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CTG Computer Task

Filed: 2 Nov 20, 3:41pm

 

 

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 25, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from                 to                

Commission File No. 1-9410

 

COMPUTER TASK GROUP, INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

New York

 

16-0912632

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

800 Delaware Avenue, Buffalo, New York

 

14209

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (716) 882-8000

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class of Stock

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

CTG

 

The NASDAQ Stock Market, LLC

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      NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “an emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES      NO  

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

 

 

 

 

Shares outstanding at

Title of each class

 

October 28, 2020

Common stock, par value $.01 per share

 

15,187,955

 


 

SEC Form 10-Q Index

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share data)

(Unaudited)

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Revenue

$

88,648

 

 

$

97,204

 

 

$

264,743

 

 

$

294,850

 

Cost of services

 

69,101

 

 

 

78,462

 

 

 

209,412

 

 

 

240,056

 

Gross profit

 

19,547

 

 

 

18,742

 

 

 

55,331

 

 

 

54,794

 

Selling, general and administrative expenses

 

17,723

 

 

 

17,218

 

 

 

49,526

 

 

 

50,290

 

Operating income

 

1,824

 

 

 

1,524

 

 

 

5,805

 

 

 

4,504

 

Interest and other income

 

87

 

 

 

34

 

 

 

221

 

 

 

110

 

Gain on sale of building

 

 

 

 

 

 

 

824

 

 

 

 

Non-taxable life insurance gain

 

574

 

 

 

 

 

 

963

 

 

 

 

Interest and other expense

 

327

 

 

 

236

 

 

 

657

 

 

 

858

 

Income before income taxes

 

2,158

 

 

 

1,322

 

 

 

7,156

 

 

 

3,756

 

Provision (benefit) for income taxes

 

(673

)

 

 

443

 

 

 

1,422

 

 

 

1,302

 

Net income

$

2,831

 

 

$

879

 

 

$

5,734

 

 

$

2,454

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.21

 

 

$

0.07

 

 

$

0.42

 

 

$

0.18

 

Diluted

$

0.20

 

 

$

0.06

 

 

$

0.40

 

 

$

0.18

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

13,655

 

 

 

13,470

 

 

 

13,603

 

 

 

13,429

 

Diluted

 

14,401

 

 

 

14,045

 

 

 

14,334

 

 

 

13,916

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

1


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)

(Unaudited)

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Net Income

$

2,831

 

 

$

879

 

 

$

5,734

 

 

$

2,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of taxes

 

2,117

 

 

 

(1,540

)

 

 

2,061

 

 

 

(2,019

)

Change in pension, net of taxes of $2 and $0 in the 2020 and 2019 third quarters, respectively, and $1 and $0 in the first three quarters of 2020 and 2019, respectively

 

(135

)

 

 

258

 

 

 

(74

)

 

 

356

 

Other comprehensive income (loss)

 

1,982

 

 

 

(1,282

)

 

 

1,987

 

 

 

(1,663

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

4,813

 

 

$

(403

)

 

$

7,721

 

 

$

791

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

2


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share balances)

(Unaudited)

 

 

September 25,

 

 

December 31,

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

33,412

 

 

$

10,781

 

Accounts receivable, net of allowances of $529 and $84 in 2020 and 2019,

   respectively

 

74,907

 

 

 

88,772

 

Prepaid and other current assets

 

2,684

 

 

 

2,064

 

Income taxes receivable

 

580

 

 

 

231

 

Total current assets

 

111,583

 

 

 

101,848

 

Property, equipment and capitalized software, net

 

5,573

 

 

 

6,379

 

Operating lease right-of-use assets

 

20,616

 

 

 

21,253

 

Deferred income taxes

 

258

 

 

 

453

 

Acquired intangibles, net

 

9,001

 

 

 

8,439

 

Goodwill

 

20,200

 

 

 

16,681

 

Cash surrender value of life insurance, net

 

3,533

 

 

 

3,133

 

Other assets

 

711

 

 

 

328

 

Investments

 

193

 

 

 

192

 

Total assets

$

171,668

 

 

$

158,706

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

$

15,045

 

 

$

18,612

 

Accrued compensation

 

24,279

 

 

 

23,538

 

Advance billings on contracts

 

2,589

 

 

 

1,704

 

Short-term operating lease liabilities

 

6,030

 

 

 

5,904

 

Other current liabilities

 

7,696

 

 

 

7,096

 

Total current liabilities

 

55,639

 

 

 

56,854

 

Long-term debt

 

6,000

 

 

 

5,290

 

Deferred compensation benefits

 

12,773

 

 

 

12,346

 

Long-term operating lease liabilities

 

14,527

 

 

 

15,349

 

Deferred payroll taxes

 

4,321

 

 

 

 

Deferred income taxes

 

2,203

 

 

 

2,101

 

Other long-term liabilities

 

501

 

 

 

530

 

Total liabilities

 

95,964

 

 

 

92,470

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 150,000,000 shares authorized;

   27,017,824 shares issued in 2020 and 2019

 

270

 

 

 

270

 

Capital in excess of par value

 

108,867

 

 

 

112,096

 

Retained earnings

 

92,407

 

 

 

86,673

 

Less: Treasury stock of 11,836,143 and 12,311,010 shares at cost, in

   2020 and 2019, respectively

 

(109,285

)

 

 

(114,261

)

Accumulated other comprehensive loss

 

(16,555

)

 

 

(18,542

)

Total shareholders’ equity

 

75,704

 

 

 

66,236

 

Total liabilities and shareholders’ equity

$

171,668

 

 

$

158,706

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

 

 

For the Three Quarters Ended

 

 

September 25, 2020

 

 

September 27, 2019

 

Cash flow from operating activities:

 

 

 

 

 

 

 

Net income

$

5,734

 

 

$

2,454

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

2,576

 

 

 

2,422

 

Equity-based compensation expense

 

1,805

 

 

 

1,161

 

Deferred income taxes

 

(113

)

 

 

(300

)

Deferred compensation benefits

 

399

 

 

 

66

 

Gain on the sale of property and equipment

 

(829

)

 

 

 

Non-taxable life insurance gain

 

(963

)

 

 

 

Changes in assets and liabilities that provide (use) cash, excluding the effects of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

16,611

 

 

 

(2,904

)

Prepaid and other current assets

 

(557

)

 

 

(1,500

)

Other long-term assets

 

(383

)

 

 

(70

)

Cash surrender value of life insurance

 

779

 

 

 

708

 

Accounts payable

��

(3,901

)

 

 

(3,478

)

Accrued compensation

 

11

 

 

 

9,891

 

Income taxes payable / receivable

 

(671

)

 

 

794

 

Deferred payroll taxes

 

4,321

 

 

 

 

Advance billings on contracts

 

839

 

 

 

(1,763

)

Other current liabilities

 

(109

)

 

 

(2,644

)

Other long-term liabilities

 

(90

)

 

 

(608

)

Net cash provided by operating activities

 

25,459

 

 

 

4,229

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

(4,324

)

 

 

(8,457

)

Additions to property and equipment

 

(1,029

)

 

 

(838

)

Additions to capitalized software

 

(832

)

 

 

(408

)

Proceeds from sale of property & equipment

 

2,442

 

 

 

 

Premiums paid for life insurance

 

(616

)

 

 

(586

)

Proceeds from life insurance

 

400

 

 

 

 

Net cash used in investing activities

 

(3,959

)

 

 

(10,289

)

Cash flow from financing activities:

 

 

 

 

 

 

 

Proceeds from long-term debt

 

40,845

 

 

 

133,455

 

Payments on long-term debt

 

(40,135

)

 

 

(128,492

)

Proceeds from stock option plan exercises

 

 

 

 

91

 

Taxes remitted for shares withheld from equity-based compensation

   transactions

 

(160

)

 

 

(153

)

Proceeds from Employee Stock Purchase Plan

 

102

 

 

 

110

 

Change in cash overdraft, net

 

(370

)

 

 

(8

)

Net cash provided by financing activities

 

282

 

 

 

5,003

 

Effect of exchange rates on cash and cash equivalents

 

849

 

 

 

(681

)

Net increase (decrease) in cash and cash equivalents

 

22,631

 

 

 

(1,738

)

Cash and cash equivalents at beginning of year

 

10,781

 

 

 

12,431

 

Cash and cash equivalents at end of quarter

$

33,412

 

 

$

10,693

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Excess of

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (loss)

 

 

Equity

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of June 26, 2020

 

 

27,018

 

 

$

270

 

 

$

108,207

 

 

$

89,576

 

 

 

11,835

 

 

$

(109,320

)

 

$

(18,537

)

 

$

70,196

 

Employee Stock Purchase Plan share

   issuance

 

 

 

 

 

 

 

 

(39

)

 

 

 

 

 

(8

)

 

 

78

 

 

 

 

 

 

39

 

Restricted stock plan share

   issuance/forfeiture

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

9

 

 

 

(43

)

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

656

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,831

 

 

 

 

 

 

 

 

 

 

 

 

2,831

 

Foreign currency adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,117

 

 

 

2,117

 

Pension loss adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(135

)

 

 

(135

)

Balances as of September 25, 2020

 

 

27,018

 

 

$

270

 

 

$

108,867

 

 

$

92,407

 

 

 

11,836

 

 

$

(109,285

)

 

$

(16,555

)

 

$

75,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Excess of

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (loss)

 

 

Equity

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of June 28, 2019

 

 

27,018

 

 

$

270

 

 

$

113,684

 

 

$

84,123

 

 

 

12,565

 

 

$

(117,044

)

 

$

(14,992

)

 

$

66,041

 

Employee Stock Purchase Plan share

   issuance

 

 

 

 

 

 

 

 

(34

)

 

 

 

 

 

(7

)

 

 

66

 

 

 

 

 

 

32

 

Stock Option Plan share issuance, net

 

 

 

 

 

 

 

 

(468

)

 

 

 

 

 

(40

)

 

 

558

 

 

 

 

 

 

90

 

Restricted stock plan share

   issuance/forfeiture

 

 

 

 

 

 

 

 

(1,926

)

 

 

 

 

 

(200

)

 

 

1,926

 

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

468

 

Net income

 

 

 

 

 

 

 

 

 

 

 

879

 

 

 

 

 

 

 

 

 

 

 

 

879

 

Foreign currency adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,540

)

 

 

(1,540

)

Pension gain adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

258

 

 

 

258

 

Balances as of September 27, 2019

 

 

27,018

 

 

$

270

 

 

$

111,724

 

 

$

85,002

 

 

 

12,318

 

 

$

(114,494

)

 

$

(16,274

)

 

$

66,228

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Excess of

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (loss)

 

 

Equity

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2019

 

 

27,018

 

 

$

270

 

 

$

112,096

 

 

$

86,673

 

 

 

12,311

 

 

$

(114,261

)

 

$

(18,542

)

 

$

66,236

 

Employee Stock Purchase Plan share

   issuance

 

 

 

 

 

 

 

 

(104

)

 

 

 

 

 

(22

)

 

 

206

 

 

 

 

 

 

102

 

Restricted stock plan share

   issuance/forfeiture

 

 

 

 

 

 

 

 

(4,930

)

 

 

 

 

 

(453

)

 

 

4,770

 

 

 

 

 

 

(160

)

Equity-based compensation

 

 

 

 

 

 

 

 

1,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,805

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,734

 

 

 

 

 

 

 

 

 

 

 

 

5,734

 

Foreign currency adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,061

 

 

 

2,061

 

Pension loss adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Balances as of September 25, 2020

 

 

27,018

 

 

$

270

 

 

$

108,867

 

 

$

92,407

 

 

 

11,836

 

 

$

(109,285

)

 

$

(16,555

)

 

$

75,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Excess of

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (loss)

 

 

Equity

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2018

 

 

27,018

 

 

$

270

 

 

$

116,427

 

 

$

82,548

 

 

 

12,746

 

 

$

(120,406

)

 

$

(14,611

)

 

$

64,228

 

Employee Stock Purchase Plan share

   issuance

 

 

 

 

 

 

 

 

(126

)

 

 

 

 

 

(25

)

 

 

236

 

 

 

 

 

 

110

 

Stock Option Plan share issuance, net

 

 

 

 

 

 

 

 

(467

)

 

 

 

 

 

(41

)

 

 

558

 

 

 

 

 

 

91

 

Restricted stock plan share

   issuance/forfeiture

 

 

 

 

 

 

 

 

(3,237

)

 

 

 

 

 

(147

)

 

 

3,084

 

 

 

 

 

 

(153

)

Deferred compensation plan share

   issuance

 

 

 

 

 

 

 

 

(2,034

)

 

 

 

 

 

(215

)

 

 

2,034

 

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

1,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,161

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,454

 

 

 

 

 

 

 

 

 

 

 

 

2,454

 

Foreign currency adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,019

)

 

 

(2,019

)

Pension gain adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

356

 

 

 

356

 

Balances as of September 27, 2019

 

 

27,018

 

 

$

270

 

 

$

111,724

 

 

$

85,002

 

 

 

12,318

 

 

$

(114,494

)

 

$

(16,274

)

 

$

66,228

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


 

COMPUTER TASK GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Financial Statements

The condensed consolidated financial statements included herein reflect, in the opinion of the management of Computer Task Group, Incorporated (“CTG” or “the Company”), all normal recurring adjustments necessary to present fairly the condensed consolidated financial position, results of operations, comprehensive income, cash flows, and shareholders’ equity for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest Annual Report on Form 10K filed with the SEC.

The Company's fiscal year-end is December 31. During the year, the quarters generally consist of a 13-week fiscal period where the last day of each of the first three quarters is a Friday. The 2020 third quarter began on June 27, 2020 and ended on September 25, 2020. The 2019 third quarter began on June 29, 2019 and ended on September 27, 2019. There were 63 billable days in both the third quarters of 2020 and 2019, and 189 and 190 billable days in the 2020 and 2019 year-to-date periods, respectively.

 

2.

Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

These condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations. There are no unconsolidated entities, or off-balance sheet arrangements other than certain guarantees supporting office leases and the performance under government contracts in the Company's European operations. All inter-company accounts have been eliminated.

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Company's management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes, which could be impacted by existing market conditions and factors, including the COVID-19 pandemic. Such estimates primarily relate to the recognition of revenue, leased assets and liabilities, the purchase accounting for acquisitions and the valuation of goodwill, the valuation allowance for deferred tax assets, actuarial assumptions including discount rates and expected return on assets, as applicable, for the Company’s defined benefit plans, the valuation of stock options and restricted stock for recording equity-based compensation expense, the allowance for doubtful accounts receivable, investment valuation, legal matters, other contingencies, and estimates of progress toward completion and direct profit or loss on contracts, as applicable. Management believes that the information and disclosures provided herein are adequate to present fairly the condensed consolidated financial position, results of operations, comprehensive income, cash flows, and shareholders’ equity of the Company.

The Company evaluated subsequent events from the date of the most recent balance sheet through the date of this filing. Through the date of this filing, about 10% of the Company’s billable resources have been idled since the beginning of the COVID-19 pandemic in March 2020. To offset this reduction in billable resources, during April 2020, the Company took a number of actions to reduce costs and mitigate the potential impact of the COVID-19 pandemic, including a full-time furlough of about 5% of its North American non-billable staff, and a reduced work schedule (20% furlough) for nearly all other non-billable staff, including senior management, that are not directly or indirectly related to business development. The reduced work schedule for the non-billable staff, including senior management, ended on September 27, 2020.

There were no other subsequent events as of the date of this filing from the end of the fiscal third quarter on September 25, 2020 that require recognition or disclosure in these unaudited interim condensed consolidated financial statements.

The Company operates in 1 industry segment, providing information and technology-related services to its clients. These services include information and technology-related solutions, including supplemental staffing as a solution. CTG provides these services to all of the markets that it serves. The services provided typically encompass the IT

7


 

business solution life cycle, including phases for planning, developing, implementing, managing, and ultimately maintaining the IT solution. A typical client is an organization with large, complex information and data processing requirements.

IT solutions and IT and other staffing revenue as a percentage of total revenue for the quarter and three quarters ended September 25, 2020 and September 27, 2019 was as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

 

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

IT solutions

 

 

39.6

%

 

 

33.9

%

 

 

37.3

%

 

 

34.6

%

IT and other staffing

 

 

60.4

%

 

 

66.1

%

 

 

62.7

%

 

 

65.4

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

The Company promotes a significant portion of its services through 5 vertical market focus areas: technology service providers, manufacturing, healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), financial services, and energy. The Company focuses on these five vertical areas as it believes that these areas are either higher growth markets than the general IT services market and the general economy, or are areas that provide greater potential for the Company’s growth due to the size of the vertical market. The remainder of CTG’s revenue is derived from general markets.

The Company’s revenue by vertical market as a percentage of total revenue for the quarter and three quarters ended September 25, 2020 and September 27, 2019 was as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

 

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Technology service providers

 

 

33.1

%

 

 

32.9

%

 

 

33.3

%

 

 

32.4

%

Financial services

 

 

14.8

%

 

 

13.0

%

 

 

14.6

%

 

 

13.6

%

Healthcare

 

 

14.4

%

 

 

16.9

%

 

 

13.8

%

 

 

16.7

%

Manufacturing

 

 

13.7

%

 

 

17.6

%

 

 

14.1

%

 

 

17.2

%

Energy

 

 

5.6

%

 

 

5.4

%

 

 

6.3

%

 

 

5.2

%

General markets

 

 

18.4

%

 

 

14.2

%

 

 

17.9

%

 

 

14.9

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

Revenue Recognition

The Company recognizes revenue when control of the promised good or service is transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with progress billing schedules (i.e. progress billing), primarily monthly, revenue is recognized as services are rendered to the client. Revenue for fixed-price contracts is recognized over time using an input-based approach. Recognizing revenue over time best portrays the Company’s performance in transferring control of the goods or services to the client. On most fixed price contracts, revenue recognition is supported through contractual clauses that require the client to pay for work performed to date, including cost plus a reasonable profit margin, for goods or services that have no alternative use to the Company. On certain contracts, revenue recognition is supported through contractual clauses that indicate the client controls the asset, or work in process, as the Company creates or enhances the asset. On a given project, actual salary and indirect labor costs incurred are measured and compared with the total estimate of costs of such items at the completion of the project. Revenue is recognized based upon the percentage-of-completion calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects that include significant amounts of material or other non-labor related costs that could distort the percent complete within a percentage-of-completion calculation. The Company’s estimate of the total labor costs it expects to incur over the term of the contract is based on the nature of the project and experience on similar projects, and includes management judgments and estimates that affect the amount of revenue recognized on fixed-price contracts in any accounting period. Losses on fixed-price projects are recorded when identified.

8


 

The Company’s revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods as a percentage of consolidated revenue for the quarter and three quarters ended September 25, 2020 and September 27, 2019 was as follows:

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

 

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Time-and-material

 

 

80.5

%

 

 

80.7

%

 

 

80.7

%

 

 

80.2

%

Progress billing

 

 

14.6

%

 

 

10.1

%

 

 

14.7

%

 

 

10.2

%

Percentage-of-completion

 

 

4.9

%

 

 

9.2

%

 

 

4.6

%

 

 

9.6

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

The Company recorded revenue in the quarter and three quarters ended September 25, 2020 and September 27, 2019 as follows:

For the Quarter Ended:

 

September 25, 2020

 

 

September 27, 2019

 

 

Year-over-Year

Change

 

 

 

(amounts in thousands)

 

 

 

 

 

North America

 

 

54.9

%

 

$

48,625

 

 

 

63.6

%

 

$

61,866

 

 

 

(21.4

)%

Europe

 

 

45.1

%

 

 

40,023

 

 

 

36.4

%

 

 

35,338

 

 

 

13.3

%

Total

 

 

100.0

%

 

$

88,648

 

 

 

100.0

%

 

$

97,204

 

 

 

(8.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Quarters Ended:

 

September 25, 2020

 

 

September 27, 2019

 

 

Year-over-Year

Change

 

 

 

(amounts in thousands)

 

 

 

 

 

North America

 

 

56.0

%

 

$

148,289

 

 

 

62.4

%

 

$

183,953

 

 

 

(19.4

)%

Europe

 

 

44.0

%

 

 

116,454

 

 

 

37.6

%

 

 

110,897

 

 

 

5.0

%

Total

 

 

100.0

%

 

$

264,743

 

 

 

100.0

%

 

$

294,850

 

 

 

(10.2

)%

 

Significant Judgments

With the exception of cost estimates on certain fixed-price projects, there are no other significant judgments used to determine the timing of the satisfaction of performance obligations or determining the transaction price and amounts allocated to performance obligations. The Company allocates the transaction price based on standalone selling prices for contracts with clients that include more than one performance obligation. We determine standalone selling price based on the expected cost of the good or service plus margin approach. Certain clients may qualify for discounts and rebates, which we account for as variable consideration. We estimate variable consideration and reduce revenue recognized based on the amount we expect to provide to clients.

 

Contract Balances

For time-and-material contracts and contracts with periodic billing schedules, the timing of the Company’s satisfaction of its performance obligations is consistent with the timing of billing. For these contracts, the Company has the right to payment in the amount that corresponds directly with the value of the Company’s performance to date. The Company uses the practical expedient that allows it to recognize revenue in the amount for which it has the right to invoice for time-and-material contracts and contracts with periodic billing schedules. Billing schedules for fixed-price contracts are generally consistent with the Company’s performance in transferring control of the goods or services to the client. There are no significant financing components in contracts with clients. The Company records advanced billings that represent contract liabilities for cash payments received in advance of performance on the condensed consolidated balance sheet. Unbilled receivables are reported within “accounts receivable” on the condensed consolidated balance sheet. Accounts receivable and advanced billing balances fluctuate based on the timing of the client’s billing schedule and the Company’s month-end date. There are no significant costs to obtain or fulfill contracts with clients.

 

Transaction Price Allocated to Remaining Performance Obligations

As of September 25, 2020, the aggregate transaction price allocated to unsatisfied or partially unsatisfied performance obligations for fixed-price and all managed-support contracts was approximately $11.0 million and $34.6 million, respectively. Approximately $13.0 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2020, and approximately $32.6 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2021 and beyond. As

9


 

the Company uses the “right to invoice” practical expedient, we do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

Taxes Collected from Clients

In instances where the Company collects taxes from its clients for remittance to governmental authorities, primarily in its international locations, revenue and expenses are not presented on a gross basis in the condensed consolidated financial statements as such taxes are recorded in the Company's accounts on a net basis.

 

Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid for a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants. The Company utilizes a fair value hierarchy for its assets and liabilities, as applicable, based upon three levels of input, which are:

Level 1—quoted prices in active markets for identical assets or liabilities (observable)

Level 2—inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable or can be supported by observable market data for essentially the full term of the asset or liability (observable)

Level 3—unobservable inputs that are supported by little or no market activity, but are significant to determining the fair value of the asset or liability (unobservable)

At September 25, 2020 and December 31, 2019, the carrying amounts of the Company’s cash of $33.4 million and $10.8 million, respectively, approximated fair value.

As described in Note 3 of the condensed consolidated financial statements, the Company acquired 100% of the equity of StarDust in the 2020 first quarter, Tech-IT in the 2019 first quarter and Soft Company in the 2018 first quarter. Level 3 inputs were used to estimate the fair values of the assets acquired and liabilities assumed. The valuation techniques used to assign fair values to intangible assets included the relief-from-royalty method and excess earnings method.

The Company has a contingent consideration liability related to the earn-out provision of which a portion will be payable in each period subject to the achievement by Stardust of certain direct profit targets for fiscal 2020 and 2021, and for Tech-IT for certain direct profit targets for fiscal 2019 and 2020. In addition, the Company has a remaining contingent consideration liability related to the earn-out provision of which a portion will be payable subject to the achievement by Soft Company of certain revenue and EBIT targets for fiscal 2019. There is no payout if the achievements are below the target thresholds. The fair value of these contingent considerations is determined using level 3 inputs. The fair value assigned to the contingent consideration liabilities is determined using the real options method, which requires inputs such as revenue forecasts, EBIT forecasts, discount rate, and other market variables to assess the probability of Tech-IT and Soft Company achieving their respective targets. The Company expects to make the payments for Tech-IT and Soft Company for 2019 in the 2020 fourth quarter.  

Life Insurance Policies

The Company has purchased life insurance on the lives of a number of former employees who are plan participants in the non-qualified defined benefit Executive Supplemental Benefit Plan. In total, there are policies currently on 16 individuals, whose average age is 77 years old. Those policies have generated cash surrender value and the Company has taken loans against the policies. At September 25, 2020, these insurance policies have a gross cash surrender value of $26.7 million, outstanding loans and interest totaling $24.1 million, and a net cash surrender value of $2.6 million. At December 31, 2019, these insurance policies had a gross cash surrender value of $29.7 million, outstanding loans and interest totaling $27.2 million, and a net cash surrender value of $2.5 million. The net cash surrender values are included on the condensed consolidated balance sheet in “Cash surrender value of life insurance” under non-current assets.

 

At September 25, 2020 and December 31, 2019, the total death benefit for the remaining policies was approximately $34.7 million and $37.7 million, respectively. Currently, upon the death of all of the remaining plan participants, the Company would expect to receive approximately $10.3 million after the payment of obligations, and, under current tax regulations, record a non-taxable gain of approximately $7.7 million.

10


 

During both, the 2020 second and third quarter, a participant in the plan passed away. Upon their deaths, the Company recorded a non-taxable life insurance gain totaling approximately $1.0 million for the three quarters ended September 25, 2020, which it has recorded on its condensed consolidated statements of income. 

Cash and Cash Equivalents, and Cash Overdrafts

For purposes of the statement of cash flows, cash and cash equivalents are defined as cash on hand, demand deposits, and short-term, highly liquid investments with an original maturity of three months or less. As the Company does not fund its bank accounts for the checks it has written until the checks are presented to the bank for payment, the "change in cash overdraft, net," line item as presented on the condensed consolidated statements of cash flows represents the increase or decrease in outstanding checks in a given period.

Accounts Receivable Factoring

The Company entered into a factoring agreement during the 2020 first quarter to sell certain trade accounts receivables associated with its largest client on a non-recourse basis to a third-party financial institution. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the condensed consolidated statements of cash flows. Total trade accounts receivable sold under the factoring agreement was approximately $17.8 million and $43.2 million during the quarter and year-to-date periods ended September 25, 2020. Fees for the factoring arrangement were recorded in cost of services and were less than $0.1 million and $0.1 million in the quarter and year-to-date periods ended September 25, 2020, respectively. There were no accounts receivable factoring activities during the quarter and year-to-date periods ended September 27, 2019.

Property, Equipment and Capitalized Software Costs

Property, equipment and capitalized software at September 25, 2020 and December 31, 2019 are summarized as follows:     

 

(amounts in thousands)

 

September 25, 2020

 

 

December 31, 2019

 

Property, equipment and capitalized software

 

$

14,468

 

 

$

17,384

 

Accumulated depreciation and amortization

 

 

(8,895

)

 

 

(11,005

)

Property, equipment and capitalized software, net

 

$

5,573

 

 

$

6,379

 

 

The Company capitalizes software projects developed for commercial use. The Company recorded capitalized software costs during the quarter and three quarters ended September 25, 2020 and September 27, 2019 as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

(amounts in thousands)

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Capitalized software, beginning balance

 

$

2,741

 

 

$

1,955

 

 

$

2,147

 

 

$

1,864

 

Additions

 

 

200

 

 

 

318

 

 

 

794

 

 

 

409

 

Capitalized software

 

$

2,941

 

 

$

2,273

 

 

$

2,941

 

 

$

2,273

 

 

Capitalized software amortization periods range from three to five years, and are evaluated periodically for propriety. Amortization expense and accumulated amortization for these projects for the quarter and three quarters ended September 25, 2020 and September 27, 2019 are as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

(amounts in thousands)

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Accumulated amortization, beginning balance

 

$

1,076

 

 

$

1,017

 

 

$

866

 

 

$

745

 

Amortization expense

 

 

91

 

 

 

126

 

 

 

301

 

 

 

398

 

Accumulated amortization

 

$

1,167

 

 

$

1,143

 

 

$

1,167

 

 

$

1,143

 

During the 2020 second quarter, the Company sold its corporate headquarters located in Buffalo, NY. As the sale price of the building was $2.5 million, and the book value of the building was approximately $1.6 million, the Company recorded a profit on the sale after related fees of about $0.8 million in the 2020 second quarter.

11


 

Guarantees

The Company has a number of guarantees in place in its European operations that support office leases and performance under government contracts. These guarantees totaled approximately $3.1 million and $3.0 million at September 25, 2020 and December 31, 2019, respectively, and generally have expiration dates ranging from September 2020 through October 2034.

Goodwill

The goodwill recorded on the Company's condensed consolidated balance sheet at September 25, 2020 relates to the acquisition of Soft Company in the 2018 first quarter, Tech-IT in the 2019 first quarter, and StarDust in the 2020 first quarter. In accordance with current accounting guidance for “Intangibles - Goodwill and Other,” the Company performs goodwill impairment testing at least annually (in the Company’s fourth quarter), unless indicators of impairment exist in interim periods. There were 0 impairment indicators noted in the quarters or three quarters ended September 25, 2020 and September 27, 2019.

The changes in the carrying amount of goodwill for the three quarters ended September 25, 2020 are as follows:

 

(amounts in thousands)

 

 

 

Balance at December 31, 2019

$

16,681

 

Acquired goodwill

 

2,757

 

Foreign currency translation

 

762

 

Balance at September 25, 2020

$

20,200

 

 

Acquired Intangible Assets

Acquired intangible assets at September 25, 2020 consist of the following:

 

(amounts in thousands)

Estimated

Economic Life

Gross Carrying Amount

 

Accumulated Amortization

 

Foreign Currency Translation

 

Net Carrying Amount

 

Trademarks

2 year

$

1,532

 

$

1,282

 

$

(30

)

$

220

 

Technology

10 years

 

591

 

 

36

 

 

26

 

 

581

 

Customer relationships

7-13 years

 

10,496

 

 

1,966

 

 

(330

)

 

8,200

 

Total

 

$

12,619

 

$

3,284

 

$

(334

)

$

9,001

 

 

Estimated amortization expense for the remainder of 2020, the five succeeding years, and thereafter is as follows:

 

Year

 

Annual Amortization

 

(amounts in thousands)

 

 

 

 

2020

 

$

364

 

2021

 

 

1,163

 

2022

 

 

1,061

 

2023

 

 

1,052

 

2024

 

 

1,052

 

2025

 

 

1,052

 

Thereafter

 

 

3,257

 

Total

 

$

9,001

 

 

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which requires the immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables, and replaces the existing incurred loss model. The new standard requires an estimate of expected credit losses, measured over the contractual life of an asset, which considers relevant information

12


 

about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. It requires entities to consider the risk of loss even if it is remote, which will result in the recognition of credit losses on assets that do not have evidence of deterioration. The allowance for credit losses will be the difference between the amortized cost balance of a financial asset and the amount of amortized cost expected to be collected over the remaining contractual life. This guidance is effective for reporting periods beginning after December 15, 2019; however, early adoption is permitted.

The Company adopted the new credit loss standard on January 1, 2020. The Company estimated its allowance for credit losses by pooling assets with similar risk characteristics, reviewing historical losses within the last five years and taking into consideration any reasonable supportable forecasts of future economic conditions. The Company cannot guarantee that the rate of future credit losses will be similar to past experience, but considers all available information when assessing the adequacy of its allowance for credit losses each quarter. As the impact from this standard on the Company was immaterial, no adjustment was made to the beginning retained earnings balance.

 In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This guidance is effective for reporting periods beginning after December 15, 2019; however, early adoption is permitted. The Company adopted the new standard on January 1, 2020 for the year ending December 31, 2020 on a prospective basis and the adoption did not have a significant impact on the Company’s operations. 

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which helps entities evaluate the accounting for fees paid in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for fiscal years beginning after December 15, 2019; however, early adoption is permitted. The Company adopted the new standard on January 1, 2020 for the year ending December 31, 2020 on a prospective basis and the adoption did not have a significant impact on the Company’s operations.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for accounting contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference the London Interbank Offering Rate (“LIBOR”) or another reference rate expected to be discontinued due to the reference rate reform. It is effective for all entities between March 12, 2020 and December 31, 2022. The Company does not expect a significant impact from the adoption of this standard as provisions have been made in our Credit and Security Agreement to use an alternate benchmark interest rate when the use of LIBOR is discontinued.

3.

Acquisitions

StarDust SAS (“StarDust”)

On March 3, 2020, the Company acquired 100% of the equity of StarDust, for approximately $6.1 million (€5.5 million based on a EUR into USD exchange rate of 1.1145). The acquisition was funded using cash on hand and borrowings under the Credit and Security Agreement. The France-based StarDust, is a leading provider of testing and quality assurance for digital services with offices in Marseille, France, and Montreal, Canada. StarDust offers a complete range of testing services, including functional, multilingual, operational, environmental, regression, and application benchmarking, covering digital services and website, software, mobile applications, and Internet of Things connected objects. The acquisition is expected to expand the Company’s global testing capabilities.

The results of operations of StarDust have been included in the Company’s consolidated financial results since the date of acquisition. As the Company has determined that the acquisition is not material to its existing operations, certain disclosures, including pro forma financial information, have not been included in this quarterly report on Form 10-Q.

An earn-out of up to $1.1 million (€1.0 million based on a EUR into USD exchange rate of 1.1145) can be earned, a portion of which will be payable in each period subject to the achievement of consolidated direct profit targets for fiscal 2020 and 2021. Additionally, for each €10,000 of consolidated direct profit achieved above the target, an additional €1,000 can be earned, with no maximum limit. There is no payout if the achievement is below the target threshold. The fair value as of the March 3, 2020 acquisition date was determined to be $0.1 million, and was $0.2 million as of September 25, 2020. As such, the Company recorded $0.1 million in selling, general, and administrative expenses during the first three

13


 

quarters of 2020 related to this earn-out. Approximately $0.1 million of the remaining contingent consideration liability is recorded in both “other current liabilities” and “other long-term liabilities” on the September 25, 2020 condensed consolidated balance sheet.

The acquisition date fair value of the consideration for the acquisition of StarDust consisted of the following as of March 3, 2020:

 

(amounts in thousands)

 

 

 

Cash consideration

$

6,122

 

Fair value of contingent consideration

 

111

 

Fair value of purchase consideration

$

6,233

 

The following table summarizes the allocation of the aggregate purchase consideration to the fair value of the assets acquired and liabilities assumed as of March 3, 2020:

 

(amounts in thousands)

 

 

 

Assets Acquired:

 

 

 

Cash

$

1,798

 

Accounts receivable

 

1,303

 

Prepaids & other

 

71

 

Property & equipment

 

327

 

Acquired intangibles

 

1,282

 

Goodwill

 

2,757

 

Total assets acquired

$

7,538

 

 

 

 

 

Liabilities Assumed:

 

 

 

Accounts payable

$

285

 

Accrued compensation

 

307

 

Taxes payable

 

222

 

Other liabilities

 

163

 

Deferred income taxes

 

328

 

Total liabilities assumed

 

1,305

 

Net assets acquired

$

6,233

 

The purchase consideration for the acquisition was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The excess consideration was recorded as goodwill, which is not deductible for income tax purposes.

 

(amounts in thousands)

Fair Value

 

 

Estimated Useful Life

Trademarks

$

100

 

 

2 years

Technology

$

591

 

 

10 years

Customer relationships

 

591

 

 

7 years

Fair value of purchase consideration

$

1,282

 

 

 

The Company incurred acquisition-related legal and consulting fees and amortization of intangible assets of approximately $0.2 million and $0.3 million in the 2020 third quarter and year-to-date period, respectively, which were recorded as a component of selling, general, and administrative expenses in the condensed consolidated statements of income. The purchase price allocation for this acquisition has been finalized.


14


 

Tech-IT PSF S.A. (“Tech-IT”)

On February 6, 2019, the Company acquired 100% of the equity of Tech-IT for approximately $9.7 million. The acquisition was funded using cash on hand and borrowings under the Credit and Security Agreement. Tech-IT, located in Bertrange, Luxembourg, is a leading provider of software and hardware services, including consulting, infrastructure and software design and development, infrastructure integration, project management, and training. The acquisition of Tech-IT is expected to enable the Company to strengthen its market position in Luxembourg and broaden its portfolio to offer complete end-to-end IT solutions.

The results of operations of Tech-IT have been included in the Company’s consolidated financial results since the date of acquisition. As the Company has determined that the acquisition is not material to its existing operations, certain disclosures, including pro forma financial information, have not been included in this quarterly report on Form 10-Q.

An earn-out of up to a maximum of $1.7 million (€1.5 million based on a EUR into USD exchange rate of 1.1386) can be earned, a portion of which will be payable in each period subject to the achievement of direct profit targets for fiscal 2018, 2019, and 2020.  There is no payout if the achievement on the target is below the threshold. The fair value as of the February 6, 2019 acquisition date was determined to be $0.6 million, and was $0.7 million as of September 25, 2020. Approximately $0.4 million and $0.3 million of the remaining contingent consideration liability is recorded in “other current liabilities” and “other long-term liabilities,” respectively, on the September 25, 2020 condensed consolidated balance sheet.

The acquisition date fair value of the consideration for the acquisition of Tech-IT consisted of the following as of February 6, 2019:

(amounts in thousands)

 

 

 

Cash consideration

$

9,678

 

Fair value of contingent consideration

 

569

 

Fair value of purchase consideration

$

10,247

 

The following table summarizes the allocation of the aggregate purchase consideration to the fair value of the assets acquired and liabilities assumed as of February 6, 2019:

(amounts in thousands)

 

 

 

Assets Acquired:

 

 

 

Cash

$

1,217

 

Accounts receivable

 

4,491

 

Prepaids & other

 

1,122

 

Property & equipment

 

98

 

Acquired intangibles

 

4,099

 

Goodwill

 

5,331

 

Total assets acquired

$

16,358

 

 

 

 

 

Liabilities Assumed:

 

 

 

Accounts payable

$

2,378

 

Accrued compensation

 

172

 

Other short-term liabilities

 

2,447

 

Deferred income taxes

 

1,114

 

Total liabilities assumed

 

6,111

 

Net assets acquired

$

10,247

 

The purchase consideration for the acquisition was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The excess consideration was recorded as goodwill, which is not deductible for income tax purposes.

 

15


 

(amounts in thousands)

Fair Value

 

 

Estimated Useful Life

Trademarks

$

683

 

 

2 years

Customer relationships

 

3,416

 

 

8 years

Fair value of purchase consideration

$

4,099

 

 

 

The Company incurred acquisition-related legal and consulting fees and amortization of intangible assets of approximately $0.2 million and $0.6 million in the 2020 third quarter and year-to-date period, respectively, and approximately $0.4 million and $0.5 million in the 2019 third quarter and year-to-date period, respectively, which were recorded as a component of selling, general, and administrative expenses in the condensed consolidated statements of income. The purchase price allocation for this acquisition has been finalized.

Soft Company SAS (“Soft Company”)

On February 15, 2018, the Company acquired 100% of the equity of Soft Company for approximately $16.9 million (€13.6 million based on a EUR into USD exchange rate of 1.2392). The acquisition was funded using cash on hand and borrowings under the Company’s Credit and Security Agreement. Soft Company, located in Paris, France, is an IT consulting company that specializes in providing IT services to finance, insurance, telecom, and media services companies. The acquisition of Soft Company is expected to enable the Company to expand its position in Europe and enhance its service offerings.

The Company has a contingent consideration liability related to an earn-out provision of which a portion will be payable in each period subject to the achievement by Soft Company of certain revenue and EBIT targets for fiscal 2017, 2018, and 2019. There is no payout if the achievement on either target is below a certain target threshold. The fair value as of the February 15, 2018 acquisition date was determined to be $2.0 million. The fair value of the remaining contingent consideration liability, which is recorded in “other current liabilities” on the condensed consolidated balance sheet, was approximately $0.9 million as of September 25, 2020, and is expected to be paid in the 2020 fourth quarter.

The results of operations of Soft Company have been included in the Company’s consolidated financial results since the date of acquisition. As the Company has determined that the acquisition is not material to its existing operations, certain disclosures, including pro forma financial information, have not been included in this quarterly report on Form 10-Q. The Company incurred acquisition-related legal and consulting fees, adjustments to the fair value of the earn-out liability, and amortization of intangible assets of approximately $0.1 million and $0.4 million in the 2020 third quarter and year-to-date period, respectively, and approximately $0.4 million and $1.2 million in the 2019 third quarter and year-to-date period, respectively, which were recorded as a component of selling, general, and administrative expenses in the condensed consolidated statements of income.

 

4.

Net Income Per Share

Basic and diluted earnings per share (EPS) for the quarter and three quarters ended September 25, 2020 and September 27, 2019 were as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

(amounts in thousands, except per-share data)

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Weighted-average number of shares outstanding

   during period

 

 

13,655

 

 

 

13,470

 

 

 

13,603

 

 

 

13,429

 

Common stock equivalents from incremental shares

   under equity-based compensation plans

 

 

746

 

 

 

575

 

 

 

731

 

 

 

487

 

Number of shares on which diluted earnings

   per share is based

 

 

14,401

 

 

 

14,045

 

 

 

14,334

 

 

 

13,916

 

Net income

 

$

2,831

 

 

$

879

 

 

$

5,734

 

 

$

2,454

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

 

$

0.07

 

 

$

0.42

 

 

$

0.18

 

Diluted

 

$

0.20

 

 

$

0.06

 

 

$

0.40

 

 

$

0.18

 

 

Weighted-average shares represent the average number of issued shares less treasury shares, and for the basic EPS calculations, unvested restricted stock.

16


 

Certain options representing 1.1 million shares of common stock were outstanding at both September 25, 2020 and September 27, 2019 but were not included in the computation of diluted earnings per share as their effect on the computation would have been anti-dilutive.

 

 

5.

Lease Commitments

The Company records a right-of-use asset and liability for substantially all leases for which it is a lessee, in accordance with ASC 842. The Company is obligated under a number of long-term operating leases for office space and office equipment, and for automobiles leased in Europe.

Most leases contain both lease components (fixed payments for rent) and non-lease components (common-area maintenance and other services). The Company has elected the practical expedient to separate lease and non-lease components for its office leases and has elected to group lease and non-lease components for its vehicle leases. Some leases contain renewal options with escalation clauses commensurate with local market fluctuations, however, generally limiting an annual increase to no more than 5.0% of the existing lease payment. The exercise of lease renewal options is at the Company’s sole discretion. The Company has excluded renewal options in the measurement of right-of-use assets and lease liabilities if they are not reasonably certain of exercise.

Operating leases are included in the right-of-use lease assets, short-term lease liabilities, and long-term lease liabilities on the condensed consolidated balance sheet. The Company measures the operating lease liabilities at lease commencement date based on the present value of remaining lease payments using the rate implicit in the lease when readily determinable, or the Company’s secured incremental borrowing rate. The Company has made an accounting policy election not to recognize a lease liability or right-of-use asset for leases with a lease term of twelve months or less and do not include an option to purchase the underlying asset. The Company recognizes lease expense on a straight-line basis over the lease term and variable lease expense in the period incurred. Variable lease cost consists primarily of common-area maintenance, insurance, and taxes, which are paid based on actual costs incurred by the lessor. Operating lease cost was $1.6 million and $4.7 million for the 2020 third quarter and year-to-date period, respectively, and $1.7 million and $5.1 million for the 2019 third quarter and year-to-date period, respectively. The Company incurred variable lease cost of $0.1 million and $0.4 million in the 2020 third quarter and year-to-date period, respectively, and $0.1 million and $0.4 million in the 2019 third quarter and year-to-date period, respectively. The Company also incurred short-term lease cost of $0.2 million and $0.4 million in the 2020 third quarter and year-to-date period, respectively, and $0.1 million and $0.4 million in the 2019 third quarter and year-to-date period, respectively.

 

Maturities for the Company’s lease liabilities for all operating leases as of September 25, 2020 are as follows:

 

 

 

Total

 

Year

 

Operating Leases

 

(amounts in thousands)

 

 

 

 

2020 (remaining)

 

$

1,640

 

2021

 

 

5,752

 

2022

 

 

4,362

 

2023

 

 

3,034

 

2024

 

 

1,788

 

2025 & thereafter

 

 

5,049

 

Total undiscounted operating lease payments

 

$

21,625

 

     Less: Interest

 

 

(1,068

)

Total present value of operating lease liabilities

 

$

20,557

 

 

Operating lease payments exclude $3.9 million of legally binding lease payment for leases signed, but not yet commenced. The weighted average remaining lease terms and discount rates for all operating leases as of September 25, 2020 and September 27, 2019 were as follows:

 

 

 

September 25, 2020

 

September 27, 2019

 

Weighted average remaining lease term (years)

 

 

6.13

 

 

3.36

 

Weighted average remaining discount rate

 

 

2.00

%

 

2.83

%


17


 

Supplemental cash flow information related to the Company’s operating leases for the first three quarters of 2020 is as follows:

 

(amounts in thousands)

 

September 25, 2020

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash outflow from operating leases

 

$

4,747

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

3,193

 

 

As of December 31, 2019, minimum obligations under operating leases were expected to be:

 

 

 

Total

 

Year

 

Operating Leases

 

(amounts in thousands)

 

 

 

 

2020

 

$

5,979

 

2021

 

 

4,696

 

2022

 

 

3,255

 

2023

 

 

2,257

 

2024

 

 

1,485

 

2025 & thereafter

 

 

4,828

 

Total undiscounted operating lease payments

 

$

22,500

 

     Less: Interest

 

 

(1,247

)

Total present value of operating lease liabilities

 

$

21,253

 

 

 

6.

Debt

The Company has a credit and security agreement (the “Credit and Security Agreement”) with its bank, which provides for a three-year revolving credit facility in an aggregate principal amount of $45.0 million, including a sublimit of $10.0 million for letters of credit.

The Credit and Security Agreement expires in December 2022, and has interest rates ranging from 150 to 200 basis points over LIBOR or the greater of (i) the prime rate, (ii) the federal funds effective rate plus 50 basis points, and (iii) adjusted LIBOR plus 100 basis points plus a spread ranging from 50 to 100 basis points based on the amounts outstanding under the Credit and Security Agreement. The Company can borrow under the agreement at either rate at its discretion. At September 25, 2020 and December 31, 2019, there was $6.0 million and $5.3 million outstanding under the Credit and Security Agreement, respectively.

The maximum amounts outstanding under its credit agreement in the 2020 and 2019 third quarters were $12.0 million and $17.0 million, respectively, while borrowings during those quarters averaged $9.5 million and $10.5 million, respectively, and carried weighted average interest rates of 2.1% and 2.7%, respectively.

Under the Credit and Security Agreement, the Company is required to meet certain financial covenants in order to maintain borrowings under its revolving credit line, pay dividends, and make acquisitions. The covenants are measured quarterly, and at September 25, 2020, included a fixed charge coverage ratio, which must be greater than 1.10 times consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) adjusted for equity-based compensation and severance expenses, must be no less than $5.0 million for the trailing twelve months, and capital expenditures for property, plant, equipment, and capitalized software must be no more than $5.0 million in any annual period. The fixed charge coverage ratio is only tested if availability on a measurement date is less than $5.625 million. Actual borrowings by CTG under the Credit and Security Agreement are subject to a borrowing base, which is a formula based on certain eligible receivables and reserves. Receivable balances from our largest client, IBM, have been removed from the credit facility as collateral as the Company had entered into a factoring arrangement for those receivables. Total availability as of September 25, 2020 was approximately $12.4 million. The Company was in compliance with these covenants at September 25, 2020 as the fixed charge ratio was 53.9 to 1, the adjusted EBITDA for the trailing twelve months was $14.5 million, and capital expenditures for property, equipment and capitalized software were $1.9 million in the 2020 year-to-date period. The Company was also in compliance with its covenants at September 27, 2019.

 

18


 

7.

Accumulated Other Comprehensive Loss

The components that make up accumulated other comprehensive loss on the condensed consolidated balance sheets at September 25, 2020 and December 31, 2019 are as follows: 

 

(amounts in thousands)

 

September 25, 2020

 

 

December 31, 2019

 

Foreign currency

 

$

(7,045

)

 

$

(9,106

)

Pension loss, net of tax of $257 in 2020 and $265 in 2019

 

 

(9,510

)

 

 

(9,436

)

Accumulated other comprehensive loss

 

$

(16,555

)

 

$

(18,542

)

 

During the 2020 and 2019 third quarter and year-to-date periods, actuarial losses were amortized to expense as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

(amounts in thousands)

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Amortization of actuarial losses

 

$

76

 

 

$

45

 

 

$

221

 

 

$

138

 

Income tax

 

 

(2

)

 

 

 

 

 

(1

)

 

 

 

Net of tax

 

$

74

 

 

$

45

 

 

$

220

 

 

$

138

 

 

The amortization of both prior service cost and actuarial losses, with the exception of the actuarial gains related to the post retirement benefit plan, are included in determining net periodic pension cost. See note 9, "Deferred Compensation and Other Benefits" for additional information.

 

 

8.

Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act is a relief package intended to assist many aspects of the American economy and includes provisions relating to refundable payroll tax credits, deferral of certain payment requirements for the employer portion of Social Security taxes, net operating loss carryback periods and temporarily increasing the amount of net operating losses that corporations can use to offset income, alternative minimum tax (“AMT”) credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property.  

On July 20, 2020 The Department of the Treasury and the Internal Revenue Service issued final regulations addressing the treatment of income earned by certain foreign corporations that is subject to a high rate of foreign tax. The final regulations allow taxpayers to exclude certain high-taxed income of a controlled foreign corporation from their Global Intangible Low Taxed Income (GILTI) computation on an elective basis (“the GILTI High Tax Exclusion election” or “the election”).  Taxpayers make the election on an annual basis.  Taxpayers may make the election retroactively to tax years beginning after December 31, 2017 if certain requirements are met.  

The Company has reflected the impact of the GILTI High Tax Exclusion election as well as the impact of the extended net operating loss carryback periods provided by the CARES Act in its 2020 income tax provision and continues to assess the future implications of these provisions on its consolidated condensed financial statements.  

The Company’s effective tax rate (“ETR”) is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The 2020 third quarter and year-to-date ETR was (31.2)% and 19.9%, respectively, and the 2019 third quarter and year-to-date ETR was 33.5% and 34.7%, respectively.

The ETR was lower in the 2020 third quarter and year-to-date period as compared with the corresponding 2019 periods primarily resulting from the GILTI High Tax Exclusion election and extended net operating loss carryback periods noted above.  The combined impact of these items was approximately $1.1 million or $0.08 per diluted share during the 2020 third quarter.

The Company elected to use the incremental cash tax savings approach when considering GILTI in its assessment of the realizability of its U.S. deferred tax assets. Based upon the Company’s recent history of U.S. losses for tax purposes, including a cumulative three-year loss in the U.S. as of September 25, 2020, and uncertain profitability in future years, management has determined that it is likely that it will not realize the U.S. deferred tax assets, and a full valuation allowance against these assets continues to be recorded.

19


 

The Company has not recorded a U.S. deferred tax liability for the excess book basis over the tax basis of its investments in foreign subsidiaries as these amounts continue to be indefinitely reinvested in foreign operations. The Company does not anticipate repatriating any funds from its foreign operations, as they are needed in the local operations to meet working capital demands.

 

9.

Deferred Compensation and Other Benefits

The Company maintains a non-qualified defined benefit Executive Supplemental Benefit Plan (ESBP) that provides certain former key executives with deferred compensation benefits, based on years of service and base compensation, payable during retirement. The plan was amended as of November 30, 1994, to freeze benefits for the participants in the plan at that time.

The Company retained certain potential obligations related to a contributory defined-benefit plan for its previous employees located in the Netherlands (NDBP) when the Company disposed of its subsidiary, CTG Nederland, B.V. Benefits paid are a function of a percentage of career average pay. This plan was curtailed for additional contributions in January 2003.

The Company also maintains a fully funded pension plan related to Belgium employees (BDBP). This is a plan with active employees and the Company expects to make future contributions.

As a result of the acquisition of Soft Company on February 15, 2018, the Company maintains an unfunded pension plan related to the current Soft Company employees (FDBP). The Company does not anticipate contributing to the plan in 2020. NaN benefit payments were made in 2019 and NaN are expected to be paid in 2020.

On March 3, 2020, the Company acquired StarDust and now maintains an unfunded pension plan related to the current StarDust employees (SDBP). The Company does not anticipate contributing to this plan and 0 benefit payments are expected to be paid in 2020.

Net periodic pension cost for the quarter and three quarters ended September 25, 2020 and September 27, 2019 for the plans is as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

(amounts in thousands)

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Service cost

 

$

109

 

 

$

82

 

 

$

314

 

 

$

249

 

Interest cost

 

 

90

 

 

 

145

 

 

 

264

 

 

 

438

 

Expected return on assets

 

 

(167

)

 

 

(152

)

 

 

(484

)

 

 

(460

)

Amortization of actuarial loss

 

 

76

 

 

 

48

 

 

 

224

 

 

 

144

 

Net periodic pension cost

 

$

108

 

 

$

123

 

 

$

318

 

 

$

371

 

 

The ESBP is deemed to be unfunded as the Company has not specifically identified assets to be used to discharge the deferred compensation benefit liabilities. The Company has purchased insurance on the lives of certain plan participants in amounts deemed to be sufficient to reimburse the Company for the costs associated with the plan for those participants (see Note 2 for “Life Insurance Policies”). The Company does not anticipate contributing to the plan other than for benefit payments as required in 2020 and future years. In the 2020 third quarter and year-to-date period, the Company made benefit payments totaling approximately $0.1 million and $0.4 million, respectively, and expects to make payments in 2020 totaling approximately $0.6 million. The Company made benefit payments totaling approximately $0.1 million and $0.4 million in the 2019 third quarter and year-to-date period, respectively.

As the NDBP was curtailed for additional contributions in January 2003, 0 contributions were made in 2019 and NaN are expected to be made in the remainder of 2020.

The assets for the NDBP are held by Aegon, a financial services firm located in the Netherlands. The Company maintains a contract with Aegon to insure future benefit payments of the NDBP; however, due to certain terms of the agreement and potential obligations to the Company, the NDBP has not been settled. The benefit payments to be made in 2020 are expected to be paid by Aegon from plan assets. The assets for the plan are included in a general portfolio of government bonds, a portion of which is allocated to the NDBP based upon the estimated pension liability associated with the plan. The fair market value of the plan’s assets equals the contractual value of the NDBP at any point in time. The fair

20


 

value of the assets is determined using a Level 3 methodology (see Note 2 for “Fair Value”). In 2020, the plan investments have a targeted minimum return to the Company of 4.0%, which is consistent with historical returns and the 4.0% return guaranteed to the participants of the plan. The Company, in conjunction with Aegon, intends to maintain the current investment strategy of investing plan assets solely in government bonds throughout 2020.

The BDBP is considered fully funded. The Company made contributions of $0.2 million and $0.5 million in the 2020 third quarter and year-to-date period, respectively, and $0.2 million and $0.4 million in the 2019 third quarter and year-to-date period, respectively. The Company made benefit payments totaling less than $0.1 million in both the 2020 and 2019 third quarters, respectively, and expects to make payments in 2020 of less than $0.1 million.

The assets for the BDBP are held by Allianz, a financial services firm located in Belgium. The Company maintains a contract with Allianz to insure future benefit payments of the BDBP. Contributions made by the Company to Allianz are based on employees’ current salaries. The benefit payments to be made in 2020 are expected to be paid by Allianz from plan assets. The assets for the plan are included in the overall portfolio of assets held by Allianz. The fair market value of the plan’s assets equals the contractual value of the BDBP in any given year (which is the mathematical reserve held by Allianz). The fair value of the assets is determined using a Level 3 methodology (see Note 2 “Fair Value”). Allianz does not guarantee a minimum return on the plan investments, whereas Belgian law sets a minimum return to be guaranteed to the participants of the plan.

The change in the fair value of plan assets for the plans for the quarters ended September 25, 2020 and September 27, 2019 was as follows:

 

 

For the Quarter Ended

 

(amounts in thousands)

 

September 25, 2020

 

 

September 27, 2019

 

Fair value of plan assets at beginning of period

 

$

18,078

 

 

$

17,403

 

Return on plan assets

 

 

504

 

 

 

460

 

Contributions

 

 

878

 

 

 

829

 

Benefits paid

 

 

(624

)

 

 

(610

)

Effect of exchange rate changes

 

 

690

 

 

 

(798

)

Fair value of plan assets at end of quarter

 

$

19,526

 

 

$

17,284

 

 

The Company maintains the Key Employee Non-Qualified Deferred Compensation Plan for certain key executives. Company contributions to this plan, if any, are based on annually defined financial performance objectives. The Company made 0 cash contributions in either the 2020 or 2019 third quarter or year-to-date periods for amounts earned in the previous year. Participants in the plan have the ability to purchase stock units from the Company at current market prices using their available investment balances within the plan. In exchange for the cash received, the Company releases shares out of treasury stock equivalent to the number of share units purchased by the participants. These shares of common stock are not entitled to any voting rights, but will receive dividends in the event any are paid. The shares are being held by the Company, and will be released to the participants as prescribed by their payment elections under the plan. There were 0 stock units purchased in the 2020 or 2019 third quarter or year-to-date periods.

The Company maintains the Non-Employee Director Deferred Compensation Plan for its non-employee directors. There were 0 cash contributions in either the 2020 or 2019 third quarters or year-to-date periods. Contributions to the plan consisted of equity grants from the 2010 Equity Award Plan that were deposited in the director’s accounts. Prior to 2019, when cash contributions were made, the non-employee directors elected to purchase stock units from the Company at current market prices using their available investment balance within the plan. Consistent with the Key Employee Non-Qualified Deferred Compensation Plan, in return for funds received, the Company released shares out of treasury stock equivalent to the number of share units purchased by the participants. These shares of common stock are not entitled to any voting rights, but will receive dividends in the event any are paid. The shares are being held by the Company, and will be released to the participants as prescribed by their payment elections under the plan.

 

 

10.

Equity-based Compensation

During the 2020 third quarter, there were 0 restricted stock grants issued, but the Company has granted restricted stock totaling 599,928 shares in the year-to-date period. During the 2019 third quarter and year-to-date period, the Company granted restricted stock totaling 217,542 and 636,268 shares, respectively. All grants in 2020 and 2019 were funded out of treasury stock.

 

21


 

Director Board fees are paid exclusively in deferred stock units. Of the shares granted during the 2020 first quarter, 170,848 shares represented restricted stock units that were granted to Board members. The shares vest in four equal quarterly increments and the Company is expensing these grants ratably during the quarter in which they vest. There were no additional shares granted to the directors in the 2020 second or third quarters. Grants of similar units to the Board members totaled 215,326 in the 2019 first quarter, with no additional grants in the 2019 year-to-date period.   

Of the shares granted in the 2020 first quarter, 209,280 shares were granted to senior management, of which 115,410 shares included a performance condition. The shares will only vest, in part, to senior management if at least 80% of a three-year cumulative target for diluted earnings per share is met for the three-year period ended December 31, 2022.  If at least 80% of the three-year EPS target is not met, the grants will expire. The 217,542 shares granted in the 2019 third quarter were granted to senior management with a performance condition.  The shares will only vest in part, to senior management if at least 80% of a three-year cumulative target for diluted earnings per share is met for the three-year period ended December 31, 2021.  If at least 80% of the three-year EPS target is not met, the grants will expire.

The remaining shares granted in the 2020 and 2019 third quarters and year-to-date periods include shares that vest ratably over a period of three or four years, beginning one year from the date of grant.

The restricted shares granted are considered outstanding, can be voted, and are eligible to receive dividends in the event any are paid. However, these shares do not include a non-forfeitable right for the holder to receive dividends and none will be paid in the event the awards do not vest. Accordingly, only vested shares of outstanding restricted stock are included in the basic earnings per share calculation. The shares and share units were granted from the 2010 Equity Award Plan.

A total of 173,010 stock options were issued during the 2020 first quarter on March 6, 2020. The options have a fair value of $1.96 per share using the Black-Scholes valuation model.  The assumptions used to calculate the fair value include the price on the date of grant of $5.88 per option, an expected life of 5.2 years, expected volatility of 36.7%, an expected dividend yield of 0, and a risk free rate of 0.6%. The options vest ratably over three years, and are being expensed over that period. NaN stock options were granted during the 2020 third quarter. The Company did 0t grant any stock options during the 2019 third quarter. A total of 26,500 options were granted during the 2019 second quarter on May 31, 2019. The options have a fair value of $1.26 per share using the Black-Scholes valuation model.  The assumptions used to calculate the fair value include the price on the date of grant of $4.20 per option, an expected life of 3.7 years, expected volatility of 36.1%, an expected dividend yield of 0, and a risk free rate of 2.2%. The options were granted from the 2010 Equity Award Plan.

 

11.

Treasury Stock

The Company’s Board of Directors has authorized the repurchase of its stock up to a total of $30.0 million. The Company did 0t purchase shares for treasury during the 2020 third quarter or year-to-date period. As of September 25, 2020, the Company had repurchased approximately 3.2 million shares pursuant to the current authorization and had approximately $7.7 million left in its current stock repurchase authorization.

The Company did 0t issue any shares during the 2020 third quarter, but has issued approximately 600,000      shares out of treasury stock during the year-to-date period primarily to fulfill the share requirements from purchases of stock in the Non-Employee Director Deferred Compensation Plan, stock option exercises, and restricted stock grants.

The Company did 0t purchase shares for treasury during the 2019 third quarter or year-to-date period. At September 27, 2019, the Company had approximately $7.7 million remaining in its stock repurchase authorization. During the 2019 third quarter and year-to-date period, the Company issued 217,000 and 636,000 shares, respectively, out of treasury stock primarily to fulfill the share requirements from purchases of stock in the Non-Employee Director Deferred Compensation Plan, stock options exercises, and restricted stock grants.

 

12.

Significant Clients

In the 2020 third quarter, International Business Machines Corporation (IBM) was the Company’s largest client and accounted for $18.6 million or 21.0% of consolidated revenue compared with $21.3 million or 21.9% of consolidated revenue in the comparable 2019 period. In the 2020 year-to-date period, IBM accounted for $57.4 million or 21.7% of consolidated revenue, compared with $63.4 million or 21.5% of consolidated revenue in the comparable 2019 period. The National Technical Services Agreement with IBM was originally scheduled to expire on December 31, 2019, but has been

22


 

extended and now expires on November 27, 2020. The Company’s accounts receivable from IBM at September 25, 2020 and December 31, 2019 totaled $13.9 million and $23.0 million, respectively.

NaN other client accounted for 10% or more of the Company's revenue during the 2020 or 2019 third quarters or year-to-date periods.

23


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Quarter and Three Quarters Ended September 25, 2020

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements made by the management of Computer Task Group, Incorporated (CTG, the Company or the Registrant) that are subject to a number of risks and uncertainties. These forward-looking statements are based on information as of the date of this report. The Company assumes no obligation to update these statements based on information from and after the date of this report. Generally, forward-looking statements include words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “could,” “may,” “might,” “should,” “will” and words and phrases of similar impact. The forward-looking statements include, but are not limited to, statements regarding future operations, industry trends or conditions and the business environment, and statements regarding future levels of or trends in business strategy and expectations, new business opportunities, cost control initiatives, business wins, market demand, revenue, operating expenses, capital expenditures, and financing.  The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including the following: (i) the availability to CTG of qualified professional staff, (ii) domestic and foreign industry competition for clients and talent, including technical, sales and management personnel, (iii) increased bargaining power of large clients, (iv) the Company's ability to protect confidential client data, (v) the partial or complete loss of the revenue the Company generates from International Business Machines Corporation (IBM), (vi) the uncertainty of clients' implementations of cost reduction projects, (vii) the effect of healthcare reform and initiatives, (viii) the mix of work between staffing and solutions, (ix) currency exchange risks, (x) risks associated with operating in foreign jurisdictions, (xi) renegotiations, nullification, or breaches of contracts with clients, vendors, subcontractors or other parties, (xii) the impact of current and future laws and government regulations, as well as repeal or modification of such, affecting the information technology (IT) solutions and staffing industry, taxes and the Company's operations in particular, (xiii) industry and economic conditions, including fluctuations in demand for IT services, (xiv) consolidation among the Company's competitors or clients, (xv) the need to supplement or change our IT services in response to new offerings in the industry or changes in client requirements for IT products and solutions, (xvi) the risks associated with acquisitions,  (xvii) actions of activist shareholders, and (xviii) the effects of the COVID-19 pandemic and the regulatory, social, and business responses thereto on the Company’s business, operations, employees, contractors, and clients, and (xix) the risks described in Item 1A of the Company’s most recently filed annual report on Form 10-K, and from time to time, in the Company's reports filed with the Securities and Exchange Commission (SEC).

Industry Trends

The Company operates in one industry segment, providing information and technology-related services to its clients. At the highest level, CTG delivers services that are considered either IT solutions or IT and other staffing. IT solutions typically encompasses services where the Company takes management responsibility for a project, has a deliverable, or service level agreements are included in the services delivered. Staffing services typically include providing IT and other resources to clients under client management

IT solutions and IT and other staffing revenue as a percentage of total revenue for the quarters and year-to-date periods ended September 25, 2020 and September 27, 2019 was as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

 

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

IT solutions

 

 

39.6

%

 

 

33.9

%

 

 

37.3

%

 

 

34.6

%

IT and other staffing

 

 

60.4

%

 

 

66.1

%

 

 

62.7

%

 

 

65.4

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

The Company promotes a significant portion of its services through five vertical market focus areas: technology service providers, manufacturing, healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), financial services, and energy. The Company focuses on these five vertical areas as it believes that these areas are either higher growth markets than the general IT services market and the general economy, or are areas that provide greater potential for the Company’s growth due to the size of the vertical market. The remainder of CTG’s revenue is derived from general markets.

24


 

The Company’s revenue by vertical market as a percentage of total revenue for the quarter and three quarters ended September 25, 2020 and September 27, 2019 was as follows:

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

 

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Technology service providers

 

 

33.1

%

 

 

32.9

%

 

 

33.3

%

 

 

32.4

%

Financial services

 

 

14.8

%

 

 

13.0

%

 

 

14.6

%

 

 

13.6

%

Healthcare

 

 

14.4

%

 

 

16.9

%

 

 

13.8

%

 

 

16.7

%

Manufacturing

 

 

13.7

%

 

 

17.6

%

 

 

14.1

%

 

 

17.2

%

Energy

 

 

5.6

%

 

 

5.4

%

 

 

6.3

%

 

 

5.2

%

General markets

 

 

18.4

%

 

 

14.2

%

 

 

17.9

%

 

 

14.9

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

The IT services industry is extremely competitive and characterized by continuous changes in client requirements and improvements in technologies. The Company’s competition varies significantly by geographic region, as well as by the type of service provided. Many of the Company’s competitors are larger than CTG, and have greater financial, technical, sales and marketing resources. In addition, the Company frequently competes with a client’s own internal IT staff. The industry is impacted by the growing use of lower-cost offshore delivery capabilities (primarily India and other parts of Asia). Regularly, new IT products and services are introduced which may render the Company’s existing IT solutions and IT staffing services obsolete. The economic conditions in the markets we serve are continuously changing and may negatively affect our business if we cannot adapt to negative conditions as they occur. There can be no assurance that CTG will be able to continue to compete successfully with existing or future competitors or that future competition will not have a material adverse effect on our results of operations and financial condition.

Revenue Recognition

The Company recognizes revenue when control of the promised good or service is transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with progress billing schedules (i.e. progress billing), primarily monthly, revenue is recognized as services are rendered to the client. Revenue for fixed-price contracts is recognized over time using an input-based approach. Revenue recognition over time best portrays the Company’s performance in transferring control of the goods or services to the client. On most fixed price contracts, revenue recognition is supported through contractual clauses that require the client to pay for work performed to date, including cost plus a reasonable profit margin, for goods or services that have no alternative use to the Company. On certain contracts, revenue recognition is supported through contractual clauses that indicate the client controls the asset, or work in process, as the Company creates or enhances the asset. On a given project, actual salary and indirect labor costs incurred are measured and compared with the total estimate of costs of such items at the completion of the project. Revenue is recognized based upon the percentage-of-completion calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects that include significant amounts of material or other non-labor related costs that could distort the percent complete within a percentage-of-completion calculation. The Company’s estimate of the total labor costs it expects to incur over the term of the contract is based on the nature of the project and experience on similar projects, and includes management judgments and estimates that affect the amount of revenue recognized on fixed-price contracts in any accounting period. Losses on fixed-price projects are recorded when identified.

The Company’s revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods as a percentage of consolidated revenue for the quarter and three quarters ended September 25, 2020 and September 27, 2019 was as follows:  

 

 

 

For the Quarter Ended

 

 

For the Three Quarters Ended

 

 

 

September 25, 2020

 

 

September 27, 2019

 

 

September 25, 2020

 

 

September 27, 2019

 

Time-and-material

 

 

80.5

%

 

 

80.7

%

 

 

80.7

%

 

 

80.2

%

Progress billing

 

 

14.6

%

 

 

10.1

%

 

 

14.7

%

 

 

10.2

%

Percentage-of-completion

 

 

4.9

%

 

 

9.2

%

 

 

4.6

%

 

 

9.6

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

25


 

Results of Operations

The table below sets forth data as contained in the condensed consolidated statements of income with the percentage information calculated as a percentage of consolidated revenue.

 

For the Quarter Ended:

 

September 25, 2020

 

 

September 27, 2019

 

 

 

(amounts in thousands)

 

Revenue

 

 

100.0

%

 

$

88,648

 

 

 

100.0

%

 

$

97,204

 

Cost of services

 

 

77.9

%

 

 

69,101

 

 

 

80.7

%

 

 

78,462

 

Gross profit

 

 

22.1

%

 

 

19,547

 

 

 

19.3

%

 

 

18,742

 

Selling, general and administrative expenses

 

 

20.0

%

 

 

17,723

 

 

 

17.7

%

 

 

17,218

 

Operating income

 

 

2.1

%

 

 

1,824

 

 

 

1.6

%

 

 

1,524

 

Interest and other income (expense), net

 

 

0.3

%

 

 

334

 

 

 

(0.2

)%

 

 

(202

)

Income before income taxes

 

 

2.4

%

 

 

2,158

 

 

 

1.4

%

 

 

1,322

 

Provision (benefit) for income taxes

 

 

(0.8

)%

 

 

(673

)

 

 

0.5

%

 

 

443

 

Net income

 

 

3.2

%

 

$

2,831

 

 

 

0.9

%

 

$

879

 

 

For the Three Quarters Ended:

 

September 25, 2020

 

 

September 27, 2019

 

 

 

(amounts in thousands)

 

Revenue

 

 

100.0

%

 

$

264,743

 

 

 

100.0

%

 

$

294,850

 

Cost of services

 

 

79.1

%

 

 

209,412

 

 

 

81.4

%

 

 

240,056

 

Gross profit

 

 

20.9

%

 

 

55,331

 

 

 

18.6

%

 

 

54,794

 

Selling, general and administrative expenses

 

 

18.7

%

 

 

49,526

 

 

 

17.1

%

 

 

50,290

 

Operating income

 

 

2.2

%

 

 

5,805

 

 

 

1.5

%

 

 

4,504

 

Interest and other income (expense), net

 

 

0.5

%

 

 

1,351

 

 

 

(0.3

)%

 

 

(748

)

Income before income taxes

 

 

2.7

%

 

 

7,156

 

 

 

1.2

%

 

 

3,756

 

Provision for income taxes

 

 

0.5

%

 

 

1,422

 

 

 

0.4

%

 

 

1,302

 

Net income

 

 

2.2

%

 

$

5,734

 

 

 

0.8

%

 

$

2,454

 

 

The Company recorded revenue in the quarter and three quarters ended September 25, 2020 and September 27, 2019 as follows:

 

For the Quarter Ended:

 

September 25, 2020

 

 

September 27, 2019

 

 

Year-over-Year

Change

 

 

 

(amounts in thousands)

 

 

 

 

 

North America

 

 

54.9

%

 

$

48,625

 

 

 

63.6

%

 

$

61,866

 

 

 

(21.4

)%

Europe

 

 

45.1

%

 

 

40,023

 

 

 

36.4

%

 

 

35,338

 

 

 

13.3

%

Total

 

 

100.0

%

 

$

88,648

 

 

 

100.0

%

 

$

97,204

 

 

 

(8.8

)%

 

For the Three Quarters Ended:

 

September 25, 2020

 

 

September 27, 2019

 

 

Year-over-Year

Change

 

 

 

(amounts in thousands)

 

 

 

 

 

North America

 

 

56.0

%

 

$

148,289

 

 

 

62.4

%

 

$

183,953

 

 

 

(19.4

)%

Europe

 

 

44.0

%

 

 

116,454

 

 

 

37.6

%

 

 

110,897

 

 

 

5.0

%

Total

 

 

100.0

%

 

$

264,743

 

 

 

100.0

%

 

$

294,850

 

 

 

(10.2

)%

 

There were 63 billable days in both of the 2020 and 2019 third quarters. Reimbursable expenses billed to clients and included in revenue totaled $0.1 million and $0.7 million in the 2020 and 2019 third quarters, respectively.

There were 189 and 190 billable days in the 2020 and 2019 year-to-date periods, respectively. Reimbursable expenses billed to clients and included in revenue totaled $0.7 million and $2.0 million in the 2020 and 2019 year-to-date periods, respectively.

The Company’s strategic plan includes investing in solutions-based business development, marketing and solutions resources as part of a concerted effort to increase the mix of solutions services within its total revenue. Generally,

26


 

solutions services have much higher bill rates and produce higher profits than staffing services. Additionally, within solutions, the Company is focused on expanding the digital solutions it provides, including cloud related activities, robotic process automation and artificial intelligence, in response to the demand it is seeing in the end markets where services are provided.  Finally, as a third part of its plan, the Company is focused on disengaging from its lowest margin staffing business.

On a consolidated basis, IT solutions revenue increased $2.1 million to $35.1 million, or 39.6% of consolidated revenue in the 2020 third quarter. This compares with $33.0 million or 33.9% in the corresponding 2019 period. Solutions revenue totaled $98.6 million or 37.3% in the 2020 year-to-date period as compared with $102.1 million or 34.6% of revenue in the corresponding 2019 period. The increase in solutions revenue in the 2020 third quarter was primarily due to the Company’s continued concerted effort to focus on and increase its solution services as part of overall revenue. The 2020 year-to-date solutions revenue was less than the prior year-to-date period due to reduced demand from the macroeconomic conditions resulting from the COVID-19 pandemic.

IT and other staffing revenue decreased $10.7 million to $53.6 million and represented 60.4% of consolidated revenue in the 2020 third quarter. This compares with $64.2 million or 66.1% of revenue in the corresponding 2019 period. Staffing revenue totaled $166.1 million or 62.7% in the 2020 year-to-date period compared with $192.8 million or 65.4% in the corresponding 2019 period. The IT staffing revenue decrease in both the third quarter and year-to-date period was primarily due to the Company disengaging from a number of low margin, non-core staffing engagements in the 2019 fourth quarter and the first quarter of 2020, consistent with the Company’s overall strategy to focus on solutions services as a higher mix of its overall revenue.  Additionally, the Company has experienced lower demand starting in March 2020 from clients in its staffing business in the COVID-19 pandemic environment.

The COVID-19 pandemic had relatively limited additional financial impact on the business in the 2020 third quarter as compared with the 2020 second quarter. The Company did not experience significant additional headcount reductions or project cancellations during the third quarter as occurred at the end of the first quarter. At this time, the Company does not have any clear visibility into the magnitude of an additional potential downturn of its operations for the remainder of 2020.  The Company, however, in anticipation of lower revenue resulting from reduced demand from the pandemic took steps in April 2020 to reduce its expenses, with a full-time furlough of certain non-billable employees, and a 20% furlough of nearly all other non-billable employees, including the senior management team.  Additionally, all discretionary spending was eliminated, and business travel has been restricted. At the beginning of the Company’s 2020 fiscal fourth quarter on September 27, the Company eliminated the 20% furlough for all remaining non-billable employees, including senior management, that had already not returned to full-time employment during the 2020 third quarter.

The Company has also actively participated in government-sponsored programs in its European operations, including Belgium, France and Luxembourg, that partially reimburses the Company for employees who have been made idle as a result of the pandemic. This primarily includes employees that were previously billable on an engagement, but the client made a decision to stop or end a project before completion. The Company is continuing to participate in these programs, but the benefit to the Company’s European operations was diminished subsequent to August 2020 as the respective governments reduced the reimbursements under these programs. The Company also believes that if these employees had remained billable throughout 2020, the revenue that they would have generated would have approximated the reimbursements received from the various European governments.

The Company includes all billable consultants, consisting of both employees and subcontractors, and its support services in its headcount totals. CTG’s headcount at September 25, 2020 was approximately 3,750, down from approximately 4,350 at September 27, 2019, and a decrease from approximately 3,950 at December 31, 2019. The decrease in headcount year-over-year is primarily due to the Company’s plan to move away from its low margin staffing business and headcount reductions resulting from lower demand due to the COVID-19 pandemic, primarily in the Company’s staffing business. Headcount was positively impacted by the acquisition of StarDust, a small testing solutions company with locations in France and Canada, in March 2020.

The revenue increase in Europe in the countries in which the Company operates (Belgium, France, Luxembourg, and the United Kingdom) was impacted in the 2020 third quarter and year-to-date period by the weakness of the U.S. dollar as compared with the value of the Euro, the currency used in Belgium, France, and Luxembourg, and the British pound, the currency used in the United Kingdom. If there had been no change in these exchange rates from the 2019 third quarter to the 2020 third quarter, total European revenue would have been approximately $1.8 million lower, and operating income would have been lower by less than $0.1 million. If there had been no change in the rates from the 2019 year-to-date period to the corresponding 2020 period, total European revenue would have been approximately $0.1 million higher, and operating income would have been higher by less than $0.1 million.

27


 

The Company continues to monitor the impact that the United Kingdom’s exit from the European Union (Brexit) has had on its operations. To date, there has been a nominal impact on the Company’s operating results from Brexit. As the total revenue generated by our British subsidiary is immaterial as compared with the Company’s total consolidated revenue, we do not expect the nominal impact the exit has had on the Company’s operations to date to change in the foreseeable future.

In the 2020 third quarter, International Business Machines Corporation (IBM) was the Company’s largest client and accounted for $18.6 million or 21.0% of consolidated revenue compared with $21.3 million or 21.9% of consolidated revenue in the comparable 2019 period. In the 2020 year-to-date period, IBM accounted for $57.4 million or 21.7% of consolidated revenue, compared with $63.4 million or 21.5% of consolidated revenue in the comparable 2019 period. The National Technical Services Agreement with IBM was originally scheduled to expire on December 31, 2019, but has been extended and now expires on November 27, 2020. The Company’s accounts receivable from IBM at September 25, 2020 and December 31, 2019 totaled $13.9 million and $23.0 million, respectively.

No other client accounted for 10% or more of the Company's revenue during the 2020 or 2019 third quarters or year-to-date periods.

Cost of services, defined as the costs for billable staff including billable out-of-pocket expenses, were 77.9% and 79.1% of revenue in the 2020 third quarter and year-to-date period, respectively, as compared with 80.7% and 81.4% of revenue in the 2019 corresponding periods, respectively. The Company’s cost of services as a percentage of revenue decreased in the 2020 third quarter and year-to-date period due to a shift in the mix to a higher level of Solutions revenue which has lower direct costs.  Additionally, the overall utilization for the Company’s billable resources improved in the third quarter of 2020 as compared with the prior year. Lowering costs and improving margins is part of the Company’s solutions strategy.  

The gross profit margin was 22.1% and 20.9% of revenue in the 2020 third quarter and year-to-date period, respectively, as compared with 19.3% and 18.6% of revenue in the corresponding 2019 periods, respectively.  Within the overall gross margin, the gross profit margin on IT solutions services improved about 280 basis points in the 2020 third quarter as compared with the corresponding prior year period.  

Selling, general and administrative (“SG&A”) expenses were 20.0% of revenue in the 2020 third quarter as compared with 17.7% in the corresponding 2019 period, and 18.7% in the 2020 year-to-date period as compared with 17.1% in the corresponding 2019 period. The increase in SG&A expenses as a percentage of revenue in both the 2020 third quarter and year-to date periods as compared with the comparable prior year periods is primarily due to the loss of operating leverage with a decrease in revenue of $8.6 million and $30.1 million, respectively, year-over-year. Additionally, it is part of the Company’s strategic plan to invest in solutions-based business development, marketing and solutions resources to increase the mix of solutions services within its total revenue. As the Company made a number of investments in the 2020 third quarter, SG&A expense increased $0.5 million in the 2020 third quarter as compared with the 2019 third quarter, but was $0.8 million less in the 2020 year-to-date period as compared with the prior year.

Consolidated operating income was 2.1% of revenue in the 2020 third quarter, compared with 1.6% of revenue in the 2019 third quarter, and 2.2% in the 2020 year-to-date period, as compared with 1.5% in the corresponding 2019 period.

Other income, net in the 2020 third quarter was $0.3 million. This included approximately $0.6 million or $0.04 per diluted share of a non-taxable life insurance gain from the death of a former executive, offset by other expense.

The Company’s effective tax rate (“ETR”) is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. The 2020 third quarter and year-to-date ETR was (31.2)% and 19.9%, respectively, and the 2019 third quarter and year-to-date ETR was 33.5% and 34.7%, respectively. The ETR was lower in the 2020 third quarter and year-to-date period as compared with the corresponding 2019 periods primarily resulting from the GILTI High Tax Exclusion election and extended NOL carryback periods noted above.  The combined impact of these items was approximately $1.1 million or $0.08 per diluted share during the 2020 third quarter.

  Net income was $0.20 and $0.40 per diluted share in the 2020 third quarter and year-to-date period, respectively, as compared with $0.06 and $0.18 per diluted share in the 2019 third quarter and year-to-date period, respectively. Diluted earnings per share was calculated using 14.4 million and 14.0 million weighted-average equivalent shares outstanding for the quarters ended September 25, 2020 and September 27, 2019, respectively, and 14.3 million and 13.9

28


 

million weighted-average equivalent shares outstanding for the three quarters ended September 25, 2020 and September 27, 2019, respectively.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Company’s management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company’s significant accounting policies, along with the underlying assumptions and judgments made by the Company’s management in their application, have a significant impact on the Company’s condensed consolidated financial statements. The Company identifies its critical accounting policies as those that are the most pervasive and important to the portrayal of the Company’s financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. The Company’s critical accounting policies are those related to income taxes, specifically relating to the valuation allowance for deferred income taxes.

Income Taxes—Valuation Allowances on Deferred Tax Assets

At September 25, 2020, the Company had a total of approximately $7.0 million of deferred tax assets offset by a valuation allowance of approximately $6.7 million, resulting in a net deferred tax asset of approximately $0.3 million and approximately $2.2 million of deferred tax liabilities, recorded on its condensed consolidated balance sheet. The deferred tax assets, net, primarily consist of deferred compensation, loss carryforwards and state taxes. The changes in deferred tax assets and liabilities from period to period are determined based upon the changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax purposes, as measured by the expected tax rates when these differences are estimated to reverse. The Company has made certain assumptions regarding the timing of the reversal of these assets and liabilities, and whether taxable income in future periods will be sufficient to recognize all or a part of any gross deferred tax asset of the Company.

At September 25, 2020, the Company had deferred tax assets recorded resulting from net operating losses in previous years totaling approximately $0.4 million. The Company has analyzed each jurisdiction’s tax position, including forecasting potential taxable income in future periods and the expiration of the net operating loss carryforwards as applicable, and determined that it is unclear whether all of these deferred tax assets will be realized at any point in the future. Accordingly, at September 25, 2020, the Company had offset a portion of these assets with a valuation allowance totaling $0.3 million, resulting in a net deferred tax asset from net operating loss carryforwards of $0.1 million.

The Company’s deferred tax assets and their potential realizability are evaluated each quarter to determine if any changes should be made to the valuation allowance. Any change in the valuation allowance in the future could result in a change in the Company’s ETR. A 1% change in the ETR in the 2020 third quarter and year-to-date period would have increased or decreased net income by approximately $21,500 and $71,600, respectively.

Other Estimates

The Company has also made a number of estimates and assumptions relating to the reporting of its assets and liabilities and the disclosure of contingent assets and liabilities to prepare the condensed consolidated financial statements pursuant to the rules and regulations of the SEC, the FASB, and other regulatory authorities. Such estimates primarily relate to the recognition of revenue, leased assets and liabilities, the purchase accounting for acquisitions and the valuation of goodwill, the valuation allowance for deferred tax assets, actuarial assumptions including discount rates and expected rates of return on assets, as applicable, for the Company’s defined benefit plans, the valuation of stock options and restricted stock for recording equity-based compensation expense, the allowance for doubtful accounts receivable, investment valuation, legal matters, other contingencies, and estimates of progress toward completion and direct profit or loss on contracts, as applicable. As future events and their effect on the Company's operating results cannot be determined with precision, actual results could differ from these estimates. Changes in the economic climates in which the Company operates may affect these estimates and will be reflected in the Company’s financial statements in the event they occur.

29


 

Financial Condition and Liquidity

Cash provided by operating activities was $25.5 million in the 2020 year-to-date period compared with $4.2 million in the 2019 corresponding period. In 2020, net income was $5.7 million, while other non-cash adjustments, primarily consisting of depreciation and amortization expense, equity-based compensation, deferred income taxes, deferred compensation, the gain on sale of property, and the non-taxable gain from life insurance totaled $2.9 million. In 2019, net income was $2.5 million, while the corresponding non-cash adjustments totaled $3.3 million.

The accounts receivable balance decreased $16.6 million in 2020 and increased $2.9 million in 2019. The decrease in the accounts receivable balance in 2020 primarily resulted from an advance payment (factoring) program that the Company entered into with its largest client during the 2020 first quarter, where approximately $17.8 million was paid in the 2020 third quarter before the normal due date. Additionally, the decrease was due to a decrease in revenue of 8.8% as compared with the corresponding 2019 period. Days sales outstanding (DSO) was 77 days at September 25, 2020 as compared with 81 at September 27, 2019. The increase in the accounts receivable balance in 2019 primarily resulted from an increase in revenue of 7.7% in the 2019 third quarter as compared with the corresponding 2018 quarter. This was partially offset by a decrease in DSO of one day in 2019 to 81 days from 82 days at December 31, 2018.

Prepaid and other current assets increased $0.6 million and $1.5 million in the 2020 and 2019 periods, respectively, due to payments made early in each respective year that are then expensed throughout the year.

The accounts payable balance decreased $3.9 million and $3.5 million in the 2020 and 2019 periods, respectively, primarily due to the timing of certain payments near the end of the quarter of each year as compared with the prior year-end. Accrued compensation increased less than $0.1 million and $9.9 million in the 2020 and 2019 periods, respectively. The 2020 increase is lower primarily due to a change in the pay cycle in the U.S. where the third quarter ended on a pay date, but did not end on a pay date in 2019. The 2019 increase was driven by higher headcount compared with the corresponding prior periods due to increasing revenue. Income taxes payable/receivable increased $0.7 million and decreased $0.8 million in the 2020 and 2019 periods, respectively. The increase in 2020 reflected higher taxable income. Advance billings decreased $0.8 million in 2020 and increased $1.8 million in 2019. The change in advance billings in any given period is determined by the nature and type of existing projects, and the advance payments, if any, associated with those projects. Deferred payroll taxes in 2020 represents a U.S. government program in which the Company participates in that allows Company’s under the CARES Act to defer the payment of payroll taxes until 2021 and 2022.

Investing activities used $4.0 million and $10.3 million of cash in the 2020 and 2019 periods, respectively. Cash paid for the acquisition of StarDust, net of cash acquired, was approximately $4.3 million. Cash paid for the acquisition of Tech-IT, net of cash acquired, was approximately $8.5 million. The Company used cash for additions to property, equipment, and capitalized software of $1.9 million and $1.2 million in the 2020 and 2019 periods, respectively. The Company has no significant commitments for the purchase of property and equipment at September 25, 2020. During the 2020 second quarter, the Company entered into an agreement to sell its owned real estate for $2.5 million.  As the book value of the building was approximately $1.6 million, the Company recorded a gain of about $0.8 million, after fees, from the sale in the 2020 second quarter. The Company received life insurance proceeds totaling $0.4 million in 2020 from the death of a former executive. Additionally, the Company expects to receive approximately $0.6 million in the 2020 fourth quarter from a death of a former executive in the 2020 third quarter.

Financing activities provided $0.3 million of cash in 2020 and $5.0 million in 2019. Cash borrowed under the Company’s revolving line of credit to fund the acquisition of StarDust and working capital obligations netted to $0.7 million in the 2020 year-to-date period, while cash borrowed primarily to fund the acquisition of Tech-IT netted to $5.0 million in the 2019 year-to-date period. Payments made to taxing authorities that represent the value of shares withheld for taxes in employee equity-based compensation transactions totaled $0.2 million in both the 2020 and 2019 periods. Cash overdrafts relate to the amount of outstanding checks at a point in time, and netted to approximately $0.4 million and less than $0.1 million in 2020 and 2019, respectively. The Company did not repurchase shares for treasury under its buyback program in either of the 2020 or 2019 year-to-date periods. As of September 25, 2020, $7.7 million was available under the Company's authorization to purchase shares in future periods.

The Company’s Credit and Security Agreement provides for a three-year revolving credit facility in an aggregate principal amount of $45.0 million, including a sublimit of $10.0 million for letters of credit.

The Credit and Security Agreement expires in December 2022, and has interest rates ranging from 150 to 200 basis points over LIBOR or the greater of (i) the prime rate, (ii) the federal funds effective rate plus 50 basis points, and (iii) adjusted LIBOR plus 100 basis points plus a spread ranging from 50 to 100 basis points based on the amounts

30


 

outstanding under the Credit and Security Agreement. The Company can borrow under the agreement with either rate at its discretion. At September 25, 2020 and December 31, 2019, there was $6.0 million and $5.3 million outstanding under the Credit and Security Agreement, respectively.

Generally, the Company borrows or repays its debt as needed based upon its working capital obligations, including the timing of the U.S. bi-weekly payroll. However, during the 2020 first quarter, given the potential negative financial implications of the COVID-19 pandemic, the Company drew down $12.0 million under its revolving credit agreement to improve its cash position at quarter-end, and provide working capital in the event of a significant financial downturn in the 2020 third quarter, or remainder of the year. The Company paid down $6.0 million during the 2020 third quarter, leaving $6.0 million outstanding under its revolving credit agreement at September 25, 2020. This borrowing and the Company’s factoring arrangement resulted in a consolidated cash balance of $33.4 million at the end of the 2020 third quarter.

The maximum amounts outstanding under its credit agreement in the 2020 and 2019 third quarters were $12.0 million and $17.0 million, respectively, while borrowings during those quarters averaged $9.5 million and $10.5 million, respectively, and carried weighted average interest rates of 2.1% and 2.7%, respectively. 

Under the Credit and Security Agreement, the Company is required to meet certain financial covenants in order to maintain borrowings under its revolving credit line, pay dividends, and make acquisitions. The covenants are measured quarterly, and at September 25, 2020, included a fixed charge coverage ratio, which must be less than 1.10 times consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) adjusted for equity-based compensation and severance expenses, must be no less than $5.0 million for the trailing twelve months, and capital expenditures for property, plant, equipment, and capitalized software must be no more than $5.0 million in any annual period. The fixed charge coverage ratio is only tested if availability on a measurement date is less than $5.625 million. Actual borrowings by CTG under the Credit and Security Agreement are subject to a borrowing base, which is a formula based on certain eligible receivables and reserves. Receivable balances from our largest client, IBM, have been removed from the credit facility as collateral as the Company had entered into a factoring arrangement for those receivables. Total availability as of September 25, 2020 was approximately $12.4 million. The Company was in compliance with these covenants at September 25, 2020 as the fixed charge ratio was 53.9 to 1, the adjusted EBITDA for the trailing twelve months was $14.5 million and capital expenditures for property, equipment and capitalized software were $1.9 million in the 2020 year-to-date period. The Company was also in compliance with its covenants at September 27, 2019.

Of the total cash and cash equivalents reported on the consolidated balance sheet at September 25, 2020 of $33.4 million, approximately $21.7 million was held by the Company’s foreign operations. Earnings are considered to be indefinitely reinvested in those operations. The Company has not repatriated any of its cash and cash equivalents from its foreign operations in the past five years, and does not intend to do so in the foreseeable future as the funds are required to meet the working capital needs of its foreign operations.

The Company believes existing internally available funds, cash potentially generated from future operations, and funds available under the Company's Credit and Security Agreement (subject to collateral limits) totaling $38.8 million will be sufficient to meet foreseeable working capital and capital expenditure needs, fund stock repurchases, pay a dividend (if any are declared), fund acquisitions, and allow for future internal growth and expansion.

Off-Balance Sheet Arrangements

The Company did not have off-balance sheet arrangements or transactions in the 2020 or 2019 third quarters other than guarantees in our European operations that support office leases and the performance under government contracts. These guarantees totaled approximately $3.1 million at September 25, 2020.

Contractual Obligations

The Company did not enter into any significant contractual obligations during the quarter or year-to-date period ended September 25, 2020.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which requires the immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables, and replaces the existing incurred loss model. The new standard requires an

31


 

estimate of expected credit losses, measured over the contractual life of an asset, which considers relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. It requires entities to consider the risk of loss even if it is remote, which will result in the recognition of credit losses on assets that do not have evidence of deterioration. The allowance for credit losses will be the difference between the amortized cost balance of a financial asset and the amount of amortized cost expected to be collected over the remaining contractual life. This guidance is effective for reporting periods beginning after December 15, 2019; however, early adoption is permitted.

The Company adopted the new credit loss standard on January 1, 2020. The Company estimated its allowance for credit losses by pooling assets with similar risk characteristics, reviewing historical losses within the last five years and taking into consideration any reasonable supportable forecasts of future economic conditions. The Company cannot guarantee that the rate of future credit losses will be similar to past experience, but considers all available information when assessing the adequacy of its allowance for credit losses each quarter. As the impact from this standard on the Company was immaterial, no adjustment was made to the beginning retained earnings balance.

 In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This guidance is effective for reporting periods beginning after December 15, 2019; however, early adoption is permitted. The Company adopted the new standard on January 1, 2020 for the year ending December 31, 2020 on a prospective basis and the adoption did not have a significant impact on the Company’s operations. 

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which helps entities evaluate the accounting for fees paid in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for fiscal years beginning after December 15, 2019; however, early adoption is permitted. The Company adopted the new standard on January 1, 2020 for the year ending December 31, 2020 on a prospective basis and the adoption did not have a significant impact on the Company’s operations.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for accounting contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference the London Interbank Offering Rate (“LIBOR”) or another reference rate expected to be discontinued due to the reference rate reform. It is effective for all entities between March 12, 2020 and December 31, 2022. The Company does not expect a significant impact from the adoption of this standard as provisions have been made in our Credit and Security Agreement to use an alternate benchmark interest rate when the use of LIBOR is discontinued

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

The Company’s primary market risk exposure consists of foreign currency exchange risk associated with the Company’s European operations.

The revenue increase in Europe in the countries in which the Company operates (Belgium, France, Luxembourg, and the United Kingdom) was impacted in the 2020 third quarter and year-to-date period by the weakness of the U.S. dollar as compared with the value of the Euro, the currency used in Belgium, France, and Luxembourg, and the British pound, the currency used in the United Kingdom. If there had been no change in these exchange rates from the 2019 third quarter to the 2020 third quarter, total European revenue would have been approximately $1.8 million lower, and operating income would have been lower by less than $0.1 million. If there had been no change in the rates from the 2019 year-to-date period to the corresponding 2020 period, total European revenue would have been approximately $0.1 million higher, and operating income would have been higher by less than $0.1 million.

The Company has historically not used any market risk sensitive instruments to hedge its foreign currency exchange risk. The Company believes the market risk related to intercompany balances in future periods will not have a material effect on its results of operations.

 

 

32


 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this periodic report.

Changes in Internal Control Over Financial Reporting

The Company reviews the effectiveness of its internal controls on a continuous basis, and makes changes as necessary. There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report, which ended on September 25, 2020, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

33


 

PART II. OTHER INFORMATION

Item 1.

None

 

 

Item 1A.

Risk Factors

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread and impact the U.S., Western Europe, and India, which primarily includes all of our operations. The impact from the rapidly changing market, and economic and regulatory conditions due to the COVID-19 outbreak is uncertain, disrupting the business of our clients, and will impact our business and consolidated results of operations, and could impact our financial condition in the future. As of October 28, 2020, approximately 10% of our billable resources have been idled by the pandemic, and the Company has taken measures, including part-time and full-time furloughs, to offset the potential impact of this reduction in revenue. While we have not incurred significant disruptions or financial impacts thus far from the COVID-19 outbreak, we are unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties. These include the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our clients, the demand for IT services overall, and other factors. We will continue to evaluate the nature and extent of the impact to our business, consolidated results of operations, and financial condition.

There were no other material changes in the Company's risk factors from those previously disclosed in the Company's Form 10-K for the period ended December 31, 2019.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The Company’s Board of Directors has approved a total authorization for stock repurchases of $30.0 million.  The information below does not include shares withheld by or surrendered to the Company either to satisfy the exercise cost for the cashless exercise of employee stock options, or to satisfy tax withholding obligations associated with equity awards as the number of shares is minor.

 

Period

 

Total

Number of

Shares Purchased

 

 

Average

Price Paid

Per Share **

 

 

Total Number

of Shares Purchased

as Part of

Publicly Announced

Plans or Programs

 

 

Maximum Dollar

Amount that May

Yet be Purchased

under the

Plan or Program

 

June 27 - July 31

 

 

 

 

 

$

 

 

 

 

 

$

7,727,724

 

August 1 - August 31

 

 

 

 

$

 

 

 

 

 

$

7,727,724

 

September 1 - September 25

 

 

 

 

$

 

 

 

 

 

$

7,727,724

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**

Excludes broker commissions

 

Item 3.

Default Upon Senior Securities

None

 

 

Item 4.

Mine Safety Disclosures

Not applicable

 

 

Item 5.

Other Information

On October 2, 2020, the Board of Directors set September 16, 2021 as the date of the Company’s 2021 annual meeting of shareholders.

In accordance with Rule 14a-5(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company has determined that proposals to be considered for inclusion in the Company’s proxy statement for the annual meeting pursuant to Rule 14a-8 of the Exchange Act must be received at the Company’s principal executive offices not

34


 

later than April 15, 2021. For all shareholder proposals made outside of Rule 14a-8 of the Exchange Act and for all shareholder nominations for director, our Restated By-laws require shareholders to give the Company advance notice of any proposal or director nomination to be submitted at an annual meeting of shareholders. The Restated By-laws prescribe the information to be contained in any such notice. To be timely, a shareholder’s notice with respect to a proposal made outside of Rule 14a-8 or director nomination for the annual meeting must be given, either by personal delivery or by United States mail, postage prepaid, to and received by the Secretary of the Company at the principal executive offices of the Company no earlier than May 20, 2021 and no later than 5:30 p.m., Buffalo time, on June 19, 2021.

 

35


 

Item 6.

Exhibits

 

Exhibit

 

Description

 

Reference

 

 

 

 

 

31. (a)

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

#

 

 

 

 

 

31. (b)

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

#

 

 

 

 

 

32.

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

##

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

 

#

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

#

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase

 

#

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

#

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase

 

#

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase

 

#

 

 

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

#

Filed herewith

##

Furnished herewith

 

 

36


 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

COMPUTER TASK GROUP, INCORPORATED

 

 

 

By

 

/s/ John M. Laubacker

 

 

John M. Laubacker

Title:

 

Chief Financial Officer

 

Date: November 2, 2020

 

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