Unassociated Document

                        
UNITED STATES
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 September 30, 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 x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨    No ¨

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 x
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 ¨    No x

The number of shares of the registrant's common stock outstanding at November 1, 2010 was 11,178,577.
            
 
 
 

 
 
TECHTEAM GLOBAL, INC.
 
FORM 10-Q
 
TABLE OF CONTENTS
 

   
Page
Number
PART I – FINANCIAL INFORMATION
   
Item 1        Financial Statements
   
Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2010 and 2009
 
3
Condensed Consolidated Balance Sheets — As of September 30, 2010 and December 31, 2009
 
4
Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2010 and 2009
 
5
Notes to Condensed Consolidated Financial Statements
 
6
Item 2        Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
22
Item 3        Quantitative and Qualitative Disclosures About Market Risk
 
36
Item 4        Controls and Procedures
 
36
PART II – OTHER INFORMATION
   
Item 1        Legal Proceedings
 
37
Item 1A     Risk Factors
 
37
Item 2        Unregistered Sales of Equity Securities and Use of Proceeds
 
39
Item 5        Other Information
 
40
Item 6        Exhibits
 
40
SIGNATURES
 
41
 
 
2

 

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
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenue
                       
IT Outsourcing Services
  $ 26,197     $ 25,407     $ 75,918     $ 78,258  
IT Consulting and Systems Integration
    3,066       2,557       8,538       9,319  
Other Services
    2,419       2,637       7,632       8,273  
Total Commercial
    31,682       30,601       92,088       95,850  
Government Technology Services
    14,470       19,713       44,714       60,557  
Total revenue
    46,152       50,314       136,802       156,407  
Cost of revenue
                               
IT Outsourcing Services
    20,394       20,167       58,602       61,145  
IT Consulting and Systems Integration
    2,406       1,922       6,850       7,237  
Other Services
    1,808       1,911       5,819       6,101  
Total Commercial
    24,608       24,000       71,271       74,483  
Government Technology Services
    11,221       14,525       34,707       43,841  
Total cost of revenue
    35,829       38,525       105,978       118,324  
Gross profit
    10,323       11,789       30,824       38,083  
Selling, general and administrative expense
    10,726       9,807       31,741       30,823  
Impairment charge
    9,404             9,404        
Restructuring charge (credit)
    (75 )     (57 )     2,687       (756 )
Operating income (loss)
    (9,732 )     2,039       (13,008 )     8,016  
Net interest expense
    (165 )     (310 )     (555 )     (897 )
Foreign currency transaction loss
    (347 )     (70 )     (3 )     (720 )
Income (loss) from continuing operations before income taxes
    (10,244 )     1,659       (13,566 )     6,399  
Income tax provision (benefit)
    (1,004 )     526       (1,578 )     2,313  
Net income (loss) from continuing operations
    (9,240 )     1,133       (11,988 )     4,086  
Income (loss) from discontinued operations, net of tax
    852       (271 )     1,085       (284 )
Net income (loss)
  $ (8,388 )   $ 862     $ (10,903 )   $ 3,802  
Basic earnings (loss) per common share
                               
Income (loss) from continuing operations
  $ (0.86 )   $ 0.11     $ (1.12 )   $ 0.39  
Income (loss) from discontinued operations
    0.08       (0.03 )     0.10       (0.03 )
Total basic earnings (loss) per common share
  $ (0.78 )   $ 0.08     $ (1.02 )   $ 0.36  
Diluted earnings (loss) per common share
                               
Income (loss) from continuing operations
  $ (0.86 )   $ 0.11     $ (1.12 )   $ 0.38  
Income (loss) from discontinued operations
    0.08       (0.03 )     0.10       (0.03 )
Total diluted earnings (loss) per common share
  $ (0.78 )   $ 0.08     $ (1.02 )   $ 0.36  
Weighted average number of common shares and common share equivalents outstanding
                               
Basic
    10,755       10,628       10,710       10,609  
Diluted
    10,755       10,754       10,710       10,664  

 
3

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

   
September 30,
2010
   
December 31,
2009
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 18,984     $ 14,964  
Accounts receivable (less allowance of $922 at September 30, 2010 and $1,315 at December 31, 2009)
    37,914       42,925  
Prepaid expenses and other current assets
    7,498       3,654  
Net current assets of discontinued operations
          2,506  
Total current assets
    64,396       64,049  
Property, equipment and software, net
    5,511       6,161  
Goodwill and other intangible assets, net
    36,399       47,270  
Deferred income taxes
    4,209       3,940  
Other assets
    1,019       1,010  
Net long-term assets of discontinued operations
          90  
Total assets
  $ 111,534     $ 122,520  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities
               
Current portion of long-term debt
  $ 16,414     $ 4,074  
Accounts payable
    5,197       4,972  
Accrued payroll and related taxes
    8,845       7,181  
Accrued expenses
    5,002       5,050  
Other current liabilities
    905       3,967  
Current liabilities of discontinued operations
          1,851  
Total current liabilities
    36,363       27,095  
                 
Long-term liabilities
               
Long-term debt, less current portion
          11,051  
Other long-term liabilities
    1,245       745  
Total long-term liabilities
    1,245       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,11,193,251 and 11,118,309 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively
    112       111  
Additional paid-in capital
    81,213       79,762  
Retained earnings
    (8,177 )     2,726  
Accumulated other comprehensive income
    778       1,030  
Total shareholders’ equity
    73,926       83,629  
Total liabilities and shareholders’ equity
  $ 111,534     $ 122,520  

See accompanying notes.

 
4

 

 TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands) 

   
Nine Months Ended September 30,
 
   
2010
   
2009
 
Operating activities
           
Net income (loss)
  $ (10,903 )   $ 3,802  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    4,098       4,696  
Impairment charge
    9,404        
Non-cash expense related to stock options and issuance of common stock and restricted common stock
    1,656       1,477  
Gain on sale of business
    (1,033 )      
Other
    (394 )     786  
Changes in current assets and liabilities
    125       5,715  
Changes in long-term assets and liabilities
    265       (168 )
(Income) loss from discontinued operations
    (50 )     661  
Net operating cash flow from discontinued operations
    987       40  
Net cash provided by operating activities
    4,155       17,009  
                 
Investing activities
               
Disposition of business, net of cash disposed
    935        
Purchase of property, equipment and software
    (1,472 )     (1,209 )
Cash paid for acquisitions, net of cash acquired
    (425 )     (375 )
Net cash used in investing activities
    (962 )     (1,584 )
                 
Financing activities
               
Issuance of long-term debt
    1,288        
Other
    (204 )     (27 )
Payments on long-term debt
          (16,042 )
Net cash provided by (used in) financing activities
    1,084       (16,069 )
Effect of exchange rate changes on cash and cash equivalents
    (257 )     1,077  
                 
Increase in cash and cash equivalents
    4,020       433  
Cash and cash equivalents at beginning of period
    14,964       16,072  
Cash and cash equivalents at end of period
  $ 18,984     $ 16,505  
 
See accompanying notes.

 
5

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 and nine months ended September 30, 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 (loss), 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
September 30,
   
Nine Months Ended 
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Comprehensive income (loss)
                       
Net income (loss)
  $ (8,388 )   $ 862     $ (10,903 )   $ 3,802  
Other comprehensive income (loss) —
                               
Foreign currency translation adjustment
    2,197       397       (576 )     1,381  
Unrealized gain on derivative instruments
    85       140       324       475  
Comprehensive income (loss)
  $ (6,106 )   $ 1,399     $ (11,155 )   $ 5,658  
 
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 and nine months ended September 30, 2010, common share equivalents (including 1,676,500 stock options) were excluded from the computation of diluted earnings per common share due to the loss for the period. During the three and nine months ended September 30, 2009, 1,853,400 and 2,077,400 stock options, respectively, 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.

 
6

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 4 — Discontinued Operations
 
In August 2010, the Board of Directors authorized management to pursue the sale of TechTeam SQM AB (“SQM”), a staffing business in Sweden. On August 31, 2010, the Company completed the sale of SQM, which the Company had determined was not core to its long-term growth strategy. This business unit was included in the Other Services and IT Outsourcing Services segments. Beginning in the third quarter of 2010, SQM has been accounted for as a discontinued operation in accordance with ASC 205-20, “Discontinued Operations”. The results of operations for SQM have been removed from the results of continuing operations in the Condensed Consolidated Statements of Operations for all periods presented. The calculation of discontinued operations removes certain corporate overhead allocated to the SQM reporting unit in all periods presented. The assets and liabilities of SQM have been reclassified and are segregated in the Condensed Consolidated Balance Sheets for all periods presented. Total gross proceeds from the sale were 6,281,574 sek ($850,000 at the disposition date). The Company recognized a net gain of $1,033,000, which is included in income from discontinued operations in the Condensed Consolidated Statements of Operations.
 
The operating results of SQM classified as discontinued operations are summarized below:

   
Three Months Ended
September 30,
   
Nine Months Ended 
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Revenue
  $ 887     $ 2,035     $ 5,028     $ 6,371  
                                 
Income (loss) before income taxes
  $ (181 )   $ (271 )   $ 52     $ (284 )
Income tax provision
                       
Income (loss) from operation of discontinued operations
    (181 )     (271 )     52       (284 )
Gain on sale of business, net of tax
    1,033             1,033        
Income (loss) from discontinued operations, net of tax
  $ 852     $ (271 )   $ 1,085     $ (284 )
 
Note 5 — Goodwill and Other Intangible Assets
 
Impairment
 
Under ASC 350, “Intangibles – Goodwill and Other,” the Company is required to perform annual impairment tests of its goodwill at least annually or more frequently if impairment indicators are present. The Company has elected to test for goodwill impairment on October 1st each year. In connection with the Company’s plan to sell its TechTeam Government Solutions reporting unit, the Company determined that an interim test for impairment was required during the third quarter of 2010. No impairment indicators were present for any of the Company’s other reporting units.

 
7

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 5 — Goodwill and Other Intangible Assets (continued)
 
In the first step of the goodwill impairment test, the Company identifies its reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to these reporting units. Historically, the Company has determined estimated fair value using a combination of a discounted cash flow analysis and a market-based approach. However, for purposes of the September 30, 2010 valuation of its government business unit, the Company used $40.5 million for its estimate of fair value. This estimate is based on the completed sale of TechTeam Government Solutions, Inc., to Jacobs Engineering Group Inc. for $43.0 million on October 5, 2010, adjusted for estimated changes in the net tangible book value of $2.5 million as determined by the Stock Purchase Agreement. See Note 15 – Other Matters for further information regarding the sale. Since the carrying value of Government Solutions exceeded its estimated fair value, the second step of the goodwill impairment test was performed.
 
The second step of the goodwill impairment calculation requires allocation of the estimated fair value of the reporting unit to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination. The excess of fair value as determined in step one over the fair value of the assets and liabilities of the reporting unit is the implied value of goodwill. The carrying value of goodwill is then compared to the implied value of goodwill and any excess of carrying value of goodwill over implied value of goodwill must be recognized as a goodwill impairment. The Company determined under the second step of the interim impairment test that the fair value of goodwill was less than the carrying value of its goodwill at its Government Solutions reporting unit. The Company recorded a $9.4 million impairment charge in the third quarter of 2010 to reflect the implied fair value of goodwill for Government Solutions.
 
In addition, the Company also reviewed its other intangible assets, primarily customer relationships, for impairment in accordance with ASC 360 and concluded that the intangible assets were not impaired at its Government Solutions reporting unit.

 
8

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 6 — Restructuring
 
On March 29, 2010, the Company announced a restructuring plan to reduce certain redundant costs, eliminate 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 initial 2010 pre-tax restructuring charge amounted to $2,747,000, and was primarily related to separation costs for approximately 30 employees and reductions in excess leased facility capacity around the world. The Company reversed $118,000 of the initial charge in the third quarter of 2010 due to a change in the estimated amounts to terminate facility leases which lowered the expected exit costs. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated. The total amount related to the 2010 pre-tax restructuring charge post adjustment was $2,629,000.
 
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
   
Cash
Payments
   
Accrued
Restructuring
Charges at
September 30,
2010
 
   
(In thousands)
 
Workforce reductions
  $     $ 2,162     $ (2,153 )   $ 9  
Other
          467       (298 )     169  
Total
  $     $ 2,629     $ (2,451 )   $ 178  
 
The following table summarizes the 2010 restructuring charges by operating segment:

   
Accrued
Restructuring
Charges at
December 31,
2009
   
Adjustments
to Accrued
Restructuring
Charges
   
Cash
Payments
   
Accrued
Restructuring
Charges at
September 30,
2010
 
 
 
(In thousands)
 
Restructuring charges                         
Commercial —
                       
IT Outsourcing Services
  $     $ 669     $ (667 )   $ 2  
IT Consulting and Systems Integration
          314       (314 )      
Other Services
                       
Total Commercial
          983       (981 )     2  
Government Technology Services
          139       (133 )     6  
Selling, general and administrative expense
          1,507       (1,337 )     170  
Total restructuring charges
  $     $ 2,629     $ (2,451 )   $ 178  

 
9

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 6 — Restructuring (continued)
 
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.
 
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
   
Cash
Payments
   
Accrued
Restructuring
Charges at
September 30,
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 first nine months of 2009, the Company reversed $756,000 of previously recorded liabilities related to the 2008 restructuring plan. This reversal resulted from re-negotiating a lease for a facility in Europe to eliminate the Company’s obligation to pay for leased space that was vacated and expensed in 2008 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
   
Cash
Payments
   
Accrued
Restructuring
Charges at
September 30,
2010
 
   
(In thousands)
 
Other
  $ 156     $ 29     $ (53 )   $ 132  
 
The following table summarizes the 2008 restructuring charges by operating segment:

   
Accrued
Restructuring
Charges at
December 31,
2009
   
Adjustments
to Accrued
Restructuring
Charges
   
Cash
Payments
   
Accrued
Restructuring
Charges at
September 30,
2010
 
 
 
(In thousands)
 
Restructuring charges
                               
Government Technology Services
  $ 151     $ 29     $ (48 )   $ 132  
Selling, general and administrative expense
    5             (5 )      
Total restructuring charges
  $ 156     $ 29     $ (53 )   $ 132  

 
10

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 7 — 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 or circumstances were noted in the nine months ended September 30, 2010 and 2009 which would require management to perform the noted analysis.
 
Note 8 — Acquisitions
 
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 it provided at closing. As of September 30, 2010, $1,125,000 had been released from escrow and paid to the selling shareholders. This additional amount is being recorded as goodwill as it is earned.
 
RL Phillips, Inc.
 
On August 31, 2007, TechTeam Global, Inc., through its wholly-owned subsidiary TechTeam Government Solutions, Inc., completed the acquisition of all the outstanding common stock of RL Phillips, Inc. (“RL Phillips”) for approximately $2,150,000. Of the total purchase price, $300,000 was paid in shares of TechTeam common stock, which was placed into escrow for a period of three years after closing to reimburse the Company for any claims for indemnity or breach of representation and warranties. These shares were released in their entirety on June 23, 2010. Furthermore, $100,000 was held back and was scheduled to be paid in equal installments on the first and second anniversary of the date of acquisition. On August 31, 2008, $50,000 was paid to the selling shareholders. The installment due on August 31, 2009 was held back due to a claim for indemnity. On May 28, 2010, the final installment of $50,000 was paid to the selling shareholders.

 
11

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 9 — 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 $186,000 and $286,000 during the three months ended September 30, 2010 and 2009, respectively, and compensation expense totaling $736,000 and $879,000 during the nine months ended September 30, 2010 and 2009, respectively, related to outstanding options. At September 30, 2010 and 2009, there was approximately $1,335,000 and $2,248,000, respectively, of unrecognized compensation expense related to stock options. Unrecognized compensation expense at September 30, 2010, is expected to be recognized over a weighted-average period of approximately two years.
 
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.
 
The following assumptions were used to estimate the fair value of options granted for the nine months ended September 30, 2010 and 2009:
 
   
Nine Months Ended September 30,
 
   
2010
   
2009
 
Expected dividend yield
   
0.0%
     
0.0%
 
Weighted average volatility
   
65%
     
61%
 
Risk free interest rate
   
1.2 – 1.3%
     
1.4%
 
Expected term (in years)
   
3.0
     
3.0
 
 
Restricted Common Stock
 
Compensation expense related to restricted stock under all plans is recorded on a straight-line basis over the vesting period. The Company recorded compensation expense of approximately $238,000 and $241,000 for the three months ended September 30, 2010 and 2009, respectively, related to outstanding shares of restricted stock under all plans and compensation expense of approximately $752,000 and $483,000 for the nine months ended September 30, 2010 and 2009, respectively.
 
The weighted average grant-date fair value of restricted stock granted under all plans during the three months ended September 30, 2010 and 2009 was $6.46 and $8.61, respectively. The weighted average grant-date fair value of restricted stock granted under all plans during the nine months ended September 30, 2010 and 2009 was $6.87 and $5.07, 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.

 
12

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 9 — Stock-Based Compensation (continued)
 
At September 30, 2010 and 2009, there was approximately $2,180,000 and $2,500,000, respectively, of total unrecognized compensation expense related to non-vested shares of restricted stock. Unrecognized compensation expense at September 30, 2010, is expected to be recognized over a weighted average period of approximately three years.
 
Note 10 — Income Taxes
 
At September 30, 2010 and December 31, 2009, the Company had an unrecognized tax benefit of approximately $259,000 and $113,000, respectively. 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 and nine months ended September 30, 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 September 30, 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 2003.

Major Jurisdiction
 
Open Years
 
U.S. Federal income taxes
 
2007 through 2009
 
U.S. State income taxes
 
2005 through 2009
 
Foreign income taxes
 
2003 through 2009
 

For the three and nine months ended September 30, 2010, the consolidated effective tax rate was 9.8% and 11.6%, respectively. The rate for the three months and nine months ended September 30, 2010 was lower than the statutory rate of 34.0% primarily due to a $9.4 million impairment charge taken in the third quarter of 2010 for which no tax benefit was recorded. Taking an impairment charge with no tax benefit has the effect of lowering the effective rate when expressed as a percent of a pretax loss.
 
For the three and nine months ended September 30, 2009, the consolidated effective tax rate was 31.7% and 36.1%, respectively.  This rate differs from statutory levels in the three months ended September 30, 2009, primarily because the reversal of the restructuring charge was recorded in Belgium where there was no tax expense for the charge due to the availability of tax loss carry forwards which offset taxable income.  Excluding the reversal of restructuring charges, the effective tax rate for the three and nine months ended September 30, 2009 was 32.9% and 41.0%, respectively.  The effective tax rate excluding the reversal of restructuring charges differs from the statutory tax rate of 34.0% primarily due to state income taxes, non-deductible expenses and foreign operating losses for which a tax benefit is not recorded.

 
13

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 11 — 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.
 
Financial information for the Company’s operating segments is as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Revenue
                       
Commercial
                       
IT Outsourcing Services
  $ 26,197     $ 25,407     $ 75,918     $ 78,258  
IT Consulting and Systems Integration
    3,066       2,557       8,538       9,319  
Other Services
    2,419       2,637       7,632       8,273  
Total Commercial
    31,682       30,601       92,088       95,850  
Government Technology Services
    14,470       19,713       44,714       60,557  
Total revenue
  $ 46,152     $ 50,314     $ 136,802     $ 156,407  
                                 
Gross Profit
                               
Commercial
                               
IT Outsourcing Services
  $ 5,803     $ 5,240     $ 17,316     $ 17,113  
IT Consulting and Systems Integration
    660       635       1,688       2,082  
Other Services
    611       726       1,813       2,172  
Total Commercial
    7,074       6,601       20,817       21,367  
Government Technology Services
    3,249       5,188       10,007       16,716  
Total gross profit
    10,323       11,789       30,824       38,083  
Selling, general and administrative expense
    (10,726 )     (9,807 )     (31,741 )     (30,823 )
Impairment charge
    (9,404 )           (9,404 )      
Restructuring credit (charge)
    75       57       (2,687 )     756  
Net interest expense
    (165 )     (310 )     (555 )     (897 )
Foreign currency transaction loss
    (347 )     (70 )     (3 )     (720 )
Income (loss) from continuing operations before income taxes
  $ (10,244 )   $ 1,659     $ (13,566 )   $ 6,399  

 
14

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 11 — Segment Reporting (continued)
 
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
September 30,
   
Nine Months Ended
 September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
U.S. Federal Government
    26.7 %     33.2 %     28.2 %     34.1 %
Ford Motor Company
    12.3 %     14.5 %     11.7 %     15.0 %
Total
    39.0 %     47.7 %     39.9 %     49.1 %
 
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 September 30, 2010 and 2009, 12.4% and 19.9%, respectively, of the Company’s total revenue was derived from agencies within the U.S. Department of Defense in the aggregate. For the nine months ended September 30, 2010 and 2009, 13.4% and 20.3%, respectively, of the Company’s total revenue was derived from agencies within the U.S. Department of Defense in the aggregate.
 
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
September 30,
   
Nine Months Ended
 September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Revenue
                       
United States
  $ 32,234     $ 35,229     $ 95,479     $ 111,149  
Europe:
                               
Belgium
    8,326       8,193       24,415       24,382  
Rest of Europe
    5,592       6,892       16,908       20,876  
Total Europe
    13,918       15,085       41,323       45,258  
Total revenue
  $ 46,152     $ 50,314     $ 136,802     $ 156,407  
 
Note 12 — 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.

 
15

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 13 — Notes Payable and Line of Credit
 
Long-Term Debt Agreement
 
On June 1, 2007, the Company entered into a five-year, secured credit agreement (“Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), as Administrative Agent and participating lender, whereby the Company may borrow up to $40,000,000 for the issuance of letters of credit and loans. On July 3, 2007, LaSalle Bank Midwest, N.A., now known as Bank of America, N.A. (“Bank of America”), joined as a participating lender under the Credit Agreement through the assignment of a participation share of $15,000,000, or 37.5%. On June 5, 2008, the Company and the banks amended the Credit Agreement to permit borrowings up to $55,000,000. Borrowings under the Credit Agreement are currently secured by substantially all domestic assets of the Company and 65% of its interests in the majority of its foreign subsidiaries. The Credit Agreement terminates on May 31, 2012.
 
The Credit Agreement contains various financial and non-financial covenants, the most restrictive of which limit the Company’s ability to incur additional indebtedness and pay dividends. The financial covenants require that the Company maintain certain leverage ratios and fixed charge coverage ratios, as defined therein.
 
On October 28, 2008, the Company completed the second amendment to the Credit Agreement to provide the Company the ability to enter into a stock repurchase program through 2011 (with an annual limitation of $3.0 million per year) and to increase the Company’s ability to execute capital lease transactions from $1.0 million to $2.0 million.
 
On March 26, 2010, the Company further amended the Credit Agreement to reduce the Company’s borrowing limit from $55,000,000 to $28,000,000. As of the date of such amendment, Bank of America, N.A. was paid in full and is no longer a participating lender.
 
The March 2010 amendment permitted 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 March 2010 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.
 
Due to the goodwill impairment recorded in the third quarter of 2010, the Company was not in compliance with the debt covenants under the Credit Agreement. As of September 30, 2010, the $16.4 million outstanding balance under the Credit Agreement was reclassified to current portion of long-term debt on the Consolidated Balance Sheet. On October 5, 2010, the Company repaid the balance in full. Please see Note 15 - Other Matters for further information.

 
16

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 – Fair Value Measurements
 
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.
 
Items Measured at Fair Value on a Recurring Basis
 
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:
 
     
Total
     
Level 1
   
Level 2
   
Level 3
 
     
(In thousands)
 
Interest Rate Swap
                           
Fair Value as of September 30, 2010
    $ (125 )    
NA
    $ (125 )  
NA
 
Fair Value as of December 31, 2009
    $ (449 )    
NA
    $ (449 )  
NA
 
                                 
Deferred Compensation Plan
                               
Fair Value as of September 30, 2010
    $ (494 )   $
(494
 
NA
   
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. On October 5, 2010 the Company settled the swap agreement in full for a payment of $101,000. Please see Note 15 - Other Matters for further information.

 
17

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 – Fair Value Measurements (continued)
 
For the three months ended September 30, 2010, gains recognized in other comprehensive income (loss) on derivatives were $3,000. For the three months ended September 30, 2009, losses recognized in other comprehensive income (loss) on derivatives were $49,000. Losses reclassified from other comprehensive income (loss) into interest expense upon settlement amounted to $1,000 and $135,000, for the three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, losses recognized in other comprehensive income (loss) on derivatives were $82,000 and $189,000, respectively, and losses reclassified from other comprehensive income (loss) into interest expense upon settlement amounted to $325,000 and $610,000, for the nine months ended September 30, 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 $125,000 and $0, respectively, at September 30, 2010 and $394,000 and $55,000, respectively, at December 31, 2009.
 
The Company sponsors a nonqualified deferred compensation plan which allows certain management employees to annually elect to defer up to 10% of their compensation, on a pre-tax basis. The plan is intended to be a “top-hat” plan under the Employee Retirement Income Security Act of 1974. The deferred compensation obligation related to this plan is adjusted each quarter in accordance with ASC 710, to reflect changes in the fair value of the amount owed to the employee. The deferred compensation obligation is based on quoted market prices in active markets and therefore is considered a level 1 item. The deferred compensation obligation in included in other long-term liabilities on the consolidated balance sheet.
 
Non-financial Assets and Liabilities Measured on a Nonrecurring Basis
 
In addition to its interest rate swap and the deferred compensation plan, the Company measured restructuring related liabilities (Note 6 - Restructuring) at fair value on a nonrecurring basis. These liabilities are not measured at fair value on a recurring basis. 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.
 
Under ASC 350, “Intangibles – Goodwill and Other,” the Company is required to perform annual impairment tests of its goodwill at least annually or more frequently if impairment indicators are present. The Company has elected to test for goodwill impairment on October 1st each year. In connection with the Company’s plan to sell its TechTeam Government Solutions reporting unit, the Company determined that an interim test for impairment was required during the third quarter of 2010. No impairment indicators were present for any of the Company’s other reporting units.
 
In the first step of the goodwill impairment test, the Company identifies its reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to these reporting units. Historically, the Company has determined estimated fair value using a combination of a discounted cash flow analysis and a market-based approach. However, for purposes of the September 30, 2010 valuation of its government business unit, the Company used $40.5 million for its estimate of fair value. This estimate is based on the completed sale of TechTeam Government Solutions, Inc., to Jacobs Engineering Group Inc. for $43.0 million on October 5, 2010, adjusted for estimated changes in the net tangible book value  of $2.5 million as determined by the Stock Purchase Agreement. See Note 15 – Other Matters for further information regarding the sale. Since the carrying value of Government Solutions exceeded its estimated fair value, the second step of the goodwill impairment test was performed.

 
18

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 – Fair Value Measurements (continued)
 
The second step of the goodwill impairment calculation requires allocation of the estimated fair value of the reporting unit to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination. The excess of fair value as determined in step 1 over the fair value of the assets and liabilities of the reporting unit is the implied value of goodwill. The carrying value of goodwill is then compared to the implied value of goodwill and any excess of carrying value of goodwill over implied value of goodwill must be recognized as a goodwill impairment. The Company determined under the second step of the interim impairment test that the fair value of goodwill was less than the carrying value of its goodwill at its Government Solutions reporting unit. The Company recorded a $9.4 million impairment charge in the third quarter of 2010 to reflect the implied fair value of goodwill for Government Solutions.
 
In addition, the Company also reviewed its other intangible assets, primarily customer relationships, for impairment in accordance with ASC 360 and concluded that the intangible assets were not impaired at its Government Solutions reporting unit.
 
The following table summarizes the basis used to measure certain non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in the balance sheet:

   
Fair Value as of September 30, 2010 (In thousands)
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Goodwill
  $ 31,494       N/A       N/A     $ 31,494  
Restructuring
  $ 310       N/A       N/A     $ 310  
 
Financial Instruments Carried at Other Than Fair Values
 
At September 30, 2010, the Company’s financial instruments consist of accounts receivable, accounts payable and long-term debt. The carrying values of accounts receivable and accounts payable approximate their fair values due to their short maturity periods. The fair value of the Company’s debt approximates its carrying value based on the variable nature of the interest rates and current market rates available to the Company.
 
Note 15 — Other Matters
 
Disposition of TechTeam Government Solutions
 
On October 5, 2010, TechTeam, Jacobs Engineering Group Inc. and Jacobs Technology Inc., a wholly-owned subsidiary of Jacobs Engineering completed the sale of 100% of the outstanding stock in TechTeam Government Solutions, Inc., a wholly-owned subsidiary and separate reportable segment of TechTeam, for a net cash purchase price of $43.0 million. The purchase price of $43.0 million is subject to certain escrows and adjustments in accordance with the terms of the Stock Purchase Agreement. The purchase was subject to shareholder vote and was approved on October 4, 2010.
 
The $43.0 million purchase price consists of approximately $31.6 million of cash received at closing and approximately $11.4 million of cash that was placed in escrow, each subject to such adjustments and other conditions set forth in the Stock Purchase Agreement. The cash escrow payment consists of (a) approximately $8.6 million to secure the payment of any future indemnification claims that may be made by Jacobs Technology against TechTeam during the 36-month period after the closing date, and (b) approximately $2.8 million to secure the potential post-closing Purchase Price adjustment to the extent the net tangible book value of the assets of Government Solutions at closing exceeds or is less than a target net tangible book value of approximately $12.2 million.

 
19

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 15Other Matters (continued)
 
Revenue and pre-tax income (loss) for TechTeam Government Solutions, Inc. are as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended 
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Revenue
  $ 14,470     $ 19,713     $ 44,714     $ 60,557  
                                 
Income (loss) before income taxes
  $ (9,420 )   $ 1,538     $ (9,766 )   $ 5,934  
 
Beginning in the fourth quarter of 2010, the historical financial results of TechTeam Government Solutions, Inc. will be presented as discontinued operations. The loss on the sale of TechTeam Government Solutions, Inc. is estimated to be $1.6 million, primarily for transaction costs to be incurred in the fourth quarter of 2010 related to the sale of TechTeam Government Solutions, Inc.
 
Notes Payable and Line of Credit
 
On October 5, 2010, the Company repaid $16.4 million the Credit Agreement with the net cash proceeds received in the sale of TechTeam Government Solutions. As of October 5, 2010, no amounts were outstanding under the Credit Agreement. The $16.4 million was included in the Current portion of long term debt on the Condensed Consolidated Balance Sheet as of September 30, 2010. All commitments including future loan issuance, letters of credit and other advances under the Credit Agreement were terminated at this time. TechTeam Global incurred no material early termination penalties associated with the foregoing.
 
The Credit Agreement permitted borrowings by TechTeam Global of up to $28.0 million. Borrowings under the Credit Agreement were secured by substantially all domestic assets of TechTeam Global and 65% of its interests in the majority of its foreign subsidiaries. The Credit Agreement was to terminate in accordance with its terms on May 31, 2012.
 
On October 5, 2010, in conjunction with the repayment of the Credit Agreement, the Company settled its interest rate swap agreement in full for $101,000. The interest rate swap was to mature on June 3, 2011. The liability associated with the interest rate swap was included in other current liabilities and other long-term liabilities on the consolidated balance sheet in the amounts of $125,000 and $0, respectively, at September 30, 2010.
 
Proposed Acquisition/Transaction with Stefanini International Holdings Ltd.
 
On November 2, 2010, the Company signed a definitive agreement that an affiliate of Stefanini International Holdings Ltd. (d/b/a Stefanini IT Solutions), a privately held global provider of onshore and nearshore IT consulting, integration and development, and outsourcing services, will merge with TechTeam Global.  The transaction will be accomplished through an all-cash tender offer and second-step merger, for a total value of approximately $93.4 million. The definitive agreement was fully supported by TechTeam Global’s Board of Directors and was the result of the Board of Directors and management’s evaluation of various strategic alternatives for the benefit of all stakeholders. The transactions contemplated by the definitive agreement were unanimously approved by the Boards of Directors of both companies.
 
Stefanini International Holdings Ltd., through a U.S. subsidiary, will make an offer to purchase all outstanding shares of TechTeam Global common stock for $8.35 per share. The tender offer is scheduled to commence within 10 business days of the signed definitive agreement and is expected to close during the fourth quarter of 2010. The tender offer is conditioned on the tender of a majority of the outstanding shares of TechTeam Global common stock on a fully-diluted basis and various other conditions, including customary regulatory approvals. The transaction is not conditioned on receipt of financing. Following completion of the tender offer, an affiliate of Stefanini International Holdings Ltd. intends to acquire the remaining outstanding shares of TechTeam common stock for $8.35 per share through a second-step merger. Further details can be found in filings with the U.S. Securities and Exchange Commission.

 
20

 

TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The tender offer to purchase shares of TechTeam Global common stock referenced in this correspondence has not yet commenced, and this correspondence is neither an offer to purchase, nor a solicitation of an offer to sell, any securities. The tender offer to purchase shares of TechTeam Global common stock will be made only pursuant to a Tender Offer Statement on Schedule TO containing an offer to purchase, forms of letters of transmittal and other documents relating to the tender offer (the “Tender Offer Statement”), which Platinum Merger Sub, Inc. a wholly-owned subsidiary of Stefanini International Holdings Ltd, will file with the SEC and mail to TechTeam Global stockholders. At the time the tender offer is commenced, TechTeam Global will file a Solicitation / Recommendation Statement with respect to the tender offer (the “Recommendation Statement”). Security holders of TechTeam Global are advised to read the Tender Offer Statement and Recommendation Statement when they become available, because they will contain important information about the tender offer. Investors and security holders of TechTeam Global also are advised that they may obtain free copies of the Tender Offer Statement and other documents filed by Platinum Merger Sub, Inc. with the SEC (when these documents become available) and the Recommendation Statement and other documents filed by Stefanini International Holdings Ltd (when these documents become available) on the SEC’s website at http://www.sec.gov. In addition, free copies of the Tender Offer Statement and related materials may be downloaded (when these documents become available) from TechTeam Global’s website at: http://www.techteam.com/investors/sec-filings; and free copies of the Recommendation Statement and related materials may be obtained (when these documents become available) from TechTeam Global by written request to: TechTeam Global, Inc., Attn: Investor Relations, 27335 West 11 Mile Road, Southfield, Michigan 48033.

 
21

 

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 recent sale of Government Solutions, 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 (“MD&A”)
 
Overview
TechTeam Global, Inc. is a leading provider of IT outsourcing and business process outsourcing services to large and medium businesses. 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. Through the end of the third quarter of 2010, our business consisted 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. Until October 5, 2010, our Government Technology Services segment comprised our Government business.
 
Over the past two years, the TechTeam Board of Directors has actively explored the Company’s strategic alternatives.  During the evaluation process, the Board of Directors concluded that the Company consisted of two substantially unrelated, relatively independent and sub-scale businesses, the Commercial business and the Government business, which did not have significant synergies between them and that both required significant investment to succeed, grow and thrive. The Board concluded that the Company did not have the financial flexibility or capital resources to continue to adequately invest in both business segments and determined to engage in a process to explore alternatives to sell one or both businesses.
 
As the result of the above process, TechTeam Global, Inc. completed the sale of the Government business on October 5, 2010. The transaction was subject to certain escrows and adjustments as set forth in the definitive stock purchase agreement dated June 3, 2010 and as amended on September 14, 2010.  The Company used a portion of the net cash proceeds from the transaction to immediately pay off its debt under its existing credit facility. For more information on the sale, see Note 15.
 
The following consolidated financial data illustrates, on a pro forma basis, the effects of the sale of the Government business for the periods presented.  The unaudited pro forma consolidated balance sheet data gives effect to the sale and the payment in full of the credit facility as if it occurred on September 30, 2010. The unaudited pro forma income statement data gives effect to the sale as if it occurred on January 1 for each period presented.1


1 The unaudited pro forma data has been derived from, and should be read in conjunction with, the Company’s historical consolidated financial statements, including the notes thereto, in the Company’s annual report filed on Form 10-K for the year ended December 31, 2009 and the Company’s quarterly report filed on Form 10-Q for the quarter ended September 30, 2010.  The unaudited pro forma consolidated financial data are not necessarily indicative of the financial position or results of operation that would have been achieved had the Government business been sold on the dates indicated, or that may be expected to occur in the future as a result of the sale.  This abbreviated pro forma information presented below has been prepared in a manner consistent with the pro forma presentation set forth in the Company’s Current Report on Form 8-K dated October 5, 2010.

 
22

 
 
   
Nine Months Ended
September 30, 2010
   
Nine Months Ended
September 30, 2009
 
   
(In thousands)
 
Revenue
  $ 92,088     $ 95,850  
Gross profit
    20,817       21,367  
Selling, general and administrative expenses
    21,959       20,814  
Operating income (loss) before restructuring charge
    (1,142 )     553  
Restructuring charge (credit), net
    2,519       (756 )
Operating income (loss)
    (3,661 )     1,309  
Net interest expense and foreign currency loss
    139       844  
Income (loss) from continuing operations before income taxes
    (3,800 )     465  
Income tax provision (benefit)
    (1,315 )     84  
Net income (loss) from continuing operations
  $ (2,485 )   $ 381  
                 
Current assets
  $ 63,290          
Long-term assets
  $ 24,446          
Current liabilities
  $ 13,876          
Long-term liabilities
  $ 1,140          
Equity
  $ 72,720          
  
For reference, the financial results in the above table include a number of special items, such as professional fee expenses.  Notably, for the nine months ended September 30, 2010, the above includes $3.8 million of professional fees primarily related to the sale of the Government Solutions business.
   
Contemporaneously with the sale process of the Government business, the Board continued its evaluation of the strategic alternatives for the Company’s remaining Commercial business. On November 2, 2010, the Company announced that it had signed a definitive agreement pursuant to which an affiliate of Stefanini International Holdings Ltd. (dba Stefanini IT Solutions), a privately held global provider of onshore and nearshore IT consulting, integration and development, and outsourcing services, will merge with the Company.
 
Specifically, the transaction will be accomplished through an all-cash tender offer and second-step merger, for a total value of approximately $93.4 million. Stefanini International Holdings Ltd., through a U.S. subsidiary, will make an offer to purchase all outstanding shares of the Company’s common stock for $8.35 per share. The tender offer price represents a 24.0% premium to the Company’s average closing stock price over the last three-month period ended November 1, 2010 and a 16.8% premium over the closing price of the Company’s common stock on November 1, 2010. The tender offer is currently expected to close during the fourth quarter of 2010. For more information regarding this matter, please see the Form 8-K filed on November 2, 2010 regarding this transaction.
 
The following discussion of the Company’s financial results from third quarter 2010 reflect: (a) a stable financial performance of the Commercial business; (b) the weakened financial performance of the Government business; (c) a goodwill impairment of the Government business in light of the weakened performance of the Government business as reflected in the lower purchase price for the business; (d) the significant expenses incurred by the Company in the sale process; and (e) the sale of TechTeam SQM, which has been accounted for as a discontinued operation, and therefore all results of operations for SQM have been removed from continuing operations in accordance with ASC 205-20, “Discontinued Operations” as of the beginning of the third quarter 2010 for all periods presented.
 
 
23

 

The tender offer to purchase shares of TechTeam Global common stock referenced in this correspondence has not yet commenced, and this correspondence is neither an offer to purchase, nor a solicitation of an offer to sell, any securities. The tender offer to purchase shares of TechTeam Global common stock will be made only pursuant to a Tender Offer Statement on Schedule TO containing an offer to purchase, forms of letters of transmittal and other documents relating to the tender offer (the “Tender Offer Statement”), which Platinum Merger Sub, Inc. a wholly-owned subsidiary of Stefanini International Holdings Ltd, will file with the SEC and mail to TechTeam Global stockholders. At the time the tender offer is commenced, TechTeam Global will file a Solicitation / Recommendation Statement with respect to the tender offer (the “Recommendation Statement”). Security holders of TechTeam Global are advised to read the Tender Offer Statement and Recommendation Statement when they become available, because they will contain important information about the tender offer. Investors and security holders of TechTeam Global also are advised that they may obtain free copies of the Tender Offer Statement and other documents filed by Platinum Merger Sub, Inc. with the SEC (when these documents become available) and the Recommendation Statement and other documents filed by Stefanini International Holdings Ltd (when these documents become available) on the SEC’s website at http://www.sec.gov. In addition, free copies of the Tender Offer Statement and related materials may be downloaded (when these documents become available) from TechTeam Global’s website at: http://www.techteam.com/investors/sec-filings; and free copies of the Recommendation Statement and related materials may be obtained (when these documents become available) from TechTeam Global by written request to: TechTeam Global, Inc., Attn: Investor Relations, 27335 West 11 Mile Road, Southfield, Michigan 48033.
 
24

 
Results of Operations
Quarter Ended September 30, 2010 Compared to September 30, 2009
 
Revenue

   
Quarter Ended September 30,
   
Increase
   
%
 
   
2010
   
2009
   
(Decrease)
   
Change
 
   
(In thousands, except percentages)
 
Revenue
                       
Commercial —
                       
IT Outsourcing Services
  $ 26,197     $ 25,407     $ 790       3.1 %
IT Consulting and Systems Integration
    3,066       2,557       509       19.9 %
Other Services
    2,419       2,637       (218 )     (8.3 )%
Total Commercial
    31,682       30,601       1,081       3.5 %
Government Technology Services
    14,470       19,713       (5,243 )     (26.6 )%
Total revenue
  $ 46,152     $ 50,314     $ (4,162 )     (8.3 )%
 
Total Company revenue decreased $4.2 million, or 8.3%, to $46.2 million in the third quarter of 2010 from $50.3 million in the third quarter of 2009. The revenue decrease was driven primarily by the conclusion of customer contracts in Government Technology Services segments and an approximate $1.2 million negative impact of exchange rates on foreign revenue. This decrease was partially offset by new customer contracts and expansion with existing customers in the Americas and Europe. 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 third quarter of 2009. We are unable to predict the effect fluctuations in international currencies will have on revenue for the remainder of 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 increased $790,000, or 3.1%, to $26.2 million in the third quarter of 2010, from $25.4 million in the third quarter of 2009. The revenue increase was due to new customers and expansion with existing customers in Americas and Europe. The revenue increase was offset by the conclusion of customer contracts in Europe and the Americas, lower revenue from Ford and a negative impact of exchange rates on foreign currency revenue. The negative foreign currency impact approximated $1.0 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 third quarter of 2009.
 
IT Outsourcing Services revenue generated from Ford globally decreased $1.6 million, or 25.0%, to $4.7 million in the third quarter of 2010 compared to $6.3 million in 2009. Revenue from Ford declined 4.1% in the Americas and 58.3% 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 increased $509,000, or 19.9%, to $3.1 million in the third quarter of 2010, from $2.6 million in 2009. Revenue increased due to an increase in project based work in the Americas with the Company’s hospitality business.

 
25

 

Government Technology Services
 
Revenue from Government Technology Services decreased $5.2 million, or 26.6%, to $14.5 million in the third quarter of 2010, from $19.7 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. On October 5, 2010 the Company completed the sale of its TechTeam Government Solutions subsidiary. Please refer to Note 15 and our discussion of the U.S. Federal Government in the “Significant Customers” section of MD&A.
 
Gross Profit and Gross Margin

   
Quarter Ended September 30,
             
   
2010
   
2009
             
   
Amount
   
Gross
Margin %
   
Amount
   
Gross
Margin %
   
Increase
(Decrease)
   
%
Change
 
   
(In thousands, except percentages)
 
Gross Profit
                                   
Commercial —
                                   
IT Outsourcing Services
  $ 5,803       22.2 %   $ 5,240       20.6 %   $ 563       10.7 %
IT Consulting and Systems Integration
    660       21.5 %     635       24.8 %     25       3.9 %
Other Services
    611       25.3 %     726       27.5 %     (115 )     (15.8 )%
Total Commercial
    7,074       22.3 %     6,601       21.6 %     473       7.2 %
Government Technology Services
    3,249       22.5 %     5,188       26.3 %     (1,939 )     (37.4 )%
Total gross profit
  $ 10,323       22.4 %   $ 11,789       23.4 %   $ (1,466 )     (12.4 )%
 
Gross profit decreased $1.5 million, or 12.4%, to $10.3 million in the third quarter of 2010 from $11.8 million in the third quarter of 2009. Gross margin decreased to 22.4% for third quarter 2010 from 23.4% for third quarter 2009. The decrease in gross profit and gross margin was primarily due to the loss of higher margin government business. This decrease was partially offset by improved operating efficiencies, the successful execution of the restructuring action announced and completed in the first quarter of 2010 and expansion with existing customers in the Company’s Commercial segment.
 
IT Outsourcing Services
 
Gross profit from IT Outsourcing Services increased 10.7% to $5.8 million in the third quarter of 2010, from $5.2 million in 2009, and gross margin increased to 22.2% from 20.6%. The increase in gross profit and gross margin was due to improved operating efficiencies, the successful execution of restructurings announced and completed in first quarter of 2010 and expansion with existing customers.
 
IT Consulting and Systems Integration
 
Gross profit from IT Consulting and Systems Integration increased 3.9% to $660,000 in the third quarter of 2010 from $635,000 in 2009, and gross margin decreased to 21.5% from 24.8% in 2009. Gross profit increased mainly due to more project based work in the Company’s hospitality business. Gross margin decreased due to less project based work in the Americas and Europe.

 
26

 

Government Technology Services
 
Gross profit from our Government Technology Services segment decreased 37.4% to $3.2 million in the third quarter of 2010 from $5.2 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 third quarter of 2010 to 22.5% from 26.3% in 2009. The gross margin decrease was due to the loss of higher margin government business. On October 5, 2010, the Company completed the sale of its TechTeam Government Solutions subsidiary. Please refer to Note 15 and our discussion of the U.S. Federal Government in the “Significant Customers” section of MD&A.
 
Geographic Market Discussion

   
Quarter Ended September 30,
   
Increase
   
%
 
   
2010
   
2009
   
(Decrease)
   
Change
 
   
(In thousands)
       
Revenue
                       
Commercial —
                       
Americas
  $ 17,764     $ 15,516     $ 2,248       14.5 %
Europe
    13,918       15,085       (1,167 )     (7.7 )%
Total Commercial
    31,682       30,601       1,081       3.5 %
Government
    14,470       19,713       (5,243 )     (26.6 )%
Total revenue
  $ 46,152     $ 50,314     $ (4,162 )     (8.3 )%
                                 
Gross Margin
                               
Commercial —
                               
Americas
    19.6 %     20.0 %                
Europe
    26.1 %     23.0 %                
Total Commercial
    22.3 %     21.6 %                
Government
    22.5 %     26.3 %                
Total Gross Margin
    22.4 %     23.4 %                
 
Americas
 
Revenue generated in the Americas increased $2.2 million, or 14.5%, to $17.8 million in the third quarter of 2010, from $15.5 million in 2009. Revenue generated across all segments experienced an increase due to new customers and expansion with existing customers. This increase was partially offset by a decrease from a decline in revenue earned from Ford. Gross margin from the Americas decreased to 19.6% for the third quarter of 2010 from 20.0% in 2009 mainly due to a decrease in gross margin in the IT Consulting and Systems Integration segment due to a decrease in project based work with higher margin accounts.
 
Europe
 
Revenue generated in Europe decreased $1.2 million, or 7.7%, to $13.9 million in the third quarter of 2010 from $15.1 million in 2009, due to the conclusion of customer contracts in the IT Outsourcing segment and a negative impact of an approximate $1.2 million from exchange rates on revenue. This decrease was partially offset by an increase in revenue from expansion with existing customers. The foreign currency impact was calculated as if revenue in Europe in third quarter of 2010 were translated into U.S. dollars at the average exchange rates in effect during the third quarter of 2009. Despite a decrease in revenue, gross margin from Europe increased to 26.1% in the third quarter of 2010, from 23.0% in 2009, primarily due to improved operating efficiencies and the realization of restructuring actions taken in 2010.

 
27

 

Operating Expenses and Other

   
Quarter Ended September 30,
   
Increase
   
%
 
   
2010
   
2009
   
(Decrease)
   
Change
 
   
(In thousands, except percentages)
 
Operating Expenses and Other
                       
Selling, general and administrative expense
  $ 10,726     $ 9,807     $ 919       9.4 %
Restructuring credit
  $ (75 )   $ (57 )   $ (18 )     31.6 %
Net interest expense
  $ (165 )   $ (310 )   $ 145       (46.8 )%
Foreign currency transaction (loss)
  $ (347 )   $ (70 )   $ (277 )  
NM
%
Income tax provision (benefit)
  $ (1,004 )   $ 526     $ (1,530 )  
NM
%
 
Selling, general, and administrative (“SG&A”) expense increased 9.4% to $10.7 million for the third quarter of 2010 from $9.8 million in 2009. The increase was mainly due to an increase of $1.3 million of professional fees related to the sale of the Company’s TechTeam Government Solutions subsidiary. This increase was partially offset by a reduction in amortization expense in 2010 from the write-down of certain intangible assets in 2009 and the realization of the restructuring actions taken in 2009 and 2010. SG&A expense as a percent of revenue increased to 23.2% in the third quarter of 2010, from 19.5% in 2009.
 
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. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated. Accordingly, previously recorded restructuring related reserves of $75,000 were reversed in the third quarter of 2010 primarily from the Company favorably amending lease facilities in order to eliminate its obligation to pay for leased space that was vacated and expensed as part of the 2010 and 2008 restructuring actions.
 
Net interest expense was $165,000 in the third quarter of 2010, compared to $310,000 in 2009, a result of lower average outstanding long-term debt, partially offset by lower interest income from lower average invested cash equivalents and lower interest rates.
 
For the three months ended September 30, 2010, the consolidated effective tax rate was 9.8%. The rate for the three months ended September 30, 2010 was lower than the statutory rate of 34.0% primarily due to a $9.4 million impairment charge taken in the third quarter of 2010 for which no tax benefit was recorded. Taking an impairment charge with no tax benefit has the effect of lowering the effective rate when expressed as a percent of a pretax loss.
 
For the three months ended September 30, 2009, the consolidated effective tax rate was 31.7%. This rate differs from statutory levels primarily because the reversal of the restructuring charge recorded in Belgium where there was no tax expense for the charge due to the availability of tax loss carry forwards which offset taxable income.  The effective tax rate excluding the reversal of restructuring charges was 32.9% which differs from the statutory tax rate of 34.0% primarily due to state income taxes, non-deductible expenses and foreign operating losses for which a tax benefit is not recorded.

 
28

 
 
Results of Operations
Nine Months Ended September 30, 2010 Compared to September 30, 2009
 
Revenue

   
Nine Months Ended
September 30,
   
Increase
   
%
 
   
2010
   
2009
   
(Decrease)
   
Change
 
   
(In thousands, except percentages)
 
Revenue
                       
Commercial —
                       
IT Outsourcing Services
  $ 75,918     $ 78,258     $ (2,340 )     (3.0 )%
IT Consulting and Systems Integration
    8,538       9,319       (781 )     (8.4 )%
Other Services
    7,632       8,273       (641 )     (7.7 )%
Total Commercial
    92,088       95,850       (3,762 )     (3.9 )%
Government Technology Services
    44,714       60,557       (15,843 )     (26.2 )%
Total revenue
  $ 136,802     $ 156,407     $ (19,605 )     (12.5 )%
 
Total Company revenue decreased $19.6 million, or 12.5%, to $136.8 million for the nine months ended September 30, 2010 from $156.4 million during the same period in 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, a decrease in project based work due to the difficult economic environment and an approximate $730,000 negative impact of exchange rates on foreign revenue. This decrease was partially offset by expansion with existing customer and new contracts in the Americas and Europe. 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 nine months of 2009. We are unable to predict the effect fluctuations in international currencies will have on revenue for the remainder of 2010, but given the uncertain market environment and the effect on the U.S. dollar, there could be noteworthy revenue volatility.
 
IT Outsourcing Services
 
Revenue from IT Outsourcing Services decreased $2.3 million, or 3.0%, to $75.9 million for the nine months ended September 30, 2010, from $78.3 million during the same period of 2009. The revenue decrease was primarily a result of the conclusion of customer contracts in Europe and the Americas, lower revenue from Ford and an approximate $600,000 negative impact of exchange rates on foreign revenue. This decrease was partially offset by an increase in revenue in the Americas and Europe from new customer contract and expansion with existing customers. The foreign currency impact was calculated as if IT Outsourcing Services revenue in Europe was translated into U.S. dollars at the average exchange rates in effect during the nine months of 2009.
 
IT Outsourcing Services revenue generated from Ford globally decreased $8.1 million, or 38.2%, to $13.0 million for the nine months ended September 30, 2010 compared to $21.1 million in 2009. Revenue from Ford declined 18.8% in the Americas and 66.3% 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.

 
29

 

IT Consulting and Systems Integration
 
Revenue from IT Consulting and Systems Integration decreased $781,000, or 8.4%, to $8.5 million for the nine months ended September 30, 2010, from $9.3 million during the same period in 2009. Revenue decreased in the Americas primarily from a decrease in project based work in certain systems implementation and training projects.
 
Government Technology Services
 
Revenue from Government Technology Services decreased $15.8 million, or 26.2%, to $44.7 million during the nine months ended September 30, 2010, from $60.6 million for the same period 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. On October 5, 2010, the Company completed the sale of its TechTeam Government Solutions subsidiary. Please refer to Note 15 and our discussion of the U.S. Federal Government in the “Significant Customers” section of MD&A.
 
Gross Profit and Gross Margin

   
Nine Months Ended September 30,
             
   
2010
   
2009
             
   
Amount
   
Gross
Margin %
   
Amount
   
Gross
Margin %
   
Increase
(Decrease)
   
%
Change
 
   
(In thousands, except percentages)
 
Gross Profit
                                   
Commercial —
                                   
IT Outsourcing Services
  $ 17,316       22.8 %   $ 17,113       21.9 %   $ 203       1.2 %
IT Consulting and Systems Integration
    1,688       19.8 %     2,082       22.3 %     (394 )     (18.9 )%
Other Services
    1,813       23.8 %     2,172       26.3 %     (359 )     (16.5 )%
Total Commercial
    20,817       22.6 %     21,367       22.3 %     (550 )     (2.6 )%
Government Technology Services
    10,007       22.4 %     16,716       27.6 %     (6,709 )     (40.1 )%
Total gross profit
  $ 30,824       22.5 %   $ 38,083       24.3 %   $ (7,259 )     (19.1 )%
 
Gross profit decreased $7.3 million, or 19.1%, to $30.8 million for the nine months ended September 30, 2010 from $38.1 million during the same period of 2009. Gross margin decreased to 22.5% for nine months ended September 30, 2010 from 24.3% for the same period of 2009. The decrease in gross profit and gross margin was primarily due to the loss of higher margin government business.

 
30

 

IT Outsourcing Services
 
Gross profit from IT Outsourcing Services increased 1.2% to $17.3 million for the nine months ended September 30, 2010, from $17.1 million in 2009, and gross margin increased to 22.8% from 21.9%. The increase in gross profit and gross margin was primarily due to improved operational efficiencies and from the successful execution of restructuring action announced and completed in the first quarter of 2010.
 
IT Consulting and Systems Integration
 
Gross profit from IT Consulting and Systems Integration decreased 18.9% to $1.7 million for the nine months ended September 30, 2010 from $2.1 million in 2009, and gross margin decreased to 19.8% from 22.3% 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 40.1% to $10.0 million for the nine months ended September 30, 2010 from $16.7 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 nine months ended September 30, 2010 to 22.4% from 27.6% in 2009. The gross margin decrease was also primarily due to the loss of higher margin government business. On October 5, 2010, the Company completed the sale of its TechTeam Government Solutions subsidiary. Please refer to Note 15 and our discussion of the U.S. Federal Government in the “Significant Customers” section of MD&A.
 
Geographic Market Discussion
 
   
Nine Months Ended
 September 30,
   
Increase
   
%
 
   
2010
   
2009
   
(Decrease)
   
Change
 
   
(In thousands, except percentages)
       
R