UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the Transition period from to
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol |
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Name of each exchange on which registered |
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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.
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).
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 |
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☒ |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 Exchange Act). Yes ☐ NO
APPLICABLE ONLY TO CORPORATE ISSUERS: |
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Shares outstanding at |
Title of each class |
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August 3, 2023 |
Common stock, par value $.01 per share |
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SEC Form 10-Q Index
Section |
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Page |
Part I Financial Information |
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Item 1. |
1 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
24 |
Item 3. |
35 |
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Item 4. |
35 |
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Part II Other Information |
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Item 1. |
36 |
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Item 1A. |
36 |
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Item 2. |
38 |
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Item 3. |
39 |
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Item 4. |
39 |
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Item 5. |
39 |
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Item 6. |
40 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(amounts in thousands, except per share data)
(Unaudited)
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For the Quarter Ended |
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For the Two Quarters Ended |
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June 30, 2023 |
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July 1, 2022 |
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June 30, 2023 |
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July 1, 2022 |
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Revenue |
$ |
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$ |
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$ |
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$ |
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Cost of services |
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Gross profit |
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Selling, general and administrative expenses |
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Operating income |
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Interest and other income |
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Interest and other expense |
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Income (loss) before income taxes |
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Provision for income taxes |
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Net income (loss) |
$ |
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$ |
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$ |
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$ |
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Net income (loss) per share: |
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
$ |
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$ |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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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)
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For the Quarter Ended |
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For the Two Quarters Ended |
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June 30, 2023 |
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July 1, 2022 |
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June 30, 2023 |
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July 1, 2022 |
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Net income (loss) |
$ |
( |
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$ |
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$ |
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$ |
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Foreign currency translation adjustment |
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( |
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Change in pension, net of taxes of $ |
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Other comprehensive income (loss) |
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Comprehensive income (loss) |
$ |
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$ |
( |
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$ |
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$ |
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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)
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June 30, |
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December 31, |
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2023 |
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2022 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable, net of allowances of $ |
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Prepaid and other current assets |
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Total current assets |
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Property, equipment and capitalized software, net |
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Operating lease right-of-use assets |
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Deferred income taxes |
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Acquired intangibles, net |
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Goodwill |
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Cash surrender value of life insurance, net |
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Other assets |
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Investments |
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Total assets |
$ |
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$ |
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Liabilities and Shareholders’ Equity |
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Current Liabilities: |
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Accounts payable |
$ |
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$ |
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Accrued compensation |
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Advance billings on contracts |
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Short-term operating lease liabilities |
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Other current liabilities |
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Income taxes payable |
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Total current liabilities |
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Long-term debt |
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— |
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— |
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Deferred compensation benefits |
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Long-term operating lease liabilities |
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Deferred income taxes |
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Other long-term liabilities |
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Total liabilities |
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Shareholders’ Equity: |
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Common stock, par value $ |
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Capital in excess of par value |
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Retained earnings |
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Less: Treasury stock of |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ |
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$ |
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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)
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For the Two Quarters Ended |
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June 30, 2023 |
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July 1, 2022 |
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Cash flow from operating activities: |
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Net income |
$ |
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$ |
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Adjustments to reconcile net income to net cash provided by |
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Depreciation and amortization expense |
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Equity-based compensation expense |
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Deferred income taxes |
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( |
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Deferred compensation benefits |
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( |
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Loss on the sale of property and equipment |
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— |
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Changes in assets and liabilities that provide (use) cash, excluding the effects of acquisitions: |
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Accounts receivable |
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Prepaid and other current assets |
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( |
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( |
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Other long-term assets |
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( |
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( |
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Cash surrender value of life insurance |
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Accounts payable |
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( |
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( |
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Accrued compensation |
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( |
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( |
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Income taxes payable / receivable |
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( |
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Advance billings on contracts |
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( |
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Other current liabilities |
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Other long-term liabilities |
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( |
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Net cash provided by (used in) operating activities |
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( |
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Cash flow from investing activities: |
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Cash paid for acquisitions, net of cash acquired |
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— |
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Additions to property and equipment |
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( |
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( |
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Additions to capitalized software |
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( |
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— |
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Proceeds from sale of property & equipment |
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Premiums paid for life insurance |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flow from financing activities: |
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Proceeds from long-term debt |
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— |
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Payments on long-term debt |
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( |
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— |
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Proceeds from stock option plan exercises |
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Taxes remitted for shares withheld from equity-based compensation |
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( |
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( |
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Proceeds from Employee Stock Purchase Plan |
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Change in cash overdraft, net |
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Net cash provided by (used in) financing activities |
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( |
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Effect of exchange rates on cash and cash equivalents |
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( |
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Net decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents at beginning of year |
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Cash and cash equivalents at end of quarter |
$ |
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$ |
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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)
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Accumulated |
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Capital in |
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Other |
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Total |
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Common Stock |
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Excess of |
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Retained |
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Treasury Stock |
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Comprehensive |
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Shareholders’ |
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Shares |
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Amount |
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Par Value |
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Earnings |
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Shares |
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Amount |
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Income (Loss) |
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Equity |
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(amounts in thousands) |
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Balances as of March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Employee Stock Purchase Plan share |
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— |
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— |
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( |
) |
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— |
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( |
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— |
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Stock Option Plan share issuance, net |
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— |
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— |
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( |
) |
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— |
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( |
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— |
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Restricted stock plan share |
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— |
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— |
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( |
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— |
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( |
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— |
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( |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Foreign currency adjustment |
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— |
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— |
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— |
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— |
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— |
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— |
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Pension loss adjustment, net of tax |
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— |
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— |
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— |
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— |
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— |
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— |
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Balances as of June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Accumulated |
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Capital in |
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Other |
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Total |
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Common Stock |
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Excess of |
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Retained |
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Treasury Stock |
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Comprehensive |
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Shareholders’ |
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Shares |
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Amount |
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Par Value |
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Earnings |
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Shares |
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Amount |
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Income (Loss) |
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Equity |
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(amounts in thousands) |
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Balances as of April 1, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Employee Stock Purchase Plan share |
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— |
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— |
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( |
) |
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— |
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( |
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— |
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Stock Option Plan share issuance, net |
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— |
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— |
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( |
) |
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— |
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( |
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— |
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Restricted Stock Plan share |
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— |
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— |
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( |
) |
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— |
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( |
) |
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— |
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( |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency adjustment |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Pension loss adjustment, net of tax |
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— |
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— |
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— |
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— |
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— |
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— |
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Balances as of July 1, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(amounts in thousands)
(Unaudited)
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Accumulated |
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Capital in |
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Other |
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Total |
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Common Stock |
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Excess of |
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Retained |
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Treasury Stock |
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Comprehensive |
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Shareholders’ |
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Shares |
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Amount |
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Par Value |
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Earnings |
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Shares |
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Amount |
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Income (Loss) |
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Equity |
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Balances as of December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
|
$ |
|
||||||
Employee Stock Purchase Plan share |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
||
Stock Option Plan share issuance, net |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
||
Restricted stock plan share |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
( |
) |
|
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Foreign currency adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Pension loss adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balances as of June 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
Capital in |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
||||||||
|
|
Common Stock |
|
|
Excess of |
|
|
Retained |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Shareholders’ |
|
||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Par Value |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Income (Loss) |
|
|
Equity |
|
||||||||
Balances as of December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
Employee Stock Purchase Plan share |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
||
Stock Option Plan share issuance, net |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
||
Restricted Stock Plan share |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
( |
) |
|
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Foreign currency adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Pension loss adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balances as of July 1, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
COMPUTER TASK GROUP, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 were reclassified to conform to the current year’s presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest Annual Report on Form 10‑K filed with the SEC.
The Company's fiscal year-end is December 31. During the year, the quarters generally consist of a 13-week fiscal period where the last day of each of the first three quarters is a Friday. The 2023 second quarter began on April 1, 2023 and ended on June 30, 2023. The 2022 second quarter began on April 2, 2022 and ended on July 1, 2022. There were
Basis of Presentation and Consolidation
These condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations. There are no unconsolidated entities, or off-balance sheet arrangements other than certain guarantees supporting office leases and the performance under government contracts in the Company's European operations. All intercompany 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 among others lingering effects of the COVID-19 pandemic, current macroeconomic conditions such as inflation, and the unpredictability and severity of a civil unrest or outbreak of war or hostilities. 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 credit losses, 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.
Subsequent Event
On August 9, 2023, subsequent to the end of the fiscal second quarter on June 30, 2023, the Company and the IT solutions provider Cegeka Groep nv (“Cegeka”), a company headquartered in Hasselt, Belgium, entered into a transaction for Cegeka to purchase all of the outstanding shares of CTG for $
The Company operates in
7
typically encompass the IT business solution life cycle, including phases for planning, developing, implementing, managing, and ultimately maintaining the IT solution. These services ensure that the Company's clients utilize the right information technology to meet their business needs, maximize their IT systems’ value, and operate efficiently and effectively. A typical client is an organization with large, complex technology, information, and data processing requirements.
The segment revenue for the quarter and two quarters ended June 30, 2023 and July 1, 2022 was as follows:
For the Quarter Ended: |
|
|
|
|
Year-over-Year |
|
||||||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Change |
|
|||||||||||
North America IT Solutions and Services |
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|||||
Europe IT Solutions and Services |
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|||||
Non-Strategic Technology Services |
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
( |
)% |
||||
Total |
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
( |
)% |
||||
For the Two Quarters Ended: |
|
|
|
|
Year-over-Year |
|
||||||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Change |
|
|||||||||||
North America IT Solutions and Services |
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|||||
Europe IT Solutions and Services |
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
( |
)% |
||||
Non-Strategic Technology Services |
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
( |
)% |
||||
Total |
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
( |
)% |
||||
The Company focuses a significant portion of its services through
The Company’s revenue by vertical market as a percentage of total revenue for the quarter and two quarters ended June 30, 2023 and July 1, 2022 was as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Healthcare |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Financial services |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Technology service providers |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Manufacturing |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Energy |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
General markets |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Total |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
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
8
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 the Company's experience on similar projects, and includes management judgments and estimates that affect the amount of revenue recognized on fixed-price contracts in any accounting period. Losses on fixed-price projects are recorded when identified.
The Company’s revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods as a percentage of consolidated revenue for the quarter and two quarters ended June 30, 2023 and July 1, 2022 was as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Time-and-material |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Progress billing |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Percentage-of-completion |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Total |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
The Company recorded revenue in the quarter and two quarters ended June 30, 2023 and July 1, 2022 as follows:
For the Quarter Ended: |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Year-over-Year |
|
|||||||||||
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
( |
)% |
||||
Europe |
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|||||
Total |
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
( |
)% |
||||
For the Two Quarters Ended: |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Year-over-Year |
|
|||||||||||
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
( |
)% |
||||
Europe |
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
( |
)% |
||||
Total |
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
( |
)% |
||||
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 the Company accounts for as variable consideration. We estimate variable consideration and reduce revenue recognized based on the amount we expect to provide to clients.
Contract Balances
For time-and-material and progress billing contracts, 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 right to invoice practical expedient that allows the Company to recognize revenue in the amount for which it has the right to invoice for time-and-material and progress billing contracts. Bill 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 the Company's contracts with clients. Advance billings represent contract liabilities for cash payments received in advance of the Company's performance. Unbilled receivables are reported within “accounts receivable” on the consolidated balance sheets. Accounts receivable and contract liability balances fluctuate based on the timing of the client’s billing schedule and the Company’s period-end date. There are no significant costs to obtain or fulfill contracts with clients.
9
Transaction Price Allocated to Remaining Performance Obligations
As of June 30, 2023, the aggregate transaction price allocated to unsatisfied or partially unsatisfied performance obligations for fixed-price contracts was approximately $
Taxes Collected from Clients
The Company records taxes collected from its clients for remittance to governmental authorities, primarily in its international locations, on a net basis in the condensed consolidated financial statements.
Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid for a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants. The Company utilizes a fair value hierarchy for its assets and liabilities, as applicable, based upon three levels of input, which are:
Level 1—quoted prices in active markets for identical assets or liabilities (observable)
Level 2—inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable or can be supported by observable market data for essentially the full term of the asset or liability (observable)
Level 3—unobservable inputs that are supported by little or no market activity, but are significant to determining the fair value of the asset or liability (unobservable)
At June 30, 2023 and December 31, 2022, the carrying amounts of the Company’s cash of $
As described in Note 3 of the condensed consolidated financial statements, the Company acquired
Life Insurance Policies
The Company has purchased life insurance on the lives of a number of former employees who are plan participants in the non-qualified defined benefit Executive Supplemental Benefit Plan. In total, there are policies currently on
At June 30, 2023 and December 31, 2022, the total death benefit for the remaining policies was approximately $
10
Company would expect to receive approximately $
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 a maturity of three months or less. The Company does not fund its bank accounts for the checks it has written until the checks are presented to the bank for payment. In the event the Company has no available cash at the bank for which it writes its checks, the "change in cash overdraft, net" line item on the condensed consolidated statement of cash flows would be present, and represent the increase or decrease in outstanding checks for a given period. The cash in the Company’s U.S. banks is insured by the Federal Deposit Insurance Corporation up to the insurable limit of $
Accounts Receivable Factoring
As part of its working capital management, the Company has a factoring agreement to sell certain trade accounts receivables associated with its largest client on a non-recourse basis to a third-party financial institution. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the condensed consolidated statements of cash flows. There were $
Property, Equipment and Capitalized Software Costs
(amounts in thousands) |
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Property, equipment and capitalized software |
|
$ |
|
|
$ |
|
||
Accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Property, equipment and capitalized software, net |
|
$ |
|
|
$ |
|
||
Depreciation expense for the Company totaled $
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Capitalized software, beginning balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Additions |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Foreign currency translation |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Capitalized software |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
11
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Accumulated amortization, beginning balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accumulated amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
During the quarter and two quarters ended June 30, 2023 and July 1, 2022, the Company's change in work-in-progress costs related to software projects being developed was as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Capitalized software, work-in-progress, beginning balance |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Additions |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Placed into service |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Capitalized software, work-in-progress, ending balance |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Guarantees
The Company has a number of guarantees in place in its European operations that support office leases and performance under government contracts. These guarantees totaled approximately $
Goodwill
The goodwill recorded on the Company's condensed consolidated balance sheet at June 30, 2023 relates to previous acquisitions, including Eleviant in 2022. 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
The changes in the carrying amount of goodwill for the two quarters ended June 30, 2023 are as follows:
(amounts in thousands) |
|
|
|
Balance at December 31, 2022 |
$ |
|
|
Working capital adjustment - acquisitions |
|
( |
) |
Foreign currency translation |
|
|
|
Balance at June 30, 2023 |
$ |
|
|
The Company's goodwill by segment at June 30, 2023 and December 31, 2022 was as follows:
(amounts in thousands) |
June 30, 2023 |
|
December 31, 2022 |
|
||
North America IT Solutions and Services |
$ |
|
$ |
|
||
Europe IT Solutions and Services |
|
|
|
|
||
Total goodwill |
$ |
|
$ |
|
||
12
Acquired Intangible Assets
Acquired intangible assets at June 30, 2023 consist of the following:
(amounts in thousands) |
Estimated |
Gross Carrying Amount |
|
Accumulated Amortization |
|
Foreign Currency Translation |
|
Net Carrying Amount |
|
||||
Trademarks |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
— |
|
||
Technology |
|
|
|
( |
) |
|
( |
) |
|
|
|||
Customer relationships |
|
|
|
( |
) |
|
( |
) |
|
|
|||
Total |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
Acquired intangible assets at December 31, 2022 consist of the following:
(amounts in thousands) |
Estimated |
Gross Carrying Amount |
|
Accumulated Amortization |
|
Foreign Currency Translation |
|
Net Carrying Amount |
|
||||
Trademarks |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
— |
|
||
Technology |
|
|
|
( |
) |
|
( |
) |
|
|
|||
Customer relationships |
|
|
|
( |
) |
|
( |
) |
|
|
|||
Total |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||
Estimated amortization expense for the remainder of 2023, the five succeeding years, and thereafter is as follows:
Year |
|
Annual Amortization |
|
|
(amounts in thousands) |
|
|
|
|
2023 (remaining) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The objective of this ASU is to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Then in December 2022, the FASB issued ASU No. 2022-06 “Deferral of the Sunset Date of Topic 848” which amends and extends the sunset date to December 31, 2024. The Company has not elected any of the practical expedients or scope exceptions to date related to this standard. We will continue to review our contracts and arrangements that will be affected by a discontinued reference rate during the transition period.
Eleviant Technologies, Inc. ("Eleviant")
On September 29, 2022, the Company acquired
13
The U.S.-based Eleviant is a provider of digital transformation services and solutions, and is headquartered in Dallas, TX, with operations in Chennai and Coimbatore, India. Eleviant’s offerings support the new ways enterprises work, communicate, and scale today and focus on cloud, application modernization, mobile, artificial intelligence (AI), machine learning (ML), and robotic process automization (RPA). Eleviant’s services are supported by a portfolio of solutions, including PeopleOne, a Digital Workplace platform for employee engagement, communication, and collaboration; vChat, a chatbot builder platform; and vBots, an RPA builder platform. The acquisition is expected to aid CTG in accelerating the growth of digital solutions sales to clients in the Americas and Europe and create new points of entry with proven technology services and solutions.
An earn-out of $
The acquisition fair value of the consideration for the acquisition of Eleviant consisted of the following as of September 29, 2022:
(amounts in thousands) |
|
|
|
Cash consideration |
$ |
|
|
Share issuance |
|
|
|
Stock option issuance - 3 month vest |
|
|
|
Stock option issuance - 12 month vest |
|
|
|
Working capital adjustment |
|
( |
) |
Fair value of contingent consideration |
|
|
|
Fair value of purchase consideration |
$ |
|
|
The following table summarizes the preliminary allocation of the aggregate purchase price consideration to the fair value of the assets acquired and liabilities assumed as of September 29, 2022:
(amounts in thousands) |
|
|
|
Assets Acquired: |
|
|
|
Cash |
$ |
|
|
Accounts receivable |
|
|
|
Prepaids and other current assets |
|
|
|
Property and equipment, net |
|
|
|
Taxes receivable |
|
|
|
Acquired intangibles |
|
|
|
Goodwill |
|
|
|
Total assets acquired |
$ |
|
|
|
|
|
|
Liabilities Assumed: |
|
|
|
Accounts payable |
$ |
|
|
Short-term debt |
|
|
|
Accrued compensation |
|
|
|
Other current liabilities |
|
|
|
Long-term debt |
|
|
|
Deferred compensation benefits |
|
|
|
Deferred tax liability |
|
|
|
Total liabilities assumed |
$ |
|
|
Net assets acquired |
$ |
|
|
14
The Company allocated value to current assets and liabilities based on book values at September 29, 2022, which approximates fair value. The excess consideration was recorded as goodwill, which is not deductible for income tax purposes, and is driven by Eleviant providing a high level of digital IT solutions and offshore delivery capabilities.
The intangible assets acquired in this acquisition consisted of the following:
(amounts in thousands) |
Fair Value |
|
|
Estimated Useful Life |
|
Technology |
$ |
|
|
||
Customer relationships |
|
|
|
||
Fair value of purchase consideration |
$ |
|
|
|
|
The Company incurred acquisition-related expenses related to retention bonuses and amortization of intangible assets of approximately $
Basic and diluted earnings per share (EPS) for the quarter and two quarters ended June 30, 2023 and July 1, 2022 were as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
(amounts in thousands, except per-share data) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Weighted-average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common stock equivalents from incremental shares |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Number of shares on which diluted earnings |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Diluted |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Weighted-average shares represent the average number of issued shares less treasury shares, and for the basic EPS calculations, unvested restricted stock.
For the quarter ended June 30, 2023, the diluted share amount reported is equal to the basic per share amount as the Company was in a net loss position and as a result, any dilution from incremental shares under equity-based compensation plans would be considered anti-dilutive. If the Company had net income, and assuming dilution, certain options representing
The Company records a right-of-use asset and liability for substantially all leases for which it is a lessee, in accordance with Topic 842 “Leases.” The Company is obligated under a number of long-term operating leases for office space and office equipment, and for automobiles leased in Europe.
Most leases contain both lease components (fixed payments for rent) and non-lease components (common-area maintenance and other services). The Company has elected the practical expedient to separate lease and non-lease components for its office leases and has elected to group lease and non-lease components for its vehicle leases. Some leases contain renewal options with escalation clauses commensurate with local market fluctuations, however, generally limiting an annual increase to no more than
15
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 sheets. 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 does 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.
Lease costs for the quarter and two quarters ended June 30, 2023 and July 1, 2022 were as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Operating lease costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable lease costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term lease costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Maturities for the Company’s lease liabilities for all operating leases as of June 30, 2023 are as follows:
|
|
Total |
|
|
Year |
|
Operating Leases |
|
|
(amounts in thousands) |
|
|
|
|
2023 (remaining) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 & thereafter |
|
|
|
|
Total undiscounted operating lease payments |
|
|
|
|
Less: Interest |
|
|
( |
) |
Total present value of operating lease liabilities |
|
$ |
|
|
Operating lease payments exclude $
|
|
June 30, 2023 |
|
July 1, 2022 |
|
||
Weighted average remaining lease term (years) |
|
|
|
|
|
||
Weighted average remaining discount rate |
|
|
% |
|
% |
||
Supplemental cash flow information related to the Company’s operating leases for the 2023 year-to-date period is as follows:
(amounts in thousands) |
|
June 30, 2023 |
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash outflow from operating leases |
|
$ |
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
|
|
|
The Company has an asset-based lending revolving credit agreement (“Credit Agreement”), which has a
16
At both June 30, 2023 and December 31, 2022, there were
The maximum amounts outstanding under the Credit Agreement in the 2023 and 2022 second quarters were $
Under the Credit Agreement, the Company is required to meet one financial covenant in order to maintain borrowings under its revolving credit line, pay dividends, and make acquisitions. The covenant is measured quarterly, and at June 30, 2023 represented a fixed charge coverage ratio, where for the trailing twelve months the consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) adjusted for, amongst other items, equity-based compensation and severance expenses, must be greater than
Eleviant has a revolving credit facility totaling $
The components that make up accumulated other comprehensive loss on the condensed consolidated balance sheets at June 30, 2023 and December 31, 2022 are as follows:
(amounts in thousands) |
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Foreign currency translation adjustment |
|
$ |
( |
) |
|
$ |
( |
) |
Pension loss, net of tax of $ |
|
|
( |
) |
|
|
( |
) |
Accumulated other comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
During the 2023 and 2022 second quarter and year-to-date periods, actuarial losses were amortized to expense as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Amortization of actuarial losses |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Income tax |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net of tax |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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.
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 2023 second quarter and year-to-date ETR was (
The ETR was higher in the 2023 second quarter and year-to-date periods as compared with the corresponding 2022 periods primarily due to the increased losses of the Company's foreign subsidiaries for which no tax benefit can be recorded due to valuation allowances.
17
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 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 ESBP was amended as of November 30, 1994, to freeze benefits for the participants in the plan at that time.
The Company also 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. The NDBP was curtailed for additional contributions in January 2003.
The Company maintains a fully funded pension plan related to CTG Belgium and CTG Health Solutions (Belgium) employees (“BDBP”). The BDBP has active employees and the Company expects to make future contributions.
The Company maintains an unfunded pension plan related to the current Soft Company employees (“FDBP”). The Company does not anticipate making contributions to the FDBP.
The Company maintains an unfunded pension plan related to the current StarDust employees (“SDBP”). The Company does not anticipate making contributions to the SDBP.
On September 29, 2022, the Company acquired Eleviant and now maintains an unfunded defined-benefit gratuity plan related to the current Eleviant employees (“IDBP”). The Company does not anticipate making contributions to the IDBP.
Net periodic pension cost for the quarter and two quarters ended June 30, 2023 and July 1, 2022 for the plans is as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net periodic pension cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 2023 and future years. In the 2023 second quarter and year-to-date period, the Company made benefit payments totaling $
As the NDBP was curtailed for additional contributions in January 2003, no contributions were made in 2022 and none are expected to be made in 2023. 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 2023 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 2023, the plan investments have a targeted minimum return to the Company of
18
with historical returns and the
The BDBP is considered fully funded. The Company made contributions of $
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 2023 are expected to be paid by Allianz from plan assets. The assets for the plan are included in the overall portfolio of assets held by Allianz. The fair market value of the plan’s assets equals the contractual value of the BDBP in any given year (which is the mathematical reserve held by Allianz). The fair value of the assets is determined using a Level 3 methodology (see Note 2 “Fair Value”). Allianz does not guarantee a minimum return on the plan investments, whereas Belgian law sets a minimum return to be guaranteed to the participants of the plan.
The Company maintains various other defined contribution retirement plans covering employees from Europe and India. Company contributions charged to operations were $
The change in the fair value of plan assets for the plans for the two quarters ended June 30, 2023 and July 1, 2022 was as follows:
|
|
For the Two Quarters Ended |
|
|||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||
Fair value of plan assets at beginning of period |
|
$ |
|
|
$ |
|
||
Return on plan assets |
|
|
|
|
|
|
||
Contributions |
|
|
|
|
|
|
||
Benefits paid |
|
|
( |
) |
|
|
( |
) |
Effect of exchange rate changes |
|
|
|
|
|
( |
) |
|
Fair value of plan assets at end of quarter |
|
$ |
|
|
$ |
|
||
The Company maintains the Key Employee Non-Qualified Deferred Compensation Plan for certain key executives. Company contributions to this plan, if any, are based on annually defined financial performance objectives. The Company made
The Company maintains the Non-Employee Director Deferred Compensation Plan for its non-employee directors. The Company made cash contributions of less than $
During the 2023 second quarter and year-to-date period, the Company granted restricted stock totaling
19
Director Board fees are paid in part with quarterly grants of stock units. Of the total shares granted during the 2023 second quarter and year-to-date period,
The remaining shares granted in the 2023 and 2022 second quarter and year-to-date periods include shares that vest ratably over a period of three or four years, beginning one year from the date of grant.
The restricted shares granted are considered outstanding, can be voted, and are eligible to receive dividends in the event any are paid. However, these shares do not include a non-forfeitable right for the holder to receive dividends and none will be paid in the event the awards do not vest. Accordingly, only vested shares of outstanding restricted stock are included in the basic earnings per share calculation. The shares and share units granted in 2023 and 2022 were from the 2020 Equity Award Plan.
A total of
The Company’s Board of Directors has previously authorized the repurchase of up to $
The Company issued
The Company issued
In the 2023 second quarter, International Business Machines Corporation (IBM) was the Company’s largest client and accounted for $
20
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance.
The Company provides information technology and related services to its clients. These services include digital IT solutions and services, and staffing services. With digital IT Solutions and Services, the Company generally takes responsibility for the deliverables and some level of project and staff management, and these services may include high-end advisory or business-related consulting. When providing staffing services, including managed staffing, staff augmentation, and volume staffing, personnel are provided to clients based upon their requirements for specific skills, who then, in turn, take their direction from clients’ managers.
The Company’s strategy throughout its operations is to expand the amount of IT solutions and services it provides to its clients as compared with staffing services, and to focus on delivering digital solutions. IT solutions and services provide significant value to the Company's clients, and drive higher bill rates and margins for the Company. Existing solutions include business, technology, and operations solutions that aid the Company's clients in digitally transforming their company, and ultimately meet the needs of its clients. The digital services the Company delivers includes the Internet of Things, Intelligent Automation, Data and Analytics, and Cloud and Automated Testing.
The Company's strategy is to focus on providing digital services within its IT Solutions business in both North America and in Europe. As part of this strategy, the Company also determined that there are certain lower margin staffing accounts within its business that are no longer part of the Company’s long-term business plan. The focus includes investing in business development, solutions, delivery, and marketing for IT Solutions. Additionally, the Company is critically evaluating each significant staffing engagement as it comes up for renewal to determine if the Company would continue to provide those services to its clients. These decisions are based on, among other factors, evaluating the work performed, the availability of the resources, the client, the long-term opportunities for the services provided at the client, and the revenue and profit associated with the engagement.
Accordingly, the Company reports its operations in
The segments are composed of the following:
IT Solutions and Services in North America and Europe
IT Solutions and Services include business, technology, and operations solutions that aid the Company's clients in digitally transforming their company, and ultimately meet the needs of its clients. The digital services the Company delivers include the Internet of Things, Intelligent Automation, Data and Analytics, Cloud and Automated Testing.
Non-Strategic Technology Services
The Company’s Non-Strategic Technology Services address a range of information and technology resource needs, from filling specific talent gaps to managing high-volume staffing programs. The Company recruits, retains, and manages IT talent for its clients, which are primarily large technology service providers and other companies with multiple locations and a significant need for high-volume professional IT resources. This segment consists of the lowest margin services the Company provides to its clients. This segment consists primarily of staffing services in North America, and a minor amount (less than
The Company makes decisions related to resource allocation based upon the contribution income of each of its segments. Contribution profit reflects gross profit less any expenses directly related to each respective segment. Those expenses primarily include sales, solutions, delivery, and recruiting expenses. General and administrative expenses are not allocated to the individual segments and primarily include corporate support costs such as finance and accounting, internal IT, human resources, benefits and marketing.
21
The operating results for the Company’s segments for the quarter and two quarters ended June 30, 2023 and July 1, 2022 were as follows:
Quarter Ended June 30, 2023 |
|
North America IT |
|
|
Europe IT |
|
|
Non-Strategic |
|
|
|
|
||||
(amounts in thousands) |
|
Solutions & Services |
|
|
Solutions & Services |
|
|
Technology Services |
|
|
Total |
|
||||
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
Direct costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales, solutions, delivery, and recruiting expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contribution profit |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
|
|
|
|
|
|
|
|
|
$ |
|
||||
Quarter Ended July 1, 2022 |
|
North America IT |
|
|
Europe IT |
|
|
Non-Strategic |
|
|
|
|
||||
(amounts in thousands) |
|
Solutions & Services |
|
|
Solutions & Services |
|
|
Technology Services |
|
|
Total |
|
||||
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
Direct costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales, solutions, delivery, and recruiting expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contribution profit |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
|
|
|
|
|
|
|
|
|
$ |
|
||||
Two Quarters Ended June 30, 2023 |
|
North America IT |
|
|
Europe IT |
|
|
Non-Strategic |
|
|
|
|
||||
(amounts in thousands) |
|
Solutions & Services |
|
|
Solutions & Services |
|
|
Technology Services |
|
|
Total |
|
||||
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
Direct costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales, solutions, delivery, and recruiting expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contribution profit |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
|
|
|
|
|
|
|
|
|
$ |
|
||||
Two Quarters Ended July 1, 2022 |
|
North America IT |
|
|
Europe IT |
|
|
Non-Strategic |
|
|
|
|
||||
(amounts in thousands) |
|
Solutions & Services |
|
|
Solutions & Services |
|
|
Technology Services |
|
|
Total |
|
||||
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
Direct costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales, solutions, delivery, and recruiting expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contribution profit |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
|
|
|
|
|
|
|
|
|
$ |
|
||||
Depreciation allocated to Europe IT Solutions and Services totaled $
22
The Company has not provided any other expense or asset information for each of its segments as the Company’s CEO, who is the chief operating decision maker, does not use this information in any way to make resource decisions or to manage the segments. The Company does not prepare balance sheet or statement of cash flow information for its segments.
The Company's goodwill by segment at June 30, 2023 and December 31, 2022 was as follows:
(amounts in thousands) |
June 30, 2023 |
|
December 31, 2022 |
|
||
North America IT Solutions and Services |
$ |
|
$ |
|
||
Europe IT Solutions and Services |
|
|
|
|
||
Total goodwill |
$ |
|
$ |
|
||
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking information and statements made by the management of Computer Task Group, Incorporated (“CTG”, the “Company” or the “Registrant”) that are based on the beliefs of management as well as assumptions made by, and information currently available to, the Company, and are subject to a number of risks and uncertainties. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. These forward-looking statements are current only as of the date of this quarterly 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,” “expects,” “might,” “plans,” “may,” “will,” “would,” “should,” “could,” “seeks,” “estimates,”, “project,” “predict,” “potential,” “currently,” “continue,” “intends,” “outlook,” “forecasts,” “targets,” 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 and risks could cause actual results to differ materially from those in the forward-looking statements, including the following:
Subsequent Event
On August 9, 2023, subsequent to the end of the fiscal second quarter on June 30, 2023, the Company and the IT solutions provider Cegeka Groep nv (“Cegeka”), a company headquartered in Hasselt, Belgium, entered into a transaction for Cegeka to purchase all of the outstanding shares of CTG for $10.50 per share in cash, which represents an implied equity value for the Company of approximately $170 million. The closing of the transaction will be subject to customary conditions, including the expiration or termination of certain regulatory periods and the tender of shares representing at
24
least two-thirds of CTG’s outstanding common stock in a tender offer, as required by the merger approval requirements under applicable New York law. The transaction is expected to close later in 2023. Upon the successful completion of the tender offer, Cegeka’s acquisition subsidiary will be merged into CTG, and any remaining shares of common stock of CTG will be cancelled and converted into the right to receive the same $10.50 per share in cash. After closing, CTG will become a privately held company and shares of CTG common stock will no longer be listed on any public market.
Trends Impacting the Business
Macroeconomic Trends
In recent years, interest rates remained at historically low levels, primarily due to impacts to the U.S economy caused by COVID-19. More recently, higher consumer demand, lower interest rates, global supply chain disruption, and other factors have contributed to rapidly accelerating economic inflation. To offset the impacts of inflation, the Federal Open Market Committee ("FOMC") raised interest rates throughout 2022 and intends to continue raising rates into 2023. While the actual timing and extent of the future increases in interest rates remains unknown, higher long-term interest rates may have a material adverse impact to us as a higher cost of capital could significantly increase our interest expense on any debt we incur in the future. High inflation and interest rates are negatively impacting our clients spending, which may adversely impact our business, financial condition, cash flows and results of operations.
Foreign Currency Exchange Rate Fluctuations
Due to the nature of our operations, we have exposure to the impact of fluctuations in exchange rates associated with the Company’s European operations. Our foreign operations will continue to expose us to foreign currency exchange rate fluctuations. The impact of future foreign currency exchange rate fluctuations on our results of operations cannot be accurately predicted.
Industry Trends
The Company’s services include information and technology-related solutions. 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. These services ensure that the Company's clients utilize the right information technology to meet their business needs, maximize their IT systems’ value, and operate efficiently and effectively. A typical client is an organization with large, complex technology, information, and data processing requirements.
The Company focuses a significant portion of its services through five vertical market focus areas: healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), financial services, technology service providers, manufacturing, and energy. The Company focuses on these five vertical areas as it believes that these areas are either higher growth markets than the general IT services market and the general economy, or are areas that provide greater potential for the Company’s growth due to the size of the vertical market. The remainder of CTG’s revenue is derived from general markets.
The Company’s revenue by vertical market as a percentage of total revenue for the quarter and two quarters ended June 30, 2023 and July 1, 2022 was as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Healthcare |
|
|
23.4 |
% |
|
|
17.6 |
% |
|
|
20.9 |
% |
|
|
17.5 |
% |
Financial services |
|
|
16.7 |
% |
|
|
15.3 |
% |
|
|
17.1 |
% |
|
|
15.8 |
% |
Technology service providers |
|
|
14.8 |
% |
|
|
24.2 |
% |
|
|
15.5 |
% |
|
|
23.9 |
% |
Manufacturing |
|
|
13.7 |
% |
|
|
15.2 |
% |
|
|
15.1 |
% |
|
|
14.5 |
% |
Energy |
|
|
6.5 |
% |
|
|
6.6 |
% |
|
|
6.4 |
% |
|
|
5.9 |
% |
General markets |
|
|
24.9 |
% |
|
|
21.1 |
% |
|
|
25.0 |
% |
|
|
22.4 |
% |
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
The IT services industry is extremely competitive and characterized by continuous changes in client requirements and improvements in technologies. Our competition varies significantly by geographic region, as well as by the type of service provided. Many of our competitors are larger than CTG, and have greater financial, technical, sales, and marketing resources. In addition, the Company frequently competes with a client’s use of its own internal IT staff for
25
projects. Our industry continues to be impacted by the use of lower-cost offshore delivery capabilities (primarily India and other parts of Asia). There can be no assurance that we 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 the Company's experience on similar projects, and includes management judgments and estimates that affect the amount of revenue recognized on fixed-price contracts in any accounting period. Losses on fixed-price projects are recorded when identified.
The Company’s revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods as a percentage of consolidated revenue for the quarter and two quarters ended June 30, 2023 and July 1, 2022 was as follows:
|
|
For the Quarter Ended |
|
|
For the Two Quarters Ended |
|
||||||||||
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||
Time-and-material |
|
|
74.5 |
% |
|
|
77.7 |
% |
|
|
76.6 |
% |
|
|
77.6 |
% |
Progress billing |
|
|
18.6 |
% |
|
|
17.7 |
% |
|
|
16.9 |
% |
|
|
18.1 |
% |
Percentage-of-completion |
|
|
6.9 |
% |
|
|
4.6 |
% |
|
|
6.5 |
% |
|
|
4.3 |
% |
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Segments
The Company provides information technology and related services to its clients. These services include digital IT solutions and services, and staffing services. With digital IT solutions and services, the Company generally takes responsibility for the deliverables and some level of project and staff management, and these services may include high-end advisory or business-related consulting. When providing staffing services, including managed staffing, staff augmentation, and volume staffing, personnel are provided to clients based upon their requirements for specific skills, who then, in turn, take their direction from clients’ managers.
The Company’s strategy throughout its operations is to expand the amount of IT solutions and services it provides to its clients as compared with staffing services, and to focus on delivering digital solutions. IT solutions and services provide significant value to the Company's clients, and drive higher bill rates and margins for the Company. Existing solutions include business, technology, and operations solutions that aid the Company's clients in digitally transforming their company, and ultimately meet the needs of its clients. The digital services the Company delivers includes the Internet of Things, Intelligent Automation, Data and Analytics and Cloud and Automated Testing.
The Company's strategy is to focus on providing digital services within its IT Solutions business in both North America and in Europe. As part of this strategy, the Company determined that there are certain lower margin staffing accounts within its business that are no longer part of the Company’s long-term business plan. The focus includes investing in business development, solutions, delivery, and marketing for IT Solutions. Additionally, the Company is critically evaluating each significant staffing engagement as it comes up for renewal to determine if the Company would continue to provide those services to its client. These decisions are based on, among other factors, evaluating the work
26
performed, the availability of the resources, the client, the long-term opportunities for the services provided at the client, and the revenue and profit associated with the engagement.
Accordingly, the Company reports its operations in three segments within its business: North America IT Solutions and Services, Europe IT Solutions and Services, and Non-Strategic Technology Services.
The Company’s operating segments recorded revenue in the quarter and two quarters ended June 30, 2023 and July 1, 2022 was as follows:
For the Quarter Ended: |
|
|
|
|
Year-over-Year |
|
||||||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Change |
|
|||||||||||
North America IT Solutions and Services |
|
|
34.8 |
% |
|
$ |
25,997 |
|
|
|
24.6 |
% |
|
$ |
20,339 |
|
|
|
27.8 |
% |
Europe IT Solutions and Services |
|
|
51.5 |
% |
|
|
38,393 |
|
|
|
44.9 |
% |
|
|
37,160 |
|
|
|
3.3 |
% |
Non-Strategic Technology Services |
|
|
13.7 |
% |
|
|
10,198 |
|
|
|
30.5 |
% |
|
|
25,260 |
|
|
|
(59.6 |
)% |
Total |
|
|
100.0 |
% |
|
$ |
74,588 |
|
|
|
100.0 |
% |
|
$ |
82,759 |
|
|
|
(9.9 |
)% |
For the Two Quarters Ended: |
|
|
|
|
Year-over-Year |
|
||||||||||||||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Change |
|
|||||||||||
North America IT Solutions and Services |
|
|
32.2 |
% |
|
$ |
49,193 |
|
|
|
23.7 |
% |
|
$ |
40,773 |
|
|
|
20.7 |
% |
Europe IT Solutions and Services |
|
|
51.4 |
% |
|
|
78,486 |
|
|
|
46.2 |
% |
|
|
79,638 |
|
|
|
(1.4 |
)% |
Non-Strategic Technology Services |
|
|
16.4 |
% |
|
|
25,111 |
|
|
|
30.1 |
% |
|
|
51,765 |
|
|
|
(51.5 |
)% |
Total |
|
|
100.0 |
% |
|
$ |
152,790 |
|
|
|
100.0 |
% |
|
$ |
172,176 |
|
|
|
(11.3 |
)% |
Results of Operations
The table below sets forth data as contained in the condensed consolidated statements of income with the percentage information calculated as a percentage of consolidated revenue.
For the Quarter Ended: |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||||||||
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
|
100.0 |
% |
|
$ |
74,588 |
|
|
|
100.0 |
% |
|
$ |
82,759 |
|
Cost of services |
|
|
71.9 |
% |
|
|
53,593 |
|
|
|
76.1 |
% |
|
|
63,009 |
|
Gross profit |
|
|
28.1 |
% |
|
|
20,995 |
|
|
|
23.9 |
% |
|
|
19,750 |
|
Selling, general and administrative expenses |
|
|
27.7 |
% |
|
|
20,710 |
|
|
|
20.1 |
% |
|
|
16,577 |
|
Operating income |
|
|
0.4 |
% |
|
|
285 |
|
|
|
3.8 |
% |
|
|
3,173 |
|
Interest and other expense, net |
|
|
(0.5 |
)% |
|
|
(364 |
) |
|
|
(0.4 |
)% |
|
|
(385 |
) |
Income (loss) before income taxes |
|
|
(0.1 |
)% |
|
|
(79 |
) |
|
|
3.4 |
% |
|
|
2,788 |
|
Provision for income taxes |
|
|
0.1 |
% |
|
|
51 |
|
|
|
0.9 |
% |
|
|
748 |
|
Net income (loss) |
|
|
(0.2 |
)% |
|
$ |
(130 |
) |
|
|
2.5 |
% |
|
$ |
2,040 |
|
For the Two Quarters Ended: |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
||||||||||
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue |
|
|
100.0 |
% |
|
$ |
152,790 |
|
|
|
100.0 |
% |
|
$ |
172,176 |
|
Cost of services |
|
|
73.1 |
% |
|
|
111,660 |
|
|
|
76.6 |
% |
|
|
131,831 |
|
Gross profit |
|
|
26.9 |
% |
|
|
41,130 |
|
|
|
23.4 |
% |
|
|
40,345 |
|
Selling, general and administrative expenses |
|
|
26.3 |
% |
|
|
40,138 |
|
|
|
19.7 |
% |
|
|
33,973 |
|
Operating income |
|
|
0.6 |
% |
|
|
992 |
|
|
|
3.7 |
% |
|
|
6,372 |
|
Interest and other expense, net |
|
|
(0.3 |
)% |
|
|
(594 |
) |
|
|
(0.4 |
)% |
|
|
(642 |
) |
Income before income taxes |
|
|
0.3 |
% |
|
|
398 |
|
|
|
3.3 |
% |
|
|
5,730 |
|
Provision for income taxes |
|
|
0.2 |
% |
|
|
213 |
|
|
|
0.8 |
% |
|
|
1,450 |
|
Net income |
|
|
0.1 |
% |
|
$ |
185 |
|
|
|
2.5 |
% |
|
$ |
4,280 |
|
The Company’s strategic plan includes investing in IT solutions-based business development, marketing and solutions resources as part of a concerted effort to increase the mix of solutions services within its total revenue. Generally, solutions services have much higher bill rates and produce higher profits than IT staffing services. Additionally, within solutions, the Company is focused on expanding the digital solutions it provides, including cloud related activities, robotic process automation and artificial intelligence, in response to the demand in the end markets where services are
27
provided. Finally, as a third part of its plan, the Company is on focused on disengaging from its lowest margin staffing business, which are included in the Non-Strategic Technology Services segment.
On a consolidated basis, North America IT Solutions and Services revenue increased approximately $5.7 million year-over-year to $26.0 million, or 34.8% of consolidated revenue in the 2023 second quarter, and increased approximately $8.4 million year-over-year to $49.2 million, or 32.2% of consolidated revenue in the 2023 year-to-date period. This compares with $20.3 million, or 24.6% in the corresponding 2022 second quarter, and $40.8 million, or 23.7% in the corresponding 2022 year-to-date period. The increase in North America IT Solutions and Services revenue in the 2023 second quarter was driven by the contributions from Eleviant, the Company's acquisition in 2022, and new customers or projects in digital IT solutions resulting from the business development investments the Company has been making in this segment.
Europe IT Solutions and Services revenue increased $1.2 million to $38.4 million and represented 51.5% of consolidated revenue in the 2023 second quarter, and decreased approximately $1.2 million year-over-year to $78.5 million, or 51.4% of consolidated revenue in the 2023 year-to-date period. This compares with $37.2 million or 44.9% of revenue in the corresponding 2022 second quarter, and $79.6 million or 46.2% of consolidated revenue in the 2022 year-to-date period. The Europe IT Solutions and Services revenue increase in the 2023 second quarter was primarily due to the strength of the value of the Euro as compared with the U.S. dollar. Approximately 99% of European revenue for the second quarter is in this segment, while the remaining 1% is in the Non-Strategic Technology Services segment. If there had been no change in the foreign currency exchange rates from the 2022 second quarter to the 2023 second quarter, revenue overall for the Company would have been approximately $0.8 million lower. If there had been no change in the foreign currency exchange rates from the 2022 year-to-date period to the corresponding 2023 period, revenue overall for the Company would have been approximately $1.2 million higher.
Non-Strategic Technology Services revenue decreased $15.1 million to $10.2 million and represented 13.7% of consolidated revenue in the 2023 second quarter, and decreased approximately $26.7 million year-over-year to $25.1 million, or 16.4% of consolidated revenue in the 2023 year-to-date period. This compares with $25.3 million or 30.5% of revenue in the corresponding 2022 second quarter, and $51.8 million or 30.1% in the corresponding 2022 year-to-date period. The Non-Strategic Technology Services revenue decreases in the 2023 second quarter and year-to-date period were primarily due to the Company continuing to disengage from a number of low margin, non-core staffing engagements in North America and the high inflationary macroeconomic conditions which lowered demand in this segment throughout 2023.
The Company recorded revenue by geography in the quarter and two quarters ended June 30, 2023 and July 1, 2022 as follows:
For the Quarter Ended: |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Year-over-Year |
|
|||||||||||
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
|
48.2 |
% |
|
$ |
35,970 |
|
|
|
54.4 |
% |
|
$ |
45,042 |
|
|
|
(20.1 |
)% |
Europe |
|
|
51.8 |
% |
|
|
38,618 |
|
|
|
45.6 |
% |
|
|
37,717 |
|
|
|
2.4 |
% |
Total |
|
|
100.0 |
% |
|
$ |
74,588 |
|
|
|
100.0 |
% |
|
$ |
82,759 |
|
|
|
(9.9 |
)% |
For the Two Quarters Ended: |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Year-over-Year |
|
|||||||||||
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
North America |
|
|
48.3 |
% |
|
$ |
73,829 |
|
|
|
53.0 |
% |
|
$ |
91,304 |
|
|
|
(19.1 |
)% |
Europe |
|
|
51.7 |
% |
|
|
78,961 |
|
|
|
47.0 |
% |
|
|
80,872 |
|
|
|
(2.4 |
)% |
Total |
|
|
100.0 |
% |
|
$ |
152,790 |
|
|
|
100.0 |
% |
|
$ |
172,176 |
|
|
|
(11.3 |
)% |
There were 64 billable days in both the 2023 and 2022 second quarters. Reimbursable expenses billed to clients and included in revenue were approximately $0.1 million and zero in the 2023 and 2022 second quarters, respectively.
There were 128 and 129 billable days in the 2023 and 2022 year-to-date periods, respectively. Reimbursable expenses billed to clients and included in revenue totaled $0.3 million in both the 2023 and 2022 year-to-date periods.
28
The COVID-19 pandemic had limited financial impact on the Company’s operations in the 2023 and 2022 second quarters, although client demand for Non-Strategic Technology Services continued to be low. During 2023, to start the year, the Company faced challenging macroeconomic conditions and high inflation. Although the COVID-19 pandemic and macroeconomic conditions continue to affect all of the countries where the Company has operations, there is no clear visibility into the potential magnitude of a downturn in operations that could negatively affect financial results for the remainder of 2023.
The Company is experiencing significant competition for qualified resources due to a general shortage of available IT digital solutions talent. We believe this competition will continue in the future, and may have a negative impact on the Company’s revenue and operating profits if we are unable to hire the resources we need to meet demand from our clients on a timely basis.
The Company includes all billable consultants, consisting of both employees and subcontractors, and its support services in its headcount totals. CTG’s total headcount at June 30, 2023 was approximately 2,900, down from approximately 3,200 at July 1, 2022, and at December 31, 2022. The decrease in headcount year-over-year is primarily due to the Company's disengagement from its lowest margin staffing business in the Company’s Non-Strategic Technology Services segment, as well as reduced demand in the segment.
The revenue decrease in Europe in the countries in which the Company operates (Belgium, France, Luxembourg, and the United Kingdom) was impacted in the 2023 second quarter and year-to-date period by the weakness of the U.S. dollar as compared with the value of the Euro, the currency used in Belgium, France, and Luxembourg, and the British pound, the currency used in the United Kingdom. Revenue in constant currency is measured by applying the current period's average exchange rate to the prior periods. Based on this methodology, revenue in the 2023 second quarter was $0.8 million higher due to foreign currency exchange fluctuations compared with the prior year second quarter, while operating income was about $0.1 million higher. If there had been no change in these exchange rates from the 2022 year-to-date period to the corresponding 2023 period, revenue would have been approximately $1.2 million higher, while operating income would have been approximately $0.2 million lower.
In the 2023 second quarter, International Business Machines Corporation (IBM) was the Company’s largest client and accounted for $6.6 million or 8.8% of consolidated revenue compared with $15.9 million or 19.2% of consolidated revenue in the comparable 2022 period. In the 2023 year-to-date period, IBM accounted for $14.8 million or 9.7% of consolidated revenue, compared with $32.4 million or 18.8% of consolidated revenue in the comparable 2022 period. The National Technical Services Agreement with IBM expires on October 27, 2023. The Company’s accounts receivable from IBM at June 30, 2023 and December 31, 2022 totaled $9.2 million and $14.0 million, respectively.
No other client accounted for 10% or more of the Company's revenue during the 2023 or 2022 second quarters or year-to-date periods.
The Company recorded operating results in the quarters ended June 30, 2023 and July 1, 2022 in its operating segments as follows:
North America IT Solutions and Services |
|
|
|
|
|
|
(amounts in thousands) |
|
June 30, 2023 |
|
July 1, 2022 |
|
Change |
Revenue |
|
100.0% |
|
100.0% |
|
— |
Direct costs |
|
59.6% |
|
65.2% |
|
(5.6)% |
Gross margin |
|
40.4% |
|
34.8% |
|
5.6% |
Sales, solutions, delivery, and recruiting expenses |
|
18.1% |
|
17.4% |
|
0.7% |
Contribution margin |
|
22.3% |
|
17.4% |
|
4.9% |
Europe IT Solutions and Services |
|
|
|
|
|
|
(amounts in thousands) |
|
June 30, 2023 |
|
July 1, 2022 |
|
Change |
Revenue |
|
100.0% |
|
100.0% |
|
— |
Direct costs |
|
75.9% |
|
74.2% |
|
1.7% |
Gross margin |
|
24.1% |
|
25.8% |
|
(1.7)% |
Sales, solutions, delivery, and recruiting expenses |
|
13.8% |
|
13.1% |
|
0.7% |
Contribution margin |
|
10.3% |
|
12.7% |
|
(2.4)% |
29
Non-Strategic Technology Services |
|
|
|
|
|
|
(amounts in thousands) |
|
June 30, 2023 |
|
July 1, 2022 |
|
Change |
Revenue |
|
100.0% |
|
100.0% |
|
— |
Direct costs |
|
87.8% |
|
87.8% |
|
— |
Gross margin |
|
12.2% |
|
12.2% |
|
— |
Sales, solutions, delivery, and recruiting expenses |
|
3.7% |
|
2.7% |
|
1.0% |
Contribution margin |
|
8.5% |
|
9.5% |
|
(1.0)% |
The Company recorded operating results in the two quarters ended June 30, 2023 and July 1, 2022 in its operating segments as follows:
North America IT Solutions and Services |
|
|
|
|
|
|
|
|
|
|||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Change |
|
|||
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
— |
|
Direct costs |
|
|
60.4 |
% |
|
|
65.8 |
% |
|
|
(5.4 |
)% |
Gross margin |
|
|
39.6 |
% |
|
|
34.2 |
% |
|
|
5.4 |
% |
Sales, solutions, delivery, and recruiting expenses |
|
|
19.3 |
% |
|
|
16.3 |
% |
|
|
3.0 |
% |
Contribution margin |
|
|
20.3 |
% |
|
|
17.9 |
% |
|
|
2.4 |
% |
Europe IT Solutions and Services |
|
|
|
|
|
|
|
|
|
|||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Change |
|
|||
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
— |
|
Direct costs |
|
|
76.3 |
% |
|
|
74.8 |
% |
|
|
1.5 |
% |
Gross margin |
|
|
23.7 |
% |
|
|
25.2 |
% |
|
|
(1.5 |
)% |
Sales, solutions, delivery, and recruiting expenses |
|
|
13.2 |
% |
|
|
12.7 |
% |
|
|
0.5 |
% |
Contribution margin |
|
|
10.5 |
% |
|
|
12.5 |
% |
|
|
(2.0 |
)% |
Non-Strategic Technology Services |
|
|
|
|
|
|
|
|
|
|||
(amounts in thousands) |
|
June 30, 2023 |
|
|
July 1, 2022 |
|
|
Change |
|
|||
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
— |
|
Direct costs |
|
|
87.8 |
% |
|
|
87.7 |
% |
|
|
0.1 |
% |
Gross margin |
|
|
12.2 |
% |
|
|
12.3 |
% |
|
|
(0.1 |
)% |
Sales, solutions, delivery, and recruiting expenses |
|
|
2.9 |
% |
|
|
3.0 |
% |
|
|
(0.1 |
)% |
Contribution margin |
|
|
9.3 |
% |
|
|
9.3 |
% |
|
|
— |
|
Direct costs, defined as costs for billable staff including billable out-of-pocket expenses, were 59.6% and 65.2% of revenue in the North America IT Solutions and Services segment in the 2023 and 2022 second quarter, respectively, and 60.4% and 65.8% in the 2023 and 2022 year-to-date periods, respectively. Direct costs in the Europe IT Solutions and Services segment were 75.9% and 74.2% in the 2023 and 2022 second quarter, respectively, and 76.3% and 74.8% in the 2023 and 2022 year-to-date periods, respectively. The decrease in direct costs year-over-year as a percentage of revenue in the North America IT Solutions and Services segment was due to a concerted effort to deliver higher margin, digital services in these segments and the inclusion of the results of Eleviant since it was acquired at the end of the 2022 third quarter. Eleviant's direct margins are in excess of 50%. The increase in direct costs year-over-year in the Europe IT Solutions and Services segment was due to significant increases in wages as mandated by a number of the governments in which we operate in Europe. In Belgium, wages increased for our employees by approximately 11% on January 1, 2023, which drove higher direct costs. The Company is in the process of increasing bill rates to compensate for the increase in wage rates but expects that it will take most of 2023 to pass the increases through to clients, and most of the increases will occur in the second half of the year. Direct costs in the Non-Strategic Technology Services segment were 87.8% of revenue in both the 2023 and 2022 second quarters, and 87.8% and 87.7% in the 2023 and 2022 year-to-date periods, respectively.
30
Selling, general and administrative (“SG&A”) expenses were 27.7% of revenue in the 2023 second quarter as compared with 20.1% in the corresponding 2022 period, and 26.3% in the 2023 year-to-date period as compared with 19.7% in the corresponding 2022 period. The increase in SG&A expenses as a percentage of revenue in the 2023 second quarter as compared with the prior year period was due to significant investments in business development resources in the Company's IT Solutions and Services segments, costs incurred for an enterprise resource planning (ERP) system implementation in 2023, costs incurred related to the evaluation of potential transactions, and a loss of operating leverage resulting from lower revenue in the quarter.
Consolidated operating income was 0.4% and 3.8% of revenue in the 2023 and 2022 second quarters, respectively, and 0.6% and 3.7% of revenue in the 2023 and 2022 year-to-date periods, respectively.
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 2023 second quarter and year-to-date ETR was (64.6)% and 53.5%, respectively, and the 2022 second quarter and year-to-date ETR was 26.8% and 25.3%, respectively. The ETR was higher in the 2023 second quarter and year-to-date periods as compared with the corresponding 2022 periods primarily due to the increased losses of the company’s foreign subsidiaries for which no tax
benefit can be recorded due to valuation allowances.
Net income was ($0.01) and $0.01 per diluted share in the 2023 second quarter and year-to-date period, respectively, as compared with $0.13 and $0.28 per diluted share in the 2022 second quarter and year-to-date period, respectively. Diluted earnings per share was calculated using 14.8 million and 15.1 million weighted-average equivalent shares outstanding in the quarters ended June 30, 2023 and July 1, 2022, respectively.
Critical Accounting Estimates
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 estimates 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 matters that are inherently uncertain. The Company’s most critical accounting estimates set forth below are related to income taxes, specifically relating to the valuation allowance for deferred income taxes, accounting for business combinations and the valuation of goodwill.
Income Taxes—Valuation Allowances on Deferred Tax Assets
At June 30, 2023, the Company had a total of approximately $4.5 million of deferred tax assets offset by a valuation allowance of approximately $0.7 million, resulting in a net deferred tax asset of approximately $3.8 million. Additionally, the Company had approximately $1.4 million of deferred tax liabilities recorded on its condensed consolidated balance sheet. The deferred tax assets and liabilities primarily consist of deferred compensation, loss carryforwards, and state taxes.
In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that all or some portion of the deferred tax assets will be realized, or that a valuation allowance is required. Management considers all available evidence, both positive and negative, in assessing realizability of its deferred tax assets. A key component of this assessment is management’s critical evaluation of current and future impacts of business and economic factors on the Company’s ability to generate future taxable income. Factors that may affect the Company’s ability to generate taxable income include, but are not limited to increased competition, a decline in revenue or margins, a loss of market share, the availability of qualified professional staff, and a decrease in demand for the Company’s services.
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 2023 second quarter and year-to-date period would have increased or decreased net income by approximately $700 and $4,000, respectively.
31
Business Combinations - Accounting
On September 29, 2022, the Company acquired 100% of the equity of Eleviant for approximately $19.0 million, including $17.4 million of cash on hand, common stock valued at $1.2 million, and stock options valued at $0.4 million. Additionally, an earn-out of $5.0 million can be earned, a portion of which will be payable in each period subject to the achievement of revenue and gross profit targets for fiscal 2022, 2023 and 2024. Assets acquired and liabilities assumed are generally recorded at their fair value in an acquisition, where the excess of the purchase price over the fair value of the net asset acquired is recorded as goodwill. The determination of fair value for identifiable assets, including intangible assets, and liabilities assumed requires management to make estimates which are based on available information and assumptions with respect to the timing and amount of future revenue and expense associated with an asset. Examples where estimates may be required in the accounting for a business combination include customer relationships, technology, and contingent consideration. Estimates within these areas may include the amount of revenue, earnings before interest expense, taxes, depreciation and amortization (EBITDA), cash flow, useful lives, discount rates and the cost of capital. The Company completes its accounting for business combinations with the aid of a third party expert.
Goodwill Valuation
As of June 30, 2023, goodwill recorded on the Company's consolidated balance sheet totaled $36.2 million, which relates to the acquisitions completed by the Company between 2018 and 2022. The acquisition of Soft Company in 2018 is in the France IT Solutions and Services reporting unit, the 2019 acquisition of Tech-IT is in the Luxembourg IT Solutions and Services reporting unit, the 2020 acquisition of StarDust is in both the North America and France IT Solutions and Services reporting units, while the 2022 acquisition of Eleviant is in the North America IT Solutions and Services reporting unit. As of June 30, 2023, goodwill consisted of $18.7 million associated with the North America IT Solutions and Services segment, while the balance of $17.5 million is associated with the Europe IT Solutions and Services segment.
As of October 2022 fiscal month-end, we performed our annual goodwill impairment test for the Luxembourg and France IT Solutions and Services reporting units with the assistance of an external consultant and estimated the fair value based on a combination of the income (estimates of future discounted cash flows) and the market approach (market multiples for similar companies). The income approach uses a discounted cash flow (DCF) method that utilizes the present value of cash flows to estimate fair value of the reporting unit. The future cash flows for the reporting units were projected based upon on our estimates of future revenue, operating income and other factors such as working capital and capital expenditures. As part of our projections, we took into account expected industry and market conditions for the industries in which the reporting units operate, as well as trends currently impacting the reporting units. The market approach utilizes multiples of earnings before interest expense, taxes, depreciation and amortization (EBITDA) to estimate the fair value of the reporting unit. The market multiples used for our reporting units were based on competitor industry data, along with the market multiples for the Company and other factors.
Finally, we compared our estimates of fair value to the consolidated Company’s October 2022 month-end total public market capitalization, which included factoring in the business operations that do not have goodwill, and assessed implied control premiums. Based on the results of this analysis, we concluded that the estimated fair value determined under our approach for the annual goodwill impairment test for our France and Luxembourg reporting units in October 2022 was reasonable, and continues to be reasonable at the end of the 2023 second quarter.
From the impairment test, we noted the excess of the fair value over the carrying value for the France reporting unit is approximately 1%. The goodwill allocated to the France reporting unit at October 2022 month end totaled $12.2 million. While the reporting unit performed well and improved its results for the year ended October 2022 as compared with the prior year, there is no assurance it will continue to improve in the future. Additionally, challenges resulting from the current macroeconomic climate in France consisting of modest GDP growth matched with inflation of approximately 5% may make it difficult for the reporting unit to meet its targets in 2023.
In addition, we elected to perform a qualitative assessment for our annual goodwill impairment test of the North America IT Solutions and Services reporting unit. The qualitative assessment included our consideration of, among other things, the overall macroeconomic conditions, industry and market considerations, overall financial performance, including revenue and contribution profits, and other relevant company specific events. Based on the assessment of these items, we concluded that it is more likely than not that the fair value of our North America IT Solutions and Services reporting unit exceeded its respective carrying amount. Accordingly, there were no indicators of impairment and the quantitative impairment test was not performed for this reporting unit.
We concluded that the goodwill assigned to the France, Luxembourg, and North America IT Solutions and Services reporting units as of October 2022 were not impaired, and that they continue to not be impaired as of June 30, 2023 as no
32
impairment triggering events have been noted subsequently through the end of the 2023 second quarter. The estimates and assumptions on which the Company’s evaluations are based involve judgments and are based on current available information, any of which could prove wrong or inaccurate when made, or become wrong or inaccurate as a result of subsequent events. In the event the business significantly under achieves its goals for revenue and profit growth in the future, especially considering the current highly inflationary macroeconomic environment in which the Company conducts its operations, the carrying value for this business unit may not be supportable using a discounted cash flow projection, and an impairment charge may exist.
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 consolidated financial statements pursuant to the rules and regulations of the SEC, the FASB, and other regulatory authorities. Such estimates primarily relate to the valuation of stock options for recording equity-based compensation expense, allowances for credit losses, investment valuation, discount rates associated with pension plans, incurred but not reported claims related to the Company's self-insured medical plan, valuation allowances for deferred tax assets, goodwill, acquisition and related accounting, 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 consolidated financial statements in the event they occur.
Financial Condition and Liquidity
Operating activities used $4.6 million in cash in the 2023 year-to-date period compared with providing $2.8 million in the 2022 corresponding period. In 2023, net income was $0.2 million, while other non-cash adjustments, primarily consisting of depreciation and amortization expense, equity-based compensation, deferred income taxes, and deferred compensation totaled $2.1 million. In 2022, net income was $4.3 million, while the corresponding non-cash adjustments totaled $2.6 million.
The accounts receivable balance decreased $1.3 million in the 2023 year-to-date period and $4.3 million in the comparable 2022 period. The decrease in accounts receivable in 2022 was due to the Company receiving payment on a large outstanding receivable balance in the second quarter of 2022 from a project completed in the 2021 fourth quarter which drove receivable balances down. The Company has a factoring agreement with its largest customer whereby invoices due in 90 days can be paid in as little as 15 days. In the 2023 year-to-date period, the Company factored approximately $12.4 million, compared to approximately $4.5 million in the comparable 2022 period. Days sales outstanding (DSO) was 86 days at June 30, 2023 and 84 days at July 1, 2022.
Prepaid and other current assets increased $1.2 million and $0.4 million in the 2023 and 2022 periods, respectively, due to the timing of payments made early in each respective year that are then expensed throughout the year.
The accounts payable balance decreased $0.4 million and $7.2 million in the 2023 and 2022 periods, respectively, primarily due to the timing of certain payments near the end of the second quarter of each year as compared with the prior year-end. Accrued compensation decreased $4.5 million and $3.0 million in the 2023 and 2022 periods, respectively. The 2023 decrease is primarily due to an overall decrease in headcount of approximately 300 year-over-year while the 2022 decrease is primarily due an overall decrease in headcount of approximately 450 year-over-year. Advance billings on contracts decreased $1.5 million in 2023 and increased $0.5 million in 2022. The change in advance billings in any given period is determined by the nature and type of existing projects, and the advance payments associated with those projects. Other current liabilities increased $0.7 million and $1.0 million in 2023 and 2022, respectively, due to the timing of vendor invoices received at the end of the quarter as compared with the prior year-end.
Investing activities used $1.8 million and $0.7 million of cash in the 2023 and 2022 periods, respectively. The Company has no significant commitments for the purchase of property and equipment at June 30, 2023.
Financing activities provided less than $0.1 million of cash in the 2023 year-to-date period and used $0.7 million in the comparable 2022 period. Cash received from the exercise of stock options and from an employee stock purchase plan totaled approximately $0.1 million in 2023 and $0.2 million in 2022. The Company borrowed $16.9 million and made repayments of $16.9 million to fund working capital needs under the Company’s revolving credit line in 2023, while the Company did not borrow or make repayments in 2022. Payments made to taxing authorities that represent the value of shares withheld for taxes in employee equity-based compensation transactions totaled $0.6 million and $1.2 million in the 2023 and 2022 periods, respectively. The increase in 2023 and 2022 were due to the vesting of the performance grants
33
issued to the management team. The Company did not repurchase shares for treasury under its buyback program in either of the 2023 or 2022 year-to-date periods. As of June 30, 2023, $7.7 million was available under the Company's authorization to purchase shares in future periods.
The Credit Agreement has a five-year term that expires in May 2026. Under this Credit Agreement, the Company can borrow up to $50.0 million depending on collateral availability. The Credit Agreement is collateralized by the Company’s accounts receivable in the United States, Belgium and Luxembourg. Interest rates range from 1.5% to 2.0% over SOFR or EURIBOR loans, and 0.5% to 1.0% over base rate (prime rate) loans. The London Interbank Offered Rate (“LIBOR”), the interest rate benchmark used as a reference rate on our Credit Agreement, began being phased out at the beginning of calendar year 2022, with the one-month LIBOR scheduled to cease immediately after June 30, 2023. A reference rate based on the Secured Overnight Financing Rate (“SOFR”), and other alternative benchmark rates, are replacing LIBOR. The Company can borrow under the agreement at either rate at its discretion.
At both June 30, 2023 and December 31, 2022, there were zero outstanding under the Credit Agreement. The Company borrows or repays its debts as needed based upon its working capital obligations, including the timing of the U.S. bi-weekly payroll.
The maximum amounts outstanding under the Credit Agreement in the 2023 and 2022 second quarters were $3.6 million and zero, respectively, while borrowings during those quarters averaged $0.6 million and zero, respectively, and carried weighted average interest rates of 8.5% and zero, respectively.
Under the Credit Agreement, the Company is required to meet one financial covenant in order to maintain borrowings under its revolving credit line, pay dividends, and make acquisitions. The covenant is measured quarterly, and at June 30, 2023, represented a fixed charge coverage ratio, where for the trailing twelve months the consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) adjusted for, amongst other items, equity-based compensation and severance expenses, must be greater than 1.0 times the consolidated interest expense paid in cash and any scheduled principal payments. The fixed charge coverage ratio is only tested if availability, subject to a maximum of the commitment of $50.0 million, on the measurement date is less than the greater of 12.5% of the total loan availability or $5.0 million. Actual borrowings by CTG under the Credit Agreement are subject to a borrowing base, which is a formula based on certain eligible receivables and reserves for each country included in the Credit Agreement (the United States, Belgium, and Luxembourg). Receivable balances from our largest client, IBM, have been removed from the Credit Agreement as collateral, as the Company had entered into a factoring arrangement for those receivables. Total availability as of June 30, 2023 was approximately $40.1 million. The Company’s compliance with its financial covenant was not required to be tested at June 30, 2023 as availability under the Credit Agreement was in excess of 12.5% of the total loan availability.
Eleviant has a revolving credit facility totaling $1.3 million. They did not have any amount outstanding under this line as of June 30, 2023. The interest rate on borrowings when taken is 8.75%.
Of the total cash and cash equivalents reported on the condensed consolidated balance sheet at June 30, 2023 of $19.1 million, approximately $18.7 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 Agreement (subject to collateral limits) totaling $49.8 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 has guarantees in our European operations that support office leases and the performance under government contracts. These guarantees totaled approximately $1.4 million at June 30, 2023.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The objective of this ASU is to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are elective
34
and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Then in December 2022, the FASB issued ASU No. 2022-06 “Deferral of the Sunset Date of Topic 848” which amends and extends the sunset date to December 31, 2024. The Company has not elected any of the practical expedients or scope exceptions to date related to this standard. We will continue to review our contracts and arrangements that will be affected by a discontinued reference rate during the transition period.
Item 3. Quantitative and Qualitative Disclosures 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) was impacted in the 2023 second quarter and year-to-date period by the weakness of the U.S. dollar as compared with the value of the Euro, the currency used in Belgium, France, and Luxembourg, and the British pound, the currency used in the United Kingdom. Revenue in constant currency is measured by applying the current period's average exchange rate to the prior periods. Based on this methodology, revenue in the 2023 second quarter was $0.8 million higher due to foreign currency exchange fluctuations compared with the prior year second quarter, while operating income was about $0.1 million higher. If there had been no change in these exchange rates from the 2022 year-to-date period to the corresponding 2023 period, revenue would have been approximately $1.2 million higher, while operating income would have been approximately $0.2 million lower.
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.
As described above, on September 29, 2022 we completed the acquisition of Eleviant. SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from date of acquisition. We are in the process of integrating Eleviant’s operations within our internal control structure. In executing this integration, we are analyzing, evaluating, and where necessary, making changes in controls and procedures related to the Eleviant business. Accordingly, management has excluded controls relating to Eleviant in this quarter’s evaluation of disclosure controls and procedures.
Changes in Internal Control Over Financial Reporting
The Company reviews the effectiveness of its internal controls on a continuous basis, and makes changes as necessary. There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report, which ended on June 30, 2023, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved from time to time in various legal proceedings arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving the Company and its subsidiaries cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not expect these matters, if any, to have a material adverse effect on the financial position, results of operations, or cash flows of the Company. See footnote 12 to the Company’s audited financial statements for the period ended December 31, 2022 included in Part II, Item 8, “Financial Statements and Supplementary Data” of the Form 10-K.
Item 1A. Risk Factors
There are a number of risk factors related to the proposed tender offer by Cegeka and the proposed merger of CTG and Cegeka. These include:
There are material uncertainties and risks associated with the Merger Agreement, the Offer, and the Merger.
On August 9, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cegeka and Chicago Merger Sub, Inc., a New York corporation and wholly-owned subsidiary of Cegeka (“Merger Sub”), pursuant to which Merger Sub will commence a tender offer for any and all shares of the Company other than certain excluded shares (the “Offer”) and, upon successful completion of the Offer, will merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Cegeka (“the Merger”), subject to the satisfaction or waiver of conditions described therein.
There are material uncertainties and risks associated with the Merger Agreement, the Offer and the Merger. If any of these uncertainties and risks develop into actual events, then the Company’s business, financial condition, results and ongoing operations, share price or prospects could be materially adversely affected. These uncertainties and risks include, but are not limited to, the following:
The completion of the Offer and the Merger are subject to certain conditions, including regulatory approvals as well as other uncertainties, and there can be no assurances as to whether and when they may be completed.
Completion of the Merger is subject to various closing conditions, including, among other things, consummation of the Offer (as further detailed below), and the receipt of applicable regulatory approvals. Further, if the Merger has not been consummated on or before February 9, 2024 (the "End Date"), then the Merger Agreement may be terminated by either party, subject to an automatic 90 day extension to the End Date if receipt of applicable regulatory approvals, including from the Committee on Foreign Investment in the United States (“CFIUS”), are the only outstanding conditions to closing. There is no assurance that receipt of applicable regulatory approvals will occur, or that all of the other closing conditions will be satisfied (or waived, to the extent permitted by applicable law), or that the Merger will be completed on the terms reflected in the Merger Agreement, within the expected timeframe or at all.
The obligation of Merger Sub to purchase shares tendered in the Offer is subject to the satisfaction or waiver of the conditions set forth in Annex I to the Merger Agreement, including (i) that there shall have been validly tendered and not validly withdrawn shares of common stock of CTG (the "Shares") that, considered together with any beneficially owned by Cegeka and its affiliates, represent at least one more Share than 66 2/3% of the total number of shares of our common
36
stock outstanding at the time of the expiration of the Offer, plus (y) the total number of shares of common stock that we are required to issue upon conversion, settlement, exchange or exercise of our convertible securities at the time of expiration of the Offer; and (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") to the extent required under the HSR Act and the receipt of clearance, approval or consent under any other applicable antitrust or merger control law, including any applicable foreign merger control or foreign direct investment law, and (iii) the receipt of clearance, approval or consent from CFIUS.
We can provide no assurance that all required approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable) in a timely manner or at all, and, if all required consents and approvals are obtained and all closing conditions are timely satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such consents and approvals or the timing of the completion of the Merger. Many of the conditions to completion of the Merger are not within either our control, and we cannot predict when or if these conditions will be satisfied (or waived, if applicable). Any delay in completing the Merger could cause us not to realize some or all of the benefits that we expect to achieve if the Merger is successfully completed within its expected timeframe.
CFIUS approval may not be received, may take longer than expected, or may be subject to conditions that are not presently anticipated or that cannot be met.
Subject to the terms and conditions of the Merger Agreement, each of Cegeka, the Merger Sub and the Company has agreed to use its reasonable best efforts to obtain clearance from CFIUS prior to the End Date. However, such parties will not be required to take any action that may limit Cegeka’s freedom of action with respect to the Company, or to sell, divest or hold separate or take any other action with respect to any of their respective assets or businesses.
We may not receive CFIUS clearance or approval or such clearance or approval may contain a condition that would be unacceptable to the parties. If CFIUS seeks to impose conditions on the granting of its approval, lengthy negotiations may ensue among CFIUS, Cegeka and the Company. Such conditions and the process of obtaining regulatory approval could have the effect of delaying completion of the Merger and such conditions may not be satisfied for an extended period of time.
We cannot assure you that CFIUS clearance or approval will be obtained in a timely manner or obtained at all, or that the granting of CFIUS approval will not involve the imposition of regulatory remedies on the completion of the Merger, including requiring changes to the terms of the Merger Agreement. These conditions or changes could result in the conditions to the closing of the Merger not being satisfied.
Failure to complete the pending Offer and Merger could have a material adverse effect on the Company.
Either the Company or Cegeka may terminate the Merger Agreement in specified circumstances. If the Offer and the Merger is not completed, the parties’ business, financial condition, results of operations and growth prospects may be adversely affected and, without realizing any of the benefits of having completed the Offer and the Merger, the Company will be subject to a number of risks, including the following:
37
Any of these risks could adversely affect the Company’s business, financial condition, results of operations and growth prospects. Similarly, delays in the completion of the Merger could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with delay and uncertainty about completion of the Merger and could adversely affect the Company’s business, financial condition, results of operations and growth prospects, after the Merger.
The Merger Agreement contains provisions that could discourage a potential competing acquirer of the Company or could result in any competing proposal being at a lower price than it might otherwise be.
The Company is subject to certain restrictions on its ability to solicit alternative acquisition proposals from third parties, to provide information to third parties, to enter into or continue discussions or negotiations with third parties regarding alternative acquisition proposals, to enter into any commitment with respect to any alternative acquisition proposal, to recommend or approve any alternative acquisition proposal or change in recommendation by our board of directors, subject to customary exceptions. In addition, we may be required to pay Cegeka a termination fee of $7.2 million in specified circumstances, including if the Merger Agreement is terminated in specified circumstances following the Company’s receipt of an alternative acquisition proposal.
These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than that market value proposed to be received in the Offer and the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in specified circumstances under the Merger Agreement.
The pendency of the Offer and the Merger could adversely affect the Company’s business and operations.
In connection with the pending Offer and Merger, some customers, suppliers, business partners or other parties with commercial relationships with the Company may delay or defer decisions, which could adversely affect the Company’s business, financial condition, results of operations and growth prospects, regardless of whether the Offer and the Merger is completed. Similarly, current and prospective employees of the Company may experience uncertainty about their future roles with the combined company following the Offer and the Merger, which may adversely affect our ability to attract and retain key personnel during the pendency of the Offer and the Merger. In addition, due to covenants in the Merger Agreement, we may be unable (without Cegeka’s prior written consent), during the pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.
Lawsuits may be filed against us challenging the transactions contemplated by the Merger Agreement. An adverse ruling in any such lawsuit may delay or prevent the proposed Offer and Merger from being completed.
Lawsuits arising out of or relating to the Merger Agreement and/or the proposed Offer and Merger may be filed in the future. One of the conditions to completion of the Offer and the Merger is the absence of any injunction or other order being in effect that prohibits completion of the Offer or the Merger, as applicable. Accordingly, if a plaintiff is successful in obtaining an injunction, then such order may prevent the proposed Offer and Merger from being completed, or from being completed within the expected timeframe. In addition, if the Off and the Merger is not consummated for any reason, litigation could be filed related to the failure to consummate the Offer and the Merger.
Regardless of the outcome of any litigation related to the Offer and the Merger (or the failure of its consummation), such litigation may be time-consuming and expensive, may distract our management from running the day-to-day operations of our business, and may result in negative publicity or an unfavorable impression of us, any of which could adversely affect the price of our common stock, impair our ability to recruit or retain employees, damage our relationships with our customers, suppliers, and other business partners, or otherwise materially harm our operations and financial performance.
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, 2022.
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.
38
The information below includes shares surrendered to the Company to satisfy tax withholding obligations associated with employee equity awards. The information for the fiscal second quarter of 2023 is as follows:
Period |
|
Total |
|
|
Average |
|
|
Total Number |
|
|
Maximum Dollar |
|
||||
April 1 - April 30 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
7,727,724 |
|
May 1 - May 31 |
|
|
25,995 |
|
|
$ |
6.61 |
|
|
|
— |
|
|
$ |
7,727,724 |
|
June 1 - June 30 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
7,727,724 |
|
Total |
|
|
25,995 |
|
|
|
|
|
|
— |
|
|
|
|
||
** Excludes broker commissions
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
39
Item 6. Exhibits
Exhibit |
|
Description |
|
Reference |
|
|
|
|
|
3.1 |
|
|
### |
|
|
|
|
|
|
3.2 |
|
|
### |
|
|
|
|
|
|
31.1 |
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
# |
|
|
|
|
|
31.2 |
|
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
### Incorporated herein by reference
40
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 |
|
|
(Duly Authorized Officer and Principal Financial Officer) |
Date: August 9, 2023
41