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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, 2011

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)

(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

The number of shares outstanding of the registrant’s common stock as of April 29, 2011 was as follows:

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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

Three months ended March 31, 2011 and 2010

(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

March 31, 2011
(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, 2011 and the condensed consolidated statements of operations and cash flows for the three months ended March 31, 2011 and 2010 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, 2010, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. 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 2011 interim period are not necessarily indicative of results to be expected for the entire year. Certain prior year amounts have been reclassified to conform to current year presentation.

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 three months ended March 31, 2011 and 2010, revenue from General Motors accounted for approximately 11% and 12%, respectively, of the Company’s consolidated revenue, and revenue from the automotive industry accounted for approximately 18% of the Company’s consolidated revenue for both the first quarter of 2011 and 2010. As of March 31, 2011, accounts receivable from General Motors totaled $4,668,000. No other customer accounted for more than 10% of the Company’s revenue in the first quarter of 2011 or accounts receivable as of March 31, 2011.

The Company also has a concentration of revenue from the United States government. For the three months ended March 31, 2011 and 2010, sales to the United States government and its agencies represented approximately 19% and 23%, 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.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(Unaudited)

(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 and restricted stock units 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:

(4)   Acquisitions

Communication Consulting

On February 1, 2011, General Physics, through its wholly-owned subsidiaries GP Worldwide Hong Kong Limited and GP (Shanghai) Consulting Co., Ltd., acquired the training business and certain related assets of Cathay/Communication Consulting Limited (“Communication Consulting”), a Hong Kong-based training and consulting company with offices in Shanghai and Beijing, China, and Haryana (New Delhi) in India. Communication Consulting designs and delivers customized training solutions and specializes in the areas of leadership, communication skills, sales and customer service training. General Physics paid approximately $1,380,000 in cash at closing. In addition, the purchase agreement requires General Physics to pay $125,000 upon the completion of certain post-closing matters and up to an additional $700,000 of contingent consideration, which would be payable subsequent to each of the two twelve-month periods following completion of the acquisition, contingent upon the achievement of certain revenue targets during those periods, as defined in the purchase agreement. The total estimated fair value of the purchase price on the date of acquisition was $1,492,000 and consisted of the upfront cash payment of $1,380,000 and $112,000 of estimated contingent consideration. The purchase price allocation consisted of $16,000 of fixed assets, $1,086,000 of goodwill and $390,000 of intangible assets to be amortized over five years from the acquisition date. The acquired Communication Consulting business is included in the Manufacturing & BPO segment and the results of its operations have been included in the consolidated financial statements since February 1, 2011. The pro-forma impact of the acquisition is not material to the Company’s results of operations.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(Unaudited)

RWD Technologies

On March 8, 2011, General Physics entered into an Asset Purchase Agreement with RWD Technologies, LLC, a Delaware limited liability company, and certain of its subsidiaries (collectively, “RWD”), to acquire certain operating assets of the consulting business of RWD. RWD is a provider of human capital management and IT consulting services, business transformation and lean process improvement, end-user training, change management, knowledge management and operator effectiveness management solutions in industries such as manufacturing, energy, automotive, aerospace, healthcare, life sciences, consumer products, financial, telecommunications, services and higher education as well as the public sector. The transaction closed on April 15, 2011. General Physics paid approximately $27,980,000 at closing, which consisted of $20,380,000 of cash on hand and $7,600,000 of borrowings under its revolving credit facility. The purchase price is subject to adjustment based on final determination of the working capital of the acquired business on the closing date in accordance with the Asset Purchase Agreement. The results of RWD’s operations will be included in the consolidated financial statements beginning April 16, 2011.

Ultra Training Ltd.

On April 1, 2011, General Physics through its wholly-owned subsidiary, General Physics (UK) Ltd., acquired Ultra Training Ltd., an independent skills training provider located in the United Kingdom. General Physics paid approximately $2,975,000 in cash at closing. In addition, the purchase agreement requires General Physics to pay $482,000 of deferred consideration, of which $161,000 was paid in April 2011 and the remainder is payable after confirmation of a customer contract renewal specified in the purchase agreement, which is expected to occur in July 2011. Ultra Training Ltd. will be included in the Company’s Manufacturing & BPO segment and its results of operations will be included in the Company’s consolidated financial statements beginning April 1, 2011.

Contingent Consideration

Effective January 1, 2009, the Company adopted Accounting Standards Codification (“ASC”) Topic 805, which requires that contingent consideration be recognized at fair value on the acquisition date, and re-measured each reporting period with subsequent adjustments recognized in the consolidated statement of operations. The Company estimates the fair value of contingent consideration liabilities based on financial projections of the acquired companies and estimated probabilities of achievement and discounts the liabilities to present value using a weighted-average cost of capital. Contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved. At each reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisitions are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to, and volatility in, the Company’s operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(Unaudited)

Below is a summary of the potential contingent consideration the Company may be required to pay in connection with completed acquisitions as of March 31, 2011 (dollars in thousands):

Below is a summary of the changes in the recorded amount of contingent consideration liabilities from December 31, 2010 to March 31, 2011 for each acquisition (dollars in thousands):

As of March 31, 2011 and December 31, 2010, contingent consideration included in accounts payable totaled $3,013,000 and $3,062,000, respectively. As of March 31, 2011 and December 31, 2010, the Company also had accrued contingent consideration totaling $2,563,000 and $2,670,000, respectively, related to acquisitions which is included in other long-term liabilities on the consolidated balance sheet and represents the portion of contingent consideration estimated to be payable greater than twelve months from the balance sheet date.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(Unaudited)

(5)   Intangible Assets

Goodwill

Changes in the carrying amount of goodwill by reportable business segment for the three months ended March 31, 2011 were as follows (in thousands):

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):

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(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, 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, 2011, the Company had non-qualified stock options and restricted stock units outstanding under these plans as discussed below.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(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. The Company recognizes the value of the market price of the underlying stock on the date of grant as 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:

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(Unaudited)

(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, 2013 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 March 31, 2011, the rate was LIBOR plus 1.25%. The Credit Agreement contains covenants with respect to General Physics’ minimum tangible net worth, total liabilities to tangible net worth ratio and interest coverage ratio. General Physics was in compliance with all loan covenants under the Credit Agreement as of March 31, 2011. 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. There was $6,566,000 remaining available for future share repurchases under the $10,000,000 authorized amount as of March 31, 2011. 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 March 31, 2011, there were no borrowings outstanding and $29,496,000 of available borrowings under the Credit Agreement, based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables.

(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 March 31, 2011, 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. For the three months ended March 31, 2011 and 2010, the Company recognized $18,000 and $23,000, respectively, of interest expense related to these tax positions which is reflected as income tax expense in the consolidated statements of operations. As of March 31, 2011, the Company had $184,000 of accrued interest related to these tax positions. 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 2002.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(Unaudited)

(9)                Stockholders’ Equity

Changes in stockholders’ equity during the three months ended March 31, 2011 were as follows (in thousands):

(10)         Comprehensive Income

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

As of March 31, 2011 and December 31, 2010, accumulated other comprehensive loss was $1,647,000 and $2,227,000, respectively, and consisted of foreign currency translation adjustments.

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GP STRATEGIES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011
(Unaudited)

(1)                     Business Segments

As of March 31, 2011, the Company operated through four reportable business segments: (i) Manufacturing & Business Process Outsourcing (“BPO”), (ii) Process & Government, (iii) Energy and (iv) Sandy Training & Marketing. The Company is organized by operating group primarily based upon the markets served by each group and the services performed. The Manufacturing & BPO segment represents an aggregation of certain operating groups in accordance with the aggregation criteria as defined in current GAAP, while the Process & Government, 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, pharmaceutical, software, 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.

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 and large government contractors. This segment also provides design and construction of alternative fuel stations, including liquefied natural gas (“LNG”) and hydrogen fueling stations.

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 approximately 800 power generating units in over 30 countries. In addition, this segment provides web-based training through our GPiLearnTM portal to over 30,000 power plant personnel in the U.S. and in over 40 countries.

Sandy Training and Marketing. The Sandy segment provides 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 helps our clients assess their customer relationship marketing strategy, measure performance against competitors and connect with their customers on a one-to-one basis. 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; gain on change in fair value of contingent consideration; 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

March 31, 2011
(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):

(12)              Subsequent Events

As discussed in more detail in Note 4, the Company completed the acquisition of Ultra Training Ltd. on April 1, 2011 and the acquisition of the consulting business of RWD Technologies, LLC on April 15, 2011.

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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 March 31, 2011, we operated through four reportable business segments: (i) Manufacturing & BPO, (ii) Process & Government, (iii) Energy, and (iv) Sandy Training & Marketing. 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. Our Manufacturing & BPO segment represents an aggregation of certain operating groups in accordance with the aggregation criteria as defined in current GAAP, while our Process & Government, 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, pharmaceutical, software, financial and other industries as well as to government agencies. Our ability to deliver a wide range of training services allows us to take over the entire learning function for the client, including their training personnel.

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 and large government contractors. This segment also provides design and construction of alternative fuel stations, including LNG and hydrogen fueling stations.

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 approximately 800 power generating units in over 30 countries. In addition, this segment provides web-based training through our GPiLearnTM portal to over 30,000 power plant personnel in the U.S. and in over 40 countries.

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Sandy Training & Marketing. Our Sandy segment provides 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 helps our clients assess their customer relationship marketing strategy, measure performance against competitors and connect with their customers on a one-to-one basis. This segment also provides technical training services to automotive customers.

2011 Acquisitions

Communication Consulting

On February 1, 2011, General Physics, through its wholly-owned subsidiaries GP Worldwide Hong Kong Limited and GP (Shanghai) Consulting Co., Ltd., acquired the training business and certain related assets of Cathay/Communication Consulting Limited (“Communication Consulting”), a Hong Kong-based training and consulting company with offices in Shanghai and Beijing, China, and Haryana (New Delhi) in India. Communication Consulting designs and delivers customized training solutions and specializes in the areas of leadership, communication skills, sales and customer service training. General Physics paid approximately $1.4 million in cash at closing. In addition, the purchase agreement requires General Physics to pay $0.1 million upon the completion of certain post-closing matters and up to an additional $0.7 million of contingent consideration, which would be payable subsequent to each of the two twelve-month periods following completion of the acquisition, contingent upon the acquired business achieving certain earnings targets during those periods, as defined in the purchase agreement. The total estimated fair value of the purchase price on the date of acquisition was $1.5 million and consisted of the upfront cash payment of $1.4 million and $0.1 million of estimated contingent consideration. The acquired Communication Consulting business is included in the Manufacturing & BPO segment and the results of its operations have been included in the consolidated financial statements since February 1, 2011.

RWD Technologies

On March 8, 2011, General Physics entered into an Asset Purchase Agreement with RWD Technologies, LLC, a Delaware limited liability company, and certain of its subsidiaries (collectively, “RWD”), to acquire certain operating assets of the consulting business of RWD. RWD is a provider of human capital management and IT consulting services, business transformation and lean process improvement, end-user training, change management, knowledge management and operator effectiveness management solutions in industries such as manufacturing, energy, automotive, aerospace, healthcare, life sciences, consumer products, financial, telecommunications, services and higher education as well as the public sector. The transaction closed on April 15, 2011. General Physics paid approximately $28.0 million at closing, which consisted of $20.4 million of cash on hand and $7.6 million of borrowings under its revolving credit facility. The purchase price is subject to adjustment based on final determination of the working capital of the acquired business on the closing date in accordance with the Asset Purchase Agreement. The results of RWD’s operations will be included in the consolidated financial statements beginning April 16, 2011.

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Operating Highlights

Three Months ended March 31, 2011 compared to the Three Months ended March 31, 2010

For the three months ended March 31, 2011, we had income before income tax expense of $4.4 million compared to $3.7 million for the three months ended March 31, 2010.  The increase was primarily due to an increase in operating income, the components of which are discussed below.  Included in operating income are net gains on the change in estimated fair value of contingent consideration of $0.2 million and $0.9 million for the three months ended March 31, 2011 and 2010, respectively. Excluding these gains, operating income increased $1.3 million. Net income was $2.6 million, or $0.14 per diluted share, for the three months ended March 31, 2011, compared to net income of $2.2 million, or $0.12 per diluted share, for the three months ended March 31, 2010. During the three months ended March 31, 2011, diluted weighted average shares outstanding increased by 178,000 to 18,892,000 shares outstanding compared to 18,714,000 shares for the same period in 2010, primarily due to the issuance of shares for stock-based compensation and the effect of the increase in our stock price compared to the prior year on the results of the calculation of diluted weighted average shares outstanding.

Revenue

Manufacturing & BPO revenue increased $6.2 million or 20.2% during the first quarter of 2011 compared to the first quarter of 2010. The increase in revenue is due to the following:

·                  $3.7 million increase in revenue attributable to acquisitions completed during 2010 and 2011, which includes $2.3 million for Marton House, $0.6 million for Bath Consulting, $0.7 million for Academy of Training and $0.1 million for Communication Consulting;

·                  $1.9 million increase in training BPO revenue primarily due to an increase in volume with existing customers during the first quarter of 2011 compared to the first quarter of 2010; and

·                  $0.6 million net increase in revenue primarily for training and technical services for manufacturing customers.

Process & Government revenue decreased $0.5 million or 4.5% during the first quarter of 2011 compared to the first quarter of 2010. The net decrease in revenue is due to the following:

·                  $1.0 million decrease relating to construction projects for liquefied natural gas (LNG) fueling station facilities due to the completion of projects in 2010; and

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·                  $0.8 million decrease in revenue from engineering and technical services primarily for aerospace and process industry customers.

These revenue decreases were offset by a $1.3 million increase in revenue on various contracts related to homeland security / first responder training services, environmental engineering and other technical services primarily for government clients.

Energy group revenue increased $0.5 million or 8.6% during the first quarter of 2011 compared to the first quarter of 2010 primarily due to a large EtaProTM contract which was started during the second quarter of 2010.

Sandy Training & Marketing revenue increased $1.2 million or 11.7% during the first quarter of 2011 compared to the first quarter of 2010. The $1.2 million revenue increase was primarily attributable to an increase in training services for a new vehicle launch program for an automotive customer during the first quarter of 2011.

In addition, 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 $0.4 million during the first quarter of 2011 compared to $0.7 million during the first quarter of 2010.

Gross Profit

Manufacturing & BPO gross profit of $5.7 million or 15.3% of revenue for the first quarter of 2011 increased by $1.3 million or 30.2% when compared to gross profit of $4.4 million or 14.1% of revenue for the first quarter of 2010. Approximately $0.4 million of the increase in gross profit dollars is attributable to the acquisitions we completed in 2010 and 2011. In addition, this segment experienced increases in gross profit and improved margins as a percentage of revenue primarily due to the revenue increases discussed above, as well as fixed costs not increasing in the same proportion as the revenue increases in certain of our manufacturing operations during the first quarter of 2011 compared to the first quarter of 2010, and an overall increase in margin in the first quarter of 2011 in our e-Learning operations.

Process & Government gross profit of $1.8 million or 18.0% of revenue for the first quarter of 2011 increased by $0.2 million or 14.7% when compared to gross profit of $1.6 million or 15.0% of revenue for the first quarter of 2010. Despite the overall net revenue decrease in this segment, gross profit increased slightly due to the revenue increases in this segment discussed above due to a reduction in estimated costs to complete on certain fixed price projects during the first quarter of 2011 compared to the first quarter of 2010.

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Energy group gross profit of $1.7 million or 29.0% of revenue for the first quarter of 2011 increased by $0.5 million or 42.8% when compared to gross profit of $1.2 million or 22.1% of revenue for the first quarter of 2010 primarily due to a reduction of overhead costs and business development resources related to office closures.

Sandy Training and Marketing gross profit of $1.6 million or 14.3% of revenue for the first quarter of 2011 increased by $0.5 million or 52.3% when compared to gross profit of $1.0 million or 10.5% of revenue for the first quarter of 2010. The increase in gross profit dollars is primarily due to the revenue increase discussed above, as well as lower costs on certain other revenue streams during the first quarter of 2011 compared to the first quarter of 2010.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.3 million or 24.0% from $5.4 million for the first quarter of 2010 to $6.7 million for the first quarter of 2011.  The increase is primarily due to $0.8 million of transaction costs, largely for legal expenses, in connection with the RWD and Communication Consulting acquisitions we recently completed as well as increased labor and benefits expense during the first quarter of 2011 compared to the first quarter of 2010.

Interest Expense

Interest expense was consistent at less than $0.1 million for both the first quarters of 2011 and 2010.

Other Income

Other income was $0.2 million for the first quarter of 2011 compared to $0.1 million for the first quarter of 2010 and consisted primarily of income from a joint venture in both years.

Change in Fair Value of Contingent Consideration

We recognized net gains on the change in fair value of contingent consideration related to acquisitions of $0.2 million and $0.9 million for the three months ended March 31, 2011 and 2010, respectively.  Effective January 1, 2009, we adopted Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“Topic 805”), which requires that contingent consideration be recognized at fair value on the acquisition date, and re-measured each reporting period with subsequent adjustments recognized in the consolidated statement of operations. We estimate the fair value of contingent consideration liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. At each reporting date, the contingent consideration obligation will be revalued to estimated fair value and changes in fair value subsequent to the acquisitions will be reflected in income or expense in the consolidated statements of operations, and could cause a material impact to, and volatility in, our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. See Note 4 to the Condensed Consolidated Financial Statements for further details regarding the potential contingent consideration payments and the changes in fair value of the related liabilities for each acquisition during the three months ended March 31, 2011.

Income Tax Expense

Income tax expense was $1.8 million for the first quarter of 2011 compared to $1.6 million for the first quarter of 2010. The increase is due to an increase in income before income tax expense for the first quarter of 2011 compared to the first quarter of 2010.  The effective income tax rate was 41.6% and 41.9% for the three months ended March 31, 2011 and 2010, respectively. Income tax expense for the quarterly periods is based on an

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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.

Liquidity and Capital Resources

Working Capital

For the quarter ended March 31, 2011, our working capital increased $1.9 million from $47.3 million at December 31, 2010 to $49.2 million at March 31, 2011. We believe that cash generated from operations and borrowings available under the General Physics Credit Agreement ($29.5 million of available borrowings as of March 31, 2011), will be sufficient to fund our working capital and other requirements for at least the next twelve months.

On March 8, 2011, General Physics entered into an Asset Purchase Agreement with RWD Technologies, LLC, a Delaware limited liability company, and certain of its subsidiaries (collectively, “RWD”), to acquire certain operating assets of the consulting business of RWD. RWD is a provider of human capital management and IT consulting services, business transformation and lean process improvement, end-user training, change management, knowledge management and operator effectiveness management solutions in industries such as manufacturing, energy, automotive, aerospace, healthcare, life sciences, consumer products, financial, telecommunications, services and higher education as well as the public sector. The transaction closed on April 15, 2011. General Physics paid approximately $28.0 million at closing, which consisted of $20.4 million of cash on hand and $7.6 million of borrowings on its revolving credit facility.  The purchase price is subject to adjustment based on final determination of the working capital of the acquired business on the closing date in accordance with the Asset Purchase Agreement. The results of RWD’s operations will be included in the consolidated financial statements beginning April 16, 2011.

On April 1, 2011, General Physics through its wholly-owned subsidiary, General Physics (UK) Ltd., acquired Ultra Training Ltd., an independent skills training provider located in the United Kingdom. General Physics paid approximately $3.0 million in cash at closing. In addition, the purchase agreement requires General Physics to pay $0.5 million of deferred consideration, of which $0.2 million was paid in April 2011 and the remainder is payable after confirmation of a customer contract renewal specified in the purchase agreement which is expected to occur in July 2011. Ultra Training Ltd. will be included in the Company’s Manufacturing & BPO segment and its results of operations will be included in the Company’s consolidated financial statements beginning April 1, 2011.

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We may be required to pay the following contingent consideration in connection with acquisitions we previously completed (dollars in thousands):