Overview
We are a global provider of information technology ("IT"), enterprise support and business process outsourcing services to Fortune 1000 companies, government entities, multinational companies, product and service providers, and small and medium-sized companies. Our business consists of two main components - our Commercial business and our Government business. Together, our IT Outsourcing Services segment, IT Consulting and Systems Integration segment and Other Services segment comprise our Commercial business. Our Government Technology Services segment comprises our Government business. In addition to managing our business by service line, we also manage our business by geographic markets - the Americas (defined as North America excluding our government-based subsidiaries), Europe and Government Solutions (defined as our government-based subsidiaries). Together, the Americas and Europe comprise our Commercial business.
The global economic crisis of 2009 presents unprecedented uncertainties to TechTeam and its customers. We are affected by the general tightening in the credit markets, and lower consumer and business spending. The economic crisis has affected the financial health of many of our customers. At the same time, we are unable to fully anticipate the duration and scope of the downturn and, as such, we cannot provide our shareholders with good visibility of the effects of this crisis on the business. Most significantly, the economic downturn is having serious effects in at least two of our major industry verticals, the automotive and retail industries.
However, the actions we have taken in 2008 have better positioned TechTeam to weather the downturn. In February 2008, Gary J. Cotshott joined the company in the role of president and chief executive officer. Mr. Cotshott led a thorough evaluation of all aspects of our business, which resulted in streamlining our global organization, developing a solid strategy for our future and recruiting a leadership team that supplements the pre-existing leaders with new executive-level talent that has deep experience and functional expertise. In addition to these efforts, the Company improved its financial flexibility by executing two restructuring plans, which resulted in a restructuring charge in 2008 totaling $5.7 million, pre-tax. In addition to the organizational change and restructuring plan completed in the second quarter 2008, which removed legacy costs and inefficiency from our business, the Company completed a second restructuring plan in the fourth quarter due in part to the impact of the economic downturn on our customers and to better position the Company to manage through this difficult economic period. The second restructuring totaled $1.8 million on a pre-tax basis, and related primarily to exiting excess lease capacity and restructuring headcount in Europe, largely related to the worsening economic conditions in that region.
We also took steps to implement our business strategy. In the second quarter 2008, TechTeam expanded its low cost delivery models through its acquisition of Onvaio, LLC, which provided TechTeam with cost-effective delivery operations from the Philippines. In order to narrow our focus on our core service offerings and target customers, we divested TechTeam A.N.E. NV/SA which included certain lower margin IT consulting and systems integration capabilities focused on small business customers in Belgium. We have also implemented a capital management program to better evaluate and manage difficult customer accounts, collect outstanding accounts receivable, and manage our bank debt.
As a result of the contraction of the economy and a loss of a contract worth approximately $8 million per year, we are experiencing a decline in revenue. Given the economic conditions, there is the potential of continued revenue erosion within our current customer base. We have also been informed that we have or will be losing additional contracts over 2009 with an anticipated effect of less than 4% of 2008 revenue. At the same time, current market conditions present an opportunity to the Company to offset the effects of erosion through new business. Our pipeline of new opportunities continues to be robust, although is subject to extended sales and implementation lead-times due to the nature of economic conditions.

Excluding restructuring charges, we continued to deliver solid results. Total revenue reached $260 million in 2008, up 17.0% over last year, despite a difficult market environment and declining existing customer volumes later in the year. The growth was realized through a combination of acquisitions and organic growth. Gross profit was $66.3 million in 2008, up 16.6% versus 2007 while gross margins were relatively flat year over year. Revenue for the Commercial business reached $171 million in 2008, up 12.0% over last year. The IT Outsourcing business was the largest driver of growth in the Commercial business due primarily to growth in existing accounts, including expansion of our Americas customers to receive service in Europe, as well as new customer business. Gross profit was $41.9 million for the Commercial business in 2008, up 10.6% versus last year, while gross margin was down slightly. Revenue for the Government business increased by $19 million, or 28.0% to $89 million. Gross profit for the Government business improved by over $5 million in 2008, or 28.7% over 2007.
Results of Operations
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Revenue

                                                     Year Ended December 31,                 Increase             %
                                                  2008                   2007               (Decrease)         Change
                                                                    (In thousands)

Revenue
Commercial Business
IT Outsourcing Services                       $    120,166         $        104,659        $     15,507           14.8 %
IT Consulting and Systems Integration               27,064                   28,064              (1,000 )         (3.6 )%
Other Services                                      24,110                   20,219               3,891           19.2 %

Total Commercial                                   171,340                  152,942              18,398           12.0 %
Government Technology Services                      88,615                   69,254              19,361           28.0 %

Total revenue                                 $    259,955         $        222,196        $     37,759           17.0 %

Total Company revenue increased 17.0% to $260.0 million for 2008, through a combination of acquisitions completed in 2008 and 2007 along with organic growth across most product lines. Excluding revenue from acquisitions that affect year-over-year comparability, revenue increased 9.1% to $242.5 million for 2008. Revenue in 2008 was also positively impacted by fluctuations in the international currencies in which we do business. If revenue generated in Europe were translated into U.S. dollars at the average exchange rates in effect for 2007, reported revenue would have decreased by approximately $4.3 million for 2008. We are unable to predict the effect fluctuations in international currencies will have on revenue in 2009, 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 14.8%, or $15.5 million, to $120.2 million for 2008, from $104.7 million for 2007, primarily as a result of $14.2 million of revenue growth in Europe. Our solid revenue growth reflects our success at being able to grow existing accounts in our Commercial business by expanding the scope of our services and the geographies in which we deliver services. The majority of revenue growth occurred in existing accounts, including existing clients of the Americas to whom we have expanded our service delivery to include parts of Europe. Revenue also increased $1.3 million in the Americas due to new customer contracts in the later part of 2008. Revenue growth occurred in 2008 despite a reduction in revenue from two projects, comprising about 4% of IT Outsourcing Services revenue for 2007, that concluded. The related contracts were not renewed at the end of March 2008.
IT Outsourcing Services revenue generated from Ford globally decreased to $35.0 million for 2008 compared to $36.6 million for 2007. Revenue from Ford declined 19.1% in the Americas as a result of a decline in seats supported from a reduction in Ford's workforce, while revenue in Europe increased from expansion of the SPOC Program resulting in aggregate growth in Europe of 16.6%. Please refer to our discussion of Ford in the "Impact of Business with Major Clients" section of MD&A.

IT Outsourcing revenue in 2008 was positively impacted by fluctuations in the international currencies in which we do business. If IT Outsourcing revenue in Europe was translated into U.S. dollars at the average exchange rates in effect for 2007, reported revenue would have decreased by approximately $2.9 million for 2008. Since most of our international operating expenses are also incurred in the same foreign currencies in which the associated revenue is denominated, the net impact of exchange rate fluctuations on gross profit is considerably less than the estimated impact on revenue. IT Consulting and Systems Integration
Revenue from IT Consulting and Systems Integration decreased 3.6% to $27.1 million for 2008, from $28.1 million for 2007, due primarily to a decrease in Europe from the divestiture of ANE and a decrease in project based work due to a difficult economy and de-scoping or elimination of projects in Europe partially offset by an increase in revenue growth in the Americas. Revenue in the Americas increased from growth in the Company's hospitality business and organic growth through existing customers in our IT Outsourcing Services segment. The increase in the Americas was partially offset by a decrease in business with Dell, which resulted from a reduction in Ford's workforce and also from the tendency of this business to fluctuate from period to period. Government Technology Services
Revenue from Government Technology Services increased 28.0% to $88.6 million for 2008, from $69.3 million for 2007, primarily due to our acquisitions of NewVectors and RL Phillips in 2007. Excluding revenue from these acquisitions, revenue increased 5.9% to $73.4 million for 2008 due to growth in existing customer programs and, to a lesser extent, new customer contracts. Please refer to our discussion of the U.S. Federal Government in the "Impact of Business with Major Clients" section of MD&A.
Gross Profit and Gross Margin

                                             Year Ended December 31,
                                      2008                              2007
                                             Gross                             Gross            Increase             %
                            Amount          Margin %          Amount          Margin %         (Decrease)         Change
                                                         (In thousands, except percentages)

Gross Profit
Commercial
IT Outsourcing
Services                   $ 30,008              25.0 %      $ 26,888              25.7 %      $     3,120           11.6 %
IT Consulting and
Systems Integration           6,427              23.7 %         6,187              22.0 %              240            3.9 %
Other Services                5,427              22.5 %         4,789              23.7 %              638           13.3 %

Total Commercial             41,862              24.4 %        37,864              24.8 %            3,998           10.6 %
Government Technology
Services                     24,428              27.6 %        18,978              27.4 %            5,450           28.7 %

Total gross profit         $ 66,290              25.5 %      $ 56,842              25.6 %      $     9,448           16.6 %

Consistent with revenue, the increase in gross profit is attributable to a combination of acquisitions completed in 2008 and 2007 and organic growth from IT Outsourcing Services, Government Technology Services and Other Services. Excluding gross profit contributed by acquisitions that affect year-over-year comparability, total gross profit increased 7.6% to $61.1 million and gross margin decreased to 25.2% for 2008 from 25.6% for the same period in 2007.

IT Outsourcing Services
Gross profit from IT Outsourcing Services increased 11.6% to $30.0 million for 2008, from $26.9 million in 2007, and gross margin decreased to 25.0% from 25.7%. In the Americas, gross margin improved primarily due to margin improvements on certain existing accounts, the acquisition of Onvaio and new customer contracts in the later part of 2008. This improvement in the Americas was partially offset by a decrease in gross margin from the revenue decrease with Ford due to a reduction in their workforce. In Europe, gross margin decreased as a result of several factors, including the cost of expanding our service delivery capabilities in Europe and increased labor and benefit-related costs. During the past year, the Company has expanded its service delivery capability in Europe with the establishment of new locations in Dresden, Germany; Sibiu, Romania; and Stockholm, Sweden. These facilities have some excess capacity that negatively impacted gross margin in 2008. IT Consulting and Systems Integration
Gross profit from IT Consulting and Systems Integration increased 3.9% to $6.4 million for 2008 from $6.2 million in 2007, and gross margin increased to 23.7% from 22.0% in 2007. Gross margin increased in the Americas from new project-based work in the Company's hospitality business, partially offset by a decline in gross margin in business with Dell. In Europe, gross margin declined primarily due to challenges from the competitive environment in our application development business in Romania and from less project-based IT Consulting work over the rest of Europe due to economic pressures across Europe. Government Technology Services
Gross profit from our Government Technology Services segment increased 28.7% to $24.4 million for 2008, from $19.0 million in 2007, and gross margin increased slightly to 27.6% from 27.4%. The increase in gross profit was primarily due to our acquisition of NewVectors in 2007. Excluding gross profit contributed by acquisitions that affect year-over-year comparability, gross profit increased 6.7% to $20.2 million and gross margin increased to 27.6% for 2008. The increase in gross margin was due to various factors, most notably an increased requirement for the Company to use subcontracted resources on several programs. Please refer to our discussion of the U.S. Federal Government in the "Impact of Business with Major Clients" section of MD&A. Geographic Market Discussion

                               Year Ended December 31,             Increase          %
                             2008                 2007            (Decrease)      Change
                                             (In thousands)

    Revenue
    Commercial
    Americas             $     72,375       $         68,022     $      4,353         6.4 %
    Europe                     98,965                 84,920           14,045        16.5 %

    Total Commercial          171,340                152,942           18,398        12.0 %
    Government                 88,615                 69,254           19,361        28.0 %

    Total revenue        $    259,955       $        222,196     $     37,759        17.0 %


    Gross Margin
    Commercial
    Americas                     26.2 %                 23.0 %
    Europe                       23.2 %                 26.1 %

    Total Commercial             24.4 %                 24.8 %
    Government                   27.6 %                 27.4 %

    Total Gross Margin           25.5 %                 25.6 %

Americas
Revenue generated in the Americas increased 6.4% to $72.4 million for 2008, from $68.0 million in 2007 across all services lines, due primarily to new customers and projects. Revenue from IT Outsourcing Services experienced a significant increase in growth from new customers and growth in existing customers that was partially offset by a decline in revenue earned from Ford. Revenue in IT Consulting and Systems Integration increased due to new project-based work in the Company's hospitality business. The Other Services segment also experienced an increase in revenue from an increase in technical staffing growth. Gross margin from the Americas increased to 26.2% for 2008, from 23.0% in 2007, as a result of gross margin improvement across all service lines. Europe
Revenue generated in Europe increased 16.5% to $99.0 million for 2008, from $84.9 million in 2007, due to solid revenue growth in the IT Outsourcing Services and Other Services segments, the acquisition of SQM and the weakening of the U.S. dollar against the currencies in which the Company does business. If revenue in Europe were translated into U.S. dollars at the average exchange rates in effect for 2007, reported revenue would have decreased by approximately $4.3 million for 2008. Gross margin from Europe decreased to 23.2% for 2008, from 26.1% in 2007, primarily due to expanding IT Outsourcing Services delivery capabilities with the establishment of new locations in Dresden, Germany; Sibiu, Romania; and Stockholm, Sweden. These facilities have some excess capacity that negatively impacted gross margin in 2008.

Operating Expenses and Other

                                                        Year Ended December 31,                 Increase             %
                                                      2008                  2007               (Decrease)          Change
                                                                       (In thousands)

Operating Expenses and Other
Selling, general and administrative expense       $    52,774          $      46,547          $    6,227            13.4 %
Restructuring charges                             $     5,719          $           -          $    5,719              NM %
Net interest expense                              $    (1,712 )        $        (572 )        $   (1,140 )            NM %
Foreign currency transaction gain (loss)          $       910          $         (84 )        $      994              NM %
Other income, net                                 $       155          $           -          $      155              NM %
Income tax provision                              $     4,182          $       3,343          $      839            25.1 %

Selling, general, and administrative ("SG&A") expense decreased to 20.3% of total revenue for 2008, from 20.9% of total revenue in 2007. As the Company's revenue has grown, we have achieved greater leverage in our SG&A spending, yet we have incurred greater expenses related to expansion of service delivery locations in Europe, amortization expense in connection with acquisitions, marketing expenses and travel expenses. SG&A expense also increased due to the weakening of the U.S. dollar against the currencies in the foreign jurisdictions in which we operate.
In connection with the decision between the Board of Directors and the Company's former President and Chief Executive Officer, William C. Brown, not to renew Mr. Brown's contract upon its completion in February 2009, Mr. Brown's Employment and Noncompetition Agreement was amended. Under the terms of the amendment, (1) all outstanding, unvested stock-based awards were accelerated and became fully vested in February 2008, (2) Mr. Brown will have until February 15, 2010 to exercise outstanding stock options and (3) Mr. Brown will be paid a bonus for fiscal 2008 of not less than $75,000. The modification of the stock-based awards to accelerate vesting and extend the period in which stock options may be exercised resulted in additional compensation expense of $254,000 for 2008.

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 December 23, 2008 and May 21, 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. We do not anticipate recording any further expense in future periods related to these realignment and restructuring plans.
Net interest expense was $1.7 million for 2008, compared to $572,000 for 2007, as a result of interest expense on long-term debt issued in connection with acquisitions and lower interest income from lower average invested cash equivalents.
For 2008, the consolidated effective tax rate of 58.5% differs from the statutory corporate tax rate of 34.0% in the United States primarily due to foreign operating losses for which a tax benefit is not recorded and other nondeductible expenses. The level of foreign operating losses was increased during 2008 because a significant portion of the Company's restructuring charge was incurred in countries with historical operating losses. Further, the Company recorded State of Michigan income tax expense of $241,000 for 2008. Prior to 2008, the State of Michigan had a value-added tax called the Single Business Tax that was not considered an income tax and was, therefore, included in SG&A expense. Single Business Tax included in SG&A expense totaled $423,500 for 2007. For 2007, the consolidated effective tax rate of 34.7% differs from the statutory corporate tax rate of 34.0% in the United States primarily due to state income taxes and nondeductible expenses, which were partially offset by the tax benefit of tax rates in certain foreign countries that are lower than 34%.
Results of Operations
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Revenue

                                                     Year Ended December 31,                 Increase             %
                                                  2007                   2006               (Decrease)         Change
                                                                    (In thousands)

Revenue
Commercial Business
IT Outsourcing Services                       $    104,659         $         86,461        $     18,198           21.0 %
IT Consulting and Systems Integration               28,064                   24,013               4,051           16.9 %
Other Services                                      20,219                    9,497              10,722            113 %

Total Commercial                                   152,942                  119,971              32,971           27.5 %
Government Technology Services                      69,254                   47,393              21,861           46.1 %

Total revenue                                 $    222,196         $        167,364        $     54,832           32.8 %

Total Company revenue increased 32.8% to $222.2 million through a combination of acquisitions and organic growth from both new and existing customers across all service lines. Excluding revenue contributed by three acquisitions completed in 2007, total Company revenue increased 13.5% to $189.9 million. This organic growth in revenue was over 17% in the Commercial business and about 4% in the Government business. Revenue from the Commercial business in 2007 was also favorably impacted by approximately $6.2 million from the weakening of the U.S. dollar over 2006 relative to the international currencies in which we conduct business.

IT Outsourcing Services
Revenue from IT Outsourcing Services increased 21.0% to $104.7 million in 2007, from $86.5 million in 2006, as a result of revenue growth of 11.7% in the Americas and 30.0% in Europe. Our revenue growth reflects our continuing success at being able to grow existing accounts in our Commercial business by expanding the scope of our services and the geographies in which we deliver services. Revenue growth in the Americas also reflects greater activity on certain accounts that were ramping up in 2006 and a new Fortune 500 account added in the fourth quarter of 2007. Revenue growth in Europe also resulted from a combination of new account growth, our acquisition of SQM and the weakening of the U.S. dollar over 2006 relative to the international currencies in which we conduct business. If IT Outsourcing Services revenue in Europe were translated into U.S. dollars at the average exchange rate in 2006, reported revenue would have decreased approximately $4.4 million in 2007. Since most of our international operating expenses are also incurred in the same foreign currencies in which the associated revenue is denominated, the net impact of exchange rate fluctuations on gross profit is considerably less that the estimated impact on revenue and it is not significant.
Ford is the Company's largest Commercial customer. IT Outsourcing Services revenue generated from Ford globally decreased 0.8% to $36.6 million in 2007, from $36.9 million in 2006. Revenue from Ford declined over 9% in the Americas while revenue in Europe increased in each country in which we deliver services to Ford resulting in aggregate growth in Europe of over 14%. Please refer to our discussion of Ford in the "Impact of Business with Major Clients" section of MD&A.
IT Consulting and Systems Integration
Revenue from IT Consulting and Systems Integration increased 16.9% to $28.1 million in 2007, from $24.0 million in 2006. We experienced an increase in revenue in Europe of $5.8 million, or 59.5%, driven primarily by new and existing customer growth at TechTeam Akela and the acquisition of SQM. Excluding revenue from the acquisition of SQM, revenue in Europe increased 43.8% to $14.1 million, and revenue globally increased 10.4% to $26.5 million. The increase in revenue in Europe was partially offset by a decline in revenue in the Americas of 12.6% from the wind-down of certain systems implementation and training projects in our hospitality business. Government Technology Services
Revenue from Government Technology Services increased 46.1% to $69.3 million in 2007, from $47.4 million in 2006, primarily due to our acquisitions of NewVectors and RL Phillips. Excluding revenue from these acquisitions, revenue increased 3.8% to $49.2 million. As discussed in our quarterly filings on Form 10-Q, our Government business was adversely affected in 2007 by the difficult government contracting environment created by the "continuing resolution" funding the civilian agencies enacted by the U.S. Federal Government for fiscal 2007. Our Government business was also impacted by the uncertainty created in funding for our Department of Defense customers earlier in 2007 when the supplemental war funding bill was passed later than anticipated, as they contemplated the need to reallocate funds to support the war effort and delayed . . .