SEC Info - Computer Task Group Inc. - ‘10-Q’ for 6/26/20

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Computer Task Group Inc. – ‘10-Q’ for 6/26/20

On: Monday, 8/3/20, at 12:34pm ET · For: 6/26/20 · Accession #: 1564590-20-35396 · File #: 1-09410

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 8/03/20  Computer Task Group Inc.          10-Q        6/26/20   80:9.4M                                   ActiveDisclosure/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    993K 
 2: EX-31.A     Certification -- §302 - SOA'02                      HTML     31K 
 3: EX-31.B     Certification -- §302 - SOA'02                      HTML     31K 
 4: EX-32       Certification -- §906 - SOA'02                      HTML     28K 
11: R1          Document and Entity Information Document            HTML     77K 
12: R2          Condensed Consolidated Statements of Income         HTML     83K 
                (Unaudited)                                                      
13: R3          Condensed Consolidated Statements of Comprehensive  HTML     46K 
                Income (Unaudited)                                               
14: R4          Condensed Consolidated Statements of Comprehensive  HTML     27K 
                Income (Unaudited) (Parenthetical)                               
15: R5          Condensed Consolidated Balance Sheets (Unaudited)   HTML    123K 
16: R6          Condensed Consolidated Balance Sheets (Unaudited)   HTML     35K 
                (Parenthetical)                                                  
17: R7          Condensed Consolidated Statements of Cash Flows     HTML    116K 
                (Unaudited)                                                      
18: R8          Condensed Consolidated Statements of Shareholders'  HTML     83K 
                Equity (Unaudited)                                               
19: R9          Financial Statements                                HTML     28K 
20: R10         Summary of Significant Accounting Policies          HTML    309K 
21: R11         Acquisitions                                        HTML     77K 
22: R12         Net Income Per Share                                HTML     82K 
23: R13         Lease Commitments                                   HTML     91K 
24: R14         Debt                                                HTML     30K 
25: R15         Accumulated Other Comprehensive Loss                HTML     69K 
26: R16         Income Taxes                                        HTML     32K 
27: R17         Deferred Compensation and Other Benefits            HTML    106K 
28: R18         Equity-based Compensation                           HTML     31K 
29: R19         Treasury Stock                                      HTML     28K 
30: R20         Significant Clients                                 HTML     28K 
31: R21         Summary of Significant Accounting Policies          HTML    345K 
                (Policies)                                                       
32: R22         Summary of Significant Accounting Policies          HTML    290K 
                (Tables)                                                         
33: R23         Acquisitions (Tables)                               HTML     74K 
34: R24         Net Income Per Share (Tables)                       HTML     80K 
35: R25         Lease Commitments (Tables)                          HTML     92K 
36: R26         Accumulated Other Comprehensive Loss (Tables)       HTML     70K 
37: R27         Deferred Compensation and Other Benefits (Tables)   HTML     93K 
38: R28         Financial Statements - Additional Information       HTML     26K 
                (Details)                                                        
39: R29         Summary of Significant Accounting Policies - Basis  HTML     37K 
                of Presentation and Consolidation (Details)                      
40: R30         Summary of Significant Accounting Policies -        HTML     36K 
                Summary of IT Solutions and IT and Other Staffing                
                Revenue as Percentage of Total Revenue (Details)                 
41: R31         Summary of Significant Accounting Policies -        HTML     45K 
                Revenue by Vertical Market as Percentage of Total                
                Revenue (Details)                                                
42: R32         Summary of Significant Accounting Policies -        HTML     34K 
                Revenue by Contract Type (Details)                               
43: R33         Summary of Significant Accounting Policies -        HTML     47K 
                Schedule of Revenue by Geographic Location                       
                (Details)                                                        
44: R34         Summary of Significant Accounting Policies -        HTML     33K 
                Transaction Price Allocated to Remaining                         
                Performance Obligations (Details 1)                              
45: R35         Summary of Significant Accounting Policies -        HTML     30K 
                Transaction Price Allocated to Remaining                         
                Performance Obligations (Details)                                
46: R36         Summary of Significant Accounting Policies - Fair   HTML     38K 
                Value (Details)                                                  
47: R37         Summary of Significant Accounting Policies - Life   HTML     50K 
                Insurance Policies (Details)                                     
48: R38         Summary of Significant Accounting Policies -        HTML     28K 
                Accounts Receivable Factoring (Details)                          
49: R39         Summary of Significant Accounting Policies -        HTML     32K 
                Schedule of Property, Equipment and Capitalized                  
                Software (Details)                                               
50: R40         Summary of Significant Accounting Policies -        HTML     55K 
                Property, Equipment and Capitalized Software Costs               
                - Additional Information (Details)                               
51: R41         Summary of Significant Accounting Policies -        HTML     26K 
                Guarantees (Details)                                             
52: R42         Summary of Significant Accounting Policies -        HTML     26K 
                Goodwill (Details)                                               
53: R43         Summary of Significant Accounting Policies -        HTML     31K 
                Summary of Changes in Carrying Amount of Goodwill                
                (Details)                                                        
54: R44         Summary of Significant Accounting Policies -        HTML     46K 
                Summary of Acquired Intangible Assets (Details)                  
55: R45         Summary of Significant Accounting Policies -        HTML     41K 
                Summary of Estimated Amortization Expense                        
                (Details)                                                        
56: R46         Acquisitions - Additional Information (Details)     HTML     88K 
57: R47         Acquisitions - Summary of Acquisition Date Fair     HTML     32K 
                Value of Consideration (Details)                                 
58: R48         Acquisitions - Summary of Allocation of Aggregate   HTML     60K 
                Purchase Consideration to Fair Values of Assets                  
                Acquired and Liabilities Assumed (Details)                       
59: R49         Acquisitions - Summary of Intangible Assets         HTML     34K 
                Acquired (Details)                                               
60: R50         Net Income Per Share - Schedule of Basic and        HTML     53K 
                Diluted Earnings Per Share (Details)                             
61: R51         Net Income Per Share - Additional Information       HTML     29K 
                (Details)                                                        
62: R52         Lease Commitments - Additional Information          HTML     33K 
                (Details)                                                        
63: R53         Lease Commitments - Summary of Maturities of Lease  HTML     44K 
                Liabilities for Operating Liabilities (Details)                  
64: R54         Lease Commitments - Summary of Weighted Average     HTML     36K 
                Remaining Lease Terms, Discount Rates and                        
                Supplemental Cash Flow Information for All                       
                Operating Leases (Details)                                       
65: R55         Lease Commitments - Summary of Minimum Obligations  HTML     44K 
                under Operating Leases (Details)                                 
66: R56         Debt - Additional Information (Details)             HTML     76K 
67: R57         Accumulated Other Comprehensive Loss - Schedule of  HTML     35K 
                Accumulated Other Comprehensive Loss (Details)                   
68: R58         Accumulated Other Comprehensive Loss - Schedule of  HTML     27K 
                Accumulated Other Comprehensive Loss                             
                (Parenthetical) (Details)                                        
69: R59         Accumulated Other Comprehensive Loss - Schedule of  HTML     33K 
                Net Benefit Costs (Details)                                      
70: R60         Income Taxes - Additional Information (Details)     HTML     26K 
71: R61         Deferred Compensation and Other Benefits -          HTML     64K 
                Additional Information (Details)                                 
72: R62         Deferred Compensation and Other Benefits -          HTML     43K 
                Schedule of Net Periodic Pension Cost (Details)                  
73: R63         Deferred Compensation and Other Benefits -          HTML     40K 
                Schedule of Change in Fair Value of Plan Assets                  
                (Details)                                                        
74: R64         Equity-based Compensation - Additional Information  HTML     78K 
                (Details)                                                        
75: R65         Treasury Stock - Additional Information (Details)   HTML     35K 
76: R66         Significant Clients - Additional Information        HTML     51K 
                (Details)                                                        
78: XML         IDEA XML File -- Filing Summary                      XML    150K 
10: XML         XBRL Instance -- ctg-10q_20200626_htm                XML   2.44M 
77: EXCEL       IDEA Workbook of Financial Reports                  XLSX     98K 
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 5: EX-101.SCH  XBRL Schema -- ctg-20200626                          XSD    181K 
79: JSON        XBRL Instance as JSON Data -- MetaLinks              370±   579K 
80: ZIP         XBRL Zipped Folder -- 0001564590-20-035396-xbrl      Zip    190K

‘10-Q’ — Quarterly Report
Document Table of Contents

Page	(sequential)	(alphabetic)	↑Top
		Alternative Formats (Word, et al.) Controls and Procedures Defaults Upon Senior Securities Exhibits Financial Statements Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Mine Safety Disclosures Other Information Quantitative and Qualitative Disclosures about Market Risk Risk Factors Unregistered Sales of Equity Securities and Use of Proceeds
1	1st Page – Filing Submission
"	Financial Statements
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Quantitative and Qualitative Disclosures about Market Risk
"	Controls and Procedures
"	Legal Proceedings
"	Risk Factors
"	Unregistered Sales of Equity Securities and Use of Proceeds
"	Defaults Upon Senior Securities
"	Mine Safety Disclosures
"	Other Information
"	Exhibits

This is an HTML Document rendered as filed. [ Alternative Formats ]

iX: C: C: C: C: C: C:

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM i 10-Q

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

For the quarterly period ended i June 26, 2020

i ☐	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. i 1-9410

i COMPUTER TASK GROUP, INCORPORATED

(Exact name of registrant as specified in its charter)

i New York		i 16-0912632
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
i 800 Delaware Avenue, i Buffalo, i New York		i 14209
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: ( i 716) i 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
i Common Stock, par value $0.01 per share		i CTG		i 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	i ☒

Emerging growth company	i ☐

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 i ☐ NO ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

		Shares outstanding at
Title of each class		July 27, 2020
Common stock, par value $.01 per share		i 15,173,249

SEC Form 10-Q Index

Section		Page
Part I Financial Information
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30

Part II Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32

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 Two Quarters Ended

Revenue

i 89,146

i 100,408

i 176,095

i 197,646

Direct costs

i 70,408

i 82,072

i 140,311

i 161,594

Selling, general and administrative expenses

i 16,824

i 16,483

i 31,803

i 33,072

Operating income

i 1,914

i 1,853

i 3,981

i 2,980

Interest and other income

i 131

i 2

i 134

i 76

Gain on sale of building

i 824

—

i 824

—

Non-taxable life insurance gain

i 389

—

i 389

—

Interest and other expense

i 136

i 368

i 330

i 622

Income before income taxes

i 3,122

i 1,487

i 4,998

i 2,434

Provision for income taxes

i 1,363

i 544

i 2,095

i 859

Net income

i 1,759

i 943

i 2,903

i 1,575

Net income per share:

Basic

i 0.13

i 0.07

i 0.21

i 0.12

Diluted

i 0.12

i 0.07

i 0.20

i 0.11

Weighted average shares outstanding:

Basic

i 13,605

i 13,436

i 13,576

i 13,408

Diluted

i 14,282

i 13,918

i 14,299

i 13,851

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

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands)

(Unaudited)

For the Quarter Ended

For the Two Quarters Ended

Net Income

i 1,759

i 943

i 2,903

i 1,575

Foreign currency translation adjustment, net of taxes

i 732

i 445

( i 56

)

( i 478

)

Change in pension, net of taxes of $ i 1 and $ i 0 in the 2020 and 2019 second quarters, respectively, and $ i 1 and $ i 0 in the first two quarters of 2020 and 2019, respectively

( i 88

)

( i 46

)

i 61

i 97

Other comprehensive income (loss)

i 644

i 399

i 5

( i 381

)

Comprehensive income

i 2,403

i 1,342

i 2,908

i 1,194

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

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share balances)

(Unaudited)

	June 26,			December 31,
	2020			2019
Assets
Current Assets:
Cash and cash equivalents	$	i 34,319		$	i 10,781
Accounts receivable, net of allowances of $ i 147 and $ i 84 in 2020 and 2019, respectively		i 79,133			i 88,772
Prepaid and other current assets		i 2,358			i 2,064
Income taxes receivable		—			i 231
Total current assets		i 115,810			i 101,848
Property, equipment and capitalized software, net		i 5,246			i 6,379
Operating lease right-of-use assets		i 20,278			i 21,253
Deferred income taxes		i 330			i 453
Acquired intangibles, net		i 7,741			i 8,439
Goodwill		i 19,969			i 16,681
Cash surrender value of life insurance, net		i 2,989			i 3,133
Other assets		i 748			i 328
Investments		i 187			i 192
Total assets	$	i 173,298		$	i 158,706
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	i 15,580		$	i 18,612
Accrued compensation		i 24,754			i 23,538
Advance billings on contracts		i 3,555			i 1,704
Short-term operating lease liabilities		i 5,289			i 5,904
Other current liabilities		i 8,450			i 7,096
Income taxes payable		i 1,210			—
Total current liabilities		i 58,838			i 56,854
Long-term debt		i 12,000			i 5,290
Deferred compensation benefits		i 12,435			i 12,346
Long-term operating lease liabilities		i 14,929			i 15,349
Deferred income taxes		i 1,906			i 2,101
Other long-term liabilities		i 2,994			i 530
Total liabilities		i 103,102			i 92,470
Shareholders’ Equity:
Common stock, par value $ i i 0.01 / per share, i i 150,000,000 / shares authorized; i i 27,017,824 / shares issued in 2020 and 2019		i 270			i 270
Capital in excess of par value		i 108,207			i 112,096
Retained earnings		i 89,576			i 86,673
Less: Treasury stock of i 11,835,050 and i 12,311,010 shares at cost, in 2020 and 2019, respectively		( i 109,320	)		( i 114,261	)
Accumulated other comprehensive loss		( i 18,537	)		( i 18,542	)
Total shareholders’ equity		i 70,196			i 66,236
Total liabilities and shareholders’ equity	$	i 173,298		$	i 158,706

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

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

	For the Two Quarters Ended
	June 26, 2020			June 28, 2019
Cash flow from operating activities:
Net income	$	i 2,903		$	i 1,575
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense		i 1,641			i 1,365
Equity-based compensation expense		i 1,149			i 693
Deferred income taxes		( i 96	)		( i 102	)
Deferred compensation benefits		i 154			( i 81	)
Gain on the sale of property and equipment		( i 826	)		( i 2	)
Non-taxable life insurance gain		( i 389	)		—
Changes in assets and liabilities that provide (use) cash, excluding the effects of acquisitions:
Accounts receivable		i 10,878			( i 5,852	)
Prepaid and other current assets		( i 302	)		( i 1,242	)
Other long-term assets		( i 420	)		( i 24	)
Cash surrender value of life insurance		i 277			i 233
Accounts payable		( i 2,867	)		( i 2,271	)
Accrued compensation		i 957			i 2,057
Income taxes payable / receivable		i 1,422			i 121
Advance billings on contracts		i 1,833			( i 1,544	)
Other current liabilities		i 861			i 369
Other long-term liabilities		i 2,464			( i 432	)
Net cash provided by (used in) operating activities		i 19,639			( i 5,137	)
Cash flow from investing activities:
Cash paid for acquisitions, net of cash acquired		( i 3,995	)		( i 8,457	)
Additions to property and equipment		( i 583	)		( i 572	)
Additions to capitalized software		( i 593	)		( i 91	)
Proceeds from sale of fixed assets		i 2,442			—
Premiums paid for life insurance		( i 144	)		—
Insurance proceeds		i 400
Deferred compensation plan investments, net		—			( i 1	)
Net cash used in investing activities		( i 2,473	)		( i 9,121	)
Cash flow from financing activities:
Proceeds from long-term debt		i 40,845			i 97,666
Payments on long-term debt		( i 34,135	)		( i 84,334	)
Taxes remitted for shares withheld from equity-based compensation transactions		( i 160	)		( i 153	)
Proceeds from Employee Stock Purchase Plan		i 63			i 79
Change in cash overdraft, net		( i 370	)		i 154
Net cash provided by financing activities		i 6,243			i 13,412
Effect of exchange rates on cash and cash equivalents		i 129			( i 295	)
Net increase (decrease) in cash and cash equivalents		i 23,538			( i 1,141	)
Cash and cash equivalents at beginning of year		i 10,781			i 12,431
Cash and cash equivalents at end of quarter	$	i 34,319		$	i 11,290

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

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’

Amount

Par Value

Earnings

Amount

Income (loss)

Equity

(amounts in thousands)

Balances as of March 27, 2020

i 27,018

i 270

i 109,112

i 87,817

i 11,950

( i 110,818

)

( i 19,181

)

i 67,200

Employee Stock Purchase Plan share

issuance

—

( i 42

)

—

( i 9

)

i 77

—

i 35

Restricted stock plan share

issuance/forfeiture

—

( i 1,500

)

—

( i 106

)

i 1,421

—

( i 79

)

Equity-based compensation

—

i 637

—

i 637

Net income

—

i 1,759

—

i 1,759

Foreign currency adjustment

—

i 732

Pension gain adjustment, net of tax

—

( i 88

)

( i 88

)

Balances as of June 26, 2020

i 27,018

i 270

i 108,207

i 89,576

i 11,835

( i 109,320

)

( i 18,537

)

i 70,196

Accumulated

Capital in

Other

Total

Common Stock

Excess of

Retained

Treasury Stock

Comprehensive

Shareholders’

Amount

Par Value

Earnings

Amount

Income (loss)

Equity

(amounts in thousands)

Balances as of March 29, 2019

i 27,018

i 270

i 115,074

i 83,180

i 12,741

( i 118,860

)

( i 15,391

)

i 64,273

Employee Stock Purchase Plan share

issuance

—

( i 48

)

—

( i 9

)

i 89

—

i 41

Restricted stock plan share

issuance/forfeiture

—

( i 1,786

)

—

( i 167

)

i 1,727

—

( i 59

)

Equity-based compensation

—

i 444

—

i 444

Net income

—

i 943

—

i 943

Foreign currency adjustment

—

i 445

Pension gain adjustment, net of tax

—

( i 46

)

( i 46

)

Balances as of June 28, 2019

i 27,018

i 270

i 113,684

i 84,123

i 12,565

( i 117,044

)

( i 14,992

)

i 66,041

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

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’

Amount

Par Value

Earnings

Amount

Income (loss)

Equity

(amounts in thousands)

Balances as of December 31, 2019

i 27,018

i 270

i 112,096

i 86,673

i 12,311

( i 114,261

)

( i 18,542

)

i 66,236

Employee Stock Purchase Plan share

issuance

—

( i 65

)

—

( i 14

)

i 128

—

i 63

Restricted stock plan share

issuance/forfeiture

—

( i 4,973

)

—

( i 462

)

i 4,813

—

( i 160

)

Equity-based compensation

—

i 1,149

—

i 1,149

Net income

—

i 2,903

—

i 2,903

Foreign currency adjustment

—

( i 56

)

( i 56

)

Pension gain adjustment, net of tax

—

i 61

Balances as of June 26, 2020

i 27,018

i 270

i 108,207

i 89,576

i 11,835

( i 109,320

)

( i 18,537

)

i 70,196

Accumulated

Capital in

Other

Total

Common Stock

Excess of

Retained

Treasury Stock

Comprehensive

Shareholders’

Amount

Par Value

Earnings

Amount

Income (loss)

Equity

(amounts in thousands)

Balances as of December 31, 2018

i 27,018

i 270

i 116,427

i 82,548

i 12,746

( i 120,406

)

( i 14,611

)

i 64,228

Employee Stock Purchase Plan share

issuance

—

( i 91

)

—

( i 18

)

i 170

—

i 79

Restricted stock plan share

issuance/forfeiture

—

( i 1,311

)

—

i 52

i 1,158

—

( i 153

)

Deferred compensation plan share

issuance

—

( i 2,034

)

—

( i 215

)

i 2,034

—

Equity-based compensation

—

i 693

—

i 693

Net income

—

i 1,575

—

i 1,575

Foreign currency adjustment

—

( i 478

)

( i 478

)

Pension gain adjustment, net of tax

—

i 97

Balances as of June 28, 2019

i 27,018

i 270

i 113,684

i 84,123

i 12,565

( i 117,044

)

( i 14,992

)

i 66,041

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

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. Certain prior period amounts have been reclassified to conform to the current year presentation. 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 10‑K 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 second quarter began on March 28, 2020 and ended on June 26, 2020. The 2019 second quarter began on March 30, 2019 and ended on June 28, 2019. There were 64 billable days in both the second quarters of 2020 and 2019, and 126 and 127 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. i 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. i In addition, the Company subsequently entered into a i 10-year lease agreement for its new headquarters in Buffalo, NY. This agreement includes expected lease payments totaling $ i 3.7 million for the signed lease, which has not yet commenced. The Company expects to occupy its new space by December 31, 2020. /

There were no other subsequent events as of the date of this filing from the end of the fiscal second quarter on June 26, 2020 that require recognition or disclosure in these unaudited interim condensed consolidated financial statements.

/ /

The Company operates in i one industry, 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 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 two quarters ended June 26, 2020 and June 28, 2019 was as follows:

For the Quarter Ended

For the Two Quarters Ended

IT solutions

i 38.0

i 35.5

i 35.6

i 34.9

IT and other staffing

i 62.0

i 64.5

i 64.4

i 65.1

Total

i 100.0

The Company promotes a majority of its services through i 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.

/ i

CTG’s revenue by vertical market as a percentage of total revenue for the quarter and two quarters ended June 26, 2020 and June 28, 2019 was as follows:

For the Quarter Ended

For the Two Quarters Ended

Technology service providers

i 31.8

i 31.7

i 33.3

i 32.1

Manufacturing

i 13.7

i 17.1

i 14.4

i 17.1

Healthcare

i 13.6

i 16.7

i 13.5

i 16.5

Financial services

i 14.8

i 13.4

i 14.5

i 13.7

Energy

i 7.2

i 5.5

i 6.7

i 5.1

General markets

i 18.9

i 15.6

i 17.6

i 15.5

Total

i 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.

i 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 two quarters ended June 26, 2020 and June 28, 2019 was as follows:

For the Quarter Ended

For the Two Quarters Ended

Time-and-material

i 78.9

i 79.3

i 80.5

i 79.7

Progress billing

i 16.2

i 10.4

i 15.1

i 10.6

Percentage-of-completion

i 4.9

i 10.3

i 4.4

i 9.7

Total

i 100.0

The Company recorded revenue in the quarter and two quarters ended June 26, 2020 and June 28, 2019 as follows:

For the Quarter Ended:

June 26, 2020

June 28, 2019

Year-over-Year

Change

(amounts in thousands)

North America

i 55.4

i 49,357

i 62.4

i 62,653

( i 21.2

Europe

i 44.6

i 39,789

i 37.6

i 37,755

i 5.4

Total

i 100.0

i 89,146

i 100.0

i 100,408

( i 11.2

For the Two Quarters Ended:

June 26, 2020

June 28, 2019

Year-over-Year

Change

(amounts in thousands)

North America

i 56.6

i 99,664

i 61.8

i 122,088

( i 18.4

Europe

i 43.4

i 76,431

i 38.2

i 75,558

i 1.2

Total

i 100.0

i 176,095

i 100.0

i 197,646

( i 10.9

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 June 26, 2020, the aggregate transaction price allocated to unsatisfied or partially unsatisfied performance obligations for fixed-price and all managed-support contracts was approximately $ i 11.6 million and $ i 52.4 million, respectively. Approximately $ i 26.1 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2020, and approximately $ i 37.9 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2021 and beyond. As

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 June 26, 2020 and December 31, 2019, the carrying amounts of the Company’s cash of $ i 34.3 million and $ i 10.8 million, respectively, approximated fair value.

As described in Note 3 of the condensed consolidated financial statements, the Company acquired i i i 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 Tech-IT of 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 also acquired StarDust in the 2020 first quarter, and the Company has begun the process of accounting for the acquisition and anticipates completion in the 2020 third quarter.

The Company is also allowed to elect an irrevocable option to measure, on a contract-by-contract basis, specific financial instruments and certain other items that are currently not being measured at fair value. The Company did not elect to apply the fair value provisions of this accounting standard for any specific contracts during the quarters ended June 26, 2020 or June 28, 2019.

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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 i 17 individuals, whose average age is i 76 years old. Those policies have generated cash surrender value and the Company has taken loans against the policies. At June 26, 2020, these insurance policies have a gross cash surrender value of $ i 28.2 million, outstanding loans and interest totaling $ i 26.0 million, and a net cash surrender value of $ i 2.2 million. At December 31, 2019, these insurance policies had a gross cash surrender value of $ i 29.7 million, outstanding loans and interest totaling $ i 27.2 million, and a net cash surrender value of $ i 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 June 26, 2020 and December 31, 2019, the total death benefit for the remaining policies was approximately $ i 37.1 million and $ i 37.7 million, respectively. Currently, upon the death of all of the remaining plan participants, the Company would expect to receive approximately $ i 10.8 million after the payment of obligations, and, under current tax regulations, record a non-taxable gain of approximately $ i 8.6 million.

During the second quarter ended June 26, 2020, one of the participants in the plan passed away. Upon their death, the Company recorded a non-taxable life insurance gain of approximately $ i 0.4 million, which it has recorded on its condensed consolidated statements of income. Additionally, the Company settled approximately $ i 1.9 million of outstanding loans and interest.

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

As part of our working capital management, the Company entered into a factoring agreement during the 2020 first quarter to sell certain trade accounts receivables on a non-recourse basis to third-party financial institutions. We account for these transactions as sales of receivables and present 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 $ i 13.5 million and $ i 25.4 million during the quarter and year-to-date periods ended June 26, 2020. Factoring fees for the sale of receivables were recorded in direct costs and were not material for the quarter and year-to-date periods ended June 26, 2020. There were no accounts receivable factoring activities during the quarter and year-to-date periods ended June 28, 2019.

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Property, Equipment and Capitalized Software Costs

Property, equipment and capitalized software at June 26, 2020 and December 31, 2019 are summarized as follows:

(amounts in thousands)	June 26, 2020			December 31, 2019
Property, equipment and capitalized software	$	i 13,592		$	i 17,384
Accumulated depreciation and amortization		( i 8,346	)		( i 11,005	)
Property, equipment and capitalized software, net	$	i 5,246		$	i 6,379

The Company recorded $ i 0.3 million and $ i 0.6 million of capitalized software costs during the quarter and two quarters ended June 26, 2020, respectively, and less than $ i i 0.1 / million of capitalized software costs during both the quarter and two quarters ended June 28, 2019. As of those dates, the Company had capitalized a total of $ i 2.7 million and $ i 2.0 million, respectively, for software projects developed for commercial use. Amortization periods range from i 3 to i 5 years, and are evaluated periodically for propriety. Amortization expense totaled approximately $ i 0.1 million and $ i 0.2 million in the quarter and two quarters ended June 26, 2020, respectively, and approximately $ i 0.1 million and $ i 0.3 million in the quarter and two quarters ended June 28, 2019. Accumulated amortization for these projects totaled $ i 1.1 million and $ i 1.0 million as of June 26, 2020 and June 28, 2019, respectively.

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

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Guarantees

The Company has a number of guarantees in place in its European operations that support office leases and performance under government contracts. At both June 26, 2020 and December 31, 2019, these guarantees totaled approximately $ i i 3.0 / million and generally have expiration dates ranging from June 2020 through October 2034.

Goodwill

The goodwill recorded on the Company's condensed consolidated balance sheet at June 26, 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 i i no / impairment indicators noted in the quarters or two quarters ended June 26, 2020 and June 28, 2019.

The changes in the carrying amount of goodwill for the two quarters ended June 26, 2020 are as follows:

(amounts in thousands)
Balance at December 31, 2019	$	i 16,681
Acquired goodwill		i 3,260
Foreign currency translation		i 28
Balance at June 26, 2020	$	i 19,969

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Acquired Intangible Assets

Acquired intangible assets at June 26, 2020 consist of the following:

(amounts in thousands)

Estimated

Economic Life

Gross Carrying Amount

Accumulated Amortization

Foreign Currency Translation

Net Carrying Amount

Trademarks

i 2 year

i 1,432

i 1,122

( i 86

)

i 224

Customer relationships

8-13 years

i 9,905

i 1,627

( i 761

)

i 7,517

Total

i 11,337

i 2,749

( i 847

)

i 7,741

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

Year	Annual Amortization
(amounts in thousands)
2020	$	i 547
2021		i 926
2022		i 870
2023		i 870
2024		i 870
2025		i 870
Thereafter		i 2,788
Total	$	i 7,741

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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 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 i 100% of the equity of StarDust, for approximately $ i 5.8 million (€ i 5.2 million based on a EUR into USD exchange rate of i 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.

i An earn-out of up to $ i 1.1 million (€ i 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 € i 10,000 of consolidated direct profit achieved above the target, an additional € i 1,000 can be earned, with no maximum limit. There is no payout if the achievement is below the target threshold. / 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. As of the date of filing this quarterly report on Form 10-Q, the preliminary purchase accounting has not yet been finalized due primarily to the timing of information being provided to our valuation specialist and the pending receipt of a preliminary valuation report for certain assets and liabilities, including identified intangible assets. The Company expects to update this information in the third quarter. At June 26, 2020, the Company allocated value to current assets and liabilities based on book values at March 3, 2020, which approximates fair value. The remaining purchase price is tentatively allocated to goodwill.

Tech-IT PSF S.A. (“Tech-IT”)

On February 6, 2019, the Company acquired i 100% of the equity of Tech-IT for approximately $ i 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.

i An earn-out of up to a maximum of $ i 1.7 million (€ i 1.5 million based on a EUR into USD exchange rate of i 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 $ i 0.6 million, and was $ i 0.7 million as of June 26, 2020. Approximately $ i 0.4 million and $ i 0.3 million of the remaining contingent consideration liability is recorded in “other current liabilities” and “other long-term liabilities,” respectively, on the June 26, 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	$	i 9,678
Fair value of contingent consideration		i 569
Fair value of purchase consideration	$	i 10,247

/ i

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	$	i 1,217
Accounts receivable		i 4,491
Prepaids & other		i 1,122
Property & equipment		i 98
Acquired intangibles		i 4,099
Goodwill		i 5,331
Total assets acquired	$	i 16,358

Liabilities Assumed:
Accounts payable	$	i 2,378
Accrued compensation		i 172
Other short-term liabilities		i 2,447
Deferred income taxes		i 1,114
Total liabilities assumed		i 6,111
Net assets acquired	$	i 10,247

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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	$	i 683	i 2 years
Customer relationships		i 3,416	i 8 years
Fair value of purchase consideration	$	i 4,099

The Company incurred acquisition-related legal and consulting fees and amortization of intangible assets of approximately $ i 0.2 million and $ i 0.4 million in the 2020 second quarter and year-to-date period, respectively, and less than $ i i 0.1 / million in both the 2019 second quarter and year-to-date periods, 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 i 100% of the equity of Soft Company for approximately $ i 16.9 million (€ i 13.6 million based on a EUR into USD exchange rate of i 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 $ i 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 $ i 0.8 million as of June 26, 2020, and is expected to be paid in 2020.

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 amortization of intangible assets of approximately $ i 0.1 million and $ i 0.3 million in the 2020 second quarter and year-to-date period, respectively, and incurred acquisition-related legal and consulting fees, adjustments to the fair value of the earn-out liability, and amortization of intangible assets of $ i 0.5 million and $ i 0.9 million in the 2019 second 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 two quarters ended June 26, 2020 and June 28, 2019 were as follows:

For the Quarter Ended

For the Two Quarters Ended

(amounts in thousands, except per-share data)

Weighted-average number of shares outstanding

during period

i 13,605

i 13,436

i 13,576

i 13,408

Common stock equivalents from incremental shares

under equity-based compensation plans

i 677

i 482

i 723

i 443

Number of shares on which diluted earnings

per share is based

i 14,282

i 13,918

i 14,299

i 13,851

Net income

i 1,759

i 943

i 2,903

i 1,575

Net income per share

Basic

i 0.13

i 0.07

i 0.21

i 0.12

Diluted

i 0.12

i 0.07

i 0.20

i 0.11

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

Certain options representing i 1.1 million and i 1.2 million shares of common stock were outstanding at June 26, 2020 and June 28, 2019, respectively, 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 i 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 $ i 1.5 million and $ i 3.1 million for the 2020 second quarter and year-to-date period, respectively, and $ i 1.7 million and $ i 3.4 million for the 2019 second quarter and year-to-date period, respectively. The Company incurred variable lease cost of $ i 0.2 million and $ i 0.3 million in the 2020 second quarter and year-to-date period, respectively, and $ i 0.2 million and $ i 0.3 million in the 2019 second quarter and year-to-date period, respectively. The Company also incurred short-term lease cost of $ i 0.1 million and $ i 0.2 million in the 2020 second quarter and year-to-date period, respectively, and $ i 0.1 million and $ i 0.3 million in the 2019 second quarter and year-to-date period, respectively.

i Maturities for the Company’s lease liabilities for all operating leases as of June 26, 2020 are as follows:

	Total
Year	Operating Leases
(amounts in thousands)
2020 (remaining)	$	i 3,047
2021		i 5,243
2022		i 3,874
2023		i 2,647
2024		i 1,605
2025 & thereafter		i 4,874
Total undiscounted operating lease payments	$	i 21,290
Less: Interest		( i 1,072	)
Total present value of operating lease liabilities	$	i 20,218

i The weighted average remaining lease terms and discount rates for all operating leases as of June 26, 2020 and June 28, 2019 were as follows:

	June 26, 2020			June 28, 2019
Weighted average remaining lease term (years)		6.27			3.43
Weighted average remaining discount rate		i 2.01	%		i 2.84	%

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

(amounts in thousands)	June 26, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases	$	i 3,124
Right-of-use assets obtained in exchange for new operating lease liabilities		i 1,963

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

	Total
Year	Operating Leases
(amounts in thousands)
2020	$	i 5,979
2021		i 4,696
2022		i 3,255
2023		i 2,257
2024		i 1,485
2025 & thereafter		i 4,828
Total undiscounted operating lease payments	$	i 22,500
Less: Interest		( i 1,247	)
Total present value of operating lease liabilities	$	i 21,253

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 $ i 45.0 million, including a sublimit of $ i 10.0 million for letters of credit and a $ i 10.0 million sublimit for swing line loans.

The Credit and Security Agreement expires in i December 2022, and has interest rates ranging from i 150 to i 200 basis points over LIBOR or the greater of (i) the prime rate, (ii) the federal funds effective rate plus i 50 basis points, and (iii) adjusted LIBOR plus 100 basis points plus a spread ranging from i 50 to i 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 June 26, 2020 and December 31, 2019, there was $ i 12.0 million and $ i 5.3 million outstanding under the Credit and Security Agreement, respectively. 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.

The maximum amounts outstanding under its credit agreement in the 2020 and 2019 second quarters were $ i 12.0 million and $ i 22.3 million, respectively, while borrowings during those quarters averaged $ i 12.0 million and $ i 15.1 million, respectively, and carried weighted average interest rates of i 1.6% and i 3.2%, 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 June 26, 2020, included a fixed charge coverage ratio, which must be greater than i 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 $ i 5.0 million for the trailing twelve months, and capital expenditures for property, plant, equipment, and capitalized software must be no more than $ i 5.0 million in any annual period. The fixed charge coverage ratio is only tested if availability on a measurement date is less than $ i 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. Total availability as of June 26, 2020 was approximately $ i 5.1 million. The Company was in compliance with these covenants at June 26, 2020 as the fixed charge ratio was i 50.8 to 1, the adjusted EBITDA for the trailing twelve months was $ i 14.2 million, and capital expenditures for property, equipment and capitalized software were $ i 1.2 million in the 2020 year-to-date period. The Company was also in compliance with its covenants at June 28, 2019.

7.	Accumulated Other Comprehensive Loss

The components that make up accumulated other comprehensive loss on the condensed consolidated balance sheets at June 26, 2020 and December 31, 2019 are as follows:

(amounts in thousands)	June 26, 2020			December 31, 2019
Foreign currency	$	( i 9,162	)	$	( i 9,106	)
Pension loss, net of tax of $ i 248 in 2020 and $ i 265 in 2019		( i 9,375	)		( i 9,436	)
Accumulated other comprehensive loss	$	( i 18,537	)	$	( i 18,542	)

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

For the Quarter Ended

For the Two Quarters Ended

(amounts in thousands)

Amortization of actuarial losses

i 72

i 47

i 145

i 93

Income tax

i 1

—

i 1

—

Net of tax

i 73

i 47

i 146

i 93

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. The CARES Act did not materially affect the Company’s second quarter 2020 income tax provision, deferred tax assets and liabilities, or related taxes payable. The Company continues to assess the future implications of these provisions within the CARES Act on its consolidated condensed financial statements, but does not expect the impact to be material.

The ETR was higher in the 2020 second quarter and year-to-date period as compared with the corresponding 2019 periods primarily resulting from certain non-deductible items due to the full valuation allowance against the U.S. deferred tax assets, and taxable income in the Company’s European operations where the ETR is generally higher than that of the United States.

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 June 26, 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.

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. i No benefit payments were made in 2019 and i none 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 i i no / benefit payments are expected to be paid in 2020.

Net periodic pension cost for the quarter and two quarters ended June 26, 2020 and June 28, 2019 for the plans is as follows:

For the Quarter Ended

For the Two Quarters Ended

(amounts in thousands)

Service cost

i 102

i 83

i 205

i 167

Interest cost

i 87

i 146

i 174

i 293

Expected return on assets

( i 158

)

( i 153

)

( i 317

)

( i 308

)

Amortization of actuarial loss

i 74

i 48

i 148

i 96

Net periodic pension cost

i 105

i 124

i 210

i 248

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 second quarter and year-to-date period, the Company made benefit payments totaling approximately $ i 0.2 million and $ i 0.3 million, respectively, and expects to make payments in 2020 totaling approximately $ i 0.6 million. The Company made benefit payments totaling $ i 0.2 million and $ i 0.3 million in the 2019 second quarter and year-to-date period, respectively.

As the NDBP was curtailed for additional contributions in January 2003, i no contributions were made in 2019 and i none 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 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 i 4.0%, which is consistent with historical returns and the i 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 $ i 0.2 million and $ i 0.3 million in the 2020 second quarter and year-to-date period, respectively, and $ i 0.1 million and $ i 0.2 million in the 2019 second quarter and

year-to-date period, respectively. The Company made benefit payments totaling less than $ i i 0.1 / million in both the 2020 and 2019 second quarters, respectively, and expects to make payments in 2020 of less than $ i 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 June 26, 2020 and June 28, 2019 was as follows:

	For the Quarter Ended
(amounts in thousands)	June 26, 2020			June 28, 2019
Fair value of plan assets at beginning of period	$	i 18,078		$	i 17,403
Return on plan assets		i 317			i 308
Contributions		i 568			i 554
Benefits paid		( i 408	)		( i 408	)
Effect of exchange rate changes		i 16			( i 101	)
Fair value of plan assets at end of quarter	$	i 18,571		$	i 17,756

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 i i i i no / / / cash contributions in either the 2020 or 2019 second 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 i i i i no / / / stock units purchased in the 2020 or 2019 second quarter or year-to-date periods.

The Company maintains the Non-Employee Director Deferred Compensation Plan for its non-employee directors. There were i i i i no / / / cash contributions in either the 2020 or 2019 second 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 the 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 second quarter and year-to-date period, the Company granted restricted stock totaling i 219,800 and i 599,928 shares, respectively. During the 2019 second quarter and year-to-date period, the Company granted restricted stock totaling i 203,400 and i 418,726 shares, respectively. All grants in 2020 and 2019 were funded out of treasury stock.

Director Board fees are paid exclusively in deferred stock units. Of the shares granted during the 2020 first quarter, i 170,848 shares represented restricted stock units that were granted to Board members. i 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 year-to-date period. Grants of similar units to the Board members totaled i 215,326 in the 2019 first quarter.

Of the shares granted in the 2020 first quarter, i 209,280 shares were granted to senior management, of which i 115,410 shares included a performance condition. i The shares will only vest, in part, to senior management if at least i 80% of a three-year cumulative target for diluted earnings per share is met for the three-year period ended i December 31, 2022. If at least 80% of the three-year EPS target is not met, the grants will expire. / i i No / performance awards were granted during the 2019 first or second quarters.

The remaining shares granted in the 2020 and 2019 second quarters and year-to-date periods include shares that vest ratably over a period of three or i i i i 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 i 173,010 stock options were issued during the 2020 first quarter on March 6, 2020. The options have a fair value of $ i 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 $ i 5.88 per option, an expected life of i 5.2 years, expected volatility of i 36.7%, an expected dividend yield of i zero, and a risk free rate of i 0.6%. The options vest ratably over i three years, and are being expensed over that period. i No stock options were granted during the 2020 second quarter. The Company granted i 26,500 stock options during the 2019 second quarter. i No stock options were issued during the 2019 first quarter. The options have a fair value of $ i 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 $ i 4.20 per option, an expected life of i 3.7 years, expected volatility of i 36.1%, an expected dividend yield of i zero, and a risk free rate of i 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 $ i 30.0 million. The Company did not purchase shares for treasury during the 2020 second quarter or year-to-date period. As of June 26, 2020, the Company had repurchased approximately i 3.2 million of shares pursuant to the authorization and had approximately $ i 7.7 million left in its current stock repurchase authorization.

During the 2020 second quarter and year-to-date period, the Company issued i 219,800 and i 599,928 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 option exercises, and restricted stock grants.

The Company did i i no / t purchase shares for treasury during the 2019 second quarter or year-to-date period. At June 28, 2019, the Company had approximately $ i 7.7 million remaining in its stock repurchase authorization. During the 2019 second quarter and year-to-date period, the Company issued i 203,400 and i 418,726, 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 second quarter, International Business Machines Corporation (IBM) was the Company’s largest client and accounted for $ i 18.9 million or i 21.2% of consolidated revenue compared with $ i 21.1 million or i 21.1% of consolidated revenue in the comparable 2019 period. In the 2020 year-to-date period, IBM accounted for $ i 38.8 million or i 22.0% of consolidated revenue, compared with $ i 42.0 million or i 21.3% 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 for i nine months and now expires on i September 30, 2020. The Company’s accounts receivable from IBM at June 26, 2020 and December 31, 2019 totaled $ i 14.4 million and $ i 23.0 million, respectively.

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

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Quarter and Two Quarters Ended June 26, 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 (xiv) 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. The market demand for the Company’s services is heavily dependent on IT spending by major corporations, organizations and government entities in the markets and regions that it serves. The pace of technological change and changes in business requirements and practices of the Company’s clients all have a significant impact on the demand for the services that CTG provides. Competition for new engagements and pricing pressure has been and, management believes, will continue to be strong.

IT solutions and IT and other staffing revenue as a percentage of total revenue for the quarters and year-to-date periods ended June 26, 2020 and June 28, 2019 was as follows:

	For the Quarter Ended						For the Two Quarters Ended
	June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019
IT solutions		38.0	%		35.5	%		35.6	%		34.9	%
IT and other staffing		62.0	%		64.5	%		64.4	%		65.1	%
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 these either are 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 quarters and year-to-date periods ended June 26, 2020 and June 28, 2019 was as follows:

	For the Quarter Ended						For the Two Quarters Ended
	June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019
Technology service providers		31.8	%		31.7	%		33.3	%		32.1	%
Manufacturing		13.7	%		17.1	%		14.4	%		17.1	%
Healthcare		13.6	%		16.7	%		13.5	%		16.5	%
Financial services		14.8	%		13.4	%		14.5	%		13.7	%
Energy		7.2	%		5.5	%		6.7	%		5.1	%
General markets		18.9	%		15.6	%		17.6	%		15.5	%
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 quarters and year-to-date periods ended June 26, 2020 and June 28, 2019 was as follows:

	For the Quarter Ended						For the Two Quarters Ended
	June 26, 2020			June 28, 2019			June 26, 2020			June 28, 2019
Time-and-material		78.9	%		79.3	%		80.5	%		79.7	%
Progress billing		16.2	%		10.4	%		15.1	%		10.6	%
Percentage-of-completion		4.9	%		10.3	%		4.4	%		9.7	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

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:	June 26, 2020					June 28, 2019
	(amounts in thousands)
Revenue		100.0	%	$	89,146		100.0	%	$	100,408
Direct costs		79.0	%		70,408		81.7	%		82,072
Selling, general and administrative expenses		18.9	%		16,824		16.5	%		16,483
Operating income		2.1	%		1,914		1.8	%		1,853
Interest and other income (expense), net		1.4	%		1,208		(0.3	)%		(366	)
Income before income taxes		3.5	%		3,122		1.5	%		1,487
Provision for income taxes		1.5	%		1,363		0.6	%		544
Net income		2.0	%	$	1,759		0.9	%	$	943

For the Two Quarters Ended:	June 26, 2020					June 28, 2019
	(amounts in thousands)
Revenue		100.0	%	$	176,095		100.0	%	$	197,646
Direct costs		79.7	%		140,311		81.8	%		161,594
Selling, general and administrative expenses		18.0	%		31,803		16.7	%		33,072
Operating income		2.3	%		3,981		1.5	%		2,980
Interest and other income (expense), net		0.5	%		1,017		(0.3	)%		(546	)
Income before income taxes		2.8	%		4,998		1.2	%		2,434
Provision for income taxes		1.2	%		2,095		0.4	%		859
Net income		1.6	%	$	2,903		0.8	%	$	1,575

The Company recorded revenue in the quarter and two quarters ended June 26, 2020 and June 28, 2019 as follows:

For the Quarter Ended:	June 26, 2020					June 28, 2019					Year-over-Year Change
	(amounts in thousands)
North America		55.4	%	$	49,357		62.4	%	$	62,653		(21.2	)%
Europe		44.6	%		39,789		37.6	%		37,755		5.4	%
Total		100.0	%	$	89,146		100.0	%	$	100,408		(11.2	)%

For the Two Quarters Ended:	June 26, 2020					June 28, 2019					Year-over-Year Change
	(amounts in thousands)
North America		56.6	%	$	99,664		61.8	%	$	122,088		(18.4	)%
Europe		43.4	%		76,431		38.2	%		75,558		1.2	%
Total		100.0	%	$	176,095		100.0	%	$	197,646		(10.9	)%

There were 64 billable days in both of the 2020 and 2019 second quarters. Reimbursable expenses billed to clients and included in revenue totaled $0.2 million and $0.6 million in the 2020 and 2019 second quarters, respectively.

There were 126 and 127 billable days in the 2020 and 2019 year-to-date periods, respectively. Reimbursable expenses billed to clients and included in revenue totaled $0.6 million and $1.2 million in the 2020 and 2019 year-to-date periods, respectively.

On a consolidated basis, IT solutions revenue decreased $1.8 million to $33.8 million, but expanded to represent 38.0% of consolidated revenue in the 2020 second quarter as compared with $35.6 million and 35.5% in the corresponding 2019 period. Solutions revenue totaled $62.6 million or 35.6% in the 2020 year-to-date period as compared

with $69.1 million or 34.9% of revenue in the corresponding 2019 period. The decrease in revenue was primarily due to several significant solutions projects ending in the 2019 fourth quarter. However, the increase in the percentage of total revenue was due to the Company’s execution of its solutions-centric strategy where the primary focus is to deliver solutions related services to its clients and disengage from low margin staffing business.

IT and other staffing revenue decreased $9.5 million to $55.3 million and represented 62.0% of consolidated revenue in the 2020 second quarter as compared with $64.8 million or 64.5% of revenue in the corresponding 2019 period. Staffing revenue totaled $113.5 million or 64.4% in the 2020 year-to-date period compared with $128.6 million or 65.1% in the corresponding 2019 period. The IT staffing revenue decrease in both the second quarter and year-to-date period was primarily due 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 transform to a solutions-centric organization. Additionally, the Company experienced lower demand 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 second quarter as compared with the 2020 first quarter. The Company did not experience significant additional headcount reductions or project cancellations during the second 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 the potential downturn of its operations for the remainder of 2020. The Company, however, in anticipation of lower revenue took steps to reduce its expenses beginning in April 2020, 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 has been eliminated, and business travel has been restricted. Finally, the Company is actively participating in government-sponsored programs in its European operations, including Belgium, France and Luxembourg, that will partially reimburse the Company for employees who have been made idle as a result of the pandemic. The Company expects to continue to participate in these programs, but the benefit provided by the respective governments will diminish as year-end approaches.

The Company includes all billable consultants, consisting of both employees and subcontractors, and its support services in its headcount totals. CTG’s headcount at June 26, 2020 was approximately 3,700, a 15% decrease from 4,350 at June 28, 2019, and a 6% 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 negatively impacted in the 2020 second quarter by the strength 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, used in the United Kingdom. If there had been no change in these exchange rates from the 2019 second quarter to the 2020 second quarter, total European revenue would have been approximately $0.8 million higher, and operating income would have increased by less than $0.1 million. If there had been no change in these rates in the first half of 2020, total European revenue would have been approximately $1.9 million higher, and operating income would have increased by approximately $0.1 million.

The Company continues to assess the potential impact that the United Kingdom’s exit from the European Union (Brexit) will have 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 impact of the exit to have a material impact on the Company’s operations.

In the 2020 second quarter and year-to-date period, International Business Machines Corporation (IBM) was the Company’s largest client and accounted for $18.9 million or 21.2% and $38.8 million and 22.0%, respectively, of consolidated revenue. This compares with $21.1 million or 21.1% and $42.0 million and 21.3%, respectively, of consolidated revenue in the comparable 2019 periods. The National Technical Services Agreement with IBM previously expired on December 31, 2019. The Agreement with IBM has been extended for nine months and now expires on September 30, 2020. The Company’s accounts receivable from IBM at June 26, 2020 and December 31, 2019 totaled $14.4 million and $23.0 million, respectively.

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

Direct costs, defined as the costs for billable staff including billable out-of-pocket expenses, were 79.0% and 79.7% of revenue in the 2020 second quarter and year-to-date period, respectively, as compared with 81.7% and 81.8% of revenue in the 2019 corresponding periods, respectively. The Company’s direct costs as a percentage of revenue decreased in the 2020 second 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 second quarter of 2020 as compared with the prior year. Lowering costs and improving margins is part of the Company’s solutions-centric strategy. The direct profit margin on IT solutions business improved about 290 basis points in the 2020 second quarter as compared with the prior year period. Additionally, the direct profit margin on IT and other staffing business improved 220 basis points as compared with the prior year.

Selling, general and administrative (“SG&A”) expenses were 18.9% of revenue in the 2020 second quarter as compared with 16.5% in the corresponding 2019 period, and 18.1% in the 2020 year-to-date period as compared with 16.7% in the corresponding 2019 period. The increase in SG&A expenses as a percentage of revenue in both the 2020 second 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 $21.6 million year-over-year. Overall, SG&A expense was $1.3 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 second quarter, compared with 1.8% of revenue in the 2019 second quarter, and 2.3% in the 2020 year-to-date period, as compared with 1.5% in the corresponding 2019 period.

Other income, net in the 2020 second quarter was $1.2 million. This included approximately $0.8 million of a gain from the sale of the Company’s corporate headquarters, and $0.4 million of a non-taxable life insurance gain from the death of a former executive.

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 second quarter and year-to-date ETR was 43.7% and 41.9%, respectively, and the 2019 second quarter and year-to-date ETR was 36.6% and 35.3%, respectively. The higher ETR in the 2020 second quarter as compared with the corresponding 2019 period primarily was a result of certain non-deductible items due to the full valuation allowance against the U.S. deferred tax assets, and taxable income in the Company’s European operations where the ETR is generally higher than that of the United States.

Net income was $0.12 and $0.20 per diluted share in the 2020 second quarter and year-to-date period, respectively, as compared with $0.07 and $0.11 per diluted share in the 2019 second quarter and year-to-date period, respectively. Diluted earnings per share was calculated using 14.3 million and 13.9 million weighted-average equivalent shares outstanding for both the quarter and year-to-date periods ended June 26, 2020 and June 28, 2019.

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 June 26, 2020, the Company had a total of approximately $0.3 million of deferred tax assets, net of valuation allowances, and approximately $1.9 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 June 26, 2020, the Company had deferred tax assets recorded resulting from net operating losses in previous years totaling approximately $0.5 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 June 26, 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 $0.2 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 second quarter and year-to-date period would have increased or decreased net income by approximately $31,300 and $50,000, 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.

Financial Condition and Liquidity

Cash provided by operating activities was $19.6 million in the 2020 year-to-date period compared with cash used of $5.1 million in the 2019 corresponding period. In 2020, net income was $2.9 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 $1.6 million. In 2019, net income was $1.6 million, while the corresponding non-cash adjustments totaled $1.9 million.

The accounts receivable balance decreased $10.9 million in 2020 and increased $5.9 million in 2019. The decrease in the accounts receivable balance in 2020 primarily resulted from an advance payment program that the Company entered into with its largest client during the 2020 first quarter, where approximately $13.5 million was paid in the 2020 second quarter before the normal due date. Additionally, the decrease was due to a decrease in revenue of 10.9% as compared with the corresponding 2019 period. Days sales outstanding (DSO) was 81 days at June 26, 2020 as compared with 83 at June 28, 2019. The increase in the accounts receivable balance in 2019 primarily resulted from an increase in revenue of 8.4% in the 2019 second quarter as compared with the corresponding 2018 quarter. There was also an increase in DSO of two days in 2019 to 83 days from 81 days at December 31, 2018.

Prepaid and other current assets increased $0.3 million and $1.2 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 $2.9 million and $2.3 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 $1.0 million and $2.1 million in the 2020 and 2019 periods, respectively. The 2020 increase is primarily due to a change in the pay cycle in the U.S. where the second quarter did not end on a pay date, but did end on a pay date in 2019. The 2019 increase was driven by higher headcount compared with the corresponding prior periods. Income taxes payable/receivable increased $1.4 million and $0.1 million in the 2020 and 2019 periods, respectively. The increase in the balance in 2020 reflected higher taxable income in 2020, and a higher ETR due to the non-deductibility of certain items resulting from the full valuation allowance in the United States. Advance billings

increased $1.8 million in 2020 and decreased $1.5 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.

Investing activities used $2.5 million and $9.1 million of cash in the 2020 and 2019 periods, respectively. Cash paid for the acquisition of StarDust, net of cash acquired, was approximately $4.0 million in the 2020 first quarter. Cash paid for the acquisition of Tech-IT, net of cash acquired, was approximately $8.5 million in the 2019 first quarter. The Company used cash for additions to property, equipment, and capitalized software of $1.2 million and $0.7 million in the 2020 and 2019 periods, respectively. The Company has no significant commitments for the purchase of property and equipment at June 26, 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.

Financing activities provided $6.2 million of cash in 2020 and $13.4 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 $6.7 million in the 2020 year-to-date period, while cash borrowed to fund the acquisition of Tech-IT netted to $13.3 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 of 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 $0.2 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 June 26, 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 and a $10.0 million sublimit for swing line loans.

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 with either rate at its discretion. At June 26, 2020 and December 31, 2019, there was $12.0 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 second quarter, or remainder of the year. The Company continued to borrow this amount during the entire second quarter. This borrowing brought the Company’s consolidated cash balance to $34.3 million, the highest total in nearly five years, at the end of the 2020 second quarter.

The maximum amounts outstanding under its credit agreement in the 2020 and 2019 second quarters were $12.0 million and $22.3 million, respectively, while borrowings during those quarters averaged $12.0 million and $15.1 million, respectively, and carried weighted average interest rates of 1.6% and 3.2%, 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 June 26, 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. Total availability as of June 26, 2020 was approximately $5.1 million. The Company was in compliance with these covenants at June 26, 2020 as the fixed charge ratio was 50.8 to 1, the adjusted EBITDA for the trailing twelve months was $14.2 million and capital expenditures for property, equipment and capitalized software were $1.2 million in the 2020 year-to-date period. The Company was also in compliance with its covenants at June 28, 2019.

Of the total cash and cash equivalents reported on the consolidated balance sheet at June 26, 2020 of $34.3 million, approximately $17.2 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 $32.7 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 second quarters other than guarantees in our European operations that support office leases and the performance under government contracts. These guarantees totaled approximately $3.0 million at June 26, 2020.

Contractual Obligations

The Company did not enter into any significant contractual obligations during the quarter or year-to-date period ended June 26, 2020.

Recently Issued Accounting Standards

(“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 negatively impacted in the 2020 second quarter and year-to-date period by the strength 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 second quarter to the 2020 second quarter, total European revenue would have been approximately $0.8 million higher and operating income would have been less than $0.1 million higher. If there had been no change in the rates from the 2019 year-to-date period to the corresponding 2020 period, total revenue would have been $1.9 million higher, and operating income would have been $0.1 million higher.

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.

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 June 26, 2020, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

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 August 3, 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
March 28 - April 30			$	—		—	$	7,727,724
May 1 - May 31		—	$	—		—	$	7,727,724
June 1 - June 26		—	$	—		—	$	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

None

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

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: August 3, 2020

Dates Referenced Herein and Documents Incorporated by Reference

This ‘10-Q’ Filing	Date	Other Filings

	12/31/22
	12/31/20	10-K, 11-K
	9/30/20
Filed on:	8/3/20
	7/27/20
For Period end:	6/26/20	11-K
	3/28/20
	3/27/20	10-Q
	3/12/20
	3/6/20	4
	3/3/20	4, 8-K
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	12/31/19	10-K, 11-K
	12/15/19
	6/28/19	10-Q, 8-K
	3/30/19
	3/29/19	10-Q
	2/6/19	8-K
	12/31/18	10-K, 11-K
	2/15/18	8-K, SC TO-C
	11/30/94
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Computer Task Group Inc. – ‘10-Q’ for 6/26/20

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