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esidd

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended April 1, 2022

OR

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

For the Transition period from                 to                

Commission File No. 1-9410

 

COMPUTER TASK GROUP, INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

New York

 

16-0912632

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

300 Corporate Parkway, Suite 214N, Amherst, New York

 

14226

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (716882-8000

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

CTG

 

The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “an emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

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:

 

 

 

 

 

Shares outstanding at

Title of each class

 

May 5, 2022

Common stock, par value $.01 per share

 

15,417,204

 


 

 

SEC Form 10-Q Index

 

Section

 

Page

Part I Financial Information

 

Item 1.

Financial Statements

1

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

Item 4.

Controls and Procedures

30

 

 

 

Part II Other Information

 

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

32

 

 

 


 

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share data)

(Unaudited)

 

 

For the Quarter Ended

 

 

April 1, 2022

 

 

April 2, 2021

 

Revenue

$

89,417

 

 

$

97,129

 

Cost of services

 

68,822

 

 

 

76,362

 

Gross profit

 

20,595

 

 

 

20,767

 

Selling, general and administrative expenses

 

17,396

 

 

 

18,669

 

Operating income

 

3,199

 

 

 

2,098

 

Interest and other income

 

91

 

 

 

84

 

Interest and other expense

 

348

 

 

 

234

 

Income before income taxes

 

2,942

 

 

 

1,948

 

Provision for income taxes

 

702

 

 

 

440

 

Net income

$

2,240

 

 

$

1,508

 

Net income per share:

 

 

 

 

 

 

 

Basic

$

0.16

 

 

$

0.11

 

Diluted

$

0.15

 

 

$

0.10

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

14,199

 

 

 

13,696

 

Diluted

 

14,977

 

 

 

14,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

1


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)

(Unaudited)

 

 

For the Quarter Ended

 

 

April 1, 2022

 

 

April 2, 2021

 

Net income

$

2,240

 

 

$

1,508

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(1,329

)

 

 

(2,245

)

Change in pension, net of taxes of $33 and $38 in the 2022 and 2021 first quarters, respectively

 

331

 

 

 

550

 

Other comprehensive loss

 

(998

)

 

 

(1,695

)

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

1,242

 

 

$

(187

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

April 1,

 

 

December 31,

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

38,724

 

 

$

35,584

 

Accounts receivable, net of allowances of $559 and $581 in 2022 and 2021,

   respectively

 

74,674

 

 

 

84,252

 

Prepaid and other current assets

 

3,065

 

 

 

2,849

 

Income taxes receivable

 

 

 

 

80

 

Total current assets

 

116,463

 

 

 

122,765

 

Property, equipment and capitalized software, net

 

4,777

 

 

 

5,242

 

Operating lease right-of-use assets

 

20,762

 

 

 

22,132

 

Deferred income taxes

 

4,763

 

 

 

4,946

 

Acquired intangibles, net

 

6,837

 

 

 

7,280

 

Goodwill

 

19,174

 

 

 

19,676

 

Cash surrender value of life insurance, net

 

3,756

 

 

 

4,018

 

Other assets

 

2,344

 

 

 

2,228

 

Investments

 

64

 

 

 

47

 

Total assets

$

178,940

 

 

$

188,334

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

$

12,444

 

 

$

21,150

 

Accrued compensation

 

20,444

 

 

 

22,534

 

Advance billings on contracts

 

5,710

 

 

 

4,762

 

Short-term operating lease liabilities

 

6,199

 

 

 

6,444

 

Short-term deferred payroll taxes

 

3,508

 

 

 

3,508

 

Other current liabilities

 

7,621

 

 

 

6,585

 

Income taxes payable

 

197

 

 

 

 

Total current liabilities

 

56,123

 

 

 

64,983

 

Deferred compensation benefits

 

11,283

 

 

 

11,437

 

Long-term operating lease liabilities

 

14,379

 

 

 

15,612

 

Deferred income taxes

 

1,672

 

 

 

1,792

 

Other long-term liabilities

 

75

 

 

 

73

 

Total liabilities

 

83,532

 

 

 

93,897

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 150,000,000 shares authorized;

   27,017,824 shares issued in 2022 and 2021

 

270

 

 

 

270

 

Capital in excess of par value

 

109,422

 

 

 

110,330

 

Retained earnings

 

110,282

 

 

 

108,042

 

Less: Treasury stock of 11,599,124 and 11,667,719 shares at cost, in

   2022 and 2021, respectively

 

(106,628

)

 

 

(107,265

)

Accumulated other comprehensive loss

 

(17,938

)

 

 

(16,940

)

Total shareholders’ equity

 

95,408

 

 

 

94,437

 

Total liabilities and shareholders’ equity

$

178,940

 

 

$

188,334

 

 

 

 

 

 

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

3


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

 

 

For the Quarter Ended

 

 

April 1, 2022

 

 

April 2, 2021

 

Cash flow from operating activities:

 

 

 

 

 

 

 

Net income

$

2,240

 

 

$

1,508

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

716

 

 

 

854

 

Equity-based compensation expense

 

573

 

 

 

590

 

Deferred income taxes

 

135

 

 

 

(95

)

Deferred compensation benefits

 

103

 

 

 

135

 

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

 

 

 

 

 

 

 

Accounts receivable

 

8,530

 

 

 

994

 

Prepaid and other current assets

 

(340

)

 

 

(600

)

Other long-term assets

 

(122

)

 

 

(173

)

Cash surrender value of life insurance

 

262

 

 

 

172

 

Accounts payable

 

(8,467

)

 

 

(4,139

)

Accrued compensation

 

(1,646

)

 

 

2,267

 

Income taxes payable / receivable

 

271

 

 

 

40

 

Advance billings on contracts

 

998

 

 

 

1,140

 

Other current liabilities

 

1,153

 

 

 

(430

)

Other long-term liabilities

 

2

 

 

 

(8

)

Net cash provided by operating activities

 

4,408

 

 

 

2,255

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Additions to property and equipment

 

(61

)

 

 

(891

)

Net cash used in investing activities

 

(61

)

 

 

(891

)

Cash flow from financing activities:

 

 

 

 

 

 

 

Proceeds from stock option plan exercises

 

90

 

 

 

223

 

Taxes remitted for shares withheld from equity-based compensation

   transactions

 

(971

)

 

 

(96

)

Proceeds from Employee Stock Purchase Plan

 

37

 

 

 

36

 

Net cash provided by (used in) financing activities

 

(844

)

 

 

163

 

Effect of exchange rates on cash and cash equivalents

 

(363

)

 

 

(868

)

Net increase in cash and cash equivalents

 

3,140

 

 

 

659

 

Cash and cash equivalents at beginning of year

 

35,584

 

 

 

32,865

 

Cash and cash equivalents at end of quarter

$

38,724

 

 

$

33,524

 

 

 

 

 

 

 

 

 

 

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

4


 

COMPUTER TASK GROUP, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Excess of

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Equity

 

Balances as of December 31, 2021

 

 

27,018

 

 

$

270

 

 

$

110,330

 

 

$

108,042

 

 

 

11,668

 

 

$

(107,265

)

 

$

(16,940

)

 

$

94,437

 

Employee Stock Purchase Plan share

   issuance

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(4

)

 

 

39

 

 

 

 

 

 

37

 

Stock Option Plan share issuance, net

 

 

 

 

 

 

 

 

(94

)

 

 

 

 

 

(20

)

 

 

184

 

 

 

 

 

 

90

 

Restricted stock plan share

   issuance/forfeiture

 

 

 

 

 

 

 

 

(1,385

)

 

 

 

 

 

(45

)

 

 

414

 

 

 

 

 

 

(971

)

Equity-based compensation

 

 

 

 

 

 

 

 

573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

573

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,240

 

 

 

 

 

 

 

 

 

 

 

 

2,240

 

Foreign currency adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,329

)

 

 

(1,329

)

Pension loss adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

331

 

 

 

331

 

Balances as of April 1, 2022

 

 

27,018

 

 

$

270

 

 

$

109,422

 

 

$

110,282

 

 

 

11,599

 

 

$

(106,628

)

 

$

(17,938

)

 

$

95,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2020

 

 

27,018

 

 

$

270

 

 

$

109,407

 

 

$

94,312

 

 

 

11,842

 

 

$

(109,114

)

 

$

(15,367

)

 

$

79,508

 

Employee Stock Purchase Plan share

   issuance

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

(5

)

 

 

43

 

 

 

 

 

 

36

 

Stock Option Plan share issuance, net

 

 

 

 

 

 

 

 

(387

)

 

 

 

 

 

(82

)

 

 

610

 

 

 

 

 

 

223

 

Restricted stock plan share

   issuance/forfeiture

 

 

 

 

 

 

 

 

(1,218

)

 

 

 

 

 

(119

)

 

 

1,122

 

 

 

 

 

 

(96

)

Equity-based compensation

 

 

 

 

 

 

 

 

590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

590

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,508

 

 

 

 

 

 

 

 

 

 

 

 

1,508

 

Foreign currency adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,245

)

 

 

(2,245

)

Pension loss adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

550

 

 

 

550

 

Balances as of April 2, 2021

 

 

27,018

 

 

$

270

 

 

$

108,385

 

 

$

95,820

 

 

 

11,636

 

 

$

(107,339

)

 

$

(17,062

)

 

$

80,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

5


 

COMPUTER TASK GROUP, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Financial Statements

The condensed consolidated financial statements included herein reflect, in the opinion of the management of Computer Task Group, Incorporated (“CTG” or “the Company”), all normal recurring adjustments necessary to present fairly the condensed consolidated financial position, results of operations, comprehensive income, cash flows, and shareholders’ equity for the periods presented. Certain prior period amounts 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 10K filed with the SEC.

The Company's fiscal year-end is December 31. During the year, the quarters generally consist of a 13-week fiscal period where the last day of each of the first three quarters is a Friday. The 2022 first quarter began on January 1, 2022 and ended on April 1, 2022. The 2021 first quarter began on January 1, 2021 and ended on April 2, 2021. There were 65 billable days in both the 2022 and 2021 first quarters.

 

2.

Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

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

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Company's management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes, which could be impacted by existing market conditions and factors, including the COVID-19 pandemic 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 first quarter on April 1, 2022 that require recognition or disclosure in these unaudited interim condensed consolidated financial statements.

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.

6


 

The segment revenue for the quarters ended April 1, 2022 and April 2, 2021 was as follows:

 

 

 

For the Quarter Ended

 

 

Year-over-Year

 

(amounts in thousands)

 

April 1, 2022

 

 

April 2, 2021

 

 

Change

 

North America IT Solutions and Services

 

 

22.9

%

 

$

20,435

 

 

 

19.0

%

 

$

18,454

 

 

 

10.7

%

Europe IT Solutions and Services

 

 

47.5

%

 

 

42,478

 

 

 

47.4

%

 

 

46,007

 

 

 

(7.7

)%

Non-Strategic Technology Services

 

 

29.6

%

 

 

26,504

 

 

 

33.6

%

 

 

32,668

 

 

 

(18.9

)%

Total

 

 

100.0

%

 

$

89,417

 

 

 

100.0

%

 

$

97,129

 

 

 

(7.9

)%

 

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 quarters ended April 1, 2022 and April 2, 2021 was as follows:

 

 

 

For the Quarter Ended

 

 

 

April 1, 2022

 

 

April 2, 2021

 

Technology service providers

 

 

23.8

%

 

 

30.8

%

Healthcare

 

 

17.4

%

 

 

15.5

%

Financial services

 

 

16.5

%

 

 

17.0

%

Manufacturing

 

 

13.9

%

 

 

12.4

%

Energy

 

 

5.3

%

 

 

5.5

%

General markets

 

 

23.1

%

 

 

18.8

%

Total

 

 

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.

7


 

The Company’s revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods as a percentage of consolidated revenue for the quarters ended April 1, 2022 and April 2, 2021 was as follows:

 

 

 

For the Quarter Ended

 

 

 

April 1, 2022

 

 

April 2, 2021

 

Time-and-material

 

 

77.2

%

 

 

79.1

%

Progress billing

 

 

18.9

%

 

 

18.4

%

Percentage-of-completion

 

 

3.9

%

 

 

2.5

%

Total

 

 

100.0

%

 

 

100.0

%

 

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

 

For the Quarter Ended:

 

April 1, 2022

 

 

April 2, 2021

 

 

Year-over-Year

Change

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

51.7

%

 

$

46,262

 

 

 

51.0

%

 

$

49,504

 

 

 

(6.5

)%

Europe

 

 

48.3

%

 

 

43,155

 

 

 

49.0

%

 

 

47,625

 

 

 

(9.4

)%

Total

 

 

100.0

%

 

$

89,417

 

 

 

100.0

%

 

$

97,129

 

 

 

(7.9

)%