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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the transition period from             to             

Commission File Number 1-7234

GP STRATEGIES CORPORATION

(Exact name of Registrant as specified in its charter)

(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.

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

Indicate the number of shares outstanding of each of issuer’s classes of common stock as of October 30, 2009:

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

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Part I. Financial Information

Item 1. Financial Statements

GP STRATEGIES CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

See accompanying notes to condensed consolidated financial statements.

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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.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Nine months ended September 30, 2009 and 2008

(Unaudited, in thousands)

See accompanying notes to condensed consolidated financial statements.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(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 September 30, 2009, the condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008 have not been audited, but have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008, as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the 2009 interim period are not necessarily indicative of results to be expected for the entire year. In connection with the preparation of the condensed consolidated financial statements, the Company has evaluated all subsequent events through November 5, 2009, the date on which the financial statements were filed.

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 statements of operations for the three and nine months ended September 30, 2008 have been reclassified to conform with the presentation for 2009. The reclassification resulted in a decrease of $473,000 and $1,483,000 in cost of revenue and a corresponding increase in selling, general and administrative expenses for the three and nine months ended September 30, 2008, respectively.

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets generally accepted accounting principles (GAAP) that the Company follows to ensure it consistently reports its financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification,™ sometimes referred to as the Codification or ASC. The FASB finalized the Codification effective for periods ending on or after September 15, 2009. For further discussion of the Codification, see “Accounting Standards Adopted” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this report.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(Unaudited)

The condensed consolidated financial statements include the operations of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

(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 nine months ended September 30, 2009 and 2008, revenue from General Motors accounted for approximately 17% and 19%, respectively, of the Company’s consolidated revenue, and revenue from the automotive industry accounted for approximately 23% and 29%, respectively, of the Company’s consolidated revenue. As of September 30, 2009, accounts receivable from General Motors totaled $8,773,000. On June 1, 2009, General Motors filed a voluntary petition under Chapter 11 of the US Bankruptcy Code. Subsequent to filing that petition, General Motors sold a portion of its business to Vehicle Acquisition Holdings LLC (“New GM”) as part of its reorganization plan.  In connection with that sale, substantially all of the Company’s executory contracts with General Motors were assigned to and assumed by New GM, and substantially all of the Company’s pre-petition accounts receivable have been paid. No material reserves against possible uncollectible accounts receivable from General Motors have been provided as General Motors has consistently made scheduled payments to date and substantially all accounts receivable outstanding on June 1, 2009, when General Motors filed bankruptcy, have been paid. No other customer accounted for more than 10% of the Company’s revenue during the nine months ended September 30, 2009 or accounts receivable as of September 30, 2009.

The Company also has a concentration of revenue from the United States government. For the nine months ended September 30, 2009 and 2008, sales to the United States government and its agencies represented approximately 23% 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 period.  Diluted EPS reflects the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

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:

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(Unaudited)

(4)               Acquisition

Effective September 1, 2009, General Physics, through its wholly owned subsidiary, General Physics (UK) Ltd. (“GPUK”), completed the acquisition of Milsom Industrial Designs Limited (“Milsom”), a provider of technical documentation, technical publications, technical recruiting and engineering design services in the United Kingdom. GPUK acquired 100% ownership of Milsom for a purchase price of approximately $2,763,000 in cash. In addition, the purchase agreement requires GPUK to pay up to an additional $3,600,000, of which $1,200,000 would be payable subsequent to each of the three twelve-month periods following completion of the acquisition, contingent upon Milsom achieving certain earnings targets during those periods, as defined in the purchase agreement. Milsom is included in the Company’s Manufacturing & BPO segment and its results of operations are included in the consolidated financial statements for the period beginning September 1, 2009. The pro-forma impact of the Milsom acquisition is not material to the Company’s results of operations for the three and nine months ended September 30, 2009 and 2008.

Effective January 1, 2009, the Company adopted ASC Topic 805, Business Combinations (“Topic 805”), which requires that contingent consideration be recognized at fair value on the acquisition date with subsequent adjustments recognized in the consolidated statement of operations. Under the prior accounting standard, contingent consideration was recognized in the financial statements as an addition to goodwill at the time the payment was determinable beyond a reasonable doubt.  In accordance with Topic 805, the Company accrued $2,437,000 of contingent consideration based on its estimate of the fair value of the potential contingent consideration for Milsom on the acquisition date. The Company will re-evaluate the recorded amount of contingent consideration on a quarterly basis and any subsequent adjustments based on actual payments or revised estimates will be recognized in the consolidated statements of operations during the period of adjustment.

The fair value of the purchase price recorded by the Company consisted of the following (in thousands):

The Company’s purchase price allocation for the net assets acquired is as follows (in thousands):

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(Unaudited)

The Company recorded customer-related intangible assets as a result of the acquisition, which included $816,000 relating to customer lists and relationships acquired which will be amortized over an estimated useful life of nine years, and $393,000 relating to contract backlog for future services under firm contracts which will be amortized over approximately three years subsequent to the acquisition in proportion to the amount of related backlog to be recognized in revenue. The customer-related intangible assets and accrued contingent consideration for Milsom were recorded at fair value in accordance with the guidance in ASC Topic 820, Fair Value Measurements and Disclosure (“Topic 820”), which defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. The guidance within Topic 820 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels as follows:

·                  Level 1 — unadjusted quoted prices for identical assets or liabilities in active markets;

·                  Level 2 — quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation; and

·                  Level 3 — unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability.

The customer-related intangible assets and contingent consideration for the Milsom acquisition were valued using Level 3 inputs.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(Unaudited)

(5)               Intangible Assets

Goodwill

Changes in the carrying amount of goodwill by reportable business segment for the nine months ended September 30, 2009 were as follows (in thousands):

Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company reviews its goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company performs a two-step impairment test on goodwill. In the first step, the Company compares the fair value of each reporting unit to its carrying value. A reporting unit is an operating segment, or one level below an operating segment, as defined by current GAAP.  The Company determines the fair value of its reporting units based on an income approach, whereby it calculates the fair value of each reporting unit based on the present value of estimated future cash flows, which are prepared by evaluating historical trends, current budgets, operating plans and industry data. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit’s assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value allocated to goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded.

Based upon indicators of impairment in the second quarter of 2009, which included significantly lower than projected revenue and profit and a revised lower outlook for a longer period of time for certain of its reporting units, the Company performed an interim impairment test on its Manufacturing and Process & Aerospace reporting units as of June 30, 2009. The Manufacturing reporting unit’s revenue and profit projections were significantly lowered as a result of the impact of the economic recession and the corresponding reduction in spending by several customers. The Process & Aerospace reporting unit’s profit projections were decreased due to a lower profit margin as a percentage of revenue experienced by this reporting unit, despite revenue being in line with projections, and a change in projected future profit margin which was lower than previously assumed. The Company determined that the fair value of its Manufacturing reporting unit was below its carrying value and recognized a goodwill impairment loss of

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(Unaudited)

$9,909,000 in the second quarter of 2009 related to this reporting unit.  The Company determined that the fair value of its Process & Aerospace reporting unit was above its carrying value and no impairment was indicated as of June 30, 2009.

On April 1, 2009, the Company paid $2,500,000 of contingent consideration relating to the 2007 acquisition of Sandy Corporation (“Sandy”) with respect to the second twelve-month period following the completion of the acquisition based on the revenue targets achieved for that period. The contingent consideration had been accrued as of December 31, 2008 and applied to goodwill at that time. There are no further contingent consideration payments relating to the Sandy acquisition.

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 acquisition of Performance Consulting Services, Inc. (“PCS”) based on the revenue targets achieved for the twelve months ended February 28, 2009. The accrued contingent consideration of $305,000 was paid in April 2009.

As of September 30, 2009, the Company accrued $159,000 of contingent consideration with respect to the first twelve-month period following the completion of an acquisition in the UK during the fourth quarter of 2008. The accrued contingent consideration is payable in the fourth quarter of 2009.

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):

During the second quarter of 2009 and in connection with the goodwill impairment loss discussed above, the Company recorded an intangible asset impairment loss of $254,000 relating to a non-compete agreement that was no longer deemed to have value as of June 30, 2009.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(Unaudited)

(6)               Stock-Based Compensation

The Company recognizes compensation expense for its stock-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 (the “Non-Qualified Plan”), and 2003 Incentive Stock Plan (the “2003 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 and/or in shares of the Company’s common stock to officers, employees or members of the Board of Directors. As of September 30, 2009, the Company had non-qualified stock options and restricted stock units outstanding under these plans as discussed below.

Non-Qualified Stock Options

Summarized information for the Company’s non-qualified stock options is as follows:

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(Unaudited)

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. The Company recognizes the value of the underlying stock on the date of grant to compensation expense over the requisite service period. Upon vesting, the stock units are settled in shares of the Company’s common stock. Summarized share information for the Company’s restricted stock units is as follows:

(7)               Short-Term Borrowings

General Physics has a $35 million Financing and Security Agreement (the “Credit Agreement”) with a bank that expires on October 31, 2010 with annual renewal options. The Credit Agreement is secured by certain assets of General Physics and provides for an unsecured guaranty from the Company. The maximum interest rate on the Credit Agreement is the daily LIBOR market index rate plus 2.25%. Based upon the financial performance of General Physics, the interest rate can be reduced. For the three months ended September 30, 2009, the rate was LIBOR plus 1.25%, which resulted in a rate of 1.50% as of September 30, 2009. 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 compliance with all loan covenants under the amended Credit Agreement as of September 30, 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 the Company up to $10,000,000 of cash to repurchase shares of its outstanding common stock in the open market. General Physics is otherwise currently restricted from paying dividends or management fees to the Company in excess of $1,000,000 in any year.

As of September 30, 2009, there were $1,273,000 of borrowings outstanding and $21,531,000 of available borrowings under the Credit Agreement, based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables. As of December 31, 2008, there were $3,234,000 of borrowings outstanding under the Credit Agreement.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

(Unaudited)

(8)               Income Taxes

An uncertain tax position taken or expected to be taken in a tax return is 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 September 30, 2009, the Company had $2,218,000 of unrecognized tax benefits, all of which would impact the effective tax rate if recognized. The Company does not expect any material changes to its uncertain tax positions in the next twelve months. As of September 30, 2009, the Company had $50,000 of accrued interest related to these tax positions. Prior to January 2009, the Company did not recognize interest expense due to the existence of net operating loss carryforwards in the years in which the related tax positions were taken. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examination by tax authorities for years prior to 2003.

In connection with the $10,163,000 goodwill and intangible asset impairment loss incurred during the second quarter of 2009, the Company recognized a $1,517,000 income tax benefit for the tax deductible portion of goodwill which was written off.

(9)               Stockholders’ Equity

Changes in stockholders’ equity during the nine months ended September 30, 2009 were as follows (in thousands):

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009
(Unaudited)

(10)        Comprehensive Income (Loss)

The following are the components of comprehensive income (loss) (in thousands):

As of September 30, 2009 and December 31, 2008, accumulated other comprehensive loss was $1,819,000 and $2,629,000, respectively, and consisted of foreign currency translation adjustments.

(11)        Business Segments

As of September 30, 2009, the Company operated through four reportable business segments: (i) Manufacturing & Business Process Outsourcing (“BPO”), (ii) Process & Government, (iii) Energy and (iv) Sandy Training & Marketing (“Sandy”). The Company is organized by operating group primarily based upon the markets served by each group and the services performed. Two of the Company’s reportable business segments, Manufacturing & BPO and Process & Government, represent an aggregation of certain operating groups in accordance with the aggregation criteria as defined in current GAAP, while the Energy and Sandy groups each represent one operating segment.

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 electronics and semiconductors, steel, healthcare, financial and other industries as well as to government agencies. This segment’s ability to deliver a wide range of training services allows it to take over the entire learning function for the client, including their training personnel. The October 2007 acquisition of Via Training, LLC (“Via”) has expanded the Company’s delivery capabilities and diversified its core client base in the software, electronics and semiconductors and retail markets.  The September 2009 acquisition of Milsom bolsters the Company’s ability to deliver technical services and technical training services in Europe through its technical documentation and engineering design services capabilities, particularly in the aerospace sector.

Process & Government. The Process & Government segment has over four decades of experience providing consulting, engineering, technical and training services, including emergency preparedness, safety and regulatory compliance, chemical demilitarization and environmental services primarily to federal and state government agencies, large government contractors, and petroleum and chemical refining companies. This segment also provides design and construction of alternative fuel stations, including liquefied natural gas (“LNG”) fueling and hydrogen stations.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009
(Unaudited)

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 700 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 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 30 years. Sandy provides custom product sales training designed to better educate customer sales forces with respect to new product features and designs, in effect rapidly increasing the sales force knowledge base and enabling them to address detailed customer queries. Furthermore, Sandy provides customer relationship marketing (CRM) products including brand loyalty publications and other related products. Sandy develops personalized publications for automotive and non-automotive clients which establish a link between the manufacturer/dealer and each customer. In addition, Sandy produces brand specific portfolios that are installed in the gloveboxes of new cars and trucks at the time of vehicle assembly. This segment also provides technical training services to automotive customers.

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.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 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):

* The operating loss for the Manufacturing & BPO segment includes a $10,163,000 goodwill and intangible asset impairment loss for the nine months ended September 30, 2009.

(12)        Guarantees

Subsequent to the spin-off of National Patent Development Corporation (“NPDC”) in 2004, the Company continued to guarantee certain operating leases for the Connecticut and New Jersey warehouses of Five Star Products, Inc. (“Five Star”). The leases expire on March 31, 2010.  In connection with the spin-off of NPDC by the Company, NPDC agreed to assume the Company’s obligation under such guarantees, to use commercially reasonable efforts to cause the Company to be released from each such guaranty, and to hold the Company harmless from all claims, expenses and liabilities connected with the leases or NPDC’s breach of any agreements effecting the spin-off. In March 2009, the Company received confirmation from the landlord that it was released from the guarantee on the Connecticut warehouse lease. The Company has not received confirmation that it has been released from the guarantee of the New Jersey warehouse.  The annual rent obligation for the New Jersey warehouse is currently believed to be approximately $1,600,000. The Company does not expect to incur any material payments associated with this guarantee, and as such, no liability is reflected in the consolidated balance sheets.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

General Overview

Our 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.

As of September 30, 2009, we operated through four reportable business segments: (i) Manufacturing & Business Process Outsourcing (“BPO”), (ii) Process & Government, (iii) Energy, and (iv) Sandy Training & Marketing (“Sandy”). We are organized by operating group, primarily based upon the markets served by each group and the services performed. Each operating group consists of strategic business units (“SBUs”) and business units (“BUs”) which are focused on providing specific products and services to certain classes of customers or within targeted markets. Across operating groups, SBUs and BUs, we integrate similar service lines, technology, information, work products, client management and other resources. Communications and market research, accounting, finance, legal, human resources, information systems and other administrative services are organized at the corporate level. Business development and sales resources are aligned with operating groups to support existing customer accounts and new customer development. Two of our reportable business segments, Manufacturing & BPO and Process & Government, represent an aggregation of certain operating groups in accordance with the aggregation criteria as defined in current GAAP, while our Energy and Sandy groups each represent one operating segment. We review our reportable business segments on a continual basis and could change our reportable business segments from time to time in the event of organizational changes.

Further information regarding each business segment is discussed below.

Manufacturing & BPO. Our 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 electronics and semiconductors, steel, healthcare, financial and other industries as well as to government agencies. This segment’s ability to deliver a wide range of training services allows it to take over the entire learning function for the client, including their training personnel. The October 2007 acquisition of Via Training, LLC (“Via”) has expanded our delivery capabilities and diversified our core client base in the software, electronics and semiconductors and retail markets. The September 2009 acquisition of Milsom bolsters our ability to deliver technical services and technical training services in Europe through technical documentation and engineering design services capabilities, particularly in the aerospace sector.

Process & Government. Our Process & Government segment has over four decades of experience providing consulting, engineering, technical and training services, including emergency preparedness, safety and regulatory compliance, chemical demilitarization and environmental services primarily to federal and state government agencies, large government contractors, and petroleum and chemical refining companies. This segment also provides design and construction of alternative fuel stations, including LNG fueling and hydrogen stations.

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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 700 power generating units in over 25 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 & 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 30 years. Sandy provides custom product sales training designed to better educate customer sales forces with respect to new product features and designs, in effect rapidly increasing the sales force knowledge base and enabling them to address detailed customer queries. Furthermore, Sandy provides customer relationship marketing (CRM) products including brand loyalty publications and other related products. Sandy develops personalized publications for automotive and non-automotive clients which establish a link between the manufacturer/dealer and each customer. In addition, Sandy produces brand specific portfolios that are installed in the gloveboxes of new cars and trucks at the time of vehicle assembly. This segment also provides technical training services to automotive customers.

Share Repurchase Program

Since January 2006, our Board of Directors has authorized a total of $23 million of repurchases of our common stock from time to time in the open market, subject to prevailing business and market conditions and other factors.  During the years ended December 31, 2008, 2007 and 2006, we repurchased approximately 1,091,000, 678,500 and 420,000 shares, respectively, of our common stock in the open market for a total cost of approximately $8.8 million, $6.5 million and $3.1 million, respectively. During the three and nine months ended September 30, 2009, we repurchased approximately 121,000 and 526,000 shares, respectively, of our common stock in the open market for a total cost of approximately $0.8 million and $2.2 million, respectively. As of September 30, 2009, there was approximately $2.4 million available for future repurchases under the buyback program. There is no expiration date for the repurchase program.

Acquisition

Effective September 1, 2009, General Physics, through its wholly owned subsidiary, General Physics (UK) Ltd. (“GPUK”), completed the acquisition of Milsom Industrial Designs (“Milsom”), a provider of technical documentation, technical publications, technical recruiting and engineering design services in the United Kingdom. GPUK acquired 100% ownership of Milsom for a purchase price of approximately $2.8 million in cash. In addition, the purchase agreement requires GPUK to pay up to an additional $3.6 million, of which $1.2 million would be payable subsequent to each of the three twelve-month periods following completion of the acquisition, contingent upon Milsom achieving certain earnings targets during those periods, as defined in the purchase agreement.

Effective January 1, 2009, we adopted ASC Topic 805, Business Combinations (“Topic 805”), which requires that contingent consideration be recognized at fair value on the acquisition date with subsequent adjustments recognized in the consolidated statement of operations. Under the prior accounting standard, contingent consideration was recognized in the financial statements as an addition to goodwill at the time the payment was determinable beyond a reasonable doubt.  In accordance with Topic 805, we accrued $2.4 million of contingent consideration based on our estimate of the fair value of the potential contingent consideration on the acquisition date. We will re-evaluate the recorded amount of contingent consideration on a quarterly basis and any subsequent adjustments based on actual payments or revised estimates will be recognized in the consolidated statements of operations during the period of adjustment.

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The fair value of the purchase price we recorded consisted of the following (in thousands):

The purchase price allocation for the net assets acquired is as follows (in thousands):

We recorded customer-related intangible assets as a result of the acquisition, which included $0.8 million relating to customer lists and relationships acquired to be amortized over an estimated useful life of nine years, and $0.4 million relating to contract backlog for future services under firm contracts to be amortized over approximately three years subsequent to the acquisition in proportion to the amount of related backlog to be recognized in revenue.

Milsom is included in our Manufacturing & BPO segment and its results of operations are included in the consolidated financial statements for the period beginning September 1, 2009. The pro-forma impact of the Milsom acquisition is not material to our results of operations for the three and nine months ended September 30, 2009 and 2008.

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Operating Highlights

Three Months ended September 30, 2009 Compared to the Three Months ended September 30, 2008

For the three months ended September 30, 2009, we had income before income tax expense of $3.7 million compared to $5.1 million for the three months ended September 30, 2008. The decrease was primarily due to a decrease in operating income, the components of which are discussed below. Net income was $2.0 million, or $0.13 per diluted share, for the three months ended September 30, 2009, compared to net income of $2.9 million, or $0.18 per diluted share, for the three months ended September 30, 2008.

Revenue

(Dollars in thousands)

Manufacturing & BPO revenue decreased $4.3 million or 14.6% during the third quarter of 2009 compared to the third quarter of 2008. The decrease in revenue is due to the following:

·                  $3.6 million net decrease in revenue from BPO customers primarily due to a slowdown in spending by several customers resulting in an overall decline in the number of training courses run and some training courses running below full capacity;

·                  $0.6 million net decrease in U.S. dollar revenue recognized from our operations in the United Kingdom, which consists of a $0.8 million decrease in revenue due to the unfavorable effect of currency exchange rates and a net decrease of $1.6 million primarily due to a decrease in volume with training outsourcing customers, offset by an increase in revenue of $1.3 million attributable to the acquisitions completed in 2008 and 2009 and a $0.5 million increase due to the expansion of government funded training programs in the UK.

·                  $1.7 million reduction in process and maintenance reliability training services provided primarily to steel industry clients; and

·                  $0.7 million reduction in services for a pharmaceutical industry client.

The above decreases within the Manufacturing & BPO segment were offset by other net revenue increases of $2.3 million, primarily attributable to new customer contracts awarded during 2009.

As noted above, the changes in foreign currency exchange rates negatively impacted our U.S. dollar revenue recognized during the third quarter of 2009 when compared with the third 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 revenue when compared to 2008. In addition, we anticipate that the slowdown in

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customer spending in this segment which resulted in reduced revenue discussed above could continue to negatively impact our revenue in future quarters.

Process & Government revenue decreased $0.4 million or 3.2% during the third quarter of 2009 compared to the third quarter of 2008. The decrease is due to a $0.9 million net decrease in revenue primarily due to a reduced volume of chemical demilitarization training services and other government training services, a $0.7 million decrease in technical services for the aerospace industry, and a $0.4 million reduction in process, maintenance and reliability training services provided to petrochemical industry clients. These revenue decreases were offset by a $1.6 million increase in revenue relating to construction projects for liquefied natural gas (LNG) fueling station facilities.

Energy group revenue decreased $0.7 million or 11.9% during the third quarter of 2009 compared to the third quarter of 2008. The decrease is primarily due to a decline in training materials sold to nuclear energy clients during the third quarter of 2009 compared to the same period in 2008.

Sandy Training & Marketing revenue decreased $6.4 million or 37.8% during the third quarter of 2009 compared to the third quarter of 2008 due to a reduction in spending by automotive customers. The $6.4 million revenue decrease consisted of the following: