TechTeam Global Q4 2009 Earnings Call Transcript

123jump.com Staff
19 Apr, 2010
New York City

Revenues fell 22% to $48.5 million and net loss of $22.4 million or $2.11 a share. Gross margin was 23% in the fourth quarter of 2009, compared to 24.6% in fourth quarter of 2008. For the full-year 2009, gross margin increased 5.7 percentage points to 23.9% from 23.2% in 2008.

TechTeam Global Inc. ((TEAM))
Q4 2009 Earnings Call Transcript
March 31, 2010 8:00 a.m. ET

Executives

Molly MacAlary - FD
Gary J. Cotshott - Chairman, President and Chief Executive Officer
Margaret M. Loebl - Chief Financial Officer, Corporate Vice President and Treasurer

Analysts

Presentation

Operator

Good morning, ladies and gentlemen. And welcome to the Fourth Quarter 2009 TechTeam Global Earnings Conference Call. My name is [Fauna], and I''ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the call over to Ms. Molly MacAlary of FD. You may now proceed.

Molly MacAlary

Thank you, and good morning, everyone. Thank you for joining us today for TechTeam Global''s fourth quarter 2009 earnings conference call. A copy of the complete press release issued on Monday, March 29, 2010, is available on our company''s website, techteam.com, in the investor section.

On the call today are Gary Cotshott, President and Chief Executive Officer; and Margo Loebl, Vice President, Chief Financial Officer and Treasurer.

Once again, I''d like to remind our listeners that certain matters that we may be discussing today, including, but not limited to, the discussions of the company''s business strategy, business development, and future performance, as well as statements of expectation and belief consist of forward-looking statements. Actual results may vary materially from these statements.

These forward-looking statements are affected by many factors, including, but not limited to, the factors set forth in our press release issued on Monday, as well as other risk factors disclosed in the company''s reports filed with the U.S. Securities and Exchange Commission, including our Form 10-K for 2009. We recommend that you review these risk factors as you make your investment decision.

Now, I would like to turn the call over to Gary Cotshott. Gary?

Gary J. Cotshott

Thank you, Molly. Good morning. And thank you very much for joining us to discuss TectTeam’s fourth quarter 2009 results. Considering the extensive nature of our announcement earlier this week and related 10-K filing, I will break my brief opening comments into three specific areas, with Margo then providing more detail and the comments to follow.

First, I’ll speak to our operating environment in late 2009 and early 2010. Second, I’ll cover some summary results for Q4 2009, including actions taken to management through a tough operating environment. And finally, our comment on our balance sheet for quarter and year ending December 31, 2009.

First, I’ll start with our operating environments in Q4 and the full-year. Business conditions in the fourth quarter continue to be affected by a challenging global economic environment. However, environment showed some signs of stabilizing by the very end of the quarter and continues to do so in the first quarter of 2010.

These conditions impacted our near-term results and caused us to adjust our business and cost structure accordingly in Q4, with difficult phase of restructuring actions being finalized at the end of the first quarter of 2010 as we announced on Monday of this week. Margo will provide more detail on our restructuring efforts as part of the financial commentary.

Today’s operating environment is a multifaceted mix of challenge and opportunity. The challenges we faced in 2009, included volume erosion, price pressure, wind-down of certain contracts in the second half of the year, and particular in Q4.

Examples, we have large contract wind-down with Volvo Car Company in preparation for its recent announced divestiture from Ford. Another example, with the contract wind-down, our services provided by our government unit to the U.S. Air National Guard as a result of their decision to in-source all of the services that we had historically provided to them. This was our government businesses largest contract in the most gross profit dollars.

Coming out of 2009, we are already seeing signs in 2010 that our customer base has seem to stabilize after a period of economic crisis. However, the volumes that continued to remain lower than in prior periods. This doesn’t mean there is less competition and price pressure that does mean that we see reduced risk of customers choosing to exist credit contracts like we experienced in late 2008 and 2009.

On the other side of the equation, the opportunity side, we lost various new customers in the fourth quarter, including global service desk implementation and related support for [Hanes], our national store level support contract with Dunkin'' Brands and a significant expansion of our relationship with Princess Tiana.

In addition, we expended our presence in Australia with (inaudible) one of our largest global customers by transitioning their business away from a major competitor. However, in the quarter these new business launches were insufficient to overcome the revenue erosion from the contract wind-downs.

Unfortunately the contract wind-down, our government business, and the impact of the Swedish economy on our SQM staffing business cause both units to be subject to fair market value accounting treatment thus requiring a non-cash impairment charge totaling $27.5 million in the quarter. Margo will be providing more details in this area later in the commentary.

Given a pressure on topline revenues, we focused aggressively on operational efficiency and tight cost management. This allowed us to sustain the companies operating profitability of net income of $542,000, or $0.05 per diluted share, not considering the special charges taken in the quarter.

We also focused aggressively on our balance sheet, in one of the toughest business environments in recent history, we drove the improvements in cash flow to run price. Cash flow improved from $8.8 million in 2008 to $20.2 million in 2009, this allowed us to pay down 50% to 70% of our outstanding debt in 2009, and brought us to a positive net cash position. As a result, our balance sheet is stronger than it has been in the last three years.

And now, I’d like to turn the call over to our Chief Financial Officer, Margo Loebl, who’ll provide additional commentary and the details of our financial performance with a special focus on our restructuring and impairment charges. Margo?

Margaret M. Loebl

Thank you, Gary. As I begin my commentary, I would like to remind you that during the first quarter 2009, the company reclassified certain expenses between constant revenue and, sell and general accounting expense. We allow the company to track and compare operating results more readily. The 2008 comparable numbers we discuss today are fully re-categorized.

Revenue was $48.5 million in the fourth quarter, the decrease of $13.5 million, or 21.7% from $61.9 million in the fourth quarter of 2008. The decrease was primarily driven by the impact of the difficult business environment across our base -- of customers -- due to wind-down of certain previously announced customer contracts during the second half of 2009, including the U.S. Federal Government in-sourcing of certain services previously provided to U.S. Air National Guard or ANG as we call it, and the discontinuation of services for Volvo Car Company, as a result of Ford Motor Company’s divestiture of Volvo.

Revenue for the full-year 2009 was $211.2 million, a decrease of $48.7 million, or 18.7% from $260 million in 2008. Revenue decreased across all segments and it’s driven primarily by approximately $7.6 million negative impact of exchange rate on revenue, $7.2 million lower revenues from the divestiture ANE at the end of October 2008. Remaining $43.9 million decline relates primarily to the impact of the economic crisis across our basic customers, as well as, the previously announced foreclosure of certain customer contracts.

TectTeam reported a net loss of $22.4 million, or $2.11 per diluted share for the three months ended December 31, 2009, compared to net income of $1.2 million, or $0.11 per diluted share for the three months ended December 31, 2008.

Notably, these fourth quarter 2009 result including non-cash charge of $27.5 million related to the impairment of certain goodwill and intangible, and a cash charge of $1.2 million relating to restructuring actions in Europe. Really we’ll provide some details on $27.5 million pre-tax non-cash impairment charge, which is clearly no significant items reported in TechTeam’s fourth quarter 2009 financial results.

As that goes, we performed our annual total impairment test as of October 1, 2009, the company encountered ever changes in the business climate improving a weak U.S. and global economy, which resulted in a reduction in demand for services in the conclusion of key contracts with our customers.

In the case of government solutions there are also two key contracts with the Department of Defense due to significant reduction in valuation. Earlier this year we loss the rebid of a significant contract with the Department of Defense business transformation agency, which we did not replace with new business in the 2009 fiscal year, and as Gary previously noted, our U.S. National Guard or ANG contracts was without notice or competition wind-down and into by ANG.

With respect to SQM, our staffing business, which was acquired by TechTeam in 2007, the direct economic conditions in Sweden in 2009 cause that business to shrink considerably with few signs of immediate recovery. And the both of these factors, management revised it future cash flow expectations for the fourth quarter of 2009 was lower the fair value estimates of certain reporting units.

The company is determine under the second step of it and impairment test with the applied fair value of goodwill, and it’s government solutions in SQM reporting unit was less than the carrying value of these reported units.

The company reported a $20.8 million and $4.4 million impairment charge in the fourth quarter of 2009 to reflect the applied fair value of goodwill for government solutions in SQM reporting units, respectively.

In addition, the company also reviewed its other intangible assets, primarily customer relationships, the company estimated the fair value of its customer relationships using a discounting cash flow analysis and compared those values to the carrying value of the asset. The company concluded based on the comparison that these intangible assets were impaired and its government solutions in SQM reporting units.

The company reported a $0.5 million and $1.8 million pre-tax impairment charge in the fourth quarter of 2009 to reflect the fair value of those intangible assets for government solutions in SQM reporting unit, respectively.

Again, the pre-tax non-cash impairment charges totaled $27.5 million in the fourth quarter of 2009. The company realized the tax benefits of $5.6 million related to this charge.

With respect to the $1.2 million restructuring charge in Europe, the company implemented a restructuring plan to improve global management consistency. The company globalized its sales and solutions design functions, plus all geographies as part of the continuing transformation of the company. This action allowed us to essentially eliminate our rebuild business units, seriously address the needs of our global customers or driving standardized global best practices in each functional area at the same time, it reduce costs.

In conclusion, the 2009 pre-tax restructuring charge related to this action was $1.2 million it was primarily for separation cost for one employee.

Excluding these impairment charges and impact of the restructuring actions in both periods, net income would have been $542,000, or $0.05 per diluted share for the quarter, compared to net income of $2.9 million, or $0.27 per diluted share for same three months ended December 31, 2008.

Gross margin was 23% in the fourth quarter of 2009, compared to 24.6% in fourth quarter of 2008, due to the wind-down of higher margin contract during the period. For the full-year 2009, gross margin increased 5.7 percentage points to 23.9% from 23.2% in 2008. This was driven by new customer contracts in America, elimination of lower margin projects, successful execution of restructuring announced including 2008 and enhanced operational efficiencies.

SG&A expense was $10.4 million for the quarter -- fourth quarter 2009, a 10% decrease in dollar terms from $11.6 million in SG&A for the fourth quarter 2008. As a percent of revenue, SG&A costs increased to 21.5% on a year-over-year basis. We decided to continue our investment in sales and marketing to increase our backlog as new business.

On a reported basis, the consolidated effective tax rate for full-year was 14.9%, excluding the reversal of the restructuring charges of the both years, the company’s tax rate was 39.3%, both of this rate was effected by falling operating losses for which a tax benefit is not reported and non-deductible expenses, and State income taxes.

Turning to the balance sheet, total current assets were $64 million at the end of the fourth quarter of 2009, a decrease from $80.9 million at the end of 2008. The decrease includes a $15.4 million decrease in account receivable principally driven by reduction in overall sales and improved collection.

Moving to the statement of cash flow, net cash flow earned by operation for the 12 months ended December 31, 2009, increased $11.4 million, or 130% to $20.2 million, compared to cash provided by operation of $8.8 million for same period of 2008.

Net cash used in investing activities were [$12.8] million and $7.6 million for the 12 months ended December 31, 2008 and 2008, respectively. Net cash used in investing activity, which I’ll remind was primarily to purchase of equipment and software. Capital expenditures were $1.3 million and $2.5 million for the 12 months ended December 31, 2008 and -- 2009 and 2008, respectively.

Net cash used in financing activities for the 12 months ended December 31, 2009, was $20.2 million and $1.6 million in 2008, which allows decrease due to the repayment of debt. We are continue to manage our capital considerably as to reduce our total debt outstanding by $4 million in the fourth quarter 2009, for the full-year of 2009, (inaudible) approximately 50% -- 57% of the debt or $20.1 million and which is a positive net cash position, which is defined a total cash minus total bank debt by the end of the year.

Free cash flow was a very solid $18.9 million, or margin of 9% for the 12 months ended December 31, 2009, compared to free cash flow of 6.3% -- $6.3 million, or margin of 2.4% for the same period in 2008. Finally, a subsequent events were disclosed one, remain of our current credit facility as well as, our fourth quarter 2010 restructure.

With respect to the credit facility as of December 31, 2009, the company was no longer in compliance with the financial covenant in the secured credit agreement with JP Morgan Chase Bank, as a result of the impairment charges. According the company renegotiated the terms of the current credit agreement with the bank. Specifically, we reduced the existing $55 million facility to $28 million. The covenants of the agreement were also modified to ensure compliance at year-end 2009 in the first and second quarter 2010 despite the impairment charge at year-end 2009 and the Q1 2010 restructuring we just announced. The cost of the facility was modestly increased in conjunction with the third minute to the existing facility.

Considering to the Q1 2010 restructuring charge, we expect to record it estimated pre-tax restructuring of between $2.7 million and $3.4 million in the first quarter. This charge reflects our ongoing global consolidation, but this were related to the elimination of certain redundant positions and the vacating of excess capacity, including the reduction of some excess capacity Dresden, Germany, and Gothenburg, Sweden, but we adjust with fully assets currently running at approximately 85% to 95% utilization rate. We anticipate these restructuring actions will be completed by the end of the month.

Now, I’ll turn the call back to Gary.

Gary J. Cotshott

Thanks Margo. Coming out of a very tough business environment in 2009 the company adapted its business well, the customers were heavily impacted by the global economy, or choose to in-source services that we previously have provided to them.

We continue to be in the market and ramped up new business with several large customers in Q4. For 2010, we remain cautiously optimistic about this ability, we have seen our customer base and new account opportunities were facility in the market as the economic recovery continues.

There continues to be a great deal of pressure on IT budgets, that has carried over into 2010, we’ll see continued price pressure on existing business, while on the other hand this also caused our customers, current ones or potential new ones to continue to aggressively seek high quality outsourcing alternatives to reduce their cost, become more efficient and solve their budget problems.

This offers us opportunities to both continue to get expansion in new account growth. We expect that to robust this type of opportunity in the market will continue throughout reminder of this year and provide a solid basis to resume revenue growth overtime.

Our primary operating focus is on continuing to increase our visibility in the market, expanding our global footprint, global capabilities to increase the value we bring to customers and scaling our cost structure as we add new business to our portfolio.

We will continue to invest cautiously in our future to sustain our leadership in the industry, maintain a contemporary IT infrastructure, enhance our ability to capture the demand of flows from our leadership position and continue our reputation as a top quality customer centric service delivery organization. Our goal is now meant to find ourselves stronger and more competitive but even better equipped for the future.

Market trends continue to point to globalization and multi-sourcing of place to outsourcing which favors our focused approach to market. So we are well position in large and growing markets. We go to market with a differentiated set of offerings, including our unique set of multi-lingual capabilities, a truly global infrastructure and a consisted high quality level support across the globe.

We have proven and varied principal track record of successfully serving large multinational clients. We have a reputation for big agile and responsive while driving continues improvement in every customer engagement. We have deep client relationships, just in combination with our consistency of delivering value need that our clients come to us when they are making strategic decisions around reducing costs and standardizing their global operations. This allows us to comfortably grow our real share among existing customers in significant ways.

And we are committed to grow globally in supporting our clients when they do business. In addition, to our recent expansion in Asia, we anticipate starting up operations in Latin America in the second quarter, opening up a subsidiary in Brazil, hiring local leadership, supporting major multinational clients and partnering with a world recognized service delivery partners with operations throughout Latin America. Taking together industry analysts and customers are recognizing TechTeam leadership and capabilities as a top tier IT outsourcing service provider more than ever before.

In the meantime, we believe our restructuring actions are creating a linear appliance that is well position in this environment and applies with a leveragable P&L for outperformance in environment of improving economic conditions.

In addition, these actions are consistent with our strategy to consolidate, globalize and no other focus of our business and in doing so create shareholder value, despite the near-term challenges we remain very positive on our prospect of the future and excited about the opportunities it presents.

As usually we will not be providing any quarterly or full year guidance, we’ll continue execution in improving global economic recovery, I can bet this company as a strategy, agility, and co-capability necessary to achieve long-term success, delivering strong value for our customer, real opportunities for our employees and improve returns for our shareholders.

Now, let me turn the call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. If any participants would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Your questions will be pulled in the order they are received, there will be a short pause for participants register for a question. As a reminder, if you would like to ask question, please press the star followed by the one on your telephone, to cancel this please press the star followed by the two. As a final reminder, if you would like to ask a question, please press the star followed by the one on your telephone.

Thank you. I’d now like to hand back to management for any closing remarks.

Gary J. Cotshott

Okay. Thank you very much once again for joining us on the call, covering our Q4 2009 earnings. We will look forward to speaking with you again as we close Q1 of 2010 and report those results to you. Thank you very much.

Operator

Thank you. This thus concludes a conference call for today. Thank you for participation. You may now disconnect.