Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended March 31, 2010
Commission
File Number: 0-16284
TECHTEAM
GLOBAL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
38-2774613
|
(State or other
jurisdiction of incorporation)
|
(I.R.S. Employer
Identification No.)
|
27335
West 11 Mile Road, Southfield, MI 48033
(Address
of principal executive offices) (Zip code)
Registrant’s
telephone number, including area code: (248) 357-2866
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
n No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes 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. (Check one):
Large accelerated
filer ¨ |
Accelerated filer
n |
Non- accelerated
filer ¨ |
Smaller reporting
company ¨ |
|
|
(Do
not check if smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
n
The
number of shares of the registrant's common stock outstanding at May 1, 2010 was
11,228,296.
TECHTEAM
GLOBAL, INC.
FORM
10-Q
TABLE
OF CONTENTS
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PART
I – FINANCIAL INFORMATION
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Item 1
Financial Statements
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Condensed
Consolidated Statements of Operations—
Three
Months Ended March 31, 2010 and 2009
|
|
3
|
|
|
|
Condensed
Consolidated Balance Sheets —
As
of March 31, 2010 and December 31, 2009
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4
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|
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Condensed
Consolidated Statements of Cash Flows —
Three
Months Ended March 31, 2010 and 2009
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5
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|
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Notes
to Condensed Consolidated Financial Statements
|
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6
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|
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Item 2
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Item 3
Quantitative and Qualitative Disclosures About Market Risk
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24
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Item 4
Controls and Procedures
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24
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PART
II – OTHER INFORMATION
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Item 1
Legal Proceedings
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25
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Item 1A Risk
Factors
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25
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|
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Item 2
Unregistered Sales of Equity Securities and Use of
Proceeds
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25
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|
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Item 5
Other Information
|
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25
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|
|
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Item 6
Exhibits
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25
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SIGNATURES
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26
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PART
1 — FINANCIAL INFORMATION
|
ITEM
1 — FINANCIAL STATEMENTS
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In
thousands, except per share data)
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
IT Outsourcing
Services
|
|
$ |
26,208 |
|
|
$ |
27,718 |
|
IT Consulting and Systems
Integration
|
|
|
2,920 |
|
|
|
3,904 |
|
Other
Services
|
|
|
3,726 |
|
|
|
4,265 |
|
Total
Commercial
|
|
|
32,854 |
|
|
|
35,887 |
|
Government Technology
Services
|
|
|
15,156 |
|
|
|
20,218 |
|
Total
revenue
|
|
|
48,010 |
|
|
|
56,105 |
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
IT Outsourcing
Services
|
|
|
20,271 |
|
|
|
21,265 |
|
IT Consulting and Systems
Integration
|
|
|
2,369 |
|
|
|
2,968 |
|
Other
Services
|
|
|
2,805 |
|
|
|
3,159 |
|
Total
Commercial
|
|
|
25,445 |
|
|
|
27,392 |
|
Government Technology
Services
|
|
|
12,111 |
|
|
|
14,785 |
|
Total
cost of
revenue
|
|
|
37,556 |
|
|
|
42,177 |
|
Gross
profit
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
7,409 |
|
|
|
8,495 |
|
Government Technology
Services
|
|
|
3,045 |
|
|
|
5,433 |
|
Total
gross
profit
|
|
|
10,454 |
|
|
|
13,928 |
|
Selling, general and
administrative
expense
|
|
|
10,637 |
|
|
|
10,592 |
|
Restructuring
charge
|
|
|
3,144 |
|
|
|
— |
|
Operating
income
(loss)
|
|
|
(3,327
|
) |
|
|
3,336 |
|
Net interest
expense
|
|
|
(187
|
) |
|
|
(311
|
) |
Foreign currency transaction
gain
(loss)
|
|
|
196 |
|
|
|
(235
|
) |
Income
(loss) before income
taxes
|
|
|
(3,318
|
) |
|
|
2,790 |
|
Income tax provision
(benefit)
|
|
|
(665
|
) |
|
|
1,140 |
|
Net
income
(loss)
|
|
$ |
(2,653
|
) |
|
$ |
1,650 |
|
Basic
earnings (loss) per common
share
|
|
$ |
(0.25
|
) |
|
$ |
0.16 |
|
Diluted
earnings (loss) per common
share
|
|
$ |
(0.25
|
) |
|
$ |
0.16 |
|
Weighted
average number of common shares and
common share equivalents
outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,662 |
|
|
|
10,588 |
|
Diluted
|
|
|
10,662 |
|
|
|
10,613 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
14,210 |
|
|
$ |
15,969 |
|
Accounts receivable (less
allowance of $1,039 at March 31, 2010
and $1,315 at December 31,
2009)
|
|
|
43,557 |
|
|
|
44,314 |
|
Prepaid expenses and other
current
assets
|
|
|
4,534 |
|
|
|
3,766 |
|
Total current
assets
|
|
|
62,301 |
|
|
|
64,049 |
|
Property,
equipment and software,
net
|
|
|
5,470 |
|
|
|
6,231 |
|
Goodwill
and other intangible assets, net
|
|
|
46,770 |
|
|
|
47,270 |
|
Deferred
income
taxes
|
|
|
3,995 |
|
|
|
3,940 |
|
Other
assets
|
|
|
831 |
|
|
|
1,030 |
|
Total
assets
|
|
$ |
119,367 |
|
|
$ |
122,520 |
|
|
|
|
|
|
|
|
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|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
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|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current portion of long-term
debt
|
|
$ |
4,064 |
|
|
$ |
4,074 |
|
Accounts
payable
|
|
|
6,185 |
|
|
|
5,130 |
|
Accrued payroll and related
taxes
|
|
|
9,620 |
|
|
|
8,486 |
|
Accrued
expenses
|
|
|
5,900 |
|
|
|
5,237 |
|
Other current
liabilities
|
|
|
2,694 |
|
|
|
4,168 |
|
Total current
liabilities
|
|
|
28,463 |
|
|
|
27,095 |
|
|
|
|
|
|
|
|
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Long-term
liabilities
|
|
|
|
|
|
|
|
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Long-term debt, less current
portion
|
|
|
9,831 |
|
|
|
11,051 |
|
Other long-term
liabilities
|
|
|
786 |
|
|
|
745 |
|
Total long-term
liabilities
|
|
|
10,617 |
|
|
|
11,796 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Preferred stock, 5,000,000
shares authorized, no shares issued
|
|
|
— |
|
|
|
— |
|
Common stock, $0.01 par value,
45,000,000 shares authorized,
11,222,719 and 11,118,309
shares issued and outstanding at
March 31, 2010 and
December 31, 2009, respectively
|
|
|
112 |
|
|
|
111 |
|
Additional paid-in
capital
|
|
|
80,290 |
|
|
|
79,762 |
|
Retained
earnings
|
|
|
73 |
|
|
|
2,726 |
|
Accumulated other
comprehensive income
(loss)
|
|
|
(188
|
) |
|
|
1,030 |
|
Total shareholders’
equity
|
|
|
80,287 |
|
|
|
83,629 |
|
Total
liabilities and shareholders’
equity
|
|
$ |
119,367 |
|
|
$ |
122,520 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In
thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net income
(loss)
|
|
$ |
(2,653
|
) |
|
$ |
1,650 |
|
Adjustments to reconcile net
income (loss) to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
1,399 |
|
|
|
1,688 |
|
Non-cash expense related to
stock options and issuance
of common stock and restricted
common
stock
|
|
|
608 |
|
|
|
568 |
|
Other
|
|
|
1 |
|
|
|
6 |
|
Changes in current assets and
liabilities
|
|
|
1,124 |
|
|
|
3,548 |
|
Changes in long-term assets
and
liabilities
|
|
|
224 |
|
|
|
(260
|
) |
Net cash provided by operating
activities
|
|
|
703 |
|
|
|
7,200 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchase of property,
equipment and
software
|
|
|
(135
|
) |
|
|
(671
|
) |
Cash paid for acquisitions,
net of cash
acquired
|
|
|
(125
|
) |
|
|
(126
|
) |
Net cash used in investing
activities
|
|
|
(260
|
) |
|
|
(797
|
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Other
|
|
|
(78
|
) |
|
|
(11
|
) |
Payments on long-term
debt
|
|
|
(1,231
|
) |
|
|
(3,152
|
) |
Net cash used in financing
activities
|
|
|
(1,309
|
) |
|
|
(3,163
|
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(893
|
) |
|
|
(212
|
) |
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash
equivalents
|
|
|
(1,759
|
) |
|
|
3,028 |
|
Cash
and cash equivalents at beginning of
period
|
|
|
15,969 |
|
|
|
16,881 |
|
Cash
and cash equivalents at end of
period
|
|
$ |
14,210 |
|
|
$ |
19,909 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note
1 — Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared by TechTeam Global, Inc. (“TechTeam” or the “Company”) in accordance
with United States generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by United States generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included, and such
adjustments are of a normal recurring nature. Operating results for the three
months ended March 31, 2010, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009.
Note
2 — Comprehensive Income (Loss)
Comprehensive
income (loss) is defined as net income and all non-ownership changes in
shareholders’ equity. For the Company, comprehensive income (loss) for the
periods presented consists of net income, the foreign currency translation
adjustment and net unrealized gain on derivative instruments. A summary of
comprehensive income (loss) for the periods presented is as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
Net
income
(loss)
|
|
$ |
(2,653
|
) |
|
$ |
1,650 |
|
Other
comprehensive income (loss) —
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(1,340
|
) |
|
|
(1,224
|
) |
Unrealized gain on derivative
instruments
|
|
|
122 |
|
|
|
146 |
|
Comprehensive
income
(loss)
|
|
$ |
(3,871
|
) |
|
$ |
572 |
|
Note
3 — Earnings (Loss) Per Share
Basic
earnings (loss) per share for common stock is computed using the weighted
average number of common shares excluding unvested restricted shares
and shares held in escrow in connection with the Company’s acquisition of RL
Phillips, Inc. Dilutive earnings (loss) per share for common stock is computed
using weighted average number of common shares and common share equivalents
outstanding. Common share equivalents consist of stock options, unvested
restricted stock issued to employees and shares held in escrow in connection
with the Company’s acquisition of RL Phillips, Inc. During the three months
ended March 31, 2010, common share equivalents (including 1,867,992 stock
options) were excluded from the computation of diluted earnings per common share
due to the loss for the period. During the three months ended March 31, 2009,
2,179,100 stock options were excluded from the computation of diluted earnings
per common share because the exercise prices of the options were higher than the
average market price of the Company’s common stock for the respective
period.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
Note 4 —
Restructuring
On March
29, 2010 the Company announced a restructuring plan to reduce certain redundant
costs, eliminate some excess capacity and support the Company's strategy to more
tightly focus its business. The restructuring plan was approved by the Company’s
Board of Directors on March 23, 2010. The 2010 pre-tax restructuring charge
amounted to $3,144,000, and was primarily related to separation costs for
approximately 40 employees and reductions in excess leased facility capacity
around the world.
The
following table summarizes the accrued charges related to the 2010 restructuring
plans:
|
|
Accrued
Restructuring
Charges
at
December
31,
2009
|
|
|
Adjustments
to
Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges
at
March
31, 2010
|
|
|
|
(In
thousands)
|
|
Workforce
reductions
|
|
$ |
— |
|
|
$ |
2,487 |
|
|
$ |
(457
|
) |
|
$ |
2,030 |
|
Other
|
|
|
— |
|
|
|
657 |
|
|
|
(136
|
) |
|
|
521 |
|
Total
|
|
$ |
— |
|
|
$ |
3,144 |
|
|
$ |
(593
|
) |
|
$ |
2,551 |
|
The
following table summarizes the 2010 restructuring charges by operating
segment:
|
|
Accrued
Restructuring
Charges
at
December
31,
2009
|
|
|
Adjustments
to
Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges
at
March
31, 2010
|
|
Restructuring
charges
|
|
(In
thousands)
|
|
Commercial —
|
|
|
|
|
|
|
|
|
|
|
|
|
IT Outsourcing
Services
|
|
$ |
— |
|
|
$ |
681 |
|
|
$ |
(11
|
) |
|
$ |
670 |
|
IT Consulting and Systems
Integration
|
|
|
— |
|
|
|
328 |
|
|
|
— |
|
|
|
328 |
|
Other Services
|
|
|
— |
|
|
|
294 |
|
|
|
(54
|
) |
|
|
240 |
|
Total
Commercial
|
|
|
— |
|
|
|
1,303 |
|
|
|
(65
|
) |
|
|
1,238 |
|
Government Technology
Services
|
|
|
— |
|
|
|
139 |
|
|
|
(130
|
) |
|
|
9 |
|
Selling, general and
administrative expense
|
|
|
— |
|
|
|
1,702 |
|
|
|
(398
|
) |
|
|
1,304 |
|
Total
restructuring charges
|
|
$ |
— |
|
|
$ |
3,144 |
|
|
$ |
(593
|
) |
|
$ |
2,551 |
|
In 2009,
the Company implemented a restructuring plan to improve global management
consistency. The Company globalized its sales and solution design functions
across all geographies. This created a redundancy of a senior executive in
Europe. The 2009 pre-tax restructuring charge related to this action was
$1,167,000 and was primarily for separation costs for one employee. The total
2009 restructuring charge relates to the selling, general and administrative
expenses line item on the Consolidated Statement of Operations.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
Note 4 —
Restructuring (continued)
The
following table summarizes the accrued charges related to the 2009 restructuring
plan:
|
|
Accrued
Restructuring
Charges
at
December
31,
2009
|
|
|
Adjustments
to
Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges
at
March
31, 2010
|
|
|
|
(In
thousands)
|
|
Workforce
reductions
|
|
$ |
162 |
|
|
$ |
— |
|
|
$ |
(162
|
) |
|
$ |
— |
|
During
2008, the Company announced corporate-wide organizational realignment and
restructuring actions to improve operating efficiency, achieve greater global
consistency and drive improved financial performance. The restructuring
plans were approved by the Company’s Board of Directors on May 21, 2008 and
December 23, 2008. The 2008 pre-tax restructuring charges amounted to
$5,719,000, and were primarily related to separation costs for approximately 80
employees and reductions in excess leased facility capacity around the
world.
Due to
the inherent uncertainty involved in estimating restructuring expenses, actual
amounts paid for such activities may differ from amounts initially estimated.
Accordingly, during the second quarter of 2009, the Company reversed $756,000 of
previously recorded liabilities related to the 2008 restructuring plan. This
reversal resulted from amending a lease for
facilities in Europe to eliminate its obligation to pay for leased space that
was vacated and expensed in 2008 by favorably re-negotiating the terms of the
facility lease which lowered the expected exit costs.
The
following table summarizes the accrued charges related to the 2008 restructuring
plans:
|
|
Accrued
Restructuring
Charges
at
December
31,
2009
|
|
|
Adjustments
to
Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges
at
March
31, 2010
|
|
|
|
(In
thousands)
|
|
Other
|
|
$ |
156 |
|
|
$ |
— |
|
|
$ |
(18
|
) |
|
$ |
138 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
The following table summarizes the 2008 restructuring
charges by operating segment:
|
|
Accrued
Restructuring
Charges
at
December
31,
2009
|
|
|
Adjustments
to
Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges
at
March
31, 2010
|
|
Restructuring
charges
|
|
(In
thousands)
|
|
Government Technology
Services
|
|
$ |
151 |
|
|
$ |
— |
|
|
$ |
(16
|
) |
|
$ |
135 |
|
Selling, general and
administrative expense
|
|
|
5 |
|
|
|
— |
|
|
|
(2
|
) |
|
|
3 |
|
Total
restructuring charges
|
|
$ |
156 |
|
|
$ |
— |
|
|
$ |
(18
|
) |
|
$ |
138 |
|
Note
5 — Property, Equipment and Software
Long-lived
assets are evaluated for impairment when events occur or circumstances indicate
that the remaining estimated useful lives may warrant revision or that the
remaining balances may not be recoverable. When this occurs, an estimate of
undiscounted cash flows is used to determine if the remaining balances are
recoverable. No events of circumstances were noted in the three months ended
March 31, 2010 and 2009 which would require management to perform the noted
analysis.
Note
6 — Acquisitions and Dispositions
Onvaio
LLC
On
May 30, 2008, TechTeam Global, Inc. completed the acquisition of Onvaio LLC
(“Onvaio”), a California limited liability company. Onvaio is a provider of
technical support outsourcing services for clients globally through its
wholly-owned subsidiary, Onvaio Asia Services, Inc., based in Manila,
Philippines. The initial purchase price totaled $4,787,000 and included
acquisition costs of $400,000. In addition to the initial purchase price paid at
closing, an additional $1,500,000 was placed into an escrow account and is
payable in increments of $125,000 on the last day of each fiscal quarter
provided that Onvaio is still providing services to its largest customer in
substantially the same form and content as provided at closing. As of March 31,
2010, $875,000 had been released from escrow and paid to the selling
shareholders. This additional amount is being recorded as goodwill as it is
earned.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
Note 7 — Stock-Based
Compensation
The
Company measures and recognizes compensation expense for all stock-based payment
awards based on the estimated fair value of the award. Compensation expense is
recognized over the period during which the recipient is required to provide
service in exchange for the award. Stock-based compensation expense recognized
in each period is based on the value of the portion of the share-based award
that is ultimately expected to vest during the period. The Company’s outstanding
stock-based awards consist of stock options and restricted stock.
Stock
Options
The
Company recorded compensation expense totaling $334,000 and $314,000 related to
outstanding options during the three months ended March 31, 2010 and 2009,
respectively. At March 31, 2010 and 2009, there was approximately $1,641,000 and
$2,842,000, respectively, of unrecognized compensation expense related to stock
options. Unrecognized compensation expense at March 31, 2010 is expected to be
recognized over a weighted-average period of approximately one
year.
The
Company records compensation expense for stock options based on the estimated
fair value of the options on the date of grant using the Black-Scholes valuation
model. The Company uses historical data among other factors to estimate the
expected price volatility, the expected option term and the expected forfeiture
rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at
the date of grant for the expected term of the option.
There
were no options granted during the three months ended March 31, 2010 and
2009.
Restricted
Common Stock
Compensation
expense related to all restricted stock under all plans is recorded on a
straight-line basis over the vesting period. The Company recorded compensation
expense of approximately $274,000 and $224,000 related to outstanding shares of
restricted stock under all plans for the three months ended March 31, 2010 and
2009, respectively.
The
weighted average grant-date fair value of restricted stock granted under all
plans was $6.91 and $3.76 for the three months ended March 31, 2010 and 2009,
respectively. The fair value of restricted stock awards granted under all plans
was determined based on the closing trading price of the Company’s common stock
on the date of grant.
At
March 31, 2010 and 2009, there was approximately $3,028,000 and $2,466,000,
respectively, of total unrecognized compensation expense related to nonvested
shares of restricted stock. Unrecognized compensation expense at March 31, 2010
is expected to be recognized over a weighted-average period of three
years.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
Note 8 — Income
Taxes
At
March 31, 2010 and December 31, 2009, the Company had an unrecognized tax
benefit of approximately $113,000. The Company recognizes accrued interest
related to unrecognized tax benefits as a component of interest expense and
recognizes penalties as a component of selling, general and administrative
expense. During the three months ended March 31, 2010 and 2009, interest
and penalties recognized in the financial statements were not material. The
Company had no material accruals for the payment of interest and penalties at
March 31, 2010 and December 31, 2009.
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 examinations by tax authorities for years before 2002. The Internal
Revenue Service (“IRS”) commenced an examination of the Company’s 2004 U.S.
federal income tax return in the first quarter of 2007, which was completed in
the second quarter of 2008. The following table summarizes tax years that remain
subject to examination by major tax jurisdictions.
Major
Jurisdiction
|
|
Open
Years
|
|
U.S.
Federal income taxes
|
|
2005
through 2009
|
|
U.S.
State income taxes
|
|
2005
through 2009
|
|
Foreign
income taxes
|
|
2003
through 2009
|
|
For the
three months ended March 31, 2010 and 2009, the consolidated effective tax
rates were 20.0% and 40.9%, respectively. The rate for March 31, 2010
differs from the statutory tax rate of 34% primarily due to foreign operating
losses for which a tax benefit is not recorded, state income taxes and
nondeductible expenses. The level of foreign operating losses was increased
during the quarter because a significant portion of the Company’s restructuring
charge was incurred in countries with historical operating
losses. The rate for March 31, 2009 differs from the statutory rate
of 34% primarily due to state income taxes, foreign operating losses for which a
tax benefit is not recorded, and nondeductible expenses.
Note
9 — Segment Reporting
Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. Our chief operating decision-making
group is the Executive Leadership Team, which is comprised of the President and
Chief Executive Officer, the Chief Financial Officer, the Vice President of
Global Sales, the President of TechTeam Government Solutions, the Vice
Presidents of Client Service Management, Chief Information Officer, General
Counsel and the Vice Presidents of Human Resources. The operating segments are
managed separately because each operating segment represents a strategic
business unit that offers different services.
The
accounting policies of the operating segments are the same as those described in
Note 1 to the Company’s consolidated financial statements contained in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The Company evaluates segment performance based on segment gross profit. Assets
are not allocated to operating segments, but certain amounts of depreciation and
amortization expense are allocated to operating segments.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
Note 9 — Segment
Reporting (continued)
Financial
information for the Company’s operating segments is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
IT Outsourcing
Services
|
|
$ |
26,208 |
|
|
$ |
27,718 |
|
IT Consulting and Systems
Integration
|
|
|
2,920 |
|
|
|
3,904 |
|
Other Services
|
|
|
3,726 |
|
|
|
4,265 |
|
Total
Commercial
|
|
|
32,854 |
|
|
|
35,887 |
|
Government Technology
Services
|
|
|
15,156 |
|
|
|
20,218 |
|
Total
revenue
|
|
$ |
48,010 |
|
|
$ |
56,105 |
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
IT Outsourcing
Services
|
|
$ |
5,937 |
|
|
$ |
6,453 |
|
IT Consulting and Systems
Integration
|
|
|
551 |
|
|
|
936 |
|
Other Services
|
|
|
921 |
|
|
|
1,106 |
|
Total
Commercial
|
|
|
7,409 |
|
|
|
8,495 |
|
Government Technology
Services
|
|
|
3,045 |
|
|
|
5,433 |
|
Total
gross profit
|
|
|
10,454 |
|
|
|
13,928 |
|
Selling, general and
administrative expense
|
|
|
(10,637
|
) |
|
|
(10,592
|
) |
Restructuring
charge
|
|
|
(3,144
|
) |
|
|
— |
|
Net interest
expense
|
|
|
(187
|
) |
|
|
(311
|
) |
Foreign currency transaction
gain (loss)
|
|
|
196 |
|
|
|
(235
|
) |
Income
(loss) from continuing operations before income taxes
|
|
$ |
(3,318
|
) |
|
$ |
2,790 |
|
Revenue
from customers, or groups of customers under common control, that comprise 10%
or greater of the Company’s total revenue in any period presented are as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
U.S.
Federal Government
|
|
|
27.6 |
% |
|
|
32.8 |
% |
Ford
Motor Company
|
|
|
11.0 |
% |
|
|
15.8 |
% |
Total
|
|
|
38.6 |
% |
|
|
48.6 |
% |
The
Company conducts business under multiple contracts with various entities within
the Ford Motor Company organization and with various agencies and departments of
the U.S. Federal Government. For the three months ended March 31, 2010 and
2009, approximately 13.4% and 19.9%, respectively, of our total revenue was
derived from agencies within the U.S. Department of Defense in the
aggregate.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
Note 9 — Segment
Reporting (continued)
The
Company attributes revenue to different geographic areas on the basis of the
location that has the contract with the customer, even though the services may
be provided by a different geographic location. Revenue by geographic area is
presented below:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
31,481 |
|
|
$ |
38,230 |
|
Europe:
|
|
|
|
|
|
|
|
|
Belgium
|
|
|
8,238 |
|
|
|
8,581 |
|
Rest of Europe
|
|
|
8,291 |
|
|
|
9,294 |
|
Total
Europe
|
|
|
16,529 |
|
|
|
17,875 |
|
Total revenue
|
|
$ |
48,010 |
|
|
$ |
56,105 |
|
Note
10 — Contingencies
From time
to time the Company is involved in various litigation matters arising in the
ordinary course of its business. None of these matters, individually or in the
aggregate, currently is material to the Company.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
Note
11 – Financial Instruments Measured at Fair Value
Items
Measured at Fair Value on a Recurring Basis
On
January 1, 2009, the Company adopted the provisions of ASC 820, “Fair Value
Measurements and Disclosures” (“ASC 820”) related to nonfinancial assets and
liabilities on a prospective basis. ASC 820 establishes the authoritative
definition of fair value, sets out a framework for measuring fair value and
expands the required disclosures about fair value measurement. On
January 1, 2008, the Company adopted the provisions of ASC 820 related to
financial assets and liabilities as well as other assets and liabilities carried
at fair value on a recurring basis. The valuation techniques required by ASC 820
are based on observable and unobservable inputs using the following
hierarchy:
|
Level
1 —
|
Observable
inputs such as quoted prices (unadjusted) in active markets for identical
assets or liabilities.
|
|
Level
2 —
|
Inputs
other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not
active.
|
|
Level
3 —
|
Unobservable
inputs that reflect the reporting entity’s own
assumptions.
|
The
following table summarizes the basis used to measure certain financial assets
and financial liabilities at fair value on a recurring basis in the balance
sheet:
|
|
Fair
Value of Interest Rate Swap (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
Fair
Value as of March 31, 2010
|
|
$ |
(328 |
) |
NA
|
|
$ |
(328 |
) |
NA
|
Fair
Value as of December 31, 2009
|
|
$ |
(449 |
) |
NA
|
|
$ |
(449 |
) |
NA
|
On
June 4, 2007, the Company entered into an interest rate swap agreement with
a notional amount of $30,000,000. Under the swap agreement, the notional amount
will be reduced by $625,000 on a monthly basis and will mature on June 3,
2011. The purpose of the interest rate swap, which is designated as a cash flow
hedge, is to manage interest costs and the risk associated with variable-rate
debt. The Company does not hold or issue derivative instruments for trading
purposes. The swap effectively converts a portion of the Company’s variable-rate
debt under the Credit Agreement to a fixed rate. Under this agreement, the
Company receives a floating rate based on LIBOR and pays a fixed rate of 5.55%
on the outstanding notional amount. The fair value of these interest rate
derivatives are based on quoted prices for similar instruments from a commercial
bank and, therefore, the interest rate derivative is considered a level 2
item.
For the
three months ended March 31, 2010 and 2009, losses recognized in other
comprehensive income (loss) on derivatives were $14,000 and $74,000,
respectively and losses reclassified from other comprehensive income (loss) into
interest expense upon settlement amounted to $136,000 and $220,000, for the
three months ended March 31, 2010 and 2009, respectively. The liability
associated with the interest rate swap is included in other current liabilities
and other long-term liabilities on the consolidated balance sheet in the amounts
of $311,000 and $17,000, respectively, at March 31, 2010 and $394,000 and
$55,000, respectively, at December 31, 2009.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(continued)
Note 11 – Financial Instruments
Measured at Fair Value (continued)
Items
Measured at Fair Value on a Nonrecurring Basis
In
addition to its interest rate swap, the Company measured restructuring related
liabilities (Note 4 - Restructuring) at fair value on a nonrecurring basis.
These liabilities are not measured at fair value on a recurring basis and,
therefore, are not included in the tables above.
The
Company has determined that the fair value measurements included in these
liabilities rely primarily on Company-specific inputs and the Company’s
assumptions about the settlement of liabilities, as observable inputs are not
available. As such, the Company has determined that these fair value
measurements reside within Level 3 of the fair value hierarchy. The
restructuring obligations recorded represent the fair value of the payments
expected to be made, and are discounted if the payment are expected to extend
beyond one year.
As of
March 31, 2010, the Company had $2.7 million of restructuring accruals which
were measured at fair value upon initial recognition of the associated
liability.
Note
12 — Notes Payable and Line of Credit
On March
29, 2010, the Company amended its existing Credit Agreement with JPMorgan Chase
Bank, N.A. and Bank of America, N.A. The Amendment reduced the Company’s
borrowing limit from $55,000,000 to $28,000,000. Bank of America, N.A. has been
paid in full and is no longer a participating lender.
The
Amendment increased the interest rate applicable to borrowings under the Credit
Agreement. The interest rate is equal to the Eurocurrency rate for U.S. dollars
plus a factor determined with reference to the Company’s Leverage Ratio. The
Amendment increased the range for this factor from a range of 0.95% - 1.45% to a
range of 1.50% - 2.00%. The unused commitment fee was also increased from a
range of 0.15% - 0.25% to a range of 0.25% - 0.35% and is also based on the
Company’s Leverage Ratio.
The
Amendment permits the Company to maintain: (a) a rolling four-quarter
Leverage Ratio as of the fiscal quarters ending March 31, 2010 and June 30, 2010
of 3.25 to 1 (up from 3.0 to 1), and 3.0 to 1 for fiscal quarters thereafter;
and (b) a rolling four-quarter Fixed Charge Coverage Ratio as of fiscal quarters
ending March 31, 2010 and June 30, 2010 of 1.0 to 1.0 (down from 1.25 to 1.0),
and 1.25 to 1.0 for fiscal quarters thereafter.
The
Amendment also modified the definition of “Consolidated Adjusted EBITDA” to
allow the Company to exclude: (a) non-cash goodwill and intangible
impairment charges for fiscal quarters ended December 31, 2009, March 31, 2010
and June 30, 2010; and (b) amounts related to cash restructuring charges for
fiscal quarters ended March 31, 2010 and June 30, 2010.
Note
13 — Subsequent Event
Pursuant
to the subsequent events topic of the FASB codification, the Company evaluated
subsequent events after March 31, 2010 and concluded no material transactions
had occurred subsequent to that date that provided additional evidence about
conditions which existed at or after March 31, 2010 requiring any adjustment to
the unaudited condensed consolidated financial statements.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in Item 2, contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements represent
our expectations or beliefs concerning future events, including projections of
revenue, gross margin, expenses, earnings or losses from operations, or other
financial items; estimates of synergies; sufficiency of cash flows for future
liquidity and capital resource needs; our plans, strategies, and objectives of
management for future operations; developments or performance relating to our
services; and future economic conditions or performance. We caution that
although forward-looking statements reflect our good faith beliefs and
reasonable judgment based upon current information, these statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, because of risks,
uncertainties, and factors including, but not limited to, the continuing effects
of the U.S. recession and global credit environment, other changes in general
economic and industry conditions, the award or loss of significant client
assignments, timing of contracts, recruiting and new business solicitation
efforts, currency fluctuations, and other factors affecting the financial health
of our clients. These and other risks are described in the Company’s most recent
annual report on Form 10-K and subsequent reports filed with or furnished to the
U.S. Securities and Exchange Commission. The forward-looking statements included
in this report are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements.
ITEM
2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
TechTeam
Global, Inc. is a leading provider of IT outsourcing and business process
outsourcing services to large and medium business, as well as government
organizations. The Company's primary services include service desk, technical
support, desk-side support, security administration, infrastructure management
and related professional services. TechTeam also provides a number of
specialized, value-added services in specific vertical markets. Our business
consists of two main components — our Commercial business and our Government
business. Together, our IT Outsourcing Services segment, IT Consulting and
Systems Integration segment and Other Services segment comprise our Commercial
business. In addition to managing our commercial business by service line, we
also manage it by geographic markets — the Americas (defined as North America
excluding our government-based subsidiaries), Europe and Latin America/Asia. Our
Government Technology Services segment comprises our Government
business.
For the
first quarter of 2010, TechTeam reported a net loss of $2.7 million, or
$0.25 per diluted share, for the three months ended March 31, 2010. The net loss
for the first quarter of 2010 included a restructuring charge of
$3.1 million ($2.5 million net of tax) announced on March 29,
2010. Excluding the restructuring charge, the Company would have
reported a net loss of $134,000, or $0.01 per diluted share, for the first
quarter of 2010, as compared to net income of $1.7 million, or $0.16 per diluted
share, reported for the same period last year. Despite these results,
the Company’s first quarter results show important signs of stabilization in the
Company’s business.
·
|
While
revenue was $48.0 million in the first quarter of 2010, a decrease of
14.4% from the first quarter 2009, it was a slight decline from $48.5
million in the fourth quarter 2009. In the commercial business, the
company was awarded new contracts in the first quarter 2010 with total
contract value totaling approximately $10.6
million.
|
·
|
Gross
margin was 21.8% in the first quarter of 2010, a decrease from 24.8% in
the first quarter 2009. The decrease was primarily due to our
government segment and the wind-down of the U.S. Air National Guard
contract which was a higher gross margin contract. On a sequential basis,
gross margin decreased 1.2% from the 23.0% reported for the fourth quarter
of 2009. The decrease in margin from the fourth quarter 2009 is due
largely to the effect of higher employment taxes in the first quarter of
2010 and the impact of weather related closings of several Federal
Government offices in Washington, D.C. during February
2010.
|
·
|
Selling,
General and Administrative (SG&A) expense was $10.6 million in both
the first quarter of 2010 and the first quarter of 2009. SG&A as a
percent of revenue increased to 22.2% for the first quarter 2010 from
18.9% for the first quarter of 2009. This increase is largely due to the
effect of a decrease in revenue year-over-year without a proportional
reduction in SG&A costs and an increase in professional fees. On a
sequential basis, SG&A for the first quarter of 2010 was more
consistent with the 21.5% reported for the fourth quarter of
2009. In efforts to effectively manage its business and
cost-structure of its commercial business, TechTeam completed a
restructuring in the first quarter 2010, announced on March 29,
2010.
|
·
|
The
Company recorded a pre-tax charge of $3.1 million ($2.5 million net of
tax) during the first quarter of 2010 as a result of a restructuring. The
first quarter 2010 restructuring actions reduced certain redundant costs,
eliminated excess capacity and supported the Company’s strategy to more
tightly focus its business. The Company will begin to realize
cost-savings in the second quarter 2010 resulting from the
restructuring.
|
·
|
Cash
provided by operations was $703,000 for the first quarter of 2010 compared
to $7.2 million for the first quarter of 2009. TechTeam ended
the quarter with cash and debt balances of $14.2 million and $13.9
million, respectively. The Company continued to pay down an
additional $1.2 million of debt in the first quarter 2010 and maintained a
net positive cash position at the end of the quarter (total
cash minus total bank debt).
|
In 2010,
the Company continues to make progress toward its transformation into a truly
global IT service provider with significant revenue diversification from its
government business.
·
|
Our
Lean ITIL (Information Technology Infrastructure Library) business model
demonstrates an improvement in our operational excellence, which is the
foundation of our business.
|
·
|
We
continue the focused development of our Lean ITIL-based service desk
expertise in the enterprise support services market, as the implementation
of ITIL and Lean principles into our customer’s environment improves
quality and lowers cost.
|
·
|
We
are extending our global reach by expanding into important, targeted
geographies and by leveraging the strong relationships that we have with
current global clients to provide services to them across geographies and
in new markets.
|
Results
of Operations
Quarter
Ended March 31, 2010 Compared to March 31, 2009
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
IT Outsourcing
Services
|
|
$ |
26,208 |
|
|
$ |
27,718 |
|
|
$ |
(1,510 |
) |
|
|
(5.4 |
)% |
IT Consulting and Systems
Integration
|
|
|
2,920 |
|
|
|
3,904 |
|
|
|
(984 |
) |
|
|
(25.2 |
)% |
Other
Services
|
|
|
3,726 |
|
|
|
4,265 |
|
|
|
(539 |
) |
|
|
(12.6 |
)% |
Total
Commercial
|
|
|
32,854 |
|
|
|
35,887 |
|
|
|
(3,033 |
) |
|
|
(8.5 |
)% |
Government Technology
Services
|
|
|
15,156 |
|
|
|
20,218 |
|
|
|
(5,062 |
) |
|
|
(25.0 |
)% |
Total
revenue
|
|
$ |
48,010 |
|
|
$ |
56,105 |
|
|
$ |
(8,095 |
) |
|
|
(14.4 |
)% |
Total
Company revenue decreased $8.1 million, or 14.4%, to $48.0 million in the first
quarter of 2010 from $56.1 million in the first quarter of 2009. The revenue
decrease was across all segments and was driven primarily by the conclusion of
customer contracts in the IT Outsourcing Services and Government Technology
Services segments and a decrease in project based work due to the difficult
economic environment. This decrease was partially offset by new customer
contracts in the Americas and an approximate $1.4 million positive impact of
exchange rates on foreign revenue. The foreign currency impact was calculated as
if revenue generated in foreign currency was translated into U.S. dollars at the average
exchange rates in effect during the first quarter of 2009. We are unable to
predict the effect fluctuations in international currencies will have on revenue
in 2010, but given the uncertain market environment and the effect on the U.S.
dollar, there could be significant revenue volatility.
IT
Outsourcing Services
Revenue
from IT Outsourcing Services decreased $1.5 million, or 5.4%, to
$26.2 million in the first quarter of 2010, from $27.7 million in the first
quarter of 2009. The revenue decrease was primarily a result of the conclusion
of customer contracts in Europe and the Americas and lower revenue from Ford
partially offset by an increase in revenue in the Americas from new customer
contracts and a positive impact of exchange rates on foreign currency revenue.
The foreign currency impact approximated $1.1 million and was calculated as if
IT Outsourcing revenue in foreign currency was translated into U.S. dollars at
the average exchange rates in effect during the first quarter of
2009.
IT
Outsourcing Services revenue generated from Ford globally decreased $3.5
million, or 45.0%, to $4.3 million in the first quarter of 2010 compared to
$7.8 million in 2009. Revenue from Ford declined 22.3% in the Americas and 68.6%
in Europe as a result of a decline in seats supported from a reduction in Ford’s
workforce, the lower price in the contract renewal, the separation of Jaguar
Land Rover from the Ford SPOC contract and the separation of Volvo Car
Corporation from the global Ford IT programs, including the November 2009 SPOC
contract. Please refer to our discussion of Ford in the “Significant Customers”
section of MD&A.
IT
Consulting and Systems Integration
Revenue
from IT Consulting and Systems Integration decreased $1.0 million, or 25.2%, to
$2.9 million in the first quarter of 2010, from $3.9 million in 2009.
Revenue decreased in the Americas primarily from the wind-down of certain
systems implementation and training projects in our hospitality business and our
business with Dell through Ford.
Government
Technology Services
Revenue
from Government Technology Services decreased $5.1 million, or 25.0%, to
$15.1 million in the first quarter of 2010, from $20.2 million in
2009, primarily due to the conclusion of the Company’s ANG contract on September
30, 2009. The work performed under the ANG contract was in-sourced to be
performed by the U.S. Federal Government employees. The Company continues to
provide service to ANG as a subcontractor to Harris Corporation who was awarded
the work under the expiring contract that was not in-sourced and added some
other positions. Accordingly, the new contract will produce significantly less
revenue and gross margin than the expiring contract. Please refer to our
discussion of the U.S. Federal Government in the “Significant Customers” section
of MD&A.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Gross
Margin
%
|
|
|
Amount
|
|
|
Gross
Margin
%
|
|
|
Increase
(Decrease)
|
|
|
%
Change
|
|
|
|
(In
thousands, except percentages)
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT Outsourcing
Services
|
|
$ |
5,937 |
|
|
|
22.7 |
% |
|
$ |
6,453 |
|
|
|
23.3 |
% |
|
$ |
(516
|
) |
|
|
(8.0 |
)% |
IT Consulting and
Systems
Integration
|
|
|
551 |
|
|
|
18.9 |
% |
|
|
936 |
|
|
|
24.0 |
% |
|
|
(385
|
) |
|
|
(41.1 |
)% |
Other Services
|
|
|
921 |
|
|
|
24.7 |
% |
|
|
1,106 |
|
|
|
25.9 |
% |
|
|
(185
|
) |
|
|
(16.7 |
)% |
Total Commercial
|
|
|
7,409 |
|
|
|
22.6 |
% |
|
|
8,495 |
|
|
|
23.7 |
% |
|
|
(1,086
|
) |
|
|
(12.8 |
)% |
Government
Technology
Services
|
|
|
3,045 |
|
|
|
20.1 |
% |
|
|
5,433 |
|
|
|
26.9 |
% |
|
|
(2,388
|
) |
|
|
(44.0 |
)% |
Total
gross profit
|
|
$ |
10,454 |
|
|
|
21.8 |
% |
|
$ |
13,928 |
|
|
|
24.8 |
% |
|
$ |
(3,474
|
) |
|
|
(24.9 |
)% |
Gross
profit decreased $3.5 million, or 24.9%, to $10.4 million in the first quarter
of 2010 from $13.9 million in the first quarter of 2009. Gross margin decreased
to 21.8% for first quarter 2010 from 24.8% for first quarter 2009. The decrease
in gross profit was driven mainly by the loss of ANG in the Government
Technology Services segment and less project based work with higher margin
accounts in the Company’s hospitality business.
IT
Outsourcing Services
Gross
profit from IT Outsourcing Services decreased 8.0% to $6.0 million in the first
quarter of 2010, from $6.5 million in 2009, and gross margin decreased to
22.7% from 23.3%. The decrease in gross profit was due to lower revenue and the
loss of higher margin accounts in the second half of 2009. This decrease was
offset by improved operating efficiencies.
IT
Consulting and Systems Integration
Gross
profit from IT Consulting and Systems Integration decreased 41.1% to $551,000 in
the first quarter of 2010 from $936,000 in 2009, and gross margin decreased to
18.9% from 24.0% in 2009. Gross profit and gross margin decreased mainly due to
less project based work with higher margin accounts in the Company’s hospitality
business and less project based work throughout the Company due to the difficult
economic environment.
Government
Technology Services
Gross
profit from our Government Technology Services segment decreased 44.0% to
$3.0 million in the first quarter of 2010 from $5.4 million in 2009. The
decrease in gross profit was mainly due to lower revenue, primarily from the
conclusion of the Company’s ANG contract on September 30, 2009. Gross margin
also decreased during the first quarter of 2010 to 20.1% from 26.9% in
2009. The gross margin decrease was also primarily due from the
conclusion of the ANG contract which provided higher margins. Please refer to
our discussion of the U.S. Federal Government in the “Significant Customers”
section of MD&A.
Geographic
Market Discussion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
16,325 |
|
|
$ |
18,012 |
|
|
$ |
(1,687 |
) |
|
|
(9.4 |
)% |
Europe
|
|
|
16,529 |
|
|
|
17,875 |
|
|
|
(1,346 |
) |
|
|
(7.5 |
)% |
Total
Commercial
|
|
|
32,854 |
|
|
|
35,887 |
|
|
|
(3,033 |
) |
|
|
(8.5 |
)% |
Government
|
|
|
15,156 |
|
|
|
20,218 |
|
|
|
(5,062 |
) |
|
|
(25.0 |
)% |
Total
revenue
|
|
$ |
48,010 |
|
|
$ |
56,105 |
|
|
$ |
(8,095 |
) |
|
|
(14.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
19.8 |
% |
|
|
21.8 |
% |
|
|
|
|
|
|
|
|
Europe
|
|
|
25.5 |
% |
|
|
25.4 |
% |
|
|
|
|
|
|
|
|
Total
Commercial
|
|
|
22.6 |
% |
|
|
23.7 |
% |
|
|
|
|
|
|
|
|
Government
|
|
|
20.1 |
% |
|
|
26.9 |
% |
|
|
|
|
|
|
|
|
Total
Gross
Margin
|
|
|
21.8 |
% |
|
|
24.8 |
% |
|
|
|
|
|
|
|
|
Americas
Revenue
generated in the Americas decreased $1.7 million, or 9.4%, to $16.3 million in
the first quarter of 2010, from $18.0 million in 2009. Revenue decreased
mainly in IT Consulting and Systems Integration due to the wind-down of certain
systems implementation and training projects in our hospitality business and our
business with Dell through Ford. Revenue from IT Outsourcing Services
experienced a decrease from the loss of two customers in the second half of 2009
and a decline in revenue earned from Ford, which was partially offset by an
increase from new customers and expansion with existing customers. Gross margin
from the Americas decreased to 19.8% for the first quarter of 2010 from 21.8% in
2009 mainly due to the lower revenue in the IT Consulting and Systems
Integration segment.
Europe
Revenue
generated in Europe decreased $1.3 million, or 7.5%, to $16.6 million in
the first quarter of 2010 from $17.9 million in 2009, due to the conclusion of
two customer contracts in the IT Outsourcing segment, and a decrease in our
staffing business at SQM. This decrease was partially offset by an approximate
$1.3 million positive impact from exchange rates on revenue. The foreign
currency impact was calculated as if revenue in Europe in first quarter of 2010
were translated into U.S. dollars at the average exchange rates in effect during
the first quarter of 2009. Despite a decrease in revenue, gross margin from
Europe increased slightly to 25.5% in the first quarter of 2010, from 25.4% in
2009, primarily due to divesting of certain lower margin IT consulting and
systems integration projects throughout Europe and improved operating
efficiencies.
Operating
Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
Operating
Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expense
|
|
$ |
10,637 |
|
|
$ |
10,592 |
|
|
$ |
45 |
|
|
|
0.4 |
% |
Restructuring
charge
|
|
$ |
3,144 |
|
|
$ |
— |
|
|
$ |
3,144 |
|
|
|
|
Net
interest expense
|
|
$ |
(187 |
) |
|
$ |
(311 |
) |
|
$ |
(124 |
) |
|
|
(39.9 |
)% |
Foreign
currency transaction gain (loss)
|
|
$ |
196 |
|
|
$ |
(235 |
) |
|
$ |
431 |
|
|
|
|
Income
tax provision (benefit)
|
|
$ |
(665 |
) |
|
$ |
1,140 |
|
|
$ |
(1,805 |
) |
|
|
|
Selling,
general, and administrative (“SG&A”) expense was $10.6 million for the first
quarter of 2010 and 2009. Despite flat SG&A expense in dollars, SG&A
expense as a percent of revenue increased to 22.2% in the first quarter of 2010,
from 18.9% in 2009 largely due to the effect of a decrease in revenue
year-over-year without a proportional reduction in SG&A costs, and an
increase in professional fees.
On March
29, 2010 the Company announced a restructuring plan to enhance the effectiveness
of the Commercial businesses global management team and reduce expenses in line
with current business conditions. The restructuring plan was approved by the
Company’s Board of Directors on March 23, 2010. The 2010 pre-tax restructuring
charges amounted to $3.1 million, and were primarily related to separation costs
for approximately 40 employees and reductions in excess leased facility capacity
around the world.
Net
interest expense was $187,000 in the first quarter of 2010, compared to $311,000
in 2009 a result of lower average outstanding long-term debt offset by lower
interest income from lower average invested cash equivalents and lower interest
rates.
For the
three months ended March 31, 2010 and 2009, the consolidated effective tax
rates were 20.0% and 40.9%, respectively. The rate for March 31, 2010 differs
from the statutory tax rate of 34% primarily due to foreign operating losses for
which a tax benefit is not recorded, state income taxes, and nondeductible
expenses. The level of foreign operating losses was increased during the quarter
because a significant portion of the Company’s restructuring charge was incurred
in countries with historical operating losses. The rate for March 31, 2009
differs from the statutory rate of 34% primarily due to state income taxes,
foreign operating losses for which a tax benefit is not recorded, and
nondeductible expenses.
Significant
Customers
We
conduct business under multiple contracts with various entities within the Ford
organization and with various agencies and departments of the U.S. Federal
Government. Ford accounted for 11.0% and 15.8% of our total revenue in the first
quarter of 2010 and 2009, respectively. The U.S. Federal Government accounted
for 27.6% and 32.8% of our total revenue in the first quarter of 2010 and 2009,
respectively. Agencies within the U.S. Department of Defense in the aggregate
comprised approximately 13.4% and 19.9% of our total revenue in the first
quarter of 2010 and 2009, respectively.
Ford
Motor Company
Our
business with Ford consists of service desk and desk side services, technical
staffing, and network management. Revenue generated through our business with
Ford decreased to $5.3 million in the first quarter of 2010 from
$8.9 million in the first quarter of 2009. The decline in revenue is
attributable to a number of factors, including: (a) seat count and volume
declines within the Ford environment; (b) the effects of the entry into the
three-year renewal of the Global Single Point of Contact ("SPOC") contract,
which resulted in a change of the service delivery and pricing model as
discussed below; (c) the divestiture of Jaguar Land Rover (“JLR”) from the Ford
family of companies (we continue to provide services to JLR under a direct
contract); (d) the termination of the Company’s contract with Dell, Inc. under
which the Company provided systems integration services to Ford as a
subcontractor to Dell; and (e) the separation of Volvo Car Corporation from the
global Ford IT programs, including the SPOC contract on November 1,
2009.
On
December 23, 2008, the Company executed a new SPOC contract, under which
TechTeam provides support services to Ford's information technology
infrastructure. Under the SPOC contract, TechTeam provides service desk,
deskside support, service management, infrastructure management, and identity
and access management services to Ford in North America, Western Europe, and
Asia. The contract renewal provides for a significant change in the service
delivery model. These changes include the transition and centralization of
service for English speaking Ford personnel to our operations in the
Philippines, the transition of service for German speaking Ford personnel to
Romania, and an enhanced centralized remote deskside support management
function. This transition was completed in 2009.
Under the
existing SPOC contract, we provide these infrastructure support services under
specific service level metrics, and we invoice Ford based upon the number of
seats we support. The number of seats supported is determined bi-annually on
February 1 and August 1 of each year. If certain contractual conditions are met,
Ford and TechTeam have the right during each six month period to request one
out-of-cycle seat adjustment. We do not believe the revenue decline will
continue in 2010, as we believe that we are well-positioned to expand the SPOC
program into Latin America, Canada and Asia during 2010.
U.S.
Federal Government
We
conduct business under multiple contracts with various agencies and departments
of the U.S. Federal Government. Revenue generated through our business with the
U.S. Federal Government decreased to $13.3 million in the first quarter of
2010, from $18.4 million in 2009.
The
results of our Government business have been impacted by the difficult
government contracting environment created by the budget constraints our
customers faced. As a result of this environment, many customers have delayed
procurement actions. In turn, we have experienced delays in our expected new
business development. Despite being informed that we were not selected as prime
contractor for the Business Transformation Agency (“BTA”) of the Department of
Defense, we continue to provide service to the BTA as a
subcontractor.
As
previously reported, our contract for the Air National Guard (“ANG”) ended on
September 30, 2009. ANG in-sourced the majority of the work performed under the
expiring contract. ANG did award a new contract to Harris Corporation,
with the Company as a subcontractor, which covered the work under the expiring
contract that was not in-sourced and additional positions. Accordingly, the new
contract will produce significantly less revenue and gross margin than the
expiring contract. Specifically, had the Company been delivering service under
the new contract for the three months ended March 31, 2009, total U.S. Federal
Government revenue would have been reduced on a net basis by approximately
14.2%.
New
Accounting Pronouncements
In
February 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements,” which amends ASC
855. ASU No. 2010-09 confirms the guidance in ASC 855 for SEC filers to match
subsequent event guidance issued by the SEC. The adoption of ASU No. 2010-09 did
not have a material impact on the Company’s consolidated financial
statements.
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures (Topic 820),” which amends the FASB’s ASC 820. ASC No. 2010-06
requires disclosures of significant transfers between Level 1 and Level 2 of the
fair value hierarchy. ASU NO 2010-06 further requires entities to report, on a
gross basis, activity in the Level 3 fair value measurement reconciliation
beginning on January 1, 2011. The adoption of ASU No. 2010-06 did not have a
material impact on the Company’s consolidated financial statements.
Liquidity
and Capital Resources
Cash and
cash equivalents were $14.2 million at March 31, 2010, as compared to
$19.9 million at December 31, 2009. Cash and cash equivalents
decreased $1.8 million in the first quarter of 2010 as a result of $1.2
million in payment to reduce long-term debt offset by $703,000 in cash provided
by operations.
Net cash
from operating activities for the first quarter of 2010 provided cash of
$703,000 compared to $7.2 million in the first quarter of 2009. Net cash
provided from operations for the first quarter of 2010 was primarily due to a
net loss of $2.7 million, adjusted for depreciation/amortization expense of $1.4
million and non-cash stock based compensation expense of $608,000. Net changes
in operating assets and liabilities of $1.3 million also contributed to cash
provided by operating activities. The net changes in operating assets and
liabilities as of March 31, 2010 were primarily related to an increase in
accrued expenses and accrued payroll of $2.9 million principally driven by the
timing of payments and the restructuring charge in the first quarter of 2010.
This was partially offset by an increase in prepaid accounts and a decrease in
accrued taxes due to timing of payments. The cash generated from these operating
cash flow improvements was primarily used to pay down debt.
Cash
provided by operations for the first quarter of 2009 was primarily due to net
income of $1.6 million, adjusted for net changes in operating assets and
liabilities of $3.3 million, depreciation/amortization expense and non-cash
stock based compensation expense of $1.7 million and $568,000, respectively. The
net changes in operating assets and liabilities as of March 31, 2009 were
primarily related to a decrease in accounts receivable of $6.3 million due to
increased collection efforts. This decrease was partially offset by a decrease
in accrued expenses and accrued payroll of $2.8 million due to timing of
payments.
Net cash
used in investing activities was $260,000 and $797,000 for the first quarter of
2010 and 2009, respectively. Net cash used in investing activities during the
first quarter of 2010 and 2009 were used to purchase equipment and software and
to make payments to the selling shareholders of prior acquisitions for achieving
financial performance targets. Capital expenditures were $135,000 and
$671,000 respectively, for the first quarter of 2010 and 2009.
Net cash
used in financing activities was $1.3 million and $3.2 million for the first
quarter 2010 and 2009, respectively. Net cash used in financing activities for
both periods was primarily due to a higher pay down of debt.
Long-term
cash requirements, other than for normal operating expenses, are anticipated for
continued global expansion, enhancements of existing technologies, possible
repurchases of our common stock and the possible acquisition of businesses
complementary to our existing businesses. In light of the Company’s cash flow
and the amendment to the Credit Agreement, we believe that cash flows from
operations, together with existing cash balances and the existing credit
facility, will continue to be sufficient to meet our ongoing operational
requirements for the next twelve months and foreseeable future. We have
historically not paid dividends, and we are restricted from doing so under our
Credit Agreement. Market conditions may limit our sources of funds available,
and the terms of such financings for these activities to the extent financing is
desirable or necessary.
Material
Commitments
There
have been no significant changes in our material commitments disclosed in “Item
7 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of our Annual Report on Form 10-K for the year ended
December 31, 2009.
Critical
Accounting Policies and Estimates
There
have been no changes in the selection and application of critical accounting
policies and estimates disclosed in “Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of our Annual Report
on Form 10-K for the year ended December 31, 2009.
ITEM
3 — QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There
have been no material changes in reported market risks disclosed in “Item 7A —
Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report
on Form 10-K for the year ended December 31, 2009.
ITEM
4 — CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
Exchange Act) that is designed to ensure that information required to be
disclosed by the Company in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
In
accordance with Exchange Act Rule 13a-15(b), our management, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, performed an evaluation of the effectiveness of the Company's
disclosure controls and procedures as of the end of the fiscal quarter covered
by this Quarterly Report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, as of March 31, 2010, to
provide reasonable assurance that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms and that such information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosure.
Changes
in Internal Control over Financial Reporting
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the quarter ended
March 31, 2010, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II — OTHER INFORMATION
ITEM
1 — LEGAL PROCEEDINGS
From time
to time we are involved in various litigation matters arising in the ordinary
course of its business. None of these matters, individually or in the aggregate,
currently is material.
ITEM
1A — RISK FACTORS
There
have been no changes in the risk factors disclosed in “Item 1A — Risk Factors”
of our Annual Report on Form 10-K for the year ended December 31,
2009.
ITEM
2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There
were no sales of unregistered equity securities of the Company during the three
months ended March 31, 2010.
On
October 30, 2008, the Board of Directors authorized a stock repurchase program.
Under the program, the Company was authorized to repurchase up to one million
shares of its common stock as the Company deems appropriate. The Company is
limited under its current credit agreement with an annual limitation of $3.0
million per year on the repurchase of its common stock. The stock repurchase
program expires on December 31, 2011.The Company did not repurchase any shares
in the quarter ending March 31, 2010. The maximum number of shares that may yet
be purchased under the program is 987,742.
ITEM
5 — OTHER INFORMATION
None.
ITEM
6 — EXHIBITS
The
following exhibits are filed as part of this report on Form 10-Q:
|
10.1 |
David
A. Kriegman Performance Share Agreement |
|
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10.2 |
Robert
W. Gumber Employment Separation Agreement and Release |
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31.1
|
Certification
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
TechTeam Global,
Inc.
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|
|
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(Registrant)
|
|
Date: May
10, 2010
|
By: |
/s/ Gary J.
Cotshott |
Gary
J. Cotshott
|
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|
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President
and Chief Executive Officer (Principal Executive
Officer)
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By: |
/s/ Margaret
M. Loebl |
Margaret
M. Loebl
|
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Corporate
Vice President, Chief Financial Officer and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
|