UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended March 31, 20082009
or
o Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-7234
GP STRATEGIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware |
| 13-1926739 | ||
(State of Incorporation) |
| (I.R.S. Employer Identification No.) | ||
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6095 Marshalee Drive, Suite 300, Elkridge, MD |
| 21075 | ||
(Address of principal executive offices) |
| (Zip Code) | ||
(410) 379-3600
Registrant’s telephone number, including area code:
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer x | |
Non-accelerated filer o | Smaller reporting company o | |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the registrant’s common stock as of May 2, 2008April 30, 2009 was as follows:
Class |
| Outstanding | |
Common Stock, par value $.01 per share |
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GP STRATEGIES CORPORATION AND SUBSIDIARIESTable of Contents
TABLE OF CONTENTS
GP STRATEGIES CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except per share amounts)
See accompanying notes to condensed consolidated financial statements.
1
GP STRATEGIES CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)
See accompanying notes to condensed consolidated financial statements.
2
GP STRATEGIES CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Three months ended March 31, (Unaudited, in thousands)
See accompanying notes to condensed consolidated financial statements.
3
GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, (Unaudited)
(1)Basis of Presentation
GP Strategies Corporation (the “Company”) was incorporated in Delaware in 1959. The Company’s business consists of its training, engineering, technical services and consulting business operated by General Physics Corporation (“General Physics” or “GP”). General Physics is a workforce development company that seeks to improve the effectiveness of organizations by providing training, management consulting, e-Learning solutions, engineering and technical services that are customized to meet the specific needs of clients.
The accompanying condensed consolidated balance sheet as of March 31, Certain amounts in 2008 have been reclassified to conform with the presentation for 2009. Effective January 1, 2009, the Company changed the classification of certain information technology (IT) infrastructure costs on the consolidated statement of operations from cost of revenue to selling, general and administrative expenses. IT infrastructure expenses include those costs required to support the information technology needs of the Company, including data services, such as communication and connectivity related expenses, depreciation of equipment, servers, routers and software, and other information technology costs. While these costs support the Company’s operations, the Company changed the classification because these expenses are not directly related to revenue generating activities and are more closely aligned with selling, general and administrative expenses. The statement of operations for the three months ended March 31, 2008 has been reclassified to conform with the presentation for 2009. The reclassification resulted in a decrease of $520,000 in cost of revenue and a corresponding increase in selling, general and administrative expenses for the three months ended March 31, 2008.
The condensed consolidated financial statements include the operations of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
4 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, (Unaudited) (2)Significant Customers & Concentration of Credit Risk The Company has a concentration of revenue from General Motors Corporation and its affiliates (“General Motors”) as well as a market concentration in the automotive sector. For the three months ended March 31, 2009 and 2008, revenue from General Motors accounted for approximately 20% and 22%, respectively, of the Company’s consolidated revenue, and revenue from the automotive industry accounted for approximately 25% and 29%, respectively, of the Company’s consolidated revenue. As of March 31, 2009, accounts receivable from General Motors totaled $11,055,000. As of April 30, 2009, approximately $5,440,000 of the accounts receivable balance had been collected and $5,615,000 remained outstanding. As previously disclosed in more detail in Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, General Motors’ has reported a variety of challenges it is facing, including severe liquidity issues. In the event General Motors files for bankruptcy protection or otherwise defaults on amounts due to the Company, the outstanding accounts receivable may not be realizable and could result in substantial write-offs and adversely impact the Company’s liquidity. No material reserves against possible uncollectible accounts receivable from General Motors have been provided as General Motors has consistently made all scheduled payments to date. No other customer accounted for more than 10% of the Company’s revenue in the first quarter of 2009 or accounts receivable as of March 31, 2009. The Company also has a concentration of revenue from the United States government. For the three months ended March 31, 2009 and 2008, sales to the United States government and its agencies represented approximately 21% and 18%, respectively, of the Company’s consolidated revenue. Revenue was derived from many separate contracts with a variety of government agencies that are regarded by the Company as separate customers. (3)Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the
The Company’s dilutive common stock equivalent shares consist of stock options, restricted stock units and warrants to purchase shares of common stock computed under the treasury stock method, using the average market price during the period. The following table presents instruments which were not dilutive and were excluded from the computation of diluted EPS in each period, as well as the dilutive common stock equivalent shares which were included in the computation of diluted EPS:
5
GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, (Unaudited) (4) Intangible Assets Goodwill
Changes in the carrying amount of goodwill by reportable business segment for the three months ended March 31,
As of March 31, 2009 and December 31, As of March 31, 2009, the Company accrued $305,000 of contingent consideration with respect to the first twelve-month period following the completion of the
Intangible Assets Subject to Amortization
Intangible assets with finite lives are subject to amortization over their estimated useful lives. The primary assets included in this category and their respective balances were as follows (in thousands):
6
GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, (Unaudited)
(5)Stock-Based Compensation The Company accounts for its stock-based compensation awards under Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS No. 123R”) which requires the recognition of compensation expense for all equity-based compensation awards issued to employees that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date.
The following table summarizes the pre-tax stock-based compensation expense included in reported net income (in thousands):
Pursuant to the Company’s 1973 Non-Qualified Stock Option Plan, as amended, and 2003 Incentive Stock Plan, the Company may grant awards of non-qualified stock options, incentive stock options, restricted stock, stock units, performance shares, performance units and other incentives payable in cash or in shares of the Company’s common stock to officers, employees or members of the Board of Directors. As of March 31,
7 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2009 (Unaudited) Non-Qualified Stock Options Summarized information for the Company’s non-qualified stock options is as follows:
Restricted Stock Units In addition to stock options, the Company issues restricted stock units to key employees and members of the Board of Directors based on meeting certain service goals. The stock units vest to the recipients at various dates, up to five years, based on fulfilling service requirements. In accordance with SFAS No. 123R, the Company recognizes the value of the market price of the underlying stock on the date of grant
8 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2009 (Unaudited)
(6)Short-Term Borrowings
General Physics has a The maximum interest rate on the Credit Agreement is
As of March 31,
(7)
Uncertain tax positions are accounted for under Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN No. 48”). FIN No. 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense.
As of March 31,
GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, (Unaudited)
Changes in stockholders’ equity during the three months ended March 31,
The following are the components of comprehensive income (in thousands):
As of March 31,
As of March 31,
GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31,
Further information regarding our business segments is discussed below.
Manufacturing & BPO. The Manufacturing & BPO segment delivers training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training business process outsourcing, and consulting and technical services primarily to large companies in the
Process Energy. The Energy segment provides engineering services, products and training primarily to electric power utilities. The Company’s proprietary EtaProTM Performance Monitoring and Optimization System provides a suite of performance solutions for power generation plants and is installed at over 600 power generating units in over 25 countries. In addition, this segment provides web-based training through its GPiLearnTM portal to over 25,000 power plant personnel in the U.S. and in over 30 countries. The March 2008 acquisition of PCS strengthened and expanded the Company’s service offering to clients in the power generation industry.
Sandy Training and Marketing. Acquired in January 2007, Sandy is a provider of custom product sales training and has been a leader in serving manufacturing customers in the U.S. automotive industry for over
The Company does not allocate the following corporate items to the segments: other income and interest expense; GP Strategies’ selling, general and administrative expense; and income tax expense. Inter-segment revenue is eliminated in consolidation and is not significant. 11 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2009 (Unaudited)
The following tables set forth the revenue and operating income of each of the Company’s operating segments and includes a reconciliation of segment revenue to consolidated revenue and operating income to consolidated income before income tax expense (in thousands):
Subsequent to the spin-off of
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
General OverviewOur business consists of our principal operating subsidiary, General Physics, a global training, engineering, technical services and consulting company that seeks to improve the effectiveness of organizations by providing training, management consulting, e-Learning solutions, engineering and technical services and products that are customized to meet the specific needs of clients. Clients include Fortune 500 companies and manufacturing, process and energy companies and other commercial and governmental customers. We believe we are a global leader in performance improvement, with over four decades of experience in providing solutions to optimize workforce performance.
Further information regarding
Manufacturing & BPO.
Process Energy. Our Energy segment provides engineering services, products and training primarily to electric power utilities. Our proprietary EtaProTM Performance Monitoring and Optimization System provides a suite of performance solutions for power generation plants and is installed at over 600 power generating units in over 25
13 countries. In addition, this segment provides web-based training through our GPiLearnTM portal to over 25,000 power plant personnel in the U.S. and in over 30 countries. Our March 2008 acquisition of PCS strengthened and expanded our service offering to clients in the power generation industry. Sandy Training
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(Dollars in thousands) |
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Manufacturing & BPO |
| $ | 29,121 |
| $ | 23,500 |
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| $ | 21,947 |
| $ | 29,121 |
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Process, Energy & Government |
| 19,430 |
| 16,778 |
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Process & Government |
| 13,057 |
| 14,920 |
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Energy |
| 5,749 |
| 4,510 |
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Sandy Training & Marketing |
| 18,368 |
| 13,265 |
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| 12,838 |
| 18,368 |
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| $ | 66,919 |
| $ | 53,543 |
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| $ | 53,591 |
| $ | 66,919 |
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Manufacturing & BPO revenue increased $5.6decreased $7.2 million or 23.9%24.6% during the first quarter of 20082009 compared to the first quarter of 2007. 2008. The increasedecrease in revenue is due to the following:
·$2.6 million net decrease in revenue from BPO customers primarily due to a $2.4slowdown in spending by several customers resulting in an overall decline in the number of courses run and some courses running below full capacity;
·$2.4 million increasedecrease in U.S. dollar revenue recognized from our operations in the United Kingdom, which consists of a $1.4$1.5 million increase attributabledecrease in revenue due to the acquisitionunfavorable effect of Smallpeice Enterprises Limited (SEL) in June 2007currency exchange rates and a $1.0net revenue decrease of $1.7 million primarily due to a decrease in volume with BPO customers, offset by an increase in revenue primarilyof $0.8 million due to increasedexpansion of government funded training services with European BPO clients; a $1.5 million increaseprograms in revenue attributable to the acquisition of Via in October 2007; a $2.3 million net increase in BPO and e-Learning services with new and existing U.S. customers; offset by a $0.6UK;
·$1.2 million reduction in services for a lean consulting clientpharmaceutical industry client; and
·$1.0 million reduction in process and maintenance reliability training services provided primarily to a steel industry client.
As noted above, the changes in foreign currency exchange rates negatively impacted our U.S. dollar revenue recognized during the first quarter of 2009 when compared with the first quarter of 2008, and we expect that the significant changes in rates which occurred primarily during the second half of 2008 could continue to negatively impact our 2009 quarterly revenue when compared to 2008. In addition, we anticipate that the slow down in customer spending in this segment which resulted in reduced revenue discussed above could continue to negatively impact our 2009 revenue in future quarters when compared to 2008 results. If we continue to experience declines in revenue and gross profit, we could incur goodwill and other intangible asset impairment charges in the future.
Process & Government revenue decreased $1.9 million or 12.5% during the first quarter of 2009 compared to the first quarter of 2007.
2008. Process, Energy & Government revenue increased $2.7 million or 15.8% during the first quarter of 2008 compared to the first quarter of 2007. The increasedecrease in revenue is due to the following:
·$1.2 million reduction in process, maintenance and reliability training services provided primarily to a $1.2petrochemical industry client; and
·$1.4 million net increasedecrease in revenue primarily related to certain homeland security / first responder training contracts and related products and services primarily to energy customers; a $0.8chemical demilitarization training services; offset by
·$0.7 million net increase relating to construction projects for liquefied natural gas (LNG) and hydrogen fueling station facilities; andfacilities related to recent new contract awards.
Energy group revenue increased $1.2 million or 27.5% during the first quarter of 2009 compared to the first quarter of 2008. The increase consisted of a $0.7 million revenue increase due to PCS being included for a full quarter in 2009 as the acquisition was completed on March 1, 2008, and a $0.5 million net increase in engineeringprimarily due to new workforce development training contracts for power generation customers and technical services primarily for customers in the aerospace industry.increased web-based training course sales.
Sandy Training & Marketing revenue increased $5.1decreased $5.5 million or 38.5%30.1% during the first quarter of 20082009 compared to the first quarter of 2007. Of the net revenue increase, $3.9 million is2008 due to Sandy’s results being includedreduction in spending by automotive customers. The $5.5 million revenue decrease consisted of the following:
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·$2.0 million net decrease in revenue from product sales trainer programs for a full quarter in 2008 compared to a partial quarter in 2007, as the acquisition of Sandy was completed on January 23, 2007. In addition, revenue increased $1.6 million during the first quarter of 2008various automotive customers primarily due to a reduction in the expansionnumber of salestrainers required, and a reduction in related in-dealership training programs with existing automotive customers and an increase in publications shipped during the first quarter of 2008 compared to the first quarter of 2007. The increasesprograms;
·$1.4 million net decrease in revenue related to new vehicle launch programs and related training services provided in this segment were offset by a $0.42008 which did not recur in 2009;
·$1.0 million decrease in technical training services providedpublications revenue due to automotive customers. As mentioned above, we transferred management responsibility for our automotive technical training business unit froma reduction in the Manufacturing & BPO segment to the Sandy Training & Marketing segment during the first quartervolume of 2008.
Wepublications (we experience quarterly fluctuations in revenue and income related to Sandy’s publications business, since revenue and cost on publication contracts are recognized in the period in which the publications ship, based on the output method of performance. Shipments occur at various times throughout the year and the volume of publications shipped could fluctuate from quarter to quarter. Publications revenue in the Sandy Training & Marketing segment totaled $3.0 million during the first quarter of 2009 compared to $4.0 million during the first quarter of 2008 compared2008);
·$0.8 million decrease in glovebox portfolios sales due to $2.6decreased vehicle production volumes; and
·$0.3 million decrease in technical training services provided to automotive customers due to a reduction in plant spending.
As noted above, revenue in the Sandy segment declined during the first quarter of 2007. Publications revenue increased $1.4 million during the first quarter of 20082009 compared to the first quarter of 2007, with $1.1 million2008, primarily as a result of the increase in publications revenue reflected in the $3.9 million net increase attributable to the timingweakened condition of the Sandy acquisition noted above.automotive industry and reduced spending by these customers. We expect this trend will continue to negatively impact our 2009 quarterly revenue when compared to 2008 results. As previously disclosed, we implemented a cost reduction strategy to align costs with anticipated reductions in revenue streams.
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Gross Profit
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Manufacturing & BPO |
| $ | 3,715 |
| 12.8 | % | $ | 3,146 |
| 13.4 | % |
| $ | 2,658 |
| 12.1 | % | $ | 3,953 |
| 13.6 | % |
Process, Energy & Government |
| 3,932 |
| 20.2 | % | 3,101 |
| 18.5 | % | |||||||||||||
Process & Government |
| 1,749 |
| 13.4 | % | 2,862 |
| 19.2 | % | |||||||||||||
Energy |
| 1,309 |
| 22.8 | % | 1,235 |
| 27.4 | % | |||||||||||||
Sandy Training & Marketing |
| 2,110 |
| 11.5 | % | 1,795 |
| 13.5 | % |
| 1,773 |
| 13.8 | % | 2,227 |
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| $ | 9,757 |
| 14.6 | % | $ | 8,042 |
| 15.0 | % |
| $ | 7,489 |
| 14.0 | % | $ | 10,277 |
| 15.4 | % |
Manufacturing & BPO gross profit of $3.7$2.7 million or 12.8%12.1% of revenue for the first quarter of 2008 increased2009 decreased by $0.6$1.3 million or 18.1%32.8% when compared to gross profit of $3.1$4.0 million or 13.4%13.6% of revenue for the first quarter of 2007.2008. The increasedecrease in gross profit dollars is primarily attributable to the increase in gross profit from our UK operations largely due to the acquisition of SEL in June 2007, and due to other revenue increases in this segment including an increase attributable to the acquisition of Via in October 2007. Gross profit as a percentage of revenue decreased slightly in this segment during the first quarter of 2008 compared to the first quarter of 2007, primarily due to some courses running below full capacity for certain of our BPO clients, as well as a decline in revenue and corresponding profit margin in lean consulting services during the first quarter of 2008 as mentioned above in the revenue section.
Process, Energy & Government gross profit of $3.9 million or 20.2% of revenue for the first quarter of 2008 increased by $0.8 million or 26.8% when compared to gross profit of $3.1 million or 18.5% of revenue for the first quarter of 2007. The increase in gross profit dollars and margin is primarily attributable to the revenue growth in this segment, including an increase in software product sales to energy clients during the first quarter of 2008, as well as costs not increasing as the same rate as the revenue growth for certain business units within this segment during the first quarter of 2008 compared to the first quarter of 2007.
Sandy Training and Marketing gross profit of $2.1 million or 11.5% of revenue for the first quarter of 2008 increased by $0.3 million or 17.5% when compared to gross profit of $1.8 million or 13.5% of revenue for the first quarter of 2007. The increase in gross profit dollars is largely due to Sandy’s results being included for a full quarter in 2008 compared to a partial quarter in 2007, as the acquisition of Sandy was completed on January 23, 2007, as well as the other net increases in revenuedecreases discussed above. Gross profit as a percentage of revenue decreased in this segment during the first quarter of 20082009 compared to the first quarter of 2007,2008, primarily due to a reduction in services for a pharmaceutical industry client during 2009 which had higher margins in 2008, as well as an overall decline in the number of courses run and some courses running below full capacity for certain of our BPO clients.
16
Process & Government gross profit of $1.7 million or 13.4% of revenue for the first quarter of 2009 decreased by $1.1 million or 38.9% when compared to gross profit of $2.9 million or 19.2% of revenue for the first quarter of 2008. The decrease in gross profit is primarily due to a reduction in services provided to a petrochemical industry client during 2009 which had higher margins in 2008.
Energy group gross profit of $1.3 million or 22.8% of revenue for the first quarter of 2009 increased by $0.1 million or 6% when compared to gross profit of $1.2 million or 27.4% of revenue for the first quarter of 2008. The slight increase is due to the revenue increases discussed above, offset by a decrease in margin during the first quarter of 2009 compared to the first quarter of 2008 primarily due to the hiring of additional business development costs relatedpersonnel in this segment’s workforce development training practice.
Sandy Training and Marketing gross profit of $1.8 million or 13.8% of revenue for the first quarter of 2009 decreased by $0.5 million or 20.4% when compared to our west coast operationsgross profit of $2.2 million or 12.1% of revenue for the first quarter of 2008. The decrease in gross profit dollars is primarily due to the revenue decreases discussed above. Gross profit as a percentage of revenue increased in this segment andduring the first quarter of 2009 compared to the first quarter of 2008, primarily due to a decreasereduction in revenue and marginpersonnel in our automotive technical training business unit within this segment.connection with cost reduction initiatives.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.2decreased $0.3 million or 4.0%5.5% from $4.6$5.3 million for the first quarter of 20072008 to $4.8$5.0 million for the first quarter of 2008.2009. The increasedecrease is primarily due to an increasedecreases in labor, benefits and facilities expense related to the acquisitions we completed during 2007, offset by a net $0.2 million decrease in amortization expense for intangible assets, primarilyvarious corporate expenses due to a decrease in amortization expense associated with the backlog we acquired in connection with the Sandy acquisition which became fully amortizedreduced overall spending in the first quarter of 2009 compared to the first quarter of 2008.
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Interest Expense
Interest expense decreased from $272,000$0.2 million for the first quarter of 20072008 to $237,000$0.1 million for the first quarter of 2008.2009. The slight decrease is primarily due to a decrease in interest expense related to the Gabelli Notes as a result of warrant exercises by Gabelli during 2007long-term debt obligations which resulted in a decreasewere repaid in the principal balancesecond and third quarters of the debt (see Note 7 to the accompanying condensed consolidated financial statements).2008.
Other Income
Other income decreased from $371,000was $0.2 million for both the first quarterquarters of 2007 to $151,000 for the first quarter of 2008. The decrease is primarily due to a $125,000 gain on the sale of an investment in the first quarter of 2007 which did not recur in2009 and 2008 and primarily consisted of income from a decrease injoint venture and interest income, primarily due to lower cash balances during the first quarter of 2008 compared to the first quarter of 2007.income.
Income Tax Expense
Income tax expense was $1.1 million for the first quarter of 2009 compared to $2.0 million for the first quarter of 2008 compared to $1.5 million for the first quarter of 2007.2008. The increasedecrease is due to increaseda decrease in income before income tax expense for the first quarter of 20082009 compared to the first quarter of 2007.2008. The effective income tax rate was 41.5%42.9% and 41.7%41.5% for the three months ended March 31, 2009 and 2008, respectively. The increase in the effective income tax rate is primarily due to the decrease in income before income taxes and 2007, respectively.an increase in foreign taxes in the first quarter of 2009 compared to the first quarter of 2008. Income tax expense for the quarterly periods is based on an estimated annual effective tax rate which includes the federal and state statutory rates, permanent differences, and other items that may have an impact on income tax expense.
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Working Capital
For the quarter ended March 31, 2008, the Company’s2009, our working capital increased $0.3$1.1 million from $18.1$22.8 million at December 31, 20072008 to $18.4$24.0 million at March 31, 2008.2009. We believe that cash generated from operations and borrowings available under the General Physics Credit Agreement ($20.123.0 million of available borrowings as of March 31, 2008)2009), will be sufficient to fund our working capital and other requirements for at least the next twelve months.
During the first quarterAs of March 31, 2009 and December 31, 2008, we used $1.4had $2.5 million of cashaccrued contingent consideration with respect to repurchase approximately 152,000 shares of our common stock in the open market, and $1.2 million of cash, including transaction costs, to completeSandy acquisition based on the acquisition of PCS. In addition,revenue targets achieved for the twelve month period ended January 31, 2009. On April 1, 2009, we paid ADP, Inc. (“ADP”)the seller $2.5 million of contingent consideration. There are no further contingent consideration during the first quarter of 2008 based upon the revenue targets achieved during the first twelve-month period following the completion ofpayments relating to the Sandy acquisition.
In connection with the PCS acquisition of Performance Consulting Services, Inc. (“PCS”) on March 1, 2008, a portion of the purchase price consists of $1.0 million of guaranteed future payments to be paid in two equal installments on January 31, 2009 and January 31, 2010. We paid the first installment of $0.5 million on January 31, 2009. In addition, as of March 31, 2009, we accrued $0.3 million of contingent consideration with respect to the first twelve-month period following the completion of the acquisition of PCS based on the revenue targets achieved for the twelve months ended February 28, 2009. The accrued contingent consideration of $0.3 million was applied to goodwill as of March 31, 2009 and was paid in April 2009.
In addition to the payments discussed above, we may be required to pay the following additional contingent consideration in connection with the acquisitions we completed during 2007 and 2008:
· up to $4.0 million to ADP, contingent upon Sandy achieving certain revenue targets, as defined in the purchase agreement, during the second twelve-month period following the completion of the acquisition. As of December 31, 2007, we accrued $2.0 million of contingent consideration with respect to the first twelve-month period following the completion of the Sandy acquisition based on the revenue targets achieved for the eleven-month period ended December 31, 2007. As discussed above, the actual contingent consideration paid during the first quarter of 2008 with respect to the first full twelve-month period completed in 2008 was $2.5 million. The accrued contingent consideration of $2.0 million was
19
applied to goodwill during 2007 and the additional $0.5 million of contingent consideration paid in excess of the accrual was applied to goodwill during the first quarter of 2008;
·up to $1.8 million to the seller of SEL, contingent upon SEL achieving certain earnings targets, as defined in the purchase agreement, during the one-year period following completion of the acquisition on June 1, 2007;
· &# 160; up to $3.3$1.7 million to the seller of Via, contingent upon Via achieving certain earnings targets during the two twelve-month periods followingperiod ending September 30, 2009, which would be payable in the completionfourth quarter of the acquisition (a maximum of $1.625 million each year subsequent to the October 1, 2007 acquisition date); and2009;
· up to $2.3$1.3 million to the sellers of PCS, contingent upon the achievement of certain revenue targets during the twelve-month period ending February 28, 2010, which would be payable in the second quarter of 2010; and
·up to $1.6 million of total contingent consideration payable to the sellers of two twelve-month periods followingbusinesses acquired in the completionUK during the fourth quarter of 2008, which would be payable as follows: up to $0.3 million in 2009, $0.4 million in 2010, $0.5 million in 2011 and $0.4 million in 2012.
Significant Customers & Concentration of Credit Risk
We have a concentration of revenue from General Motors Corporation and its affiliates (“General Motors”) as well as a market concentration in the automotive sector. For the three months ended March 31, 2009 and 2008, revenue from General Motors accounted for approximately 20% and 22%, respectively, of our consolidated revenue, and revenue from the automotive industry accounted for approximately 25% and 29%, respectively, of our consolidated revenue. As of March 31, 2009, accounts receivable from General Motors totaled $11.1 million. As of April 30, 2009, approximately $5.4 million of the PCS acquisition (a maximumaccounts receivable balance had been collected and $5.6 million remained outstanding. As previously disclosed in more detail in Item 1A, Risk Factors, of $1.0 millionour Annual Report on Form 10-K for the year ended December 31, 2008, General Motors’ has reported a variety of challenges it is facing, including severe liquidity issues. In the event General Motors files for bankruptcy protection or otherwise defaults on amounts due to us, the outstanding accounts receivable may not be realizable and $1.3 million, respectively,could result in substantial write-offs and adversely impact our liquidity. No material reserves against possible uncollectible accounts receivable from General Motors have been provided as General Motors has
18
consistently made all scheduled payments to date. No other customer accounted for more than 10% of our revenue in the first quarter of 2009 or accounts receivable as of March 31, 2009.
We also have a concentration of revenue from the United States government. For the three months ended March 31, 2009 and second twelve-month periods subsequent2008, sales to the March 1, 2008 acquisition date).United States government and its agencies represented approximately 21% and 18%, respectively, of our consolidated revenue. Revenue was derived from many separate contracts with a variety of government agencies that are regarded by us as separate customers.
Cash Flows
Three months ended March 31, 20082009 compared to the Three Months ended March 31, 20072008
The Company’s cash balance decreased $0.2increased $1.0 million from $3.9$4.0 million as of December 31, 20072008 to $3.7$5.0 million as of March 31, 2008.2009. The decreaseincrease in cash and cash equivalents during the first quarter of 20082009 resulted from cash provided by operating activities of $4.2$6.7 million, cash used in investing activities of $4.1$0.7 million, and cash used in financing activities of $0.3 million.$4.8 million and a $0.1 million negative effect due to exchange rate changes on cash and cash equivalents.
Cash provided by operating activities was $6.7 million for the first quarter of 2009 compared to $4.2 million for the first quarter of 2008 compared to cash used in operations of $6.4 million for the first quarter of 2007.2008. The increase in cash provided by operating activities compared to the prior year is primarily due to favorable changes in operating assets and liabilities during the first quarter of 20082009 compared to the first quarter of 2007, primarily due to the initial working capital investment required2008, offset by a decrease in the first quarter of 2007 related to the Sandy acquisition which did not recur in 2008. The increase in cash provided by operating activities is also due in part to an increase in both net income and non-cash items added backadd-backs to net income for the first quarter of 2008 compared to the first quarter of 2007.prior year period.
Cash used in investing activities was $0.7 million for the first quarter of 2009 compared to $4.1 million for the first quarter of 2008 compared to $5.4 million for the first quarter of 2007.2008. The decrease in cash used in investing activities is primarily due to a decrease in cash used for acquisitions during the first quarter of 20082009 compared to the first quarter of 2007.2008. We used $0.5 million of cash in the first quarter of 2009 for a totaldeferred acquisition payment to the sellers of PCS, compared to $3.7 million of cash duringin the first quarter of 2008 for acquisitions, ($1.2which included $1.2 million for the PCS acquisition and $2.5 million of contingent consideration paid for the Sandy acquisition), compared to $5.3acquisition. As of March 31, 2009, we had $2.5 million of cash paid upon completion ofaccrued contingent consideration with respect to the Sandy acquisition in the first quarter of 2007. The decrease in cash used in investing activities for acquisitionswhich was slightly offset by an increase of $0.3 million of cash used for capital expenditures during the first quarter of 2008 compared to the first quarter of 2007.paid on April 1, 2009.
Cash used in financing activities was $4.8 million for the first quarter of 2009 compared to $0.3 million for the first quarter of 2008 compared to cash provided by financing activities of $3.5 million for the first quarter of 2007.2008. The decreaseincrease in cash provided byused in financing activities is primarily due to a $2.1 million decrease in proceeds fromthe repayment of short-term borrowings and a $0.6of $3.2 million decrease in cash received from the exercise of stock options during the first quarter of 20082009 compared to proceeds from short-term borrowings of $1.8 million in the first quarter of 2007. In addition, there2008. This was offset by a $0.4decrease of $0.5 million increase in cash used for repurchases of our common stock in the open market during the first quarter of 20082009 compared to the first quarter of 2007, and a $0.6 million decrease in our negative cash book balance during the first quarter of 2008 (the negative cash book balance results from outstanding checks which had not cleared the bank at the end of the period and are classified as accounts payable in the condensed consolidated balance sheets and presented as a financing activity in the condensed consolidated statements of cash flows).2008.
20Short-term Borrowings
Short-term Borrowings and Long-term Debt
General Physics has a $25$35 million Credit Agreement with a bank that expires on AugustOctober 31, 2009,2010, with annual renewal options, and is secured by certain assets of General Physics. The maximum interest rate on borrowings under the Credit Agreement is at the daily LIBOR Market Index Rate plus 2.75%2.25%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of March 31, 2008,2009, the rate was LIBOR plus 1.25% which resulted. The Credit Agreement contains covenants with respect to General Physics’ minimum tangible net worth, total liabilities ratio, leverage ratio, interest coverage ratio and its ability to make capital expenditures. General Physics was in a ratecompliance with all loan covenants under the amended Credit Agreement as of approximately 3.95%.March 31, 2009. The Credit Agreement also contains certain restrictive covenants regarding future acquisitions, incurrence of debt and the payment of dividends. The Credit Agreement permits General Physics to provide GP
19
Strategies up to $10 million of cash to repurchase shares of its outstanding common stock in the open market. The Companymarket beginning on August 14, 2008. General Physics is otherwise currently restricted from paying dividends or management fees to GP Strategies in excess of $1 million in any year withand the exceptionfunding of a waiver which permits General Physics to provide up to $8.1 million of cash to repay debt obligations which mature in 2008 in the event GP Strategies does not have available cash (see Note 7 to the Condensed Consolidated Financial Statements).stock repurchases discussed above. As of March 31, 2008,2009, there were $4.7 million ofno borrowings outstanding and $20.1$23.0 million of available borrowings under the Credit Agreement.
In August 2003, we issuedAgreement, based upon 80% of eligible accounts receivable and sold to four Gabelli funds $7.5 million in aggregate principal amount80% of 6% Conditional Subordinated Notes due in August 2008 (“Gabelli Notes”) and 937,500 warrants (“GP Warrants”), each entitling the holder thereof to purchase (subject to adjustment) one share of our common stock at an exercise price of $8.00. The aggregate purchase price for the Gabelli Notes and GP Warrants was $7.5 million. The Gabelli Notes are secured by a mortgage on our former property located in Pawling, New York which was distributed to National Patent Development Corporation (“NPDC”) in the spin-off in November 2004. In addition, at any time that less than $1.9 million principal amount of the Gabelli Notes are outstanding, we may defease the obligations secured by the mortgage and obtain a release of the mortgage. Subsequent to the spin-offs of NPDC and GSE Systems, Inc. and in accordance with the anti-dilution provisions of the warrant agreement, the number of GP Warrants was adjusted to 984,116 and the exercise price was adjusted to $5.85 per share. During the years ended December 31, 2007 and 2006, Gabelli exercised 624,862 and 197,823 GP Warrants, respectively, which reduced the principal balance of the Gabelli Notes by an aggregate of $4,615,000. Gabelli did not exercise any warrants during the first quarter of 2008. As of March 31, 2008, the principal balance of the Gabelli Notes was $2.9 million and there were 161,431 GP Warrants outstanding and exercisable with an exercise price of $5.85 per share which expire in August 2008.
In October 2003, we issued a five-year 5% note due in full in October 2008 in the principal amount of $5.3 million to ManTech International (ManTech). Interest is payable quarterly. Each year during the term of the note, ManTech has the option to convert up to 20% of the original principal amount of the note into our common stock at the then market price of our common stock, but only in the event that our common stock is trading at $10 per share or more. In the event that less than 20% of the principal amount of the note is not converted in any year, such amount not converted will be eligible for conversion in each subsequent year until converted or until the note is repaid in cash. ManTech has not converted any portion of the note into common stock and the principal balance of such note was $5.3 million as of March 31, 2008.unbilled receivables.
Off-Balance Sheet Commitments
Subsequent to the spin-off of NPDC,National Patent Development Corporation (“NPDC”) in 2004, we continued to guarantee certain obligationsoperating leases for the Connecticut and New Jersey warehouses of NPDC’s subsidiaries, Five Star Products, Inc. (“Five Star”) and MXL Industries, Inc. (“MXL”). We guaranteed certain operatingThe leases for Five Star’s New Jersey and Connecticut warehouses, which totaled approximately $1.6 million per year throughexpire on March 31, 2007. The leases have been extended and now expire in the first quarter of 2009. The annual rent obligations are currently approximately $1.6 million.2010. In connection with our spin-off of NPDC, NPDC agreed to assume our obligation under such guarantees, to use commercially reasonable efforts to cause us to be released from each such guaranty, and to hold us harmless from all claims, expenses and liabilities connected with the
21
leases or NPDC’s breach of any agreements effecting the spin-off. In March 2009, we received confirmation from the landlord that we were released from the guarantee on the Connecticut warehouse lease. We have not received confirmation that we have been released from these guarantees.the guarantee of the New Jersey warehouse. The annual rent obligation for the New Jersey warehouse is currently approximately $1.6 million. We do not expect to incur any material payments associated with these guarantees, and as such, no liability is reflected in the condensed consolidated balance sheets.
We also guarantee the repayment of a debt obligation of MXL, which is secured by property and certain equipment of MXL. The aggregate outstanding balance of MXL’s debt obligation as of March 31, 2008 was $1.0 million. Our guarantee expires upon the maturity of the debt obligation in March 2011. We do not expect to incur any material payments associated with this guarantee, and as such, no liability is reflected in the condensed consolidated balance sheets.
Accounting Standards IssuedAdopted
SFAS No. 141R
In December 2007, the Financial Accounting Standards Board (“FASB”)FASB issued Statement of Financial Accounting Standard (“SFAS”)SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective for acquisitions in fiscal years beginning after December 15, 2008, and will bewas adopted by the Company on January 1, 2009. The adoption of SFAS No. 141R did not have a material impact on the Company’s consolidated financial statements.
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will bewas adopted by the Company on January 1, 2009.
Accounting Standards Adopted
SAB No. 110
In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, Shared Based Payment (“SAB No. 110”). SAB No. 110 expresses the views, that under certain circumstances, the SEC staff will continue to accept the use of a “simplified method” in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No. 123R for stock option grants issued after December 31, 2007. Examples of such circumstances might include those in which a company does not have sufficient historical stock option exercise experience upon which to estimate an expected term, situations where historical exercise data may no longer provide a reasonable basis upon which to estimate an expected term, or situations where more relevant detailed information (employee exercise patterns by industry and/or other categories of companies) is not widely available. We currently use the simplified method to estimate the expected term for stock option grants due to inadequate historical experience to form a reasonable estimate. We will continue to use the simplified method until we have enough historical experience to provide a reasonable estimate of expected term in accordance with SAB No. 110. SAB No. 110 was effective January 1, 2008.
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SFAS No. 157
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No.157 was effective on January 1, 2008, except with respect to non-financial assets and liabilities for which the effective date was deferred by the FASB for one year later than the effective date set forth in SFAS No. 157. The initial adoption of SFAS No. 157160 did not have ana material impact on ourthe Company’s consolidated financial statements.
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. The Private Securities
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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, those factors set forth Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20072008 and those other risks and uncertainties detailed in our periodic reports and registration statements filed with the Securities and Exchange Commission. 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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Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2007.2008.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and under the Securities Exchange Act of 1934 (“Exchange Act”)) designed to provide reasonable assurance that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC’s rules and forms. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective in providing reasonable assurance of the achievement of the objectives described above.
Internal Control Over Financial Reporting
Except as discussed below, duringDuring the quarter ended March 31, 2008,2009, there has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d—15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
On January 1, 2008, we implemented a new financial system, which included a general ledger and various sub-ledgers. The implementation affected systems that include internal controls, and accordingly, the implementation has required certain revisions to our internal control over financial reporting. We reviewed the function and output of the system as it was implemented, as well as the controls affected by the implementation of the system, and made appropriate changes to affected internal controls. Because of inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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| None. | |
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The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, | ||
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The following table provides information about the Company’s share repurchase activity for the three months ended March 31, |
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| Issuer Purchases of Equity Securities |
| ||||||||
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| Total number |
| Approximate |
| ||
|
|
|
|
|
| of shares |
| dollar value of |
| ||
|
| Total number |
| Average |
| purchased as |
| shares that may yet |
| ||
|
| of shares |
| price paid |
| part of publicly |
| be purchased under |
| ||
Month |
| purchased |
| per share |
| announced program |
| the program |
| ||
January 1-31, 2008 |
| — |
| — |
| — |
| — |
| ||
February 1-29, 2008 |
| — |
| — |
| — |
| — |
| ||
March 1-31, 2008 |
| 151,797 | (1) | $ | 9.27 |
| 151,797 | (1) | $ | 1,996,000 |
|
|
| Issuer Purchases of Equity Securities |
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|
|
|
| Total number |
| Approximate |
| ||
|
|
|
|
|
| of shares |
| dollar value of |
| ||
|
| Total number |
| Average |
| purchased as |
| shares that may yet |
| ||
|
| of shares |
| price paid |
| part of publicly |
| be purchased under |
| ||
Month |
| purchased |
| per share |
| announced program |
| the program |
| ||
January 1-31, 2009 |
| — |
| — |
| — |
| — |
| ||
February 1-28, 2009 |
| — |
| — |
| — |
| — |
| ||
March 1-31, 2009 |
| 303,919 | (1) | $ | 2.92 |
| 296,320 | (2) | $ | 3,676,000 |
|
(1)Includes 7,599 shares surrendered by employees to satisfy tax withholding obligations on restricted stock units which vested during the first quarter of 2009. (2)Represents shares repurchased in the open market in connection with our 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. There is no expiration date for the repurchase program. |
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| |
| None. | |
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| |
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| None. | |
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| |
| None. |
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31.1 | Certification of Chief Executive Officer of the Company dated May | |
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31.2 | Certification of Executive Vice President and Chief Financial Officer of the Company dated May | |
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32.1 | Certification of Chief Executive Officer and Chief Financial Officer of the Company dated May |
*Filed herewith
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GP STRATEGIES CORPORATION | |
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May | /s/ Scott N. Greenberg | |
| Scott N. Greenberg | |
| Chief Executive Officer | |
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| /s/ Sharon Esposito-Mayer | |
| Sharon Esposito-Mayer | |
| Executive Vice President and Chief Financial Officer |
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