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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jul. 01, 2022

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

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Company's management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes, which could be impacted by existing market conditions and factors, including 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 doubtful accounts receivable, investment valuation, legal matters, other contingencies, and estimates of progress toward completion and direct profit or loss on contracts, as applicable. Management believes that the information and disclosures provided herein are adequate to present fairly the condensed consolidated financial position, results of operations, comprehensive income, cash flows, and shareholders’ equity of the Company.

There were no subsequent events as of the date of this filing from the end of the fiscal second quarter on July 1, 2022 that require recognition or disclosure in these unaudited interim condensed consolidated financial statements.

Concentration Risk, Credit Risk

The Company operates in three segments within its business, North America IT Solutions and Services, Europe IT Solutions and Services, and Non-Strategic Technology Services. The Company provides information and technology-related services to its clients. 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 our 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 July 1, 2022 and July 2, 2021 was as follows:

For the Quarter Ended:											Year-over-Year
(amounts in thousands)	July 1, 2022					July 2, 2021					Change
North America IT Solutions and Services		24.6	%	$	20,339		18.2	%	$	16,762		21.3	%
Europe IT Solutions and Services		44.9	%		37,160		47.8	%		44,054		(15.6	)%
Non-Strategic Technology Services		30.5	%		25,260		34.0	%		31,348		(19.4	)%
Total		100.0	%	$	82,759		100.0	%	$	92,164		(10.2	)%

For the Two Quarters Ended:											Year-over-Year
(amounts in thousands)	July 1, 2022					July 2, 2021					Change
North America IT Solutions and Services		23.7	%	$	40,773		18.6	%	$	35,216		15.8	%
Europe IT Solutions and Services		46.2	%		79,638		47.6	%		90,061		(11.6	)%
Non-Strategic Technology Services		30.1	%		51,765		33.8	%		64,016		(19.1	)%
Total		100.0	%	$	172,176		100.0	%	$	189,293		(9.0	)%

The Company focuses a significant portion of its services through five vertical market focus areas: technology service providers, healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), financial services, 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 July 1, 2022 and July 2, 2021 was as follows:

	For the Quarter Ended						For the Two Quarters Ended
	July 1, 2022			July 2, 2021			July 1, 2022			July 2, 2021
Technology service providers		24.2	%		28.9	%		23.9	%		28.6	%
Healthcare		17.6	%		14.5	%		17.5	%		15.0	%
Financial services		15.3	%		17.5	%		15.8	%		17.4	%
Manufacturing		15.2	%		12.7	%		14.5	%		12.6	%
Energy		6.6	%		5.9	%		5.9	%		5.7	%
General markets		21.1	%		20.5	%		22.4	%		20.7	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

Revenue Recognition

The Company recognizes revenue when control of the promised good or service is transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with progress billing schedules (i.e. progress billing), primarily monthly, revenue is recognized as services are rendered to the client. Revenue for fixed-price contracts is recognized over time using an input-based approach. 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 our 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 July 1, 2022 and July 2, 2021 was as follows:

	For the Quarter Ended						For the Two Quarters Ended
	July 1, 2022			July 2, 2021			July 1, 2022			July 2, 2021
Time-and-material		77.7	%		79.2	%		77.6	%		79.3	%
Progress billing		17.7	%		18.7	%		18.1	%		18.4	%
Percentage-of-completion		4.6	%		2.1	%		4.3	%		2.3	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

The Company recorded revenue in the quarter and two quarters ended July 1, 2022 and July 2, 2021 as follows:

For the Quarter Ended:	July 1, 2022					July 2, 2021					Year-over-Year Change
(amounts in thousands)
North America		54.4	%	$	45,042		51.0	%	$	47,002		(4.2	)%
Europe		45.6	%		37,717		49.0	%		45,162		(16.5	)%
Total		100.0	%	$	82,759		100.0	%	$	92,164		(10.2	)%

For the Two Quarters Ended:	July 1, 2022					July 2, 2021					Year-over-Year Change
(amounts in thousands)
North America		53.0	%	$	91,304		51.2	%	$	96,854		(5.7	)%
Europe		47.0	%		80,872		48.8	%		92,439		(12.5	)%
Total		100.0	%	$	172,176		100.0	%	$	189,293		(9.0	)%

Significant Judgments

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

Contract Balances

For time-and-material 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 our contracts with clients. Advance billings represent contract liabilities for cash payments received in advance of our 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 clients.

Transaction Price Allocated to Remaining Performance Obligations

As of July 1, 2022, the aggregate transaction price allocated to unsatisfied or partially unsatisfied performance obligations for fixed-price and all managed-support contracts was approximately $14.7 million and $38.2 million, respectively. Approximately $29.3 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2022, and approximately $23.6 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2023 and beyond. The

Company uses the right to invoice practical expedient. Therefore, no disclosure is required for unsatisfied performance obligations for contracts in which we recognize revenue at the amount to which we have the right to invoice for services performed.

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 July 1, 2022 and December 31, 2021, the carrying amounts of the Company’s cash of $35.5 million and $35.6 million, respectively, approximated fair value.

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

The Company has recorded a contingent consideration liability related to the earn-out provision of which a portion will be payable in each period subject to the achievement by StarDust of consolidated direct profit targets for fiscal 2020 and 2021. There is no payout if the achievements are below the target threshold. The fair value of this contingent consideration liability is determined using level 3 inputs. The fair value assigned to the contingent consideration liability is determined using the real options method, which requires inputs such as consolidated direct profit forecasts, discount rate, and other market variables to assess the probability of StarDust achieving their revenue and EBIT targets. There were no payments made in 2022, and no remaining liability at July 1, 2022. During the 2021 second quarter, the Company paid approximately $0.3 million relating to the earn-out based on the achievement by StarDust of the consolidated direct profit targets for fiscal 2020.

Life Insurance Policies

The Company has purchased life insurance on the lives of a number of former employees who are plan participants in the non-qualified defined benefit Executive Supplemental Benefit Plan. In total, there are policies currently on 16 individuals, whose average age is 79 years old. Those policies have generated cash surrender value and the Company has taken loans against the policies. At July 1, 2022, the insurance policies that have been borrowed against have a gross cash surrender value of $29.0 million, outstanding loans and interest totaling $25.9 million, and a net cash surrender value of $3.1 million. At December 31, 2021, these insurance policies had a gross cash surrender value of $28.3 million, outstanding loans and interest totaling $25.2 million, and a net cash surrender value of $3.1 million. The net cash surrender values are included on the condensed consolidated balance sheets in “Cash surrender value of life insurance, net” under non-current assets.

At July 1, 2022 and December 31, 2021, the total death benefit for the remaining policies was approximately $36.9 million and $36.0 million, respectively. Currently, upon the death of all of the remaining plan participants, the Company would expect to receive approximately $10.8 million after the payment of obligations, and, under current tax regulations, record a non-taxable gain of approximately $7.7 million.

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 as presented on the condensed consolidated statement of cash flows, represents 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 $250,000. As of July 1, 2022 and December 31, 2021, the Company has multiple accounts that carry balances in excess of this insurable limit. The Company’s cash in its foreign bank accounts is not insured.

Accounts Receivable Factoring

As part of our 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 zero and $10.1 million trade accounts receivable sold under the factoring agreement during the quarters ended July 1, 2022 and July 2, 2021, respectively. Total trade accounts receivable sold under the factoring agreement were approximately $4.5 million and $25.6 million in the year-to-date periods ended July 1, 2022 and July 2, 2021, respectively. Fees for the factoring arrangement were recorded in cost of services and were zero and less than $0.1 million in the quarter and year-to-date period ended July 1, 2022, respectively, and were less than $0.1 million in both the quarter and year-to-date periods ended July 2, 2021.

Property, Equipment and Capitalized Software Costs

Property, equipment and capitalized software at July 1, 2022 and December 31, 2021 were recorded as follows:

(amounts in thousands)	July 1, 2022			December 31, 2021
Property, equipment and capitalized software	$	14,097		$	15,628
Accumulated depreciation and amortization		(9,721	)		(10,386	)
Property, equipment and capitalized software, net	$	4,376		$	5,242

The Company capitalizes software projects developed for commercial use. The change in the Company’s capitalized software cost balance during the quarter and two quarters ended July 1, 2022 and July 2, 2021 was as follows:

	For the Quarter Ended						For the Two Quarters Ended
(amounts in thousands)	July 1, 2022			July 2, 2021			July 1, 2022			July 2, 2021
Capitalized software, beginning balance	$	1,573		$	2,423		$	1,607		$	2,397
Foreign currency translation		(89	)		(7	)		(123	)		19
Capitalized software	$	1,484		$	2,416		$	1,484		$	2,416

Capitalized software amortization periods range from three to five years, and are evaluated periodically for propriety.

Amortization expense and accumulated amortization for these projects for the quarter and two quarters ended July 1, 2022 and July 2, 2021 are as follows:

	For the Quarter Ended				For the Two Quarters Ended
(amounts in thousands)	July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021
Accumulated amortization, beginning balance	$	1,050	$	1,415	$	978	$	1,280
Amortization expense		34		118		106		253
Accumulated amortization	$	1,084	$	1,533	$	1,084	$	1,533

Guarantees

The Company has a number of guarantees in place in its European operations that support office leases and performance under government contracts. These guarantees totaled approximately $3.0 million and $3.1 million at July 1, 2022 and December 31, 2021, respectively, and have expiration dates ranging from July 2022 through October 2034.

Goodwill

The goodwill recorded on the Company's condensed consolidated balance sheet at July 1, 2022 relates to the acquisitions of Soft Company in 2018, Tech-IT in 2019, and StarDust in 2020. 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 no impairment indicators noted in the quarter or two quarters ended July 1, 2022 and July 2, 2021.

The changes in the carrying amount of goodwill for the two quarters ended July 1, 2022 are as follows:

(amounts in thousands)
Balance at December 31, 2021	$	19,676
Foreign currency translation		(1,572	)
Balance at July 1, 2022	$	18,104

The Company’s goodwill at July 1, 2022 totaled $18.1 million, including $16.8 million in the Europe IT Solutions and Services segment and $1.3 million in the North America IT Solutions and Services segment. At December 31, 2021, the Company’s goodwill balance totaled $19.7 million, which included $18.3 million in the Company’s Europe IT Solutions and Services segment and $1.4 million in the North America IT Solutions and Services segment.

Acquired Intangible Assets

Acquired intangible assets at July 1, 2022 consist of the following:

(amounts in thousands)	Estimated Economic Life	Gross Carrying Amount		Accumulated Amortization			Foreign Currency Translation			Net Carrying Amount
Trademarks	2 years	$	1,532	$	(1,346	)	$	(186	)	$	—
Technology	10 years		591		(129	)		(38	)		424
Customer relationships	7-13 years		10,496		(3,315	)		(1,386	)		5,795
Total		$	12,619	$	(4,790	)	$	(1,610	)	$	6,219

Acquired intangible assets at December 31, 2021 consist of the following:

(amounts in thousands)	Estimated Economic Life	Gross Carrying Amount		Accumulated Amortization			Foreign Currency Translation			Net Carrying Amount
Trademarks	2 years	$	1,532	$	(1,454	)	$	(70	)	$	8
Technology	10 years		591		(110	)		10			491
Customer relationships	7-13 years		10,496		(3,121	)		(594	)		6,781
Total		$	12,619	$	(4,685	)	$	(654	)	$	7,280

Estimated amortization expense for the remainder of 2022, the five succeeding years, and thereafter is as follows:

Year	Annual Amortization
(amounts in thousands)
2022 (remaining)	$	472
2023		943
2024		943
2025		943
2026		943
2027		551
Thereafter		1,424
Total	$	6,219

Recently Issued Accounting Standards

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

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” Among other clarifications and simplifications related to income tax accounting, the new standard simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company adopted this new standard on January 1, 2021 on a prospective basis and the adoption did not have a material impact on the Company’s consolidated financial statements.