revenues collected from operations of the surface and garage parking. From these gross revenues, the trustee pays debt service on the special facility revenue bonds outstanding, operating and capital maintenance expense of the surface and garage parking facilities, and specific annual guaranteed minimum payments to the state. Principal and interest on the Bradley special facility revenue bonds increase from approximately $3,600 in contract year 2002 to approximately $4,500 in contract year 2025. Annual guaranteed minimum payments to the State increase from approximately $8,300 in contract year 2002 to approximately $13,200 in contract year 2024. The annual minimum guaranteed payment to the State by the trustee for the twelve months ended December 31, 2014 and 2013 is $10,815 and was $10,593, respectively. All of the cash flow from the parking facilities are pledged to the security of the special facility revenue bonds and are collected and deposited with the bond trustee. Each month the bond trustee makes certain required monthly distributions, which are characterized as “Guaranteed Payments.”  To the extent the monthly gross receipts generated by the parking facilities are not sufficient for the trustee to make the required Guaranteed Payments, the Company is obligated to deliver the deficiency amount to the trustee, with such deficiency payments representing interest bearing advances to the trustee. The Company does not directly guarantee the payment of any principal or interest on any debt obligations of the State of Connecticut or the trustee.

The following is the list of Guaranteed Payments:

· Garage and surface operating expenses,

· Principal and interest on the special facility revenue bonds,

· Trustee expenses,

· Major maintenance and capital improvement deposits; and

· State minimum guarantee.

To the extent sufficient funds are available, the trustee is then directed to reimburse the Company for deficiency payments up to the amount of the calculated surplus, with the Company having the right to be repaid the principal amount of any and all deficiency payments, together with actual interest and premium, not to exceed 10% of the initial deficiency payment. The Company calculates and records interest and premium income along with deficiency principal repayments as a reduction of cost of parking services in the period the associated deficiency repayment is received from the trustee. The Company believes these advances to be fully recoverable as the Bradley Agreement places no time restriction on the Company’s right to reimbursement. The reimbursement of principal, interest and premium will be recognized when received.

The total deficiency payments to the State of Connecticut, net of reimbursements, as of June 30, 2014 is are as follows:

During the three months ended June 30, 2014 and 2013, the Company received deficiency repayments (net of payments made) of $957 and $760, respectively, and received and recorded premium income of $104 and $60, respectively, with the net of these amounts recorded as reduction in Cost of Parking Services within the Consolidated Statement of Income. During the six months ended June 30, 2014 and 2013, the Company received deficiency repayments (net of payments made) of $1,050 and $357, respectively, and received and recorded premium of $117 and $60, respectively, with the net of these amounts recorded as reduction in Cost of Parking Services within the Consolidated Statement of Income.  The Company accrues for deficiency payments when the potential for future deficiency payments are both probable and estimable.  There were no amounts of estimated deficiency payments accrued as of June 30, 2014, as the Company concluded that the potential for future deficiency payments did not meet the criteria of both probable and estimable. The Company accrued $100 of estimated deficiency payments as of December 31, 2013.

In addition to the recovery of certain general and administrative expenses incurred, the Bradley Agreement provides for an annual management fee payment, which is based on operating profit tiers. The annual management fee is further apportioned 60% to the

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Company and 40% to an unaffiliated entity and the annual management fee will be paid to the extent funds are available for the trustee to make a distribution, and are paid after Guaranteed Payments (as defined in the Bradley Agreement) are paid, and after the repayment of all deficiency payments, including interest and premium. Cumulative management fees of approximately $14,233 and $13,733 have not been recognized as of June 30, 2014 and December 31, 2013, respectively, and no management fees were recognized as revenue for the six months ended June 30, 2014 and 2013.

9. Borrowing Arrangements

Long-term borrowings, in order of preference, consist of:

Senior Credit Facility

On October 2, 2012, the Company entered into a Credit Agreement with Bank of America, as administrative agent, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, as co-syndication agents, U.S. Bank National Association, First Hawaiian Bank and General Electric Capital Corporation, as co-documentation agents, Merrill Lynch, Pierce, Fenner & Smith Inc., Wells Fargo Securities, LLC and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, and the lenders party thereto (the “Lenders”).

Pursuant to the terms, and subject to the conditions, of the Credit Agreement, the Lenders have made available to the Company a new secured Senior Credit Facility (the “Senior Credit Facility”) that permits aggregate borrowings of $450,000 consisting of (i) a revolving credit facility of up to $200,000 at any time outstanding, which includes a letter of credit facility that is limited to $100,000 at any time outstanding, and (ii) a term loan facility of $250,000. The Senior Credit Facility matures on October 2, 2017.

The Company may be required to make mandatory repayments of principal within 90 days of each fiscal year-end provided that certain excess cash is available, as defined within the Credit Agreement.  In the event the Company is required to make mandatory repayments of principal pursuant to the Credit Agreement, the aggregate borrowings available under the Senior Credit Facility are reduced by the amount of mandatory principal repayments made by the Company.  In March 2014, the Company made a mandatory principal repayment of $7,940, as provided under the Credit Agreement.  There were no mandatory repayments of principal required under the Credit Agreement in 2013.

Events of default under the Credit Agreement include failure to pay principal or interest when due, failure to comply with the financial and operational covenants, the occurrence of any cross default event, non-compliance with other loan documents, the occurrence of a change of control event, and bankruptcy and other insolvency events. If an event of default occurs and is continuing, the Lenders holding a majority of the commitments and outstanding term loan under the Credit Agreement have the right, among others, to (i) terminate the commitments under the Credit Agreement, (ii) accelerate and require the Company to repay all the outstanding amounts owed under the Credit Agreement and (iii) require the Company to cash collateralize any outstanding letters of credit.

Under the terms of the Credit Agreement, as of June 30, 2014, the Company is required to maintain a maximum consolidated total debt to EBITDA ratio of not greater than 4.0:1.0.  There are certain future step downs as described in the Credit Agreement; decreasing to 3.75:1.0 as of the end of each fiscal-quarter ending after July 1, 2014 through and including the quarter ending June 30, 2015, 3.5:1.0 as of the end of each fiscal quarter ending after July 1, 2015 through and including June 30, 2016 and 3.25:1.0 as of the end of each fiscal quarter ending after July 1, 2016.   In addition, as of June 30, 2014, the Company is required to maintain a minimum consolidated fixed charge coverage ratio of not less than 1.25:1.0 and 1.35:1.0 as of the end of each fiscal quarter ending after July 1, 2014.

The Company was in compliance with all covenants as of June 30, 2014.

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As of June 30, 2014, the Company had $68,638 of borrowing availability under the Credit Agreement, of which the Company could have borrowed $43,419 on June 30, 2014 and remained in compliance with the above described covenants as of such date.  The additional borrowing availability under the Credit Agreement is limited only as of the Company’s fiscal quarter-end by the covenant restrictions described above.   At June 30, 2014, the Company had $56,212 of letters of credit outstanding under the Senior Credit Facility, with aggregate borrowings against the Senior Credit Facility of $277,835 (excluding debt discount of $2,849).

Interest Rate Swap Transactions

On October 25, 2012, the Company entered into Interest Rate Swap transactions (collectively, the “Interest Rate Swaps”) with each of JPMorgan Chase Bank, N.A., Bank of America, N.A. and PNC Bank, N.A. in an initial aggregate Notional Amount of $150.0 million (the “Notional Amount”). The Interest Rate Swaps have an effective date of October 31, 2012 and a termination date of September 30, 2017. The Interest Rate Swaps effectively fix the interest rate on an amount of variable interest rate borrowings under the Credit Agreement, originally equal to the Notional Amount at 0.7525% per annum plus the applicable margin rate for LIBOR loans under the Credit Agreement, determined based upon the Company’s consolidated total debt to EBITDA ratio. The Notional Amount is subject to scheduled quarterly amortization that coincides with quarterly prepayments of principal under the Credit Agreement. These Interest Rate Swaps are classified as cash flow hedges, and the Company assesses the effectiveness of the hedge on a monthly basis. The ineffective portion of the cash flow hedge is recognized in earnings as an increase of interest expense. As of June 30, 2014, no ineffectiveness of the hedge has been recognized. See Note 12. Fair Value Measurement for the fair value of the interest rate swap as of June 30, 2014 and December 31, 2013.

The Company does not enter into derivative instruments for any purpose other than for cash flow hedging purposes.

10. Comprehensive Income

Comprehensive income consists of the following components, net of tax (unaudited):

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Accumulated other comprehensive income is comprised of unrealized gains (losses) on cash flow hedges and foreign currency translation adjustments. The components of changes in accumulated comprehensive income (loss), net of tax, for the six months ended June 30, 2014 were as follows (unaudited):

11. Income Taxes

For the three months ended June 30, 2014, the Company recognized income tax expense of $4,254 on pre-tax earnings of $10,451 compared to $2,065 income tax expense on pre-tax earnings of $6,289 for the three months ended June 30, 2013. For the six months ended June 30, 2014, the Company recognized an income tax benefit of $3,184 on pre-tax earnings of $7,803 compared to $1,911 income tax expense on pre-tax earnings of $6,444 for the six months ended June 30, 2013.  The effective tax rate for the six months ended June 30, 2014 was a benefit of 40.7%, primarily as a result of recognizing a $6,359 discrete benefit for the reversal of a valuation allowance for a deferred tax asset established for historical net operating losses attributable to the State of New York. The valuation allowance was reversed in the first quarter of 2014 due to the New York tax law changes effective March 31, 2014, which resulted in the Company determining that the future benefit of net operating loss carryforwards was more likely than not to be realized.

As of June 30, 2014, the Company has not identified any uncertain tax positions that would have a material impact on the Company’s financial position. The Company recognizes potential interest and penalties related to uncertain tax positions, if any, in income tax expense.

The tax years that remain subject to examination for the Company’s major tax jurisdictions at June 30, 2014 are shown below:

12. Fair Value Measurement

Fair value measurements-recurring basis

In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability.

Applicable accounting literature establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value.

Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. Applicable accounting literature defines levels within the hierarchy based on the reliability of inputs as follows:

· Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.

· Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.

· Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

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The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at June 30, 2014 and December 31, 2013:

The Company seeks to minimize risks from interest rate fluctuations through the use of interest rate swap contracts and hedge only exposures in the ordinary course of business. Interest rate swaps are used to manage interest rate risk associated with our floating rate debt. The Company accounts for its derivative instruments at fair value, provided it meets certain documentary and analytical requirements to qualify for hedge accounting treatment. Hedge accounting creates the potential for a Consolidated Statement of Operations match between the changes in fair values of derivatives and the changes in cost of the associated underlying transactions, in this case interest expense. Derivatives held by the Company are designated as hedges of specific exposures at inception, with an expectation that changes in the fair value will essentially offset the change in the underlying exposure. Discontinuance of hedge accounting is required whenever it is subsequently determined that an underlying transaction is not going to occur, with any gains or losses recognized in the Consolidated Statement of Operations at such time, and with any subsequent changes in fair value recognized currently in earnings. Fair values of derivatives are determined based on quoted prices for similar contracts. The effective portion of the change in fair value of the interest rate swap is reported in accumulated other comprehensive income, a component of stockholders’ equity, and is being recognized as an adjustment to interest expense or other (expense) income, respectively, over the same period the related expenses are recognized in earnings. Ineffectiveness would occur when changes in the market value of the hedged transactions are not completely offset by changes in the market value of the derivative and those related gains and losses on derivatives representing hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized currently in earnings when incurred. No ineffectiveness was recognized during the six months ended June 30, 2014 and 2013.

The significant inputs used to derive the fair value of the contingent acquisition consideration include financial forecasts of future operating results, the probability of reaching the forecast and the associated discount rate. The weighted average probability of the contingent acquisition consideration ranges from 10% to 50%, with a weighted average discount rate of 12%.

The following table provides a reconciliation of the beginning and ending balances for the contingent consideration liability measured at fair value using significant unobservable inputs (Level 3) (unaudited):

Obligations related to contingent consideration for certain acquisitions were finalized in June 2014 in the amount of $1,620, for which we expect pay in the third quarter of 2014.

For the three months ended June 30, 2014, the Company recognized an expense of $491 in General and Administrative Expenses within the Consolidated Statement of Income due to the change in fair value measurements using a Level 3 valuation technique. The Company recognized no benefit or expense in the three months ended June 30, 2013. For the six months ended June 30, 2014 and 2013, the Company recognized an expense of $657 and a benefit of $308, respectively, and recognized the related expense and benefit in General and Administrative Expenses within the Consolidated Statement of Income due to the change in fair value measurements using a Level 3 valuation technique. These adjustments were the result of using revised forecasts of operating results, updates to the probability of achieving the revised forecasts and updated fair value measurements that revised the Company’s contingent consideration obligations related to the purchase of these businesses.

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Nonrecurring Fair Value Measurements

Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Non-financial assets such as goodwill, intangible assets, and leasehold improvements, equipment land and construction in progress are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. The Company assesses the impairment of intangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. The fair value of its goodwill and intangible assets is not estimated if there is no change in events or circumstances that indicate the carrying amount of an intangible asset may not be recoverable. There were no impairment charges for the six months ended June 30, 2014 and 2013.

Financial instruments not measured at fair value

The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Consolidated Balance Sheet at June 30, 2014 (unaudited) and December 31, 2013:

The carrying value of cash and cash equivalents approximates their fair value due to the short-term nature of these financial instruments and has been classified as a Level 1 measurement. The fair value of the Senior Credit Facility and other obligations was estimated to not be materially different from the carrying amount, as these instruments bear interest at variable market rates and are generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments and have been classified as a Level 2 measurement.

Book overdrafts of $31,328 and $29,310 are included within Accounts Payable in the Consolidated Balance Sheet as of June 30, 2014 and December 31, 2013, respectively.

13. Business Unit Segment Information

Segment information is presented in accordance with a “management approach,” which designates the internal reporting used by the Chief Operating Decision Maker (“CODM”) for making decisions and assessing performance as the source of the Company’s reportable segments. The Company’s segments are organized in a manner consistent with which separate financial information is available and evaluated regularly by the Company’s CODM in deciding how to allocate resources and in assessing performance.

An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and about which separate financial information is regularly evaluated by the Company’s CODM. The CODM is the Company’s chief executive officer.

Each of the operating segments is directly responsible for revenue and expenses related to their operations including direct regional administrative costs. Finance, information technology, human resources, and legal are shared functions that are not allocated back to the four operating segments. The CODM assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest, taxes, and depreciation and amortization, but does not evaluate segments using discrete asset information. There are no inter-segment transactions and the Company does not allocate interest and other income, interest expense, depreciation and amortization or taxes to operating segments. The accounting policies for segment reporting are the same as for the Company as a whole.

On November 1, 2013, the Company changed its internal reporting segment information reported to its CODM. The Company now reports Ontario, Manitoba and Quebec in Region One and Missouri, Nebraska, North Carolina and South Carolina in Region Five. All prior periods presented have been restated to reflect the new internal reporting to the CODM.

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The business is managed based on regions administered by executive vice presidents. The following is a summary of revenues (excluding reimbursed management contract revenue) and gross profit by regions for the three and six months ended June 30, 2014 and 2013 (unaudited):