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Computer Task Group Inc – ‘10-Q’ for 3/27/20

On:  Wednesday, 5/6/20, at 11:43am ET   ·   For:  3/27/20   ·   Accession #:  1564590-20-21660   ·   File #:  1-09410

Previous ‘10-Q’:  ‘10-Q’ on 11/1/19 for 9/27/19   ·   Next:  ‘10-Q’ on 8/3/20 for 6/26/20   ·   Latest:  ‘10-Q’ on 11/8/23 for 9/29/23   ·   1 Reference:  By:  Computer Task Group Inc. – ‘S-8’ on 12/17/20

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

 5/06/20  Computer Task Group Inc           10-Q        3/27/20   80:7.3M                                   ActiveDisclosure/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    792K 
 2: EX-31.A     Certification -- §302 - SOA'02                      HTML     33K 
 3: EX-31.B     Certification -- §302 - SOA'02                      HTML     33K 
 4: EX-32       Certification -- §906 - SOA'02                      HTML     29K 
41: R1          Document and Entity Information Document            HTML     79K 
66: R2          Condensed Consolidated Statements of Income         HTML     70K 
                (Unaudited)                                                      
56: R3          Condensed Consolidated Statements of Comprehensive  HTML     45K 
                Income (Unaudited)                                               
14: R4          Condensed Consolidated Statements of Comprehensive  HTML     29K 
                Income (Unaudited) (Parenthetical)                               
40: R5          Condensed Consolidated Balance Sheets (Unaudited)   HTML    128K 
65: R6          Condensed Consolidated Balance Sheets (Unaudited)   HTML     38K 
                (Parenthetical)                                                  
55: R7          Condensed Consolidated Statements of Cash Flows     HTML    110K 
                (Unaudited)                                                      
13: R8          Condensed Consolidated Statements of Shareholders'  HTML     74K 
                Equity (Unaudited)                                               
42: R9          Financial Statements                                HTML     30K 
74: R10         Summary of Significant Accounting Policies          HTML    230K 
63: R11         Acquisitions                                        HTML     81K 
16: R12         Net Income Per Share                                HTML     58K 
44: R13         Lease Commitments                                   HTML     93K 
73: R14         Debt                                                HTML     33K 
62: R15         Accumulated Other Comprehensive Loss                HTML     58K 
15: R16         Income Taxes                                        HTML     30K 
43: R17         Deferred Compensation and Other Benefits            HTML     89K 
72: R18         Equity-based Compensation                           HTML     32K 
64: R19         Treasury Stock                                      HTML     31K 
21: R20         Significant Clients                                 HTML     29K 
31: R21         Summary of Significant Accounting Policies          HTML    267K 
                (Policies)                                                       
76: R22         Summary of Significant Accounting Policies          HTML    205K 
                (Tables)                                                         
49: R23         Acquisitions (Tables)                               HTML     76K 
20: R24         Net Income Per Share (Tables)                       HTML     57K 
29: R25         Lease Commitments (Tables)                          HTML     93K 
75: R26         Accumulated Other Comprehensive Loss (Tables)       HTML     58K 
48: R27         Deferred Compensation and Other Benefits (Tables)   HTML     76K 
22: R28         Financial Statements - Additional Information       HTML     27K 
                (Details)                                                        
28: R29         Summary of Significant Accounting Policies - Basis  HTML     34K 
                of Presentation and Consolidation (Details)                      
45: R30         Summary of Significant Accounting Policies -        HTML     37K 
                Summary of IT Solutions and IT and Other Staffing                
                Revenue as Percentage of Total Revenue (Details)                 
18: R31         Summary of Significant Accounting Policies -        HTML     45K 
                Revenue by Vertical Market as Percentage of Total                
                Revenue (Details)                                                
59: R32         Summary of Significant Accounting Policies -        HTML     34K 
                Revenue by Contract Type (Details)                               
70: R33         Summary of Significant Accounting Policies -        HTML     44K 
                Schedule of Revenue by Geographic Location                       
                (Details)                                                        
46: R34         Summary of Significant Accounting Policies -        HTML     34K 
                Transaction Price Allocated to Remaining                         
                Performance Obligations (Details 1)                              
19: R35         Summary of Significant Accounting Policies -        HTML     31K 
                Transaction Price Allocated to Remaining                         
                Performance Obligations (Details)                                
61: R36         Summary of Significant Accounting Policies - Fair   HTML     40K 
                Value (Details)                                                  
71: R37         Summary of Significant Accounting Policies - Life   HTML     46K 
                Insurance Policies (Details)                                     
47: R38         Summary of Significant Accounting Policies -        HTML     29K 
                Accounts Receivable Factoring (Details)                          
17: R39         Summary of Significant Accounting Policies -        HTML     35K 
                Schedule of Property, Equipment and Capitalized                  
                Software (Details)                                               
32: R40         Summary of Significant Accounting Policies -        HTML     56K 
                Property, Equipment and Capitalized Software Costs               
                - Additional Information (Details)                               
24: R41         Summary of Significant Accounting Policies -        HTML     27K 
                Guarantees (Details)                                             
52: R42         Summary of Significant Accounting Policies -        HTML     27K 
                Goodwill (Details)                                               
79: R43         Summary of Significant Accounting Policies -        HTML     32K 
                Summary of Changes in Carrying Amount of Goodwill                
                (Details)                                                        
33: R44         Summary of Significant Accounting Policies -        HTML     47K 
                Summary of Acquired Intangible Assets (Details)                  
25: R45         Summary of Significant Accounting Policies -        HTML     43K 
                Summary of Estimated Amortization Expense                        
                (Details)                                                        
53: R46         Acquisitions - Additional Information (Details)     HTML     86K 
80: R47         Acquisitions - Summary of Acquisition Date Fair     HTML     34K 
                Value of Consideration (Details)                                 
34: R48         Acquisitions - Summary of Allocation of Aggregate   HTML     64K 
                Purchase Consideration to Fair Values of Assets                  
                Acquired and Liabilities Assumed (Details)                       
23: R49         Acquisitions - Summary of Intangible Assets         HTML     36K 
                Acquired (Details)                                               
11: R50         Net Income Per Share - Schedule of Basic and        HTML     50K 
                Diluted Earnings Per Share (Details)                             
39: R51         Net Income Per Share - Additional Information       HTML     30K 
                (Details)                                                        
69: R52         Lease Commitments - Additional Information          HTML     34K 
                (Details)                                                        
58: R53         Lease Commitments - Summary of Maturities of Lease  HTML     45K 
                Liabilities for Operating Liabilities (Details)                  
10: R54         Lease Commitments - Summary of Weighted Average     HTML     38K 
                Remaining Lease Terms, Discount Rates and                        
                Supplemental Cash Flow Information for All                       
                Operating Leases (Details)                                       
38: R55         Lease Commitments - Summary of Minimum Obligations  HTML     45K 
                under Operating Leases (Details)                                 
67: R56         Debt - Additional Information (Details)             HTML     76K 
57: R57         Accumulated Other Comprehensive Loss - Schedule of  HTML     37K 
                Accumulated Other Comprehensive Loss (Details)                   
12: R58         Accumulated Other Comprehensive Loss - Schedule of  HTML     28K 
                Accumulated Other Comprehensive Loss                             
                (Parenthetical) (Details)                                        
36: R59         Accumulated Other Comprehensive Loss - Schedule of  HTML     32K 
                Net Benefit Costs (Details)                                      
78: R60         Income Taxes - Additional Information (Details)     HTML     28K 
51: R61         Deferred Compensation and Other Benefits -          HTML     63K 
                Additional Information (Details)                                 
27: R62         Deferred Compensation and Other Benefits -          HTML     43K 
                Schedule of Net Periodic Pension Cost (Details)                  
35: R63         Deferred Compensation and Other Benefits -          HTML     42K 
                Schedule of Change in Fair Value of Plan Assets                  
                (Details)                                                        
77: R64         Equity-based Compensation - Additional Information  HTML     76K 
                (Details)                                                        
50: R65         Treasury Stock - Additional Information (Details)   HTML     37K 
26: R66         Significant Clients - Additional Information        HTML     50K 
                (Details)                                                        
54: XML         IDEA XML File -- Filing Summary                      XML    150K 
68: XML         XBRL Instance -- ctg-10q_20200327_htm                XML   1.74M 
37: EXCEL       IDEA Workbook of Financial Reports                  XLSX     80K 
 6: EX-101.CAL  XBRL Calculations -- ctg-20200327_cal                XML    197K 
 7: EX-101.DEF  XBRL Definitions -- ctg-20200327_def                 XML    498K 
 8: EX-101.LAB  XBRL Labels -- ctg-20200327_lab                      XML   1.21M 
 9: EX-101.PRE  XBRL Presentations -- ctg-20200327_pre               XML    897K 
 5: EX-101.SCH  XBRL Schema -- ctg-20200327                          XSD    177K 
60: JSON        XBRL Instance as JSON Data -- MetaLinks              326±   530K 
30: ZIP         XBRL Zipped Folder -- 0001564590-20-021660-xbrl      Zip    166K 


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

Page (sequential)   (alphabetic) Top
 
11st 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 ]



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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 March 27, 2020

OR

 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

 

April 28, 2020

Common stock, par value $.01 per share

 

 i 15,068,225

 


 

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

21

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28

Item 4.

Controls and Procedures

28

 

 

 

Part II Other Information

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.

Defaults Upon Senior Securities

29

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

30

 

 

 


 

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

 

 

March 27, 2020

 

 

March 29, 2019

 

Revenue

$

 i 86,949

 

 

$

 i 97,238

 

Direct costs

 

 i 69,903

 

 

 

 i 79,522

 

Selling, general and administrative expenses

 

 i 14,979

 

 

 

 i 16,589

 

Operating income

 

 i 2,067

 

 

 

 i 1,127

 

Interest and other income

 

 i 3

 

 

 

 i 74

 

Interest and other expense

 

 i 194

 

 

 

 i 254

 

Income before income taxes

 

 i 1,876

 

 

 

 i 947

 

Provision for income taxes

 

 i 732

 

 

 

 i 315

 

Net income

$

 i 1,144

 

 

$

 i 632

 

Net income per share:

 

 

 

 

 

 

 

Basic

$

 i 0.08

 

 

$

 i 0.05

 

Diluted

$

 i 0.08

 

 

$

 i 0.05

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

 i 13,547

 

 

 

 i 13,379

 

Diluted

 

 i 14,316

 

 

 

 i 13,782

 

 

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

 

 

1


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)

(Unaudited)

 

 

For the Quarter Ended

 

 

March 27, 2020

 

 

March 29, 2019

 

Net Income

$

 i 1,144

 

 

$

 i 632

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of taxes

 

( i 788

)

 

 

( i 923

)

Change in pension, net of taxes of $ i 221 and $ i 173 in the 2020 and 2019 first quarters, respectively

 

 i 149

 

 

 

 i 143

 

Other comprehensive loss

 

( i 639

)

 

 

( i 780

)

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

 i 505

 

 

$

( i 148

)

 

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

 

 

2


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share balances)

(Unaudited)

 

 

March 27,

 

 

December 31,

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

 i 31,481

 

 

$

 i 10,781

 

Accounts receivable, net of allowances of $ i 178 and $ i 84 in 2020 and 2019,

   respectively

 

 i 71,162

 

 

 

 i 88,772

 

Prepaid and other current assets

 

 i 4,770

 

 

 

 i 2,064

 

Income taxes receivable

 

 

 

 

 i 231

 

Total current assets

 

 i 107,413

 

 

 

 i 101,848

 

Property, equipment and capitalized software, net

 

 i 5,040

 

 

 

 i 6,379

 

Operating lease right-of-use assets

 

 i 20,372

 

 

 

 i 21,253

 

Deferred income taxes

 

 i 418

 

 

 

 i 453

 

Acquired intangibles, net

 

 i 7,982

 

 

 

 i 8,439

 

Goodwill

 

 i 19,705

 

 

 

 i 16,681

 

Cash surrender value of life insurance, net

 

 i 2,931

 

 

 

 i 3,133

 

Other assets

 

 i 576

 

 

 

 i 328

 

Investments

 

 i 167

 

 

 

 i 192

 

Total assets

$

 i 164,604

 

 

$

 i 158,706

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

$

 i 15,757

 

 

$

 i 18,612

 

Accrued compensation

 

 i 24,681

 

 

 

 i 23,538

 

Advance billings on contracts

 

 i 2,063

 

 

 

 i 1,704

 

Short-term operating lease liabilities

 

 i 5,773

 

 

 

 i 5,904

 

Other current liabilities

 

 i 7,317

 

 

 

 i 7,096

 

Income taxes payable

 

 i 467

 

 

 

 

Total current liabilities

 

 i 56,058

 

 

 

 i 56,854

 

Long-term debt

 

 i 12,000

 

 

 

 i 5,290

 

Deferred compensation benefits

 

 i 12,258

 

 

 

 i 12,346

 

Long-term operating lease liabilities

 

 i 14,540

 

 

 

 i 15,349

 

Deferred income taxes

 

 i 1,964

 

 

 

 i 2,101

 

Other long-term liabilities

 

 i 584

 

 

 

 i 530

 

Total liabilities

 

 i 97,404

 

 

 

 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 109,112

 

 

 

 i 112,096

 

Retained earnings

 

 i 87,817

 

 

 

 i 86,673

 

Less: Treasury stock of  i 11,949,599 and  i 12,311,010 shares at cost, in

   2020 and 2019, respectively

 

( i 110,818

)

 

 

( i 114,261

)

Accumulated other comprehensive loss

 

( i 19,181

)

 

 

( i 18,542

)

Total shareholders’ equity

 

 i 67,200

 

 

 

 i 66,236

 

Total liabilities and shareholders’ equity

$

 i 164,604

 

 

$

 i 158,706

 

 

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

 

 

3


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

 

 

For the Quarter Ended

 

 

March 27, 2020

 

 

March 29, 2019

 

Cash flow from operating activities:

 

 

 

 

 

 

 

Net income

$

 i 1,144

 

 

$

 i 632

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 i 816

 

 

 

 i 677

 

Equity-based compensation expense

 

 i 512

 

 

 

 i 249

 

Deferred income taxes

 

( i 102

)

 

 

 i 247

 

Deferred compensation benefits

 

 i 48

 

 

 

( i 37

)

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

 

 

 

 

 

 

 

Accounts receivable

 

 i 18,187

 

 

 

( i 1,647

)

Prepaid and other current assets

 

( i 960

)

 

 

 i 89

 

Other long-term assets

 

( i 248

)

 

 

 i 45

 

Cash surrender value of life insurance

 

 i 202

 

 

 

 i 188

 

Accounts payable

 

( i 2,530

)

 

 

( i 2,943

)

Accrued compensation

 

 i 1,009

 

 

 

 i 4,377

 

Income taxes payable / receivable

 

 i 740

 

 

 

 i 248

 

Advance billings on contracts

 

 i 377

 

 

 

( i 1,144

)

Other current liabilities

 

( i 70

)

 

 

( i 293

)

Other long-term liabilities

 

 i 54

 

 

 

( i 431

)

Net cash provided by operating activities

 

 i 19,179

 

 

 

 i 257

 

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 392

)

 

 

( i 251

)

Additions to capitalized software

 

( i 291

)

 

 

( i 32

)

Deferred compensation plan investments, net

 

 i 25

 

 

 

( i 4

)

Net cash used in investing activities

 

( i 4,653

)

 

 

( i 8,744

)

Cash flow from financing activities:

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 i 40,845

 

 

 

 i 46,891

 

Payments on long-term debt

 

( i 34,135

)

 

 

( i 37,213

)

Taxes remitted for shares withheld from equity-based compensation

   transactions

 

( i 81

)

 

 

( i 94

)

Proceeds from Employee Stock Purchase Plan

 

 i 28

 

 

 

 i 38

 

Change in cash overdraft, net

 

( i 370

)

 

 

( i 153

)

Net cash provided by financing activities

 

 i 6,287

 

 

 

 i 9,469

 

Effect of exchange rates on cash and cash equivalents

 

( i 113

)

 

 

( i 284

)

Net increase in cash and cash equivalents

 

 i 20,700

 

 

 

 i 698

 

Cash and cash equivalents at beginning of year

 

 i 10,781

 

 

 

 i 12,431

 

Cash and cash equivalents at end of quarter

$

 i 31,481

 

 

$

 i 13,129

 

 

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

4


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Excess of

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (loss)

 

 

Equity

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of 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 23

)

 

 

 

 

 

( i 5

)

 

 

 i 51

 

 

 

 

 

 

 i 28

 

Restricted stock plan share

   issuance/forfeiture

 

 

 

 

 

 

 

 

( i 3,473

)

 

 

 

 

 

( i 356

)

 

 

 i 3,392

 

 

 

 

 

 

( i 81

)

Equity-based compensation

 

 

 

 

 

 

 

 

 i 512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 i 512

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 i 1,144

 

 

 

 

 

 

 

 

 

 

 

 

 i 1,144

 

Foreign currency adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

( i 788

)

 

 

( i 788

)

Pension gain adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 i 149

 

 

 

 i 149

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Excess of

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (loss)

 

 

Equity

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2018

 

 

 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 43

)

 

 

 

 

 

( i 9

)

 

 

 i 81

 

 

 

 

 

 

 i 38

 

Restricted stock plan share

   issuance/forfeiture

 

 

 

 

 

 

 

 

 i 475

 

 

 

 

 

 

 i 219

 

 

 

( i 569

)

 

 

 

 

 

( i 94

)

Deferred compensation plan share

   issuance

 

 

 

 

 

 

 

 

( i 2,034

)

 

 

 

 

 

( i 215

)

 

 

 i 2,034

 

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

 i 249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 i 249

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 i 632

 

 

 

 

 

 

 

 

 

 

 

 

 i 632

 

Foreign currency adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

( i 923

)

 

 

( i 923

)

Pension gain adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 i 143

 

 

 

 i 143

 

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

 

 

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

 

5


 

COMPUTER TASK GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 i 

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 (loss), 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 10K filed with the SEC.

The Company's fiscal year-end is December 31. During the year, the quarters generally consist of a 13-week fiscal period where the last day of each of the first three quarters is a Friday. The 2020 first quarter began on January 1, 2020 and ended on March 27, 2020. The 2019 first quarter began on January 1, 2019 and ended on March 29, 2019. There were 62 and 63 billable days in the first quarters of 2020 and 2019, respectively.

 

 i 

2.

Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

 i 

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 (loss), 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 by the COVID-19 pandemic. 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. There are no other subsequent events that require recognition or disclosure in these unaudited interim condensed consolidated financial statements.

 / 
 i 

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.

 / 
 / 

6


 

 i 

IT solutions and IT and other staffing revenue as a percentage of total revenue for the quarters ended March 27, 2020 and March 29, 2019 was as follows:

 

 

 

For the Quarter Ended

 

 

 

March 27, 2020

 

 

March 29, 2019

 

IT solutions

 

 

 i 33.4

%

 

 

 i 34.4

%

IT and other staffing

 

 

 i 66.6

%

 

 

 i 65.6

%

Total

 

 

 i 100.0

%

 

 

 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 quarters ended March 27, 2020 and March 29, 2019 was as follows:

 

 

 

For the Quarter Ended

 

 

 

March 27, 2020

 

 

March 29, 2019

 

Technology service providers

 

 

 i 34.9

%

 

 

 i 32.7

%

Manufacturing

 

 

 i 15.0

%

 

 

 i 16.9

%

Healthcare

 

 

 i 13.4

%

 

 

 i 16.2

%

Financial services

 

 

 i 14.2

%

 

 

 i 14.1

%

Energy

 

 

 i 6.2

%

 

 

 i 4.6

%

General markets

 

 

 i 16.3

%

 

 

 i 15.5

%

Total

 

 

 i 100.0

%

 

 

 i 100.0

%

 

 i 

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.

7


 

 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 quarters ended March 27, 2020 and March 29, 2019 was as follows:

 

 

For the Quarter Ended

 

 

 

March 27, 2020

 

 

March 29, 2019

 

Time-and-material

 

 

 i 82.4

%

 

 

 i 80.9

%

Progress billing

 

 

 i 14.0

%

 

 

 i 10.7

%

Percentage-of-completion

 

 

 i 3.6

%

 

 

 i 8.4

%

Total

 

 

 i 100.0

%

 

 

 i 100.0

%

 i 

The Company recorded revenue in the quarters ended March 27, 2020 and March 29, 2019 as follows:

For the Quarter Ended:

 

March 27, 2020

 

 

March 29, 2019

 

 

Year-over-Year

Change

 

 

 

(amounts in thousands)

 

 

 

 

 

North America

 

 

 i 57.9

%

 

$

 i 50,307

 

 

 

 i 61.1

%

 

$

 i 59,435

 

 

 

( i 15.4

)%

Europe

 

 

 i 42.1

%

 

 

 i 36,642

 

 

 

 i 38.9

%

 

 

 i 37,803

 

 

 

( i 3.1

)%

Total

 

 

 i 100.0

%

 

$

 i 86,949

 

 

 

 i 100.0

%

 

$

 i 97,238

 

 

 

( i 10.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 / 

 

 i 

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.

 

 i 

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 payment. 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.

 

 i 

Transaction Price Allocated to Remaining Performance Obligations

 

As of March 27, 2020, the aggregate transaction price allocated to unsatisfied or partially unsatisfied performance obligations for fixed-price and all managed-support contracts was approximately $ i 11.0 million and $ i 50.2 million, respectively. Approximately $ i 34.7 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2020 and approximately $ i 26.5 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.

 / 
 i 

 

8


 

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

 

 i 

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 March 27, 2020 and December 31, 2019, the carrying amounts of the Company’s cash of $ i 31.5 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 second 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 March 27, 2020 or March 29, 2019.

 / 
 i 

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 on  i 18 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 March 27, 2020, these insurance policies have a gross cash surrender value of $ i 29.9 million, outstanding loans and interest totaling $ i 27.6 million, and a net cash surrender value of $ i 2.3 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 both March 27, 2020 and December 31, 2019, the total death benefit for the remaining policies was approximately $ i  i 37.7 /  million. Currently, upon the death of all of the remaining plan participants, the Company would expect to receive

 / 

9


 

approximately $ i 9.8 million after the payment of obligations, and, under current tax regulations, record a non-taxable gain of approximately $ i 7.5 million.

 i 

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.

 i 

Accounts Receivable Factoring

As part of our working capital management, the Company has entered into a factoring agreement 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 11.9 million during the quarter ended March 27, 2020. Factoring fees for the sale of receivables were recorded in direct costs and were not material for the quarter ended March 27, 2020. There were no accounts receivable factoring activities during the quarter ended March 29, 2019.

 / 
 i 

Property, Equipment and Capitalized Software Costs

 i 

Property, equipment and capitalized software at March 27, 2020 and December 31, 2019 are summarized as follows:     

 

(amounts in thousands)

 

March 27, 2020

 

 

December 31, 2019

 

Property, equipment and capitalized software

 

$

 i 13,542

 

 

$

 i 17,384

 

Accumulated depreciation and amortization

 

 

( i 8,502

)

 

 

( i 11,005

)

Property, equipment and capitalized software, net

 

$

 i 5,040

 

 

$

 i 6,379

 

 

The Company recorded $ i 0.3 million of capitalized software costs during the quarter ended March 27, 2020 and less than $ i 0.1 million of capitalized software costs during the quarter ended March 29, 2019. As of those dates, the Company had capitalized a total of $ i 2.4 million and $ i 1.9 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 in the quarter ended March 27, 2020, and approximately $ i 0.2 million in the quarter ended March 29, 2019. Accumulated amortization for these projects totaled $ i 1.0 million and $ i 0.9 million as of March 27, 2020 and March 29, 2019, respectively.

During the 2020 first quarter, the Company received two unsolicited bids for its owned real estate, and is exploring a sale of the property. Accordingly, the Company recorded the building in “other current assets” as a held for sale asset, rather than in property, equipment and capitalized software at March 27, 2020.  As the sale price of the building is estimated to be $ i 2.5 million, and the book value of the building is approximately $ i 1.8 million, the Company expects to record a profit on the sale after related fees of about $ i 0.6 million in the 2020 second quarter.

 / 
 i 

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 March 27, 2020 and December 31, 2019, these guarantees totaled approximately $ i  i 3.0 /  million and generally have expiration dates ranging from March 2020 through October 2034.

 / 
 i 

Goodwill

The goodwill recorded on the Company's condensed consolidated balance sheet at March 27, 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 ended March 27, 2020 and March 29, 2019.

 / 

10


 

 i 

The changes in the carrying amount of goodwill for the quarter ended March 27, 2020 are as follows:

 

(amounts in thousands)

 

 

 

Balance at December 31, 2019

$

 i 16,681

 

Acquired goodwill

 

 i 3,260

 

Foreign currency translation

 

( i 236

)

Balance at March 27, 2020

$

 i 19,705

 

 

 i 

Acquired Intangible Assets

 i 

Acquired intangible assets at March 27, 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 1,023

 

$

( i 105

)

$

 i 304

 

Customer relationships

8-13 years

 

 i 9,905

 

 

 i 1,389

 

 

( i 838

)

 

 i 7,678

 

Total

 

$

 i 11,337

 

$

 i 2,412

 

$

( i 943

)

$

 i 7,982

 

 / 

 

 i 

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 891

 

2021

 

 

 i 912

 

2022

 

 

 i 857

 

2023

 

 

 i 857

 

2024

 

 

 i 857

 

2025

 

 

 i 857

 

Thereafter

 

 

 i 2,751

 

Total

 

$

 i 7,982

 

 / 

 

 / 
 i 

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

11


 

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 as of March 12, 2020 through 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.

 i 

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 second quarter. At March 27, 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.

 / 

12


 

 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 March 27, 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 March 27, 2020 condensed consolidated balance sheet.

 i 

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

 

 / 
 i 

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 in the first quarter of 2020 and  i none in the first quarter of 2019, 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.

 

 

 

 

13


 

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 March 27, 2020, and is expected to be paid in 2020. The Company did  i not record any selling, general and administrative expenses during the 2020 first quarter and recorded $ i 0.2 million during the 2019 first quarter.

The results of operations of Soft Company have been included in the Company’s consolidated financial results since the date of acquisition. As the Company has determined that the acquisition is not material to its existing operations, certain disclosures, including pro forma financial information, have not been included in this quarterly report on Form 10-Q. The Company incurred amortization of intangible assets of approximately $ i 0.2 million in the first quarter of 2020, and an adjustment to the fair value of the earn-out liability and amortization of intangible assets of $ i 0.4 million in the 2019 first quarter, which were recorded as a component of selling, general, and administrative expenses in the condensed consolidated statements of income.

 

 i 

4.

Net Income Per Share

 i 

Basic and diluted earnings per share (EPS) for the quarters ended March 27, 2020 and March 29, 2019 were as follows:

 

 

 

For the Quarter Ended

 

(amounts in thousands, except per-share data)

 

March 27, 2020

 

 

March 29, 2019

 

Weighted-average number of shares outstanding

   during period

 

 

 i 13,547

 

 

 

 i 13,379

 

Common stock equivalents from incremental shares

   under equity-based compensation plans

 

 

 i 769

 

 

 

 i 403

 

Number of shares on which diluted earnings

   per share is based

 

 

 i 14,316

 

 

 

 i 13,782

 

Net income

 

$

 i 1,144

 

 

$

 i 632

 

Net income per share

 

 

 

 

 

 

 

 

Basic

 

$

 i 0.08

 

 

$

 i 0.05

 

Diluted

 

$

 i 0.08

 

 

$

 i 0.05

 

 / 

 

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 0.8 million and  i 1.2 million shares of common stock were outstanding at March 27, 2020 and March 29, 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.

 / 

 

 

 i 

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.

14


 

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 for the 2020 and 2019 first quarters was $ i 1.6 million and $ i 1.5 million, respectively. The Company incurred variable lease cost of $ i 0.1 million and $ i 0.2 million, and short-term lease cost of $ i 0.1 million and $ i 0.2 million in the 2020 and 2019 first quarters, respectively.

 

 i Maturities for the Company’s lease liabilities for all operating leases as of March 27, 2020 are as follows:

 

 

 

Total

 

Year

 

Operating Leases

 

(amounts in thousands)

 

 

 

 

2020 (remaining)

 

$

 i 4,478

 

2021

 

 

 i 4,891

 

2022

 

 

 i 3,461

 

2023

 

 

 i 2,323

 

2024

 

 

 i 1,494

 

2025 & thereafter

 

 

 i 4,783

 

Total undiscounted operating lease payments

 

$

 i 21,430

 

     Less: Interest

 

 

( i 1,117

)

Total present value of operating lease liabilities

 

$

 i 20,313

 

 

 i The weighted average remaining lease terms and discount rates for all operating leases as of March 27, 2020 and March 29, 2019 were as follows:

 

 

March 27, 2020

 

March 29, 2019

 

Weighted average remaining lease term (years)

 

 

6.40

 

 

3.54

 

Weighted average remaining discount rate

 

 

 i 2.06

%

 

 i 1.73

%

 

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

 

(amounts in thousands)

 

March 27, 2020

 

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

 

 

 

 

Operating cash outflow from operating leases

 

$

 i 1,570

 

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

 

 

 i 667

 

 

 i 

 

 

 

 

15


 

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

 

 

 

 i 

6.

Debt

The Company has a credit and security agreement (the “Credit and Security Agreement”) with its bank, which provides for a three-year revolving credit facility in an aggregate principal amount of $ 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 with either rate at its discretion. At March 27, 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 first quarters were $ i 12.0 million and $ i 18.0 million, respectively, while borrowings during those quarters averaged $ i 3.1 million and $ i 10.3 million, respectively, and carried weighted average interest rates of  i 2.5% and  i 3.0%, 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 March 27, 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 March 27, 2020 was approximately $ i 5.4 million. The Company was in compliance with these covenants at March 27, 2020 as the fixed charge ratio was  i 35.0 to 1, the adjusted EBITDA for the trailing twelve months was $ i 12.9 million, and capital expenditures for property, equipment and capitalized software were $ i 0.7 million in the first quarter of 2020. The Company was also in compliance with its covenants at March 29, 2019.

 / 

 

 

 i 

7.

Accumulated Other Comprehensive Loss

 i 

The components that make up accumulated other comprehensive loss on the condensed consolidated balance sheets at March 27, 2020 and December 31, 2019 are as follows: 

 

(amounts in thousands)

 

March 27, 2020

 

 

December 31, 2019

 

Foreign currency

 

$

( i 9,894

)

 

$

( i 9,106

)

Pension loss, net of tax of $ i 221 in 2020 and $ i 265 in 2019

 

 

( i 9,287

)

 

 

( i 9,436

)

Accumulated other comprehensive loss

 

$

( i 19,181

)

 

$

( i 18,542

)

 / 

 

 / 

16


 

 i 

During the 2020 and 2019 first quarters, actuarial losses were amortized to expense as follows:

 

 

 

For the Quarter Ended

 

(amounts in thousands)

 

March 27, 2020

 

 

March 29, 2019

 

Amortization of actuarial losses

 

$

 i 73

 

 

$

 i 46

 

Income tax

 

 

 

 

 

 

Net of tax

 

$

 i 73

 

 

$

 i 46

 

 / 

 

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.

 

 

 i 

8.

Income Taxes

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 and 2019 first quarter ETR was  i 39.0% and  i 33.3%, respectively.

The ETR was higher in the 2020 first quarter as compared with the corresponding 2019 period primarily 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 March 27, 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.

 / 

 

 i 

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 no benefit payments are expected to be paid in 2020.

 / 

17


 

 i 

Net periodic pension cost for the quarters ended March 27, 2020 and March 29, 2019 for the plans is as follows:

 

 

 

For the Quarter Ended

 

(amounts in thousands)

 

March 27, 2020

 

 

March 29, 2019

 

Service cost

 

$

 i 103

 

 

$

 i 84

 

Interest cost

 

 

 i 87

 

 

 

 i 147

 

Expected return on assets

 

 

( i 159

)

 

 

( i 155

)

Amortization of actuarial loss

 

 

 i 74

 

 

 

 i 48

 

Net periodic pension cost

 

$

 i 105

 

 

$

 i 124

 

 / 

 

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 both of the 2020 and 2019 first quarters, the Company made benefit payments totaling approximately $ i  i 0.1 /  million, and expects to make payments in 2020 totaling approximately $ i 0.6 million.

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 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  i 0.1 /  million in both of the 2020 and 2019 first quarters. The Company made benefit payments totaling less than $ i  i 0.1 /  million in both the 2020 and 2019 first quarters 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.

 i 

The change in the fair value of plan assets for the plans for the quarters ended March 27, 2020 and March 29, 2019 was as follows:

 

 

For the Quarter Ended

 

(amounts in thousands)

 

March 27, 2020

 

 

March 29, 2019

 

Fair value of plan assets at beginning of period

 

$

 i 18,077

 

 

$

 i 17,403

 

Return on plan assets

 

 

 i 159

 

 

 

 i 155

 

Contributions

 

 

 i 284

 

 

 

 i 278

 

Benefits paid

 

 

( i 204

)

 

 

( i 204

)

Effect of exchange rate changes

 

 

( i 254

)

 

 

( i 334

)

Fair value of plan assets at end of quarter

 

$

 i 18,062

 

 

$

 i 17,298

 

 / 

 

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

18


 

made  i  i no /  cash contributions in either the 2020 or 2019 first quarters 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 no /  stock units purchased in the 2020 or 2019 first quarters.

The Company maintains the Non-Employee Director Deferred Compensation Plan for its non-employee directors. There were  i  i no /  cash contributions in either the 2020 or 2019 first quarters. 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.

 

 

 i 

10.

Equity-based Compensation

During the 2020 first quarter, the Company granted restricted stock totaling  i 380,128 shares. There were  i 215,326 restricted stock grants issued during the 2019 first quarter. 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 December 31, 2022.  If at least 80% of the three-year EPS target is not met, the grants will expire. /   i No performance awards were granted during the 2019 first quarter.

The remaining shares granted in the 2020 and 2019 first quarters include shares that vest ratably over a period of three or  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. The options were granted from the 2010 Equity Award Plan.  i No stock options were granted during the 2019 first quarter. 

 / 

 

 i 

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 first quarter. As of March 27, 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.

 / 

19


 

During the 2020 first quarter, the Company issued  i 380,128 shares 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 not purchase shares for treasury during the 2019 first quarter. At March 29, 2019, the Company had approximately $ i 7.7 million remaining in its stock repurchase authorization. During the 2019 first quarter, the Company issued  i 215,326 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.

 

 

 i 

12.

Significant Clients

In the 2020 first quarter, International Business Machines Corporation (IBM) was the Company’s largest client and accounted for $ i 19.9 million or  i 22.9% of consolidated revenue compared with $ i 20.9 million or  i 21.6% of consolidated revenue in the comparable 2019 period. The National Technical Services Agreement with IBM was scheduled to expire on December 31, 2019, but was extended for  i six months and now expires on  i July 3, 2020. The Company’s accounts receivable from IBM at March 27, 2020 and December 31, 2019 totaled $ i 10.0 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 first quarters.

 / 

20


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Quarter Ended March 27, 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 ended March 27, 2020 and March 29, 2019 was as follows:

 

 

 

For the Quarter Ended

 

 

 

March 27, 2020

 

 

March 29, 2019

 

IT solutions

 

 

33.4

%

 

 

34.4

%

IT and other staffing

 

 

66.6

%

 

 

65.6

%

Total

 

 

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.

21


 

The Company’s revenue by vertical market as a percentage of total revenue for the quarters ended March 27, 2020 and March 29, 2019 was as follows:

 

 

 

For the Quarter Ended

 

 

 

March 27, 2020

 

 

March 29, 2019

 

Technology service providers

 

 

34.9

%

 

 

32.7

%

Manufacturing

 

 

15.0

%

 

 

16.9

%

Healthcare

 

 

13.4

%

 

 

16.2

%

Financial services

 

 

14.2

%

 

 

14.1

%

Energy

 

 

6.2

%

 

 

4.6

%

General markets

 

 

16.3

%

 

 

15.5

%

Total

 

 

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 ended March 27, 2020 and March 29, 2019 was as follows:  

 

 

 

For the Quarter Ended

 

 

 

March 27, 2020

 

 

March 29, 2019

 

Time-and-material

 

 

82.4

%

 

 

80.9

%

Progress billing

 

 

14.0

%

 

 

10.7

%

Percentage-of-completion

 

 

3.6

%

 

 

8.4

%

Total

 

 

100.0

%

 

 

100.0

%

 

 

22


 

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:

 

March 27, 2020

 

 

March 29, 2019

 

 

 

(amounts in thousands)

 

Revenue

 

 

100.0

%

 

$

86,949

 

 

 

100.0

%

 

$

97,238

 

Direct costs

 

 

80.4

%

 

 

69,903

 

 

 

81.8

%

 

 

79,522

 

Selling, general and administrative expenses

 

 

17.2

%

 

 

14,979

 

 

 

17.0

%

 

 

16,589

 

Operating income

 

 

2.4

%

 

 

2,067

 

 

 

1.2

%

 

 

1,127

 

Interest and other expense, net

 

 

(0.2

)%

 

 

(191

)

 

 

(0.2

)%

 

 

(180

)

Income before income taxes

 

 

2.2

%

 

 

1,876

 

 

 

1.0

%

 

 

947

 

Provision for income taxes

 

 

0.9

%

 

 

732

 

 

 

0.3

%

 

 

315

 

Net income

 

 

1.3

%

 

$

1,144

 

 

 

0.7

%

 

$

632

 

 

The Company recorded revenue in the quarters ended March 27, 2020 and March 29, 2019 as follows:

 

For the Quarter Ended:

 

March 27, 2020

 

 

March 29, 2019

 

 

Year-over-Year

Change

 

 

 

(amounts in thousands)

 

 

 

 

 

North America

 

 

57.9

%

 

$

50,307

 

 

 

61.1

%

 

$

59,435

 

 

 

(15.4

)%

Europe

 

 

42.1

%

 

 

36,642

 

 

 

38.9

%

 

 

37,803

 

 

 

(3.1

)%

Total

 

 

100.0

%

 

$

86,949

 

 

 

100.0

%

 

$

97,238

 

 

 

(10.6

)%

 

There were 62 and 63 billable days in the 2020 and 2019 first quarters, respectively. Reimbursable expenses billed to clients and included in revenue totaled $0.4 million and $0.6 million in the 2020 and 2019 first quarters, respectively.

IT solutions revenue decreased $4.4 million and represented 33.4% of consolidated revenue in the 2020 first quarter, as compared with 34.4% in the corresponding 2019 period. The decrease was primarily due to several significant solutions projects ending in the 2019 fourth quarter.

IT and other staffing revenue decreased $5.9 million and represented 66.6% of consolidated revenue in the 2020 first quarter, as compared with 65.6% of revenue in the corresponding 2019 period. The IT staffing decrease 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, which is consistent with the Company’s overall plan to transform to a solutions-centric organization.

Although the COVID-19 pandemic had relatively limited financial impact on the business in the 2020 first quarter, the Company expects a more pronounced effect on both our clients’ operations and CTG’s business beginning in the second quarter as approximately 10% of the Company’s billable resources have been idled by the pandemic as of the date of this filing. At this time, the Company does not have any clear visibility into the magnitude of the potential downturn of its operations, either in the second quarter or in the remainder of 2020.  The Company, however, in anticipation of lower revenue has taken 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 includes all billable consultants, consisting of both employees and subcontractors, and its support services in its headcount totals. CTG’s headcount at March 27, 2020 was approximately 4,000, an 8% decrease from 4,350 at March 29, 2019, and a 1% increase 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. The increase in headcount in the 2020 first quarter as compared with December 31, 2019 was due to the acquisition of StarDust, a small testing solutions company, with locations in France and Canada.

23


 

The revenue decrease in Europe in the countries in which the Company operates (Belgium, France, Luxembourg, and the United Kingdom) was further impacted in the 2020 first 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 first quarter to the 2020 first quarter, total European revenue would have been approximately $1.1 million higher and operating income would have increased by less than $0.1 million.

The Company continues to assess the potential impact, if any, 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 first quarter, International Business Machines Corporation (IBM) was the Company’s largest client and accounted for $19.9 million or 22.9% of consolidated revenue. This compares with $20.9 million or 21.6% of consolidated revenue in the comparable 2019 period. The National Technical Services Agreement with IBM previously expired on December 31, 2019. The Agreement with IBM was extended for six months and now expires on July 3, 2020. The Company’s accounts receivable from IBM at March 27, 2020 and December 31, 2019 totaled $10.0 million and $23.0 million, respectively.

No other client accounted for 10% or more of the Company's revenue during the 2020 or 2019 first quarters.

Direct costs, defined as the costs for billable staff including billable out-of-pocket expenses, were 80.4% of revenue in the 2020 first quarter, as compared with 81.8% of revenue in the 2019 corresponding period. The Company’s direct costs as a percentage of revenue decreased in the 2020 first quarter due to an overall improvement in the management of the Company’s projects during the 2020 first quarter, which included the utilization of the Company’s resources. Improving margins is part of the Company’s solutions-centric strategy.  The direct profit margin on IT solutions business improved about 250 basis points in the 2020 first quarter as compared with the prior year period.  Additionally, the direct profit margin on IT and other staffing business improved 96 basis points as compared with the prior year.

Selling, general and administrative (“SG&A”) expenses were 17.2% of revenue in the 2020 first quarter as compared with 17.0% in the corresponding 2019 period. The increase in SG&A expenses as a percentage of revenue year-over-year is primarily due to the loss of operating leverage with a decrease in revenue of $10.3 million year-over-year. Overall SG&A expense was $1.6 million less in the 2020 first quarter as compared with the prior year quarter as the Company actively worked to manage its costs to offset the impact of the lower revenue.

Consolidated operating income was 2.4% of revenue in the 2020 first quarter, compared with 1.2% of revenue in the 2019 first quarter.

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 first quarter ETR was 39.0%, and the 2019 first quarter ETR was 33.3%. The ETR was higher in the 2020 first quarter as compared with the corresponding 2019 period primarily due to the 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 1.3% of revenue or $0.08 per diluted share in the 2020 first quarter, as compared with 0.7% of revenue or $0.05 per diluted share in the 2019 first quarter. Diluted earnings per share was calculated using 14.3 million and 13.8 million weighted-average equivalent shares outstanding for the quarters ended March 27, 2020 and March 29, 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

24


 

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 March 27, 2020, the Company had a total of approximately $0.4 million of deferred tax assets, and approximately $2.0 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 March 27, 2020, the Company had deferred tax assets recorded resulting from net operating losses in previous years totaling approximately $0.6 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 March 27, 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 $0.3 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 first quarter would have increased or decreased net income by approximately $18,800.

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 $19.2 million in the 2020 first quarter, and $0.3 million in the 2019 corresponding period. In 2020, net income was $1.1 million, while other non-cash adjustments, primarily consisting of depreciation and amortization expense, equity-based compensation, deferred income taxes, and deferred compensation totaled $1.3 million. In 2019, net income was $0.6 million, while the corresponding non-cash adjustments totaled $1.1 million.

The accounts receivable balance decreased $18.2 million in the 2020 first quarter, and increased $1.6 million in the 2019 first quarter. The decrease in the accounts receivable balance in the 2020 first quarter primarily resulted from an advance collections program that the Company entered into with its largest client during the 2020 first quarter, where $11.9 million was paid before the normal due date. Additionally, the decrease was due to a decrease in revenue of 10.6% as compared with the corresponding 2019 quarter. The increase in the accounts receivable balance in the 2019 first quarter primarily resulted from an increase in revenue of 17.6% as compared with the corresponding 2018 first quarter. The increase in revenue in 2019 was partially offset by days sales outstanding (DSO) decreasing four days to 78 days in 2019 from 82 days at December 31, 2018.

25


 

Prepaid and other current assets increased $1.0 million and decreased less than $0.1 million in the 2020 and 2019 first quarters, respectively, due to payments made early in each respective year that are then expensed throughout the year.

The accounts payable balance decreased $2.5 million and $2.9 million in the 2020 and 2019 first quarters, respectively, primarily due to the timing of certain payments near the end of the quarter of each year as compared with the prior quarter-end. Accrued compensation increased $1.0 million and $4.4 million in the 2020 and 2019 first quarters, respectively, primarily due to higher headcount in each of the respective years compared with the corresponding prior periods. Income taxes payable/receivable increased $0.7 million and $0.2 million in the 2020 and 2019 first quarters, respectively. The increase in the balance in 2020 reflected higher taxable income in the 2020 first quarter. Advance billings decreased $0.4 million in the 2020 first quarter, and increased $1.1 million in the 2019 first quarter. 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 $4.7 million and $8.7 million of cash in the 2020 and 2019 first quarters, 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 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 $0.7 million and $0.3 million in the 2020 and 2019 first quarters, respectively. The Company has no significant commitments for the purchase of property and equipment at March 27, 2020. Subsequent to the end of the 2020 first quarter, the Company entered into an agreement to sell its owned real estate for $2.5 million.  As the value of the building is approximately $1.8 million, the Company expects to record a gain of about $0.6 million, after fees, from the sale in the 2020 second quarter.

Financing activities provided $6.3 million of cash in the 2020 first quarter and $9.5 million in the 2019 first quarter. 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 first quarter, while cash borrowed to fund the acquisition of Tech-IT netted to $9.7 million in the 2019 first quarter. Payments made to taxing authorities that represent the value of shares withheld for taxes in employee equity-based compensation transactions totaled $0.1 million in both the 2020 and 2019 first quarters, respectively. 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 the 2020 and 2019 first quarters, respectively. The Company did not repurchase shares for treasury under its buyback program in either of the 2020 or 2019 first quarters. As of March 27, 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 March 27, 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.  This borrowing brought the Company’s consolidated cash balance to $31.5 million, the highest total in nearly five years.

The maximum amounts outstanding under its credit agreement in the 2020 and 2019 first quarters were $12.0 million and $18.0 million, respectively, while borrowings during those quarters averaged $3.1 million and $10.3 million, respectively, and carried weighted average interest rates of 2.5% and 3.0%, 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 March 27, 2020, included a fixed charge coverage ratio, which must be less than 1.10 times consolidated

26


 

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 March 27, 2020 was approximately $5.4 million. The Company was in compliance with these covenants at March 27, 2020 as the fixed charge ratio was 35.0 to 1, the adjusted EBITDA for the trailing twelve months was $12.9 million and capital expenditures for property, equipment and capitalized software were $0.7 million in the 2020 first quarter. The Company was also in compliance with its covenants at March 29, 2019.

Of the total cash and cash equivalents reported on the consolidated balance sheet at March 27, 2020 of $31.5 million, approximately $14.7 million was held by the Company’s foreign operations. Earnings are considered to be indefinitely reinvested in those operations. The Company has not repatriated any of its cash and cash equivalents from its foreign operations in the past five years, and does not intend to do so in the foreseeable future as the funds are required to meet the working capital needs of its foreign operations.

The Company believes existing internally available funds, cash potentially generated from future operations, and funds available under the Company's Credit and Security Agreement (subject to collateral limits) totaling $32.8 million will be sufficient to meet foreseeable working capital and capital expenditure needs, fund stock repurchases, pay a dividend (if any are declared), fund acquisitions, and allow for future internal growth and expansion.

Off-Balance Sheet Arrangements

The Company did not have off-balance sheet arrangements or transactions in the 2020 or 2019 first 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 March 27, 2020.

Contractual Obligations

The Company did not enter into any significant contractual obligations during the quarter or year-to-date period ended March 27, 2020.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, which requires the immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables. 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. When determining the allowance, expected credit losses over the contractual term of the financial assets will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.  Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment. 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. 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 does not expect a significant impact from the adoption of this standard.

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 a prospective basis on January 1, 2020 and does not expect a significant impact on its operations from the adoption of this standard.

27


 

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 as of March 12, 2020 through 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 decrease in Europe in the countries in which the Company operates (Belgium, France, Luxembourg, and the United Kingdom) were further impacted in the 2020 first 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 first quarter to the 2020 first quarter, total European revenue would have been approximately $1.1 million higher and operating income would have been less than $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 March 27, 2020, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

28


 

PART II. OTHER INFORMATION

Item 1.

None

 

 

Item 1A.

Risk Factors

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the U.S., Western Europe, and India, which 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 May 6, 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

 

January 1 - January 31

 

 

 

 

 

$

 

 

 

 

 

$

7,727,724

 

February 1 - February 29

 

 

 

 

$

 

 

 

 

 

$

7,727,724

 

March 1 - March 27

 

 

 

 

$

 

 

 

 

 

$

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

 

 

 

29


 

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

 

 

30


 

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: May 6, 2020

 

31


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
12/31/22
12/31/20
7/3/20
Filed on:5/6/20
4/28/20
For Period end:3/27/20
3/12/20
3/6/204
3/3/204,  8-K
1/1/20
12/31/1910-K,  11-K
12/15/19
3/29/1910-Q
2/6/198-K
1/1/19
12/31/1810-K,  11-K
2/15/188-K,  SC TO-C
11/30/94
 List all Filings 


1 Subsequent Filing that References this Filing

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

12/17/20  Computer Task Group Inc.          S-8        12/17/20    5:193K                                   Donnelley … Solutions/FA
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