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GPX > SEC Filings for GPX > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for GP STRATEGIES CORP

Form 10-K for GP STRATEGIES CORP


28-Feb-2014

Annual Report


Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2013 which are located in Item 8 of this report.

General Overview

We are a global performance improvement solutions provider of training, e-Learning solutions, management consulting and engineering services that seeks to improve the effectiveness of organizations by providing services and products that are customized to meet the specific needs of clients. Clients include Fortune 500 companies and governmental and other commercial customers in a variety of industries. 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 December 31, 2013, we operated through five reportable business segments:
(i) Learning Solutions, (ii) Professional & Technical Services, (iii) Sandy Training & Marketing, (iv) Performance Readiness Solutions (formerly RWD), and
(v) Energy Services. Our Learning Solutions segment represents an aggregation of two operating groups in accordance with the aggregation criteria in U.S. GAAP, while all of the other reportable segments each represent one operating group. We are organized by operating group primarily based upon the markets served by each group and/or the services performed. Each operating group consists of business units which are focused on providing specific products and services to certain classes of customers or within targeted markets. Marketing and communications, 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.

Effective January 1, 2013, we made changes to our organizational structure to transfer the management responsibility of certain business units between segments, which resulted in a change in the composition of certain of our operating segments. The changes primarily consisted of: (i) the alternative fuels business unit transferred from Professional & Technical Services to Energy Services; (ii) a business unit which predominantly provides content development services to U.S. government and commercial clients transferred from Learning Solutions to Professional & Technical Services; and (iii) our foreign operations in India and China and a portion of our Canadian operations transferred from Professional & Technical Services to Learning Solutions. We have reclassified the segment financial information herein for the prior years to reflect these changes and conform to the current year's presentation.

Further information regarding our business segments is discussed below.

Learning Solutions. The Learning Solutions segment delivers training, curriculum design and development, e-Learning services, system hosting, training business process outsourcing and consulting services globally through our offices in the U.S., Europe, Asia and Canada. This segment also offers organizational performance solutions including leadership training and employee engagement tools and services. This segment serves large companies in the electronics and semiconductors, healthcare, software, financial services and other industries as well as to government agencies. The ability to deliver a wide range of training services on a global basis allows this segment to take over the entire learning function for the client, including their training personnel.

Professional & Technical Services. This segment has over four decades of experience providing training, consulting, engineering and technical services, including lean consulting, emergency preparedness, safety and regulatory compliance, chemical demilitarization and environmental services primarily to large companies in the manufacturing, steel, pharmaceutical and petrochemical industries, federal and state government agencies and large government contractors.

Sandy Training & Marketing. The Sandy Training & Marketing 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 vehicle 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 manufacturers as well as customers in other industries.

Performance Readiness Solutions. This segment provides performance consulting and technology consulting services, including platform adoption, end-user training, change management, knowledge management, customer product training outsourcing and sales enablement solutions in industries such as manufacturing, aerospace, healthcare, life sciences, consumer products, financial, telecommunications, services and higher education as well as the public sector.

Energy Services. The Energy Services segment provides engineering services, products and training primarily to electric power generators. Our proprietary EtaPROTM Performance and Condition Monitoring System provides a suite of real-time software solutions for power generation facilities and is installed on power generating units across the world. In addition to providing custom training solutions, this segment provides web-based training through our GPiLearnTM portal, which offers a variety of courses to power plant personnel in the U.S. and several other countries. This segment also provides services to users of alternative fuels, including designing and constructing liquefied natural gas (LNG), liquid to compressed natural gas (LCNG) and hydrogen fueling stations, as well as supplying fuel and equipment.

We discuss our business in more detail in Item 1.Business and the risk factors affecting our business in Item 1A. Risk Factors.

Business Strategy

We seek to increase shareholder value by pursuing the following strategies:

Continuously enhance our service offerings and capabilities. We believe the demand for learning and development services will continue to increase. In a knowledge based economy, this demand is driven by ever increasing technology, processes, products, and attrition of personnel. The rate and effectiveness of the transfer of knowledge to the workforce of our clients, their partners, and even their customers can positively impact their performance. We plan to meet this demand by continuously expanding our services and capabilities through organic growth initiatives based upon our technical expertise as well as through targeted acquisitions. Our acquisitions in recent years have added product sales training and leadership development to our services offerings, strengthened our e-Learning and custom training content development services in both the commercial and government sectors, and expanded our geographical reach. We believe that the breadth of our service and product offerings allows us to effectively compete for customers by offering a comprehensive solution for custom training, consulting, engineering and technical services. We will continue to focus on increasing our capabilities to drive incremental growth from new, as well as existing, clients.

Develop and maintain strong customer relationships. We plan to preserve and grow our business by cross-selling our services and capabilities across and within our existing client base. We have a successful track record of increasing the scope of our work for a number of our clients, many of whom we estimate currently outsource only a fraction of their training expenditures. We believe that as our clients benefit from the efficient, cost-effective and flexible training solutions and services that we provide, many of them will find it beneficial to increase the scope of training services that they outsource to third party providers. We believe that the strength of our relationships with our existing clients, including the insight and knowledge into their operations that we have developed through these relationships, when combined with the broad range of our service and product offerings, provide us with an advantage when competing for these additional expenditures. We realize that many companies have reduced their external training expenditures due to the economic downturn; however, we will strive to preserve our relationships and increase our proportion of our customers' total spend.

Leverage BPO capabilities. We have a demonstrated ability to provide training services across a wide spectrum of learning engagements from transactional multi-week assignments focused on a single aspect of a learning process to multi-year contracts where we manage the learning infrastructure of our customer. Integrated BPO engagements typically require us to assume responsibility for the development, delivery and administration of learning functions and are generally carried out under multi-year agreements. We intend to leverage our BPO capabilities to expand the customers and markets we serve.

Expand global platform. We believe international markets offer growth opportunities for our services. We intend to leverage our current international presence as well as continue pursuing our strategy of enhancing our international platform by selectively acquiring businesses in targeted geographies and following our current clients into new geographic markets. In our experience, many of our clients are seeking access to these and other attractive international markets and as such we intend to enhance our international capabilities. In order to support their business expansion we are providing employee training solutions across organizations in different countries and different languages, while maintaining quality and consistency in the overall training program. By moving into specific international markets with our existing clients, we are able to not only deepen our relationships with those clients, but are also able to develop expertise in those markets that we can leverage to additional customers. We believe that following this strategy provides us with opportunities to gain access to international markets with established client relationships in those markets.

Continue our disciplined acquisition strategy. We plan to continue to focus on evaluating compelling strategic acquisition targets to enhance our service offerings and delivery capabilities and to expand our geographic footprint. We have followed a disciplined approach to target selection and have been able to acquire complementary businesses at what we believe are attractive valuations. Since 2006, we have acquired over 20 businesses which have expanded our e-Learning capabilities and added complementary services such as product sales training and leadership development. Over half of these businesses are located outside of the United States and have strengthened our international platform, enabling us to meet the needs of our global clients while providing additional client opportunities. We also believe that our current operating structure, which utilizes a centralized infrastructure of corporate services to support our various platforms, enhances our ability to quickly and cost-effectively integrate acquisitions. We look to identify acquisitions to augment our capabilities when we believe acquisitions are the quickest and most efficient way of expanding our platform and service offerings.

Acquisitions

Below is a summary of the acquisitions we completed during 2013, 2012 and 2011. See Note 2 to the accompanying Consolidated Financial Statements for further details, including the purchase price allocations.

2013 Acquisitions

Prospero

On May 31, 2013, we completed the acquisition of Prospero Learning Solutions ("Prospero"), a Canada-based provider of custom learning and content development solutions. The upfront purchase price for Prospero was $7.0 million which was paid in cash at closing. In addition, the purchase agreement requires up to an additional $4.7 million of consideration, contingent upon the achievement of certain earnings targets during the two twelve-month periods following completion of the acquisition, as defined in the purchase agreement. The acquired Prospero business is included in the Learning Solutions segment and the results of its operations have been included in the consolidated financial statements since June 1, 2013.

Lorien

On June 12, 2013, we completed the acquisition of Lorien Engineering Solutions ("Lorien"), a United Kingdom-based provider of engineering design and project management services with specific expertise in the food and beverage, manufacturing and life sciences industries. The upfront purchase price for Lorien was $6.7 million which was paid in cash at closing. In addition, the purchase agreement requires up to an additional $1.0 million of consideration, contingent upon the achievement of certain earnings targets during the first twelve months following completion of the acquisition, as defined in the purchase agreement. The acquired Lorien business is included in the Learning Solutions segment and the results of its operations have been included in the consolidated financial statements since June 12, 2013.

2012 Acquisitions

Information Horizons

Effective May 1, 2012, we entered into an Asset Purchase Agreement with Information Horizons Limited ("Information Horizons"), an independent skills training provider located in the United Kingdom, to acquire its government funded training services business. The purchase price was $0.5 million in cash at closing. Information Horizons is included in the Learning Solutions segment and its results of operations have been included in the consolidated financial statements since May 1, 2012.

Asentus

On June 29, 2012, through our wholly-owned subsidiaries in Canada and Europe, we acquired the business and operations of Asentus Consulting Group Ltd. and Asentus Europe B.V. (collectively, "Asentus"). Asentus is an international provider of IT technical training content, and live and virtual training event services, with offices in Vancouver, Canada, The Netherlands, Germany and France. The total upfront purchase price for both companies was $1.4 million, of which $1.1 million was paid in cash at closing and $0.3 million was paid during the fourth quarter of 2012 subsequent to the finalization of a working capital calculation pursuant to the purchase agreement. In addition, the purchase agreement requires up to an additional $3.7 million of consideration, contingent upon the achievement of certain earnings targets, as defined in the purchase agreement, during two successive twelve-month periods following the closing. No contingent consideration was payable in respect of the first twelve-month period following completion of the acquisition as the earnings target was not achieved. A maximum of $1.6 million would be payable subsequent to the second twelve-month period following completion of the acquisition if the earnings targets are achieved. The acquired Asentus business is included in the Learning Solutions segment and the results of its operations have been included in the consolidated financial statements since July 1, 2012.

Rovsing Dynamics

On September 17, 2012, we entered into an Asset Purchase Agreement with Rovsing Dynamics A/S ("Rovsing"), located in Denmark, a provider of vibration condition monitoring hardware and software, and on that date acquired the business and certain operating assets. The purchase price was approximately $0.7 million in cash paid at closing. The acquired Rovsing business is included in the Energy Services segment and its results of operations have been included in the consolidated financial statements since September 17, 2012.

BlessingWhite

On October 1, 2012, we completed the acquisition of BlessingWhite, a provider of leadership development and employee engagement solutions. The purchase price was $10.8 million in cash at closing and was subsequently reduced by a $0.2 million working capital adjustment paid by the sellers. BlessingWhite is included in the Learning Solutions segment and its results of operations have been included in the consolidated financial statements since October 1, 2012.

2011 Acquisitions

Communication Consulting

On February 1, 2011, through our wholly-owned subsidiaries in Hong Kong and Shanghai, we 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. The purchase price for the acquired business and assets was $1.5 million in cash and $0.2 million of contingent consideration paid in 2012. Communication Consulting is included in the Learning Solutions segment and the results of its operations have been included in the consolidated financial statements since February 1, 2011.

Ultra Training Ltd.

On April 1, 2011, we acquired Ultra Training Ltd., an independent skills training provider located in the United Kingdom. We acquired 100% ownership of Ultra Training Ltd. for a purchase price of $3.4 million in cash. Ultra Training Ltd. is included in the Learning Solutions segment and its results of operations have been included in the consolidated financial statements since April 1, 2011.

RWD Technologies

On April 15, 2011, we completed the acquisition of certain assets of the consulting business of RWD Technologies, LLC, a Delaware limited liability company, and certain of its subsidiaries (collectively, "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. We paid $28.0 million of cash at closing. The purchase price was subsequently reduced by a working capital adjustment of $2.2 million received from the sellers in September 2011. A portion of the acquired business is reported as a separate reportable segment named Performance Readiness Solutions, and the other business units are included in the Professional & Technical Services and Sandy Training & Marketing segments. The results of RWD's operations have been included in the consolidated financial statements since April 16, 2011.

Beneast Training Ltd.

On August 1, 2011, we acquired the share capital of TK Holdings Ltd and its subsidiary Beneast Training Ltd. (collectively, "Beneast"), an independent skills training provider located in the United Kingdom. We acquired 100% ownership of Beneast for a purchase price of $6.8 million in cash. Beneast is included in the Learning Solutions segment and its results of operations have been included in the consolidated financial statements since August 1, 2011.

Van Hee

On July 29, 2011, we entered into an Asset Purchase Agreement with Van Hee Transport Limited ("Van Hee"), an independent skills training provider located in the United Kingdom, to acquire a contract to provide government funded training services. The purchase price was $0.8 million in cash at closing and was recorded as an intangible asset which is being amortized over an estimated useful life of three years subsequent to the acquisition date.

Results of Operations

Operating Highlights

On July 2, 2013, we entered into an agreement (the "Global Master Agreement") with HSBC Holdings plc ("HSBC") to provide global learning services. The Global Master Agreement establishes a contractual framework pursuant to which we and certain of our wholly owned subsidiaries will enter into local services agreements with certain members of HSBC's group of companies in respect of each country in which the learning services are to be provided by us. During the third quarter of 2013, we entered into local services agreements relating to the provision of services in the U.S., Canada, the U.K. and Hong Kong. We anticipate entering into additional local services agreements with HSBC group members in other countries through September 30, 2014. The initial term of the Global Master Agreement is three years. HSBC has the right to extend the Global Master Agreement for one additional two-year term. We anticipate that HSBC will be our largest customer when the Global Master Agreement and additional local services agreements are fully implemented. As a result, we anticipate that this new contract award could materially impact our future results of operations when compared to corresponding prior year periods. See Part I, Item 1A for a discussion of certain risks related to our performance of the Global Master Agreement.

Year ended December 31, 2013 compared to the year ended December 31, 2012

For the year ended December 31, 2013, we had income before income taxes of $38.5 million compared to $35.8 million for the year ended December 31, 2012. The improved results are primarily due to an increase in operating income of $2.7 million, the components of which are discussed below. Included in operating income for 2013 is a $1.7 million net gain on the change in estimated fair value of contingent consideration relating to acquisitions previously completed, compared to a net loss of $0.8 million in 2012 related to acquisitions completed, which is discussed further below and in Note 2 to the Consolidated Financial Statements. Net income was $23.8 million, or $1.23 per diluted share, for the year ended December 31, 2013 compared to $22.7 million, or $1.18 per diluted share, for 2012. During the third quarter of 2012, we recognized an income tax benefit of $1.6 million on the reduction of an uncertain tax position liability. Diluted weighted average shares outstanding were 19.4 million for the year ended December 31, 2013 compared to 19.3 million for the same period in 2012. The increase in shares outstanding is 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

                                       Years ended December 31,
                                        2013             2012
                                        (Dollars in thousands)
Learning Solutions                  $     189,899    $     158,118
Professional & Technical Services          72,577           82,447
Sandy Training & Marketing                 70,699           70,243
Performance Readiness Solutions            53,882           55,794
Energy Services                            49,632           34,970
                                    $     436,689    $     401,572

Learning Solutions revenue increased $31.8 million or 20.1 % during the year ended December 31, 2013 compared to 2012. The increase in revenue is due to the following:

A $4.5 million increase attributable to the Asentus acquisition completed in June 2012;

A $10.5 million increase attributable to the BlessingWhite acquisition completed in October 2012;

A $7.4 million increase attributable to the Lorien acquisition completed on June 12, 2013;

A $3.2 million increase attributable to the Prospero acquisition completed on May 31, 2013; and

A $8.9 million increase in our U.S. Learning Solutions organization due to increased e-Learning content development and training business process outsourcing (BPO) services from contracts with new clients and expansion of work with existing clients.

These increases were offset by a net $2.7 million decrease in revenue from our Europe operations, excluding the effect of acquisitions, primarily due to a decrease in technical services for an aerospace customer, a decrease in e-Learning content development services and a decrease in UK government funded skills training revenue, partially offset by various other increases including revenue from a new contract with a financial services customer in 2013.

Professional & Technical Services revenue decreased $9.9 million or 12.0% during the year ended December 31, 2013 compared to 2012. The decrease in revenue is due to the following:

A $4.5 million decrease in homeland security, environmental engineering and chemical demilitarization services for U.S. government clients due to contracts concluding;

A $2.4 million decrease in technical IT services due to project completions;

A $1.1 million decrease in e-Learning services due to the completion of projects for U.S. government clients;

A $0.9 million decrease in lean consulting services due to project completions; and

$1.0 million of various other net decreases in revenue in this segment during 2013 compared to 2012.

Sandy Training & Marketing revenue increased $0.5 million or 0.6% during the year ended December 31, 2013 compared to 2012. The increase in revenue is due to the following:

A $1.9 million net increase in training services for existing U.S. automotive customers due to new vehicle training programs and an increase in dealership sales trainers; and

A $1.9 million increase in publications and glovebox portfolio revenues; partially offset by

A $3.3 million decrease in automotive sales training primarily due to a decrease in non-recurring vehicle launch events for a large west coast automotive customer.

Performance Readiness Solutions (formerly RWD) revenue decreased $1.9 million or 3.4% during the year ended December 31, 2013 compared to 2012 due to a net decrease in sales enablement, training development and system implementation training services due to various project completions.

Energy Services revenue increased $14.7 million or 41.9% during the year ended December 31, 2013 compared to 2012. The revenue increase was primarily due to the following:

A $12.9 million increase in the alternative fuels business unit due to a large new contract to design and build several LNG stations for a new customer; and

A $2.0 million of revenue attributable to the Rovsing acquisition which was completed in September 2012.

Gross profit

                                                Years ended December 31,
                                             2013                       2012
                                                % Revenue                  % Revenue
                                                 (Dollars in thousands)
Learning Solutions                  $ 33,540          17.7 %   $ 30,065          19.0 %
Professional & Technical Services     12,320          17.0 %     14,279          17.3 %
Sandy Training & Marketing            10,748          15.2 %     10,954          15.6 %
Peformance Readiness Solutions         7,515          13.9 %      7,762          13.9 %
Energy Services                       12,142          24.5 %      8,911          25.5 %
                                    $ 76,265          17.5 %   $ 71,971          17.9 %

Learning Solutions gross profit of $33.5 million or 17.7% of revenue for the year ended December 31, 2013 increased by $3.5 million or 11.6% when compared to gross profit of $30.1 million or 19.0% of revenue for the year ended December 31, 2012. Approximately $3.2 million of the increase in gross profit is attributable to the acquisitions we completed in 2012 and 2013. The remainder of . . .

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