Computer Task Group, Inc.
Feb 21, 2017
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CTG Reports 2016 Fourth Quarter and Full Year Results

Appoints Fourth New Director with IT Staffing Experience Critical to Strategic Growth Plan
Adopts Robust Performance-Based Equity Compensation Plan Promoting Shareholder Value

BUFFALO, N.Y., Feb. 21, 2017 (GLOBE NEWSWIRE) -- CTG (NASDAQ:CTG), an information technology (IT) solutions and services company, today announced its financial results for the fourth quarter and full year ended December 31, 2016, and also highlighted the progress the Company has been making in implementing its strategic plan as it seeks to increase profitability and unlock greater shareholder value.

Fourth Quarter Financials Exceeded Guidance

Recent Accomplishments to Drive Enhanced Shareholder Value

CTG Chief Executive Officer Bud Crumlish commented, "Fourth quarter financial results were above the high-end of our guidance, with Staffing declining less than previously expected and our Solutions business growing modestly over the prior quarter. Notably, we were able to retain more business with our largest Staffing client than we had anticipated during the quarter, which when combined with the cost reductions implemented in the fourth quarter, enabled us to end 2016 with better than expected results."

"Looking back at the full year, we had anticipated many of the headwinds and proactively took a number of actions to position CTG for renewed growth. We significantly improved our leadership and sales organization by hiring and promoting key personnel, which included adding account executives focused on expanding the client base and new business efforts. We also reorganized and expanded our recruiting and delivery capabilities, highlighted by the launch of our 24/7 offshore recruiting and sourcing center in Hyderabad, India. To drive increased efficiencies and profitability, we implemented more stringent cost management to align expenses with current revenue levels. As a result of these actions, we have a stronger foundation in place to support our three-year strategic plan and financial targets as we focus on execution and driving profitable growth in pursuit of shareholder value."

Three-Year Strategic Plan and Targets for Revenue Growth and Improved Profitability
In early January, CTG released its three-year strategic plan that was methodically developed with close oversight by the Board to achieve two fundamental goals - revenue growth and improved profitability in all lines of business. The Company established certain performance objectives for achievement by the end of 2019. The revenue goal is $400 million, which represents an approximate 7% compounded organic annual growth rate. This revenue growth is expected to drive a target operating margin ranging from 3.0% to 3.5%, and resulting in diluted earnings per share in the $0.45 to $0.55 range.

Key elements of the strategic plan include:

CTG's Chairman of the Board, Daniel J. Sullivan commented, "The Board carefully deliberated in establishing our strategic plan and financial targets. The Company is firmly committed to meet and potentially exceed our milestones over the next three years.  It is gratifying to see the entire company focused and moving forward with continued drive to achieve our objectives."

New Board Member Owen Sullivan Adds IT Staffing Experience
The Company recently appointed Owen Sullivan to its Board of Directors to advance the refreshment strategy that has resulted in transforming two-thirds of the Board's composition in approximately 15 months. He has over 30 years of executive-level experience in the staffing solutions and professional resourcing industry, culminating in his service as President of ManpowerGroup's Specialty Brands business. Daniel Sullivan commented, "Owen's experience at ManpowerGroup will be critical to our strategic plan as we seek to exceed our milestones and drive long-term value for our shareholders." Owen Sullivan will stand for election at the Company's annual shareholders meeting to be held on May 3, 2017, along with Arthur W. (Bud) Crumlish and James R. Helvey III.

New Performance-based Equity Plan Rewards Management Only If CTG Stock Price Increases Significantly
The Company also announced the Compensation Committee of the Board of Directors approved and implemented a new performance-based equity plan for senior executives in 2017 that more directly links shareholder returns with executive equity compensation. Under the new plan, all equity-based compensation awarded to senior executives will consist of performance-based restricted stock unit awards that will vest only if the Company's stock price increases during a performance period beginning on the date of grant to a specified target. To earn the full award, the Company's share price must increase by 100% in the three-year period from the date of grant. To earn any shares, the Company's stock price must increase by 50% during the three-year period from the date of grant, in which case half the award will vest. No senior executive will receive time-based equity compensation awards in 2017 under the enhanced policy.

CTG's Chairman of the Board, Dan Sullivan said, "While we have established specific three-year financial targets for CTG from 2017 to 2019, our adoption of an enhanced performance-based equity plan with steep stock price hurdles ensures that executives only receive value if the shareholders earn a meaningful return during the period. Our Compensation Committee is focused on ensuring that executive management and our shareholders are 100% aligned."

Optimal Use of Capital with $10 Million Share Repurchase Program
On November 17, 2016, CTG announced its Board of Directors authorized the repurchase of up to $10 million of its outstanding shares over the next two years. The Board and management believe the repurchase of CTG shares at the current valuation is an optimal use of capital resources and demonstrates the Company's commitment to maximizing shareholder value. During the fourth quarter and through February 20th, the Company used $2.5 million to repurchase 563,000 shares at an average price of $4.40 per share. As of February 21, 2017, the Company had $7.5 million remaining under its existing repurchase authorization. Concurrent with the authorization of the share repurchase program, CTG's Board of Directors approved a suspension of the Company's quarterly cash dividend.

Consolidated Fourth Quarter Results
Revenue in the fourth quarter ending December 31, 2016 was $77.5 million, compared with $78.1 million in the third quarter of 2016 and $84.2 million in the fourth quarter of 2015. Negative currency translation reduced revenue in the fourth quarter by $0.4 million, compared with a negative impact of $0.1 million in the third quarter of 2016 and $2.3 million in the year-ago fourth quarter.

Direct costs in the fourth quarter were $62.6 million, or 80.8% of revenue, compared with $64.2 million, or 82.2% of revenue in the third 2016 quarter, and $67.4 million, or 80.0% of revenue, in the year-ago fourth quarter. Fourth quarter SG&A expense was $13.1 million, compared with $14.6 million in the third quarter of 2016 and $13.0 million in the fourth quarter of 2015. SG&A expense in the third quarter of 2016 included severance charges of $1.5 million related to two former executives.

Fourth quarter operating income increased sequentially to $1.7 million, or 2.2% of revenue, compared with a loss of ($16.5) million in the third quarter of 2016 and operating income of $3.7 million, or 4.4% of revenue, in the fourth quarter of 2015. The operating loss in third quarter of 2016 included a combined $17.3 million in charges related to goodwill impairment and severance.

CTG's effective income tax rate in the fourth quarter was 28.8%, compared with a benefit of 1.3% in the third quarter and an effective tax rate of 33.0% in the fourth quarter of 2015.

Net income in the fourth quarter of 2016 was $1.1 million, or $0.07 per diluted share, compared with a net loss of ($16.2) million, or ($1.03) per share, in the third quarter of 2016. Net income in the fourth quarter of 2015 was $2.6 million, or $0.16 per diluted share. The net loss in the third quarter of 2016 included a combined $1.07 in charges related to goodwill impairment and severance.

Consolidated Full Year Results
For the full year 2016, revenue was $324.9 million, compared with $369.5 million in 2015. Negative currency translation impacted revenue in 2016 by $0.6 million and by $13.0 million in 2015. Direct costs in 2016 were $265.7 million, or 81.8% of revenue, compared with $302.3 million, or 81.8% of revenue in 2015. SG&A expense in 2016 was $55.2 million, which included $1.5 million in severance charges related to two former executives, compared with SG&A expense of $56.5 million in 2015.

GAAP operating loss for the full year 2016 was ($33.3) million, which includes non-cash impairment charges of $37.3 million for the write-down of goodwill related to the Company's healthcare business and severance charges of $1.5 million related to two former executives. Excluding impairment and severance charges, non-GAAP operating income was $5.5 million, or 1.7% of revenue, in 2016. GAAP net loss for 2016 was ($34.6) million, or ($2.22) per share, which included $2.39 in goodwill impairment and $0.06 in severance charges. This compares with GAAP net income in 2015 of $6.5 million, or $0.41 per diluted share. On a non-GAAP basis, net income for 2016 excluding goodwill impairment and severance charges was $3.7 million, or $0.23 per diluted share.

Balance Sheet
Cash and short term investments at December 31, 2016 were $9.4 million; long-term debt was $4.7 million. Days sales outstanding were 85 days in the fourth quarter of 2016, compared with 76 days in the year-ago fourth quarter. Tangible book value at December 31, 2016 was $4.94 per share.

2017 Guidance and Outlook
CTG expects total revenue for the 2017 first quarter to range between $76 and $78 million. Net income is expected to be between $0.04 and $0.06 per diluted share. There are 64 billing days in the first quarter 2017 vs. 65 billing days in the prior year quarter.

For the full year 2017, CTG expects revenue to range between $312 and $332 million. Net income is expected to be between $0.19 and $0.29 per diluted share. The revenue guidance reflects lower revenue from the Company's largest customer as previously announced of approximately $17 million and the negative impact of foreign currency adjustments of approximately $4 million due to the stronger US dollar in 2017. Excluding the impact of these items, revenue growth in 2017 would be 5.6% at the midpoint of guidance.

Conference Call and Webcast
CTG will hold a conference call today at 8:30 a.m. Eastern Time to discuss its financial results and business outlook. To access CTG's conference call via telephone, dial 1-800-553-5260 by 8:20 a.m. Eastern Time and ask for the CTG conference call. The call will also be webcast from CTG's website at http://www.ctg.com

A replay of the call will be available between 10:30 a.m. Eastern Time February 21, 2017, and 11:59 p.m. Eastern Time February 24, 2017, by dialing 1-800-475-6701 and entering conference ID 403935.  The webcast will be archived on CTG's website at http://investors.ctg.com/events.cfm for approximately 90 days following completion of the conference call.

Reconciliation of GAAP to Non-GAAP Information
The Company has referenced non-GAAP information in this news release. The Company believes that the use of non-GAAP financial information provides useful information to investors and management to gain an overall understanding of its current financial performance and prospects. In addition, non-GAAP financial measures are used by management for forecasting and facilitating ongoing operating decisions as well as measuring the Company's performance. The Company believes that these non-GAAP measures align closely to its internal measurement processes and are reflective of the Company's core operating results. Specifically, the non-GAAP information as presented excludes goodwill impairment charges and severance charges for two former executives that the Company believes are not indicative of its core operating results, and non-recurring revenue items for 2017. The reconciliation of GAAP to non-GAAP information for the year ended December 31, 2016 is as follows (in thousands except EPS data):

 Operating Operating Net Diluted 
 Income (Loss) Margin Income (Loss) EPS 
GAAP results$(33,347) (10.3%) $(34,638) $(2.22) 
Goodwill impairment charges 37,329  11.5%  37,329   2.39  
Severance charges 1,489  0.5%   989   0.06  
Non-GAAP results$  5,471  1.7% $  3,680  $0.23  
         

The reconciliation of GAAP to non-GAAP revenue guidance for the year ended December 31, 2017 is as follows (in thousands):

 Low End of Range Midpoint of Range High End of Range
2017 expected revenue guidance range$312,000  $322,000  $332,000 
Expected 2017 revenue loss from largest customer 17,000   17,000   17,000 
Expected 2017 currency impact on revenue 4,000   4,000    4,000 
Non-GAAP revenue$333,000  $343,000  $353,000 
Implied additional revenue in 2017  (8,107)  (18,107)  (28,107)
GAAP 2016 revenue$324,893  $324,893  $324,893 
Implied increase 2.5 %  5.6%  8.7%

About CTG
CTG provides industry-specific IT services and solutions that address the business needs and challenges of clients in high-growth industries in North America and Western Europe. CTG also provides strategic staffing services for major technology companies and large corporations. Backed by 50 years of experience and proprietary methodologies, CTG has a proven track record of reliably delivering high-value, industry-specific staffing services and solutions to its clients. CTG has operations in North America, Western Europe, and India. The company regularly posts news and other important information online at www.ctg.com.

Safe Harbor Statement
This document contains certain forward-looking statements concerning the Company's current expectations as to future growth, financial outlook, business strategy and expectations for 2017 and the next three years, a share repurchase program, and statements related to cost control, new business opportunities, financial performance, market demand, and other attributes of the Company. These statements are based upon the Company's expectations and assumptions, a review of industry reports, current business conditions in the areas where the Company does business, feedback from existing and potential new customers, a review of current and proposed legislation and governmental regulations that may affect the Company and/or its customers, and other future events or circumstances. Actual results could differ materially from the outlook guidance, expectations, and other forward-looking statements as a result of a number of factors, including among others, the availability to the Company of qualified professional staff, domestic and foreign industry competition for customers and talent, increased bargaining power of large customers, the Company's ability to protect confidential client data, the partial or complete loss of the revenue the Company generates from International Business Machines Corporation (IBM) and/or SDI International (SDI), the uncertainty of customers' implementations of cost reduction projects, the effect of healthcare reform and initiatives, the mix of work between staffing and solutions, currency exchange risks, risks associated with operating in foreign jurisdictions, renegotiations, nullification, or breaches of contracts with customers, vendors, subcontractors or other parties, the change in valuation of capitalized software balances, the impact of current and future laws and government regulation, as well as repeal or modification of such, affecting the information technology (IT) solutions and staffing industry, taxes and the Company's operations in particular, industry and economic conditions, including fluctuations in demand for IT services, consolidation among the Company's competitors or customers, the need to supplement or change our IT services in response to new offerings in the industry or changes in customer requirements for IT products and solutions and other factors that involve risk and uncertainty including those listed in the Company's reports filed with the Securities and Exchange Commission as of the date of this document. Such forward-looking statements should be read in conjunction with the Company's disclosures set forth in the Company's 2015 Form 10-K, which is incorporated by reference, and other reports that may be filed from time to time with the Securities and Exchange Commission. The Company assumes no obligation to update the forward-looking information contained in this release.

COMPUTER TASK GROUP, INCORPORATED (CTG)
Condensed Consolidated Statements of Operations
(Unaudited)
(amounts in thousands except per share data)
 
 For the Quarter Ended   For the Year Ended
 Dec. 31,   Dec. 31, Dec. 31,   Dec. 31,
 2016  2015  2016  2015 
 
Revenue $77,492  $84,202  $324,893  $369,478 
Direct costs 62,639  67,416  265,711  302,318 
Selling, general and administrative expenses 13,140  13,045  55,200  56,523 
Goodwill impairment charge   -     -    37,329    -  
Operating income (loss) 1,713  3,741    (33,347) 10,637  
Non-taxable life insurance gain  -   246   -   246 
Other expense, net    (107)    (78)    (189)    (154)
Income (loss) before income taxes 1,606  3,909    (33,536) 10,729 
Provision for income taxes  463   1,291   1,102   4,219 
Net income (loss) $1,143  $2,618  $  (34,638) $6,510 
   
Net income (loss) per share:            
 Basic $0.07  $0.17  $  (2.22) $0.42 
 Diluted $0.07  $0.16  $  (2.22) $0.41 
   
Weighted average shares outstanding:    
 Basic 15,614  15,599  15,593  15,479 
 Diluted  15,707  15,974  15,593  15,920 
 
Cash dividend declared per share $ -   $0.06  $  0.18  $  0.24 
 

 

COMPUTER TASK GROUP, INCORPORATED (CTG)
Condensed Consolidated Balance Sheets 
(Unaudited)
(amounts in thousands) 
 
   December 31,   December 31,
   2016 2015
         
Current Assets:      
 Cash and cash equivalents  $   9,407  $   10,801
 Accounts receivable, net    71,355    71,403
 Other current assets    2,879    2,574
Total current assets    83,641    84,778
        
 Property and equipment, net    5,863    5,488
 Goodwill    -     37,231
 Other assets    37,411    35,580
        
Total Assets  $   126,915  $   163,077
        
Current Liabilities:      
 Accounts payable  $   6,973  $   8,236
 Dividend payable    -     925
 Accrued compensation    17,365    17,541
 Other current liabilities    5,573    5,102
Total current liabilities    29,911    31,804
        
 Long-term debt    4,725    1,225
 Other liabilities    13,460    12,331
 Shareholders' equity    78,819    117,717
        
Total Liabilities and Shareholders' Equity                          $   126,915  $   163,077
 

 

COMPUTER TASK GROUP, INCORPORATED (CTG)
Condensed Consolidated Statements of Cash Flows
(Unaudited) 
(amounts in thousands)
            
   For the Year Ended
   December 31, December 31,
   2016  2015 
        
Net income (loss) $  (34,638) $  6,510 
 Depreciation and amortization expense    1,647     1,962 
 Equity-based compensation expense    1,626     1,317 
 Goodwill impairment charge    37,329     -  
 Other operating items    (3,909)    (13,821)
Net cash provided by (used in) operating activities    2,055     (4,032)
Net cash used in investing activities    (2,593)    (2,020)
Net cash used in financing activities    (497)    (22,967)
Effect of exchange rates on cash and cash equivalents        (359)    (1,042)
Net decrease in cash and cash equivalents    (1,394)    (30,061)
Cash and cash equivalents at beginning of period    10,801     40,862 
Cash and cash equivalents at end of period $  9,407   $  10,801 
 

 

COMPUTER TASK GROUP, INCORPORATED (CTG)
Other Financial Information
(Unaudited)
(amounts in thousands except days data)
 
   For the Quarter Ended   For the Year Ended  
   Dec. 31,   Dec. 31,   Dec. 31,   Dec. 31,  
Revenue by Service  2016     2015      2016     2015   
                  
IT Solutions $  22,595  29% $  26,806  32 % $  94,663  29% $  121,986  33%
IT Staffing    54,897  71%    57,396  68%    230,230  71%    247,492  67%
 Total $  77,492  100% $  84,202  100 % $  324,893  100% $  369,478  100%
                   
Revenue by Vertical Market                
                  
Technology Service Providers  35%    34%    35%    31%  
Manufacturing  25%    24%    24%    26%  
Healthcare  17%    21%    18%    24%  
General Markets  10%    8%    10%    7%  
Financial Services  8%    7%    8%    7%  
Energy  5%    6%     5%    5%  
 Total  100%    100%    100%    100%  
                  
Revenue by Location                 
                  
North America $  59,615  77% $  67,574  80% $  254,264  78% $  302,171   82%
Europe    17,877  23%    16,628  20%    70,629  22%    67,307  18%
 Total $  77,492   100% $  84,202  100% $  324,893  100% $  369,478  100%
                  
Foreign Currency Impact on Revenue                
                  
Europe $  (412)   $  (2,327)   $  (626)   $  (12,998)  
                  
Billable Travel Included in Revenue and Direct Costs                
                  
Billable Travel $  834    $  1,333    $  3,998    $  6,532   
                  
Cash at End of Period $  9,407    $  10,801           
                  
Cash provided by (used in) Operations $  (1,768)   $  (99)   $  2,055    $  (4,032)  
                   
Long-term Debt Balance  $  4,725    $  1,225           
                  
Billable Days in Period    63       62        255       255   
                  


CTG news releases are available on the Web at
www.ctg.com.
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Investors and Media:

Brendan Harrington, Chief Financial Officer

(716) 887-7368

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Source: Computer Task Group, Incorporated

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