UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED October 1, 2010
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM
TO
Commission file number 001-9410
COMPUTER TASK GROUP, INCORPORATED
(Exact name of Registrant as specified in its charter)
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New York
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16-0912632
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(State of incorporation)
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(IRS Employer Identification No.)
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800 Delaware Avenue, Buffalo, New York
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14209
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code: (716) 882-8000
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
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted 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 and post such
files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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¨
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Accelerated filer
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x
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Non-accelerated filer
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¨
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
APPLICABLE ONLY TO CORPORATE ISSUERS:
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Title of each class
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Shares outstanding at
October 22, 2010
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Common stock, par value
$.01 per share
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18,045,828
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SEC Form 10-Q
Index
2
PART I. FINANCIAL INFORMATION
Item 1.
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Financial Statements.
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COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands,
except per share data)
(Unaudited)
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For the Quarter Ended
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For the Three
Quarters Ended
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Oct. 1,
2010
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Oct. 2,
2009
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Oct. 1,
2010
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Oct. 2,
2009
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Revenue
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$
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84,463
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$
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66,771
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$
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244,094
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$
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207,907
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Direct costs
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67,189
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51,570
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192,020
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161,034
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Selling, general and administrative expenses
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14,157
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12,713
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42,379
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39,554
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Operating income
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3,117
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2,488
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9,695
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7,319
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Interest and other income
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15
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5
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46
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77
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Interest and other expense
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(56
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)
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(34
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)
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(205
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)
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(286
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)
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Income before income taxes
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3,076
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2,459
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9,536
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7,110
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Provision for income taxes
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1,049
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853
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3,818
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2,807
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Net income
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$
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2,027
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$
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1,606
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$
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5,718
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$
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4,303
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Net income per share:
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Basic
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$
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0.14
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$
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0.11
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$
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0.39
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$
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0.29
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Diluted
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$
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0.13
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$
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0.10
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$
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0.36
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$
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0.28
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Weighted average shares outstanding:
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Basic
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14,666
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14,680
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14,705
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14,833
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Diluted
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15,904
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15,830
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16,002
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15,417
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The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
COMPUTER TASK GROUP,
INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(Unaudited)
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Oct. 1,
2010
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Dec. 31,
2009
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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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9,814
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$
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10,423
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Accounts receivable, net of allowances of $899 and $964 in 2010 and 2009, respectively
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56,960
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45,423
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Prepaid and other current assets
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2,526
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2,000
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Deferred income taxes
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1,222
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1,382
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Total current assets
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70,522
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59,228
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Property, equipment and capitalized software, net of accumulated depreciation and amortization of $18,277 and $19,595 in 2010 and
2009, respectively
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8,457
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8,146
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Goodwill
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35,678
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35,678
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Deferred income taxes
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5,675
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5,566
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Other assets
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4,706
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5,473
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Investments
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621
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631
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Total assets
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$
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125,659
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$
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114,722
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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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7,718
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$
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7,741
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Accrued compensation
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26,720
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20,095
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Advance billings on contracts
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2,252
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1,510
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Other current liabilities
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3,359
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3,901
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Income taxes payable
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208
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Total current liabilities
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40,049
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33,455
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Deferred compensation benefits
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8,766
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8,865
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Other long-term liabilities
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666
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684
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Total liabilities
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49,481
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43,004
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Shareholders Equity:
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Common stock, par value $0.01 per share, 150,000,000 shares authorized; 27,017,824 shares issued
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270
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270
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Capital in excess of par value
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113,302
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112,473
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Retained earnings
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68,887
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63,169
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Less: Treasury stock of 8,972,803 and 8,876,891 shares at cost, respectively
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(45,919
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)
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(44,585
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)
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Stock Trusts of 3,363,351 and 3,363,335 shares at cost, respectively
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(55,083
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)
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(55,083
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)
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Other
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(138
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)
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Accumulated other comprehensive loss
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(5,141
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)
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(4,526
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)
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Total shareholders equity
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76,178
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71,718
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Total liabilities and shareholders equity
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$
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125,659
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$
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114,722
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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 CASH FLOWS
(amounts in thousands)
(Unaudited)
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Three Quarters Ended
|
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Oct. 1,
2010
|
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Oct. 2,
2009
|
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Cash flows from operating activities:
|
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Net income
|
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$
|
5,718
|
|
|
$
|
4,303
|
|
Adjustments:
|
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|
|
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Depreciation and amortization expense
|
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1,251
|
|
|
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1,269
|
|
Equity-based compensation expense
|
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|
1,017
|
|
|
|
1,050
|
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Deferred income taxes
|
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(13
|
)
|
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(521
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)
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Loss (gain) on sales of property and equipment
|
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(2
|
)
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|
8
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Deferred compensation
|
|
|
(96
|
)
|
|
|
(109
|
)
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Changes in assets and liabilities:
|
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(Increase) decrease in accounts receivable
|
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|
(12,212
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)
|
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|
5,172
|
|
Increase in prepaid and other current assets
|
|
|
(454
|
)
|
|
|
(234
|
)
|
(Increase) decrease in other assets
|
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|
681
|
|
|
|
(1,615
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)
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Decrease in accounts payable
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|
(239
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)
|
|
|
(2,395
|
)
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Increase (decrease) in accrued compensation
|
|
|
6,810
|
|
|
|
(3,325
|
)
|
Increase (decrease) in income taxes payable
|
|
|
(146
|
)
|
|
|
661
|
|
Increase (decrease) in advance billings on contracts
|
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|
759
|
|
|
|
(230
|
)
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Decrease in other current liabilities
|
|
|
(488
|
)
|
|
|
(472
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)
|
Increase (decrease) in other long-term liabilities
|
|
|
(12
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)
|
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|
37
|
|
|
|
|
|
|
|
|
|
|
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Net cash provided by operating activities
|
|
|
2,574
|
|
|
|
3,599
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions to property, equipment and capitalized software
|
|
|
(1,604
|
)
|
|
|
(2,338
|
)
|
Deferred compensation plan investments
|
|
|
24
|
|
|
|
(167
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)
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Proceeds from sales of property and equipment
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|
7
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|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
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Net cash used in investing activities
|
|
|
(1,573
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)
|
|
|
(2,489
|
)
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities:
|
|
|
|
|
|
|
|
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Change in cash overdraft, net
|
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|
329
|
|
|
|
327
|
|
Proceeds from Employee Stock Purchase Plan
|
|
|
128
|
|
|
|
81
|
|
Purchase of stock for treasury
|
|
|
(2,381
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)
|
|
|
(3,358
|
)
|
Excess tax benefits from equity-based compensation
|
|
|
162
|
|
|
|
254
|
|
Proceeds from stock option exercises
|
|
|
488
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|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net cash used in financing activities
|
|
|
(1,274
|
)
|
|
|
(2,151
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(336
|
)
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net decrease in cash and cash equivalents
|
|
|
(609
|
)
|
|
|
(214
|
)
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Cash and cash equivalents at beginning of year
|
|
|
10,423
|
|
|
|
10,973
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of quarter
|
|
$
|
9,814
|
|
|
$
|
10,759
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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
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 and cash flows for the periods presented.
The Companys
fiscal year-end is December 31. During the year, the quarters generally are a 13-week fiscal quarter where the last day of each of the first three quarters is a Friday. The 2010 third quarter began July 3, 2010 and ended October 1,
2010. The 2009 second quarter began July 4, 2009 and ended October 2, 2009. There were 63 billable days in the 2010 third quarter and 64 billable days in the 2009 third quarter, and 192 total billable days in the first three quarters of
2010 and 193 total billable days in the first three quarters of 2009.
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
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. The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Companys management to make estimates, judgments and
assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates include, but are not limited to the valuation of goodwill, valuation allowances for deferred tax assets, actuarial
assumptions including discount rates and expected rates of return on assets, as applicable, for the Companys defined benefit and postretirement benefit plans, the allowance for doubtful accounts receivable, assumptions underlying stock option
valuation, investment valuation, legal matters, other contingencies, and progress toward completion and direct profit or loss on contracts. Management believes that the information and disclosures provided herein are adequate to present fairly the
condensed consolidated financial position, results of operations and cash flows of the Company. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in
the Companys latest Annual Report on Form 10-K filed with the SEC.
The Company operates in one industry segment,
providing Information Technology (IT) services to its clients. These services include IT solutions and IT staffing. CTG provides these primary services to all of the markets that it serves. The services provided typically encompass the
IT business solution life cycle, including phases for planning, developing, implementing, managing, and ultimately maintaining the IT solution. A typical customer is an organization with large, complex information and data processing requirements.
6
IT solutions and IT
staffing revenue as a percentage of total revenue for the quarter and three quarters ended October 1, 2010 and October 2, 2009 are as follows:
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|
|
|
|
|
|
|
|
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For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
IT solutions
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
IT staffing
|
|
|
66
|
%
|
|
|
66
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The Company promotes a significant portion of its services through four vertical market focus areas:
Technology Service Providers, Healthcare (which includes services provided to health care providers, health insurers, and life sciences companies), Energy and Financial Services. The Company focuses on these four 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 Companys growth due to the size of the vertical market. The remainder of CTGs
revenue is derived from general markets.
The Companys revenue by vertical market as a percentage of total revenue for
the quarter and three quarters ended October 1, 2010 and October 2, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
Technology service providers
|
|
|
37
|
%
|
|
|
31
|
%
|
|
|
36
|
%
|
|
|
30
|
%
|
Healthcare
|
|
|
28
|
%
|
|
|
26
|
%
|
|
|
27
|
%
|
|
|
27
|
%
|
Energy
|
|
|
6
|
%
|
|
|
10
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
Financial services
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
8
|
%
|
General markets
|
|
|
23
|
%
|
|
|
26
|
%
|
|
|
24
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software Revenue Recognition
During the 2010 third quarter, the Company entered into a series of contracts with a customer that provides for application customization and integration services, as well as post contract support (PCS)
services, specifically utilizing one of the software tools the Company has internally developed. As the contracts are closely interrelated and dependent on each other, for accounting purposes the contracts are considered to be one arrangement.
Additionally, as the project includes significant modification and customization services to transform the previously developed software tool into an expanded tool that will meet the customers requirements, the percentage-of-completion method
of contract accounting is being utilized for the project.
As of the end of the 2010 third quarter, the customization and
integration services for this project are not complete. The Company also does not anticipate incurring a loss upon completion of this project. Utilizing current accounting guidelines, total revenue and costs recognized in the 2010 third quarter were
$0.8 million, and the total contract value for this project is $1.5 million. After completion of the application customization and integration services portion of the project, which the Company anticipates will be in December 2010, the remaining
unrecognized portion of the contract value will be recognized on a straight-line basis over the term of the PCS period of approximately 12 months.
7
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 October 1, 2010 and December 31, 2009, the carrying amounts of the
Companys cash and cash equivalents of $9.8 million and $10.4 million, respectively, approximated fair value.
The
Company is also allowed to elect an irrevocable option to measure, on a contract by contract basis, specific financial instruments and certain other items that are currently not being measured at fair value. The Company did not elect to measure on a
fair value basis any of its individual contracts during the quarter or year-to-date periods ended October 1, 2010 or October 2, 2009.
Capitalized Software Costs
During the quarter and three quarters ended October 1, 2010, the Company recorded capitalized software costs of $184,000 and $829,000, respectively, and as of that date has capitalized a total of
$4.7 million for projects either developed for internal use or developed to be leased or otherwise marketed. During 2008, the Company began to amortize several of the smaller projects as they were complete. During 2010, the Company began to amortize
several of the larger projects. Accumulated amortization for these projects totaled $0.4 million as of October 1, 2010.
Taxes
Collected from Customers
In instances where the Company collects taxes from its customers for remittance to governmental
authorities, primarily in its European operations, revenue is not recorded as such taxes are recorded and presented on a net basis.
Cash
Overdrafts
As the Company does not fund its bank accounts for checks it has written until the checks are presented to the
bank for payment, the balance for change in cash overdraft, net on the statements of cash flows represents the increase or decrease in outstanding checks for the periods presented.
8
Basic and diluted earnings per share for the quarter and three quarters ended October 1, 2010 and October 2, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
|
(amounts in thousands, except per share data)
|
|
Weighted-average number of shares outstanding during period
|
|
|
14,666
|
|
|
|
14,680
|
|
|
|
14,705
|
|
|
|
14,833
|
|
Common Stock equivalents - incremental shares primarily under stock option plans
|
|
|
1,238
|
|
|
|
1,150
|
|
|
|
1,297
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares on which diluted earnings per share is based
|
|
|
15,904
|
|
|
|
15,830
|
|
|
|
16,002
|
|
|
|
15,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,027
|
|
|
$
|
1,606
|
|
|
$
|
5,718
|
|
|
$
|
4,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
|
$
|
0.39
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain options representing 0.4 million and 0.1 million shares of common stock were outstanding
at October 1, 2010 and October 2, 2009, respectively, but were not included in the computation of diluted earnings per share as they were anti-dilutive.
The
Companys investments primarily consist of mutual funds which are part of the Computer Task Group, Incorporated Non-qualified Key Employee Deferred Compensation Plan. At both October 1, 2010 and December 31, 2009, the Companys
investment balances, which are classified as trading securities, totaled approximately $0.6 million and are measured at fair value. As there is an active trading market for these funds, fair value was determined using Level 1 inputs (see Fair
Value in Note 2). Unrealized gains and losses on these securities are recorded in earnings and were nominal in both the 2010 and 2009 third quarters and the 2010 and 2009 year-to-date periods.
5.
|
Accumulated Other Comprehensive Loss
|
The components that make up accumulated other comprehensive loss on the condensed consolidated balance sheets at October 1, 2010 and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
October 1,
2010
|
|
|
December 31,
2009
|
|
|
|
(amounts in thousands)
|
|
Foreign currency adjustment
|
|
$
|
(3,890
|
)
|
|
$
|
(3,205
|
)
|
Pension loss adjustment, net of tax of $846 in 2010 and $894 in 2009
|
|
|
(1,251
|
)
|
|
|
(1,321
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(5,141
|
)
|
|
$
|
(4,526
|
)
|
|
|
|
|
|
|
|
|
|
9
Total comprehensive
income for the quarter and three quarters ended October 1, 2010 and October 2, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
|
(amounts in thousands)
|
|
Net income
|
|
$
|
2,027
|
|
|
$
|
1,606
|
|
|
$
|
5,718
|
|
|
$
|
4,303
|
|
Foreign currency
|
|
|
1,165
|
|
|
|
456
|
|
|
|
(685
|
)
|
|
|
790
|
|
Pension loss
|
|
|
61
|
|
|
|
46
|
|
|
|
70
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,253
|
|
|
$
|
2,108
|
|
|
$
|
5,103
|
|
|
$
|
5,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Companys effective tax rate (ETR) is calculated quarterly based upon current assumptions relating to the full years estimated operating results and various tax-related items. The Companys normal ETR is 38% to 42% of
pre-tax income. The 2010 third quarter ETR was 34.1% and the 2010 year-to-date ETR was 40.0%. During the 2010 third quarter, an examination was completed for the U.S. federal tax jurisdiction for 2008. Based upon the results of this examination, the
Company reduced the amount of its unrecognized tax benefits by less than $0.1 million. In addition, during the 2010 third quarter, the Company recorded certain favorable adjustments to tax expense totaling approximately $0.1 million associated with
the filing of its 2009 state income tax returns.
The 2009 third quarter ETR was 34.7%, and the 2009 year-to-date ETR was
39.5%. The 2009 third quarter ETR was below the normal range due to less than $0.1 million of federal and state tax credits realized during that quarter.
7.
|
Deferred Compensation and Other Benefits
|
The Company maintains a non-qualified defined-benefit Executive Supplemental Benefit Plan (ESBP) that provides certain former key executives with deferred compensation benefits, based on years
of service and base compensation, payable during retirement. The ESBP was amended as of November 1994 to freeze benefits for participants at that time.
Net periodic pension cost for the quarter and three quarters ended October 1, 2010 and October 2, 2009 for the ESBP are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
|
(amounts in thousands)
|
|
Interest cost
|
|
$
|
113
|
|
|
$
|
129
|
|
|
$
|
339
|
|
|
$
|
387
|
|
Amortization of unrecognized net loss
|
|
|
41
|
|
|
|
22
|
|
|
|
125
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
154
|
|
|
$
|
151
|
|
|
$
|
464
|
|
|
$
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The Company does not anticipate making contributions to the plan other than for benefit payments as required in 2010 and future years.
10
The Company also
retained 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 plan was curtailed for additional contributions in January 2003.
Net periodic pension benefit for the quarter and three
quarters ended October 1, 2010 and October 2, 2009 for the NDBP are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
|
(amounts in thousands)
|
|
Interest cost
|
|
$
|
75
|
|
|
$
|
76
|
|
|
$
|
230
|
|
|
$
|
222
|
|
Expected return on plan assets
|
|
|
(76
|
)
|
|
|
(77
|
)
|
|
|
(233
|
)
|
|
|
(225
|
)
|
Amortization of actuarial gain
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not anticipate making contributions to the NDBP in 2010 or future years as the NDBP is
currently over-funded. The assets for the NDBP are held by Aegon, a financial services firm located in The Netherlands. 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 plans assets equals the amount allocated to the NDBP in any given year. The fair value of the assets is determined using a Level 3 methodology
(see note 2 Fair Value), including using assumptions such as expected market rates of return, equity and interest rate volatility, credit risk, correlations of market returns, and discount rates. In 2009, the plan investments had a targeted
minimum return to the Company of 4%, which is consistent with historical returns and the guaranteed 4% return guaranteed to the participants of the plan. The Company, in conjunction with Aegon, continues to maintain the current investment strategy
of investing plan assets solely in government bonds in 2010.
The Company maintains a Key Employee Non-Qualified Deferred
Compensation Plan, a defined-contribution plan for certain key executives. Company contributions to this plan, if any, are based on annually defined financial performance objectives. The Company made contributions to this plan for amounts earned in
2009 totaling $0.1 million in the 2010 year-to-date period. The investments in the plan are included in the total assets of the Company, and are discussed in Note 4, Investments. During 2009 and 2010, certain participants in the plan
exchanged a portion of their investments for stock units which represent shares of the Companys common stock. In exchange for the funds received, the Company issued stock out of treasury stock equivalent to the number of share units received
by the participant. These shares of common stock are not entitled to any voting rights and the holders will not receive dividends if any are paid. The shares are being held by the Company, and will be released to the participant as prescribed by
their payment election under the plan.
During the 2010 second quarter, the Companys shareholders approved the
Non-Employee Director Deferred Compensation Plan. Also during the 2010 second and third quarters, cash contributions were made to the plan for the Companys six non-employee directors totaling approximately $0.1 million. At the time
the contribution was made, the non-employee directors elected to exchange their cash contributions to the plan to purchase stock units which represent shares of the Companys common stock. Consistent with the Key Employee Non-Qualified
Deferred Compensation Plan discussed above, in exchange for funds received, the Company issued stock out of treasury stock equivalent to the number of share units received by the participants. These shares of common stock are not entitled to
any voting rights and the holders will not receive dividends if any are paid. The shares are being held by the Company, and will be released to the non-employee directors as prescribed by their payment election under the plan.
11
During
the 2010 third quarter, the Company used approximately $0.7 million to purchase approximately 90,000 shares of its stock for treasury pursuant to the Companys share repurchase program. For the three quarters ended October 1, 2010, the
Company used approximately $2.4 million to purchase approximately 320,000 shares pursuant to the repurchase program. At October 1, 2010, approximately 0.2 million shares remain authorized for future purchases.
In
the 2010 third quarter, IBM was the Companys largest customer, accounting for $27.2 million or 32.2% of consolidated revenue as compared with $17.2 million or 25.8% of revenue in the comparable 2009 period. In the first three quarters of 2010,
IBM accounted for $75.4 million or 30.9% of consolidated revenue, compared with $53.4 million or 25.7% of consolidated revenue in the comparable 2009 period. The Companys accounts receivable from IBM at October 1, 2010 and October 2,
2009 totaled $14.1 million and $9.4 million, respectively.
12
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations for the Quarter and Three Quarters Ended October 1, 2010
|
Forward-Looking Statements
This managements discussion and analysis of financial condition and results of operations contains forward-looking statements by management of Computer Task Group, Incorporated (CTG or
the Company) that are subject to a number of risks and uncertainties. These forward-looking statements are based on information as of the date of this report. The Company assumes no obligation to update these statements based on
information from and after the date of this report. Generally, forward-looking statements include words or phrases such as anticipates, believes, estimates, expects, intends,
plans, projects, could, may, might, should, will and words and phrases of similar impact. The forward-looking statements include, but are not limited to, statements
regarding future operations, industry trends or conditions and the business environment, and statements regarding future levels of, or trends in, revenue, operating expenses, capital expenditures, and financing. The forward-looking statements are
made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including, among other factors, the
following: (i) industry and economic conditions, including fluctuations in demand for information technology (IT) services and the deterioration in market conditions generally and for our targeted vertical markets, (ii) the
availability to us of qualified professional staff, (iii) domestic and foreign industry competition for customers and talent, (iv) rate and wage inflation or deflation, (v) risks associated with operating in foreign jurisdictions,
(vi) the impact of current and future laws and government regulation, as well as repeal or modification of same, affecting the IT solutions and staffing industry, our targeted vertical markets, taxes and the Companys operations in
particular, (vii) renegotiations, nullification, or breaches of contracts with customers, vendors, subcontractors or other parties, (viii) consolidation among the Companys competitors or customers, (ix) the partial or complete
loss of the revenue the Company generates from IBM, (x) the need to supplement or change our IT services in response to new service offerings in the industry, and (xi) the risks described in Item 1A of the Companys most recent
annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) and from time to time in the Companys other reports filed with the SEC.
Industry Trends
The market demand for the Companys services is
heavily dependent on IT spending by major corporations, organizations and government entities in the markets and regions that it serves. The pace of technological change and changes in business requirements and practices of the Companys
clients all have a significant impact on the demand for the services that we provide. Competition for new engagements and pricing pressure has been, and management believes, will continue to be strong. The Company has responded to these challenging
business conditions by focusing on two main services, which are providing IT solutions and IT staffing to its clients. IT solutions and IT staffing revenue as a percentage of total revenue for the quarter and three quarters ended October 1,
2010 and October 2, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
IT solutions
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
IT staffing
|
|
|
66
|
%
|
|
|
66
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The Company promotes a
significant portion of its services through four vertical market focus areas: Technology Service Providers, Healthcare (which includes services provided to health care providers, health insurers, and life sciences companies), Energy, and Financial
Services. The Company focuses on these four 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
Companys growth due to the size of the vertical market. The remainder of CTGs revenue is derived from general markets.
The Companys revenue by vertical market as a percentage of total revenue for the quarter and three quarters ended October 1, 2010 and October 2, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
Technology service providers
|
|
|
37
|
%
|
|
|
31
|
%
|
|
|
36
|
%
|
|
|
30
|
%
|
Healthcare
|
|
|
28
|
%
|
|
|
26
|
%
|
|
|
27
|
%
|
|
|
27
|
%
|
Energy
|
|
|
6
|
%
|
|
|
10
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
Financial services
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
8
|
%
|
General markets
|
|
|
23
|
%
|
|
|
26
|
%
|
|
|
24
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The IT services industry is extremely competitive and characterized by continuous changes in customer
requirements and improvements in technologies. The Companys competition varies significantly by geographic region, as well as by the type of service provided. Many of the Companys competitors are larger than CTG, and have greater
financial, technical, sales and marketing resources. In addition, the Company frequently competes with a clients own internal IT staff. Our industry is being impacted by the growing use of lower-cost offshore delivery capabilities (primarily
India and other parts of Asia). There can be no assurance that CTG will be able to continue to compete successfully with existing or future competitors or that future competition will not have a material adverse effect on our results of operations
and financial condition.
Revenue and Cost Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, when the services have been rendered, when the price is determinable, and when collectability of the amount due is
reasonably assured. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with periodic billing schedules, primarily monthly, revenue is recognized as services are rendered to the
customer. Revenue for fixed price contracts is recognized as per the proportional method of accounting using an input-based approach whereby salary and indirect labor costs incurred are measured and compared with the total estimate of costs at
completion of a project. Revenue is recognized based upon the percent complete 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 which could distort the percent complete within a percentage complete calculation. The Companys 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 past experience on similar projects, and includes management judgments and estimates which affect the amount of revenue recognized on fixed price contracts in any accounting period.
During the 2010 third quarter, the Company entered into a series of contracts with a customer that provides for application customization
and integration services, as well as post contract support (PCS) services, specifically utilizing one of the software tools the Company has internally developed. As the contracts are closely interrelated and dependent on each other, for accounting
purposes the contracts are considered to be one arrangement. Additionally, as the project includes significant modification and
14
customization services to transform the previously developed software tool into an expanded tool that will meet the customers requirements, the percentage-of-completion method of contract
accounting is being utilized for the project.
As of the end of the 2010 third quarter, the customization and integration
services for this project are not complete. The Company also does not anticipate incurring a loss upon completion of this project. Utilizing current accounting guidelines, total revenue and costs recognized in the 2010 third quarter were $0.8
million, and the total contract value for this project is $1.5 million. After completion of the application customization and integration services portion of the project, which the Company anticipates will be in December 2010, the remaining
unrecognized portion of the contract value will be recognized on a straight-line basis over the term of the PCS period of approximately 12 months.
The Companys revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods for the quarter and three quarters ended October 1, 2010 and
October 2, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
For the Three
Quarters Ended
|
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
|
Oct. 1,
2010
|
|
|
Oct. 2,
2009
|
|
Time-and-material
|
|
|
90
|
%
|
|
|
92
|
%
|
|
|
91
|
%
|
|
|
91
|
%
|
Progress payment
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
Percentage-of-completion
|
|
|
4
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
The tables below set forth data as contained in the condensed consolidated statements of income with the percentage information calculated as a percentage of consolidated revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter ended:
|
|
October 1, 2010
|
|
|
October 2, 2009
|
|
|
|
(amounts in thousands)
|
|
Revenue
|
|
|
100.0
|
%
|
|
$
|
84,463
|
|
|
|
100.0
|
%
|
|
$
|
66,771
|
|
Direct costs
|
|
|
79.5
|
%
|
|
|
67,189
|
|
|
|
77.2
|
%
|
|
|
51,570
|
|
Selling, general, and administrative expenses
|
|
|
16.8
|
%
|
|
|
14,157
|
|
|
|
19.1
|
%
|
|
|
12,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3.7
|
%
|
|
|
3,117
|
|
|
|
3.7
|
%
|
|
|
2,488
|
|
Interest and other expense, net
|
|
|
(0.1
|
)%
|
|
|
(41
|
)
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3.6
|
%
|
|
|
3,076
|
|
|
|
3.7
|
%
|
|
|
2,459
|
|
Provision for income taxes
|
|
|
1.2
|
%
|
|
|
1,049
|
|
|
|
1.3
|
%
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.4
|
%
|
|
$
|
2,027
|
|
|
|
2.4
|
%
|
|
$
|
1,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Quarters ended:
|
|
October 1, 2010
|
|
|
October 2, 2009
|
|
|
|
(amounts in thousands)
|
|
Revenue
|
|
|
100.0
|
%
|
|
$
|
244,094
|
|
|
|
100.0
|
%
|
|
$
|
207,907
|
|
Direct costs
|
|
|
78.6
|
%
|
|
|
192,020
|
|
|
|
77.5
|
%
|
|
|
161,034
|
|
Selling, general, and administrative expenses
|
|
|
17.4
|
%
|
|
|
42,379
|
|
|
|
19.0
|
%
|
|
|
39,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4.0
|
%
|
|
|
9,695
|
|
|
|
3.5
|
%
|
|
|
7,319
|
|
Interest and other expense, net
|
|
|
(0.1
|
)%
|
|
|
(159
|
)
|
|
|
(0.1
|
)%
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3.9
|
%
|
|
|
9,536
|
|
|
|
3.4
|
%
|
|
|
7,110
|
|
Provision for income taxes
|
|
|
1.6
|
%
|
|
|
3,818
|
|
|
|
1.3
|
%
|
|
|
2,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.3
|
%
|
|
$
|
5,718
|
|
|
|
2.1
|
%
|
|
$
|
4,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
In the 2010 third
quarter, the Company recorded revenue of $84.5 million, an increase of 26.5% compared with revenue of $66.8 million recorded in the 2009 third quarter. There were 63 billable days in the 2010 third quarter and 64 billable days in the 2009 third
quarter. Revenue from the Companys North American operations totaled $70.7 million in the 2010 third quarter, an increase of 35.9% when compared with revenue in the 2009 third quarter of $52.0 million. Revenue from the Companys European
operations in the 2010 third quarter totaled $13.8 million, a decrease of 6.6% when compared with revenue in the 2009 third quarter of $14.8 million. The European revenue represented 16.3% and 22.1% of 2010 and 2009 third quarter consolidated
revenue, respectively. The Companys revenue includes reimbursable expenses billed to customers, and totaled $2.4 million and $1.5 million in the 2010 and 2009 third quarters, respectively.
In the first three quarters of 2010, the Company recorded revenue of $244.1 million, an increase of 17.4% compared with revenue of $207.9
million recorded in the first three quarters of 2009. There were 192 billable days in the first three quarters of 2010 and 193 billable days in the first three quarters of 2009. Revenue from the Companys North American operations totaled
$199.3 million in the first three quarters of 2010, an increase of 24.3% when compared with revenue in the first three quarters of 2009 of $160.4 million. Revenue from the Companys European operations in the first three quarters of 2010
totaled $44.8 million, a decrease of 5.8% when compared with revenue in the first three quarters of 2009 of $47.5 million. The European revenue represented 18.3% and 22.9% of 2010 and 2009 year-to-date consolidated revenue, respectively.
Reimbursable expenses billed to customers and included in revenue totaled $6.5 million and $4.7 million in the 2010 and 2009 year-to-date periods, respectively.
The revenue increase in the 2010 third quarter and first three quarters as compared with the corresponding 2009 periods is due to strengthening demand for both the Companys IT staffing and IT
solutions services. IT staffing revenue increased 27.9% and 17.8% in the 2010 third quarter and first three quarters as compared with the corresponding 2009 periods, respectively. The companys headcount was approximately 3,400 employees at
October 1, 2010, which was an increase of approximately 500 employees from 2,900 at December 31, 2009, and an increase of approximately 600 employees from 2,800 at October 2, 2009. IT solutions revenue increased 23.8% and 16.6% in the
2010 third quarter and first three quarters as compared with the corresponding 2009 periods, respectively. The IT solutions revenue increase was driven by an increase in the Companys electronic medical records work which was partially offset
by a reduction in demand from a large client in its energy vertical market.
The decrease in revenue in the Companys
European operations in both the 2010 third quarter and first three quarters as compared with the corresponding 2009 periods was primarily due to weakness in all segments of this business due to the challenging European economy. This revenue decrease
was also impacted by the weakness of the currencies of Belgium, the United Kingdom, Luxembourg, and Germany, the countries in which the Companys European subsidiaries operate. In Belgium, Luxembourg and Germany, the functional currency is the
Euro, while in the United Kingdom the functional currency is the British Pound. In the 2010 third quarter as compared with the 2009 third quarter, the average value of the Euro decreased 10.7% while the average value of the British Pound decreased
5.8%. If there had been no change in these exchange rates from the 2009 third quarter to the 2010 third quarter, total European revenue would have been approximately $1.5 million higher, or $15.3 million as compared with the $13.8 million reported.
Revenue for the first three quarters of 2010 would have been approximately $1.6 million higher, or $46.4 million as compared with the $44.8 million reported if there had been no change in the year-over-year exchange rates. Operating income was
reduced by approximately $0.1 million in the first three quarters of 2010 due the change in the exchange rates. In the first three quarters of 2010 as compared with the first three quarters of 2009, the average value of the Euro decreased 3.8% while
the average value of the British Pound decreased 0.6%.
In the 2010 third quarter, IBM was the Companys largest
customer, accounting for $27.2 million or 32.2% of consolidated revenue as compared with $17.2 million or 25.8% of revenue in the comparable
16
2009 period. In the first three quarters of 2010, IBM accounted for $75.4 million or 30.9% of consolidated revenue, compared with $53.4 million or 25.7% of consolidated revenue in the comparable
2009 period. The Companys current National Technical Services (NTS Agreement) contract with IBM continues until July 1, 2011. As part of the NTS Agreement, the Company provides its services as a predominant supplier to
IBMs Integrated Technology Services unit and as sole provider to the Systems and Technology Group business unit. We expect the NTS agreement to be renewed in 2011 and continue to derive a significant portion of our revenue from IBM throughout
the remainder of 2010 and in future years. However, a significant decline or the loss of the revenue from IBM would have a significant negative effect on our operating results. The Companys accounts receivable from IBM at October 1, 2010
and October 2, 2009 totaled $14.1 million and $9.4 million, respectively. No other customer accounted for more than 10% of the Companys revenue in either the third quarter or year-to-date periods in 2010 or 2009.
Direct costs, defined as the costs for billable staff including billable out-of-pocket expenses, were 79.5% of revenue in the 2010 third
quarter as compared with 77.2% of revenue in the 2009 third quarter, and 78.6% of revenue in the 2010 first three quarters as compared with 77.5% of revenue in corresponding 2009 period. The increase in direct costs as a percentage of revenue in the
2010 third quarter and first three quarters when compared with the corresponding 2009 periods is due to a change in the Companys overall business mix resulting from the significant increase in our lowest margin IT staffing business in 2010,
which has significantly higher direct costs than the Companys IT solutions business. Additionally, due to the application of current software revenue recognition accounting guidelines, the Company recorded approximately $0.8 million of revenue
and costs with no profit during the 2010 third quarter which increased the percentage of direct costs to revenue.
Selling,
general and administrative (SG&A) expenses were 16.8% of revenue in the 2010 third quarter and 19.1% in the 2009 corresponding period, and 17.4% in the first three quarters of 2010 as compared with 19.0% in the corresponding 2009
period. The SG&A decrease as a percentage of revenue in both the 2010 third quarter and first three quarters as compared with the corresponding 2009 periods is primarily due to the change in the Companys business mix resulting from a
significant increase in our lowest margin IT staffing business in 2010, which has significantly lower SGA costs compared with the Companys IT solutions business, as well as disciplined cost management and the economies of scale associated with
revenue growth.
Operating income was 3.7% of revenue in both the 2010 and 2009 third quarters, and 4.0% in the first three
quarters of 2010 as compared with 3.5% in the corresponding 2009 period. Operating income from North American operations was $3.1 million and $2.1 million in the 2010 and 2009 third quarters, respectively, while European operations recorded
operating income of less than $0.1 million and $0.4 million, respectively, in the corresponding 2010 and 2009 periods. Operating income from North American operations was $8.9 million and $6.3 million in the 2010 and 2009 first three quarters,
respectively, while European operations recorded operating income of $0.8 million and $1.0 million, respectively, in the corresponding 2010 and 2009 periods.
Interest and other expense, net was 0.1% of revenue in both the first three quarters of 2010 and 2009. During 2009, primarily during the 2009 first quarter, the Company incurred approximately $0.1 million
in foreign currency exchange costs, while these costs were nominal in the first three quarters of 2010.
The Companys
effective tax rate (ETR) is calculated quarterly based upon current assumptions relating to the full years estimated operating results and various tax-related items. The Companys normal ETR is 38% to 42% of pre-tax income.
The 2010 third quarter ETR was 34.1% and the 2010 year-to-date ETR was 40.0%. During the 2010 third quarter, an examination was completed for the U.S. federal tax jurisdiction for 2008. Based upon the results of this examination, the Company reduced
the amount of its unrecognized tax benefits by less than $0.1 million. In addition, during the 2010 third quarter, the Company recorded certain favorable adjustments to tax expense totaling approximately $0.1 million associated with the filing of
its 2009 state income tax returns.
17
The 2009 third quarter
ETR was 34.7%, and the 2009 year-to-date ETR was 39.5%. The 2009 third quarter ETR was below the normal range due to less than $0.1 million of federal and state tax credits realized during that quarter.
Net income for the 2010 third quarter was 2.4% of revenue or $0.13 per diluted share, compared with net income of 2.4% of revenue or
$0.10 per diluted share in the 2009 third quarter. Net income for the first three quarters of 2010 was 2.3% of revenue or $0.36 per diluted share, compared with net income of 2.1% of revenue or $0.28 per diluted share in the comparable 2009 period.
Diluted earnings per share were calculated using 15.9 million and 15.8 million weighted-average equivalent shares outstanding for the quarters ended October 1, 2010 and October 2, 2009, respectively. Diluted earnings per share
were calculated using 16.0 million and 15.4 million weighted-average equivalent shares outstanding for the three quarters ended October 1, 2010 and October 2, 2009, respectively. The number of equivalent shares outstanding
increased year-over-year due to an increase in the Companys stock price which increased the dilutive effect of outstanding stock options, but was somewhat offset by the purchase of approximately 0.4 million shares pursuant to the
Companys share repurchase program for treasury during the last quarter of 2009 and the first three quarters of 2010.
Critical
Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. generally
accepted accounting principles requires the Companys management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Companys
significant accounting policies, along with the underlying assumptions and judgments made by the Companys management in their application, have a significant impact on the Companys condensed consolidated financial statements. The Company
identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Companys financial position and results of operations, and that require the most difficult, subjective and/or complex
judgments by management regarding estimates about matters that are inherently uncertain. The Companys most critical accounting policies are those related to income taxes, specifically relating to deferred taxes and valuation allowances, and
goodwill valuation.
Income Taxes Deferred Taxes and Valuation Allowances
At October 1, 2010, the
Company had a total of $6.8 million of current and non-current deferred tax assets, net of deferred tax liabilities, recorded on its consolidated balance sheet. The changes in deferred tax assets and liabilities from period to period are determined
based upon the changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax purposes, as measured by the enacted tax rates when these differences are estimated to
reverse. The Company has made certain assumptions regarding the timing of the reversal of these assets and liabilities, and whether taxable income in future periods will be sufficient to recognize all or a part of any gross deferred tax asset of the
Company.
At October 1, 2010, the Company had deferred tax assets recorded resulting from net operating losses totaling
approximately $2.8 million. Management of the Company has analyzed each jurisdictions tax position, including forecasting potential taxable income in future periods, and the expiration of the net operating loss carryforwards as applicable, and
determined that it is unclear whether some of these deferred tax assets will be realized at any point in the future. At October 1, 2010, the Company has offset substantially all of these deferred tax assets with a valuation allowance totaling
$2.6 million, resulting in a net deferred tax asset from net operating loss carryforwards of approximately $0.2 million.
18
The Companys
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
Companys ETR. A 1% increase or decrease in the ETR in the 2010 third quarter would have increased or decreased, respectively, net income in the quarter by approximately $31,000.
Goodwill valuation
The Company has a goodwill balance of $35.7 million recorded as of October 1, 2010. As of the
fiscal month-end October 2009, with the assistance of an independent appraisal company, the Company completed its annual valuation of the business to which the Companys goodwill relates. The valuation indicated that the estimated fair value of
the business was substantially in excess of its carry value by approximately 21%. Additionally, no facts or circumstances have arisen since October 2009 that have led management to believe the goodwill may be impaired.
Other Estimates
The Company has also made a number of estimates and assumptions relating to the reporting of other 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. Such estimates primarily relate to actuarial assumptions including discount
rates and expected rates of return on assets, as applicable, for the Companys defined benefit and postretirement benefit plans, an allowance for doubtful accounts receivable, assumptions underlying stock option valuation, investment valuation,
legal matters, other contingencies, and progress toward completion and direct profit or loss on contracts. As future events and their effects can not 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 Companys financial statements in the event they occur.
Financial Condition and Liquidity
Cash provided by operating activities
was $2.6 million in the first three quarters of 2010 (2010 period) as compared with cash provided by operating activities of $3.6 million in the first three quarters of 2009 (2009 period). In the 2010 period, net income
totaled $5.7 million, while other non-cash adjustments, primarily consisting of depreciation expense, equity-based compensation expense, deferred taxes, and deferred compensation totaled a net of $2.2 million. In the 2009 period, net income was $4.3
million, while the corresponding non-cash adjustments netted to $1.7 million. Accounts receivable balances increased $12.2 million in the 2010 period, and decreased $5.2 million in the 2009 period. The increase in the accounts receivable balance in
the 2010 period resulted from the 17.4% increase in revenue year-over-year and an increase in days sales outstanding (DSO) to 61 days at October 1, 2010 as compared with 60 days at October 2, 2009. The decline in accounts
receivable in the 2009 period resulted from a decrease in revenue in the 2009 period of approximately 23% as compared with the corresponding 2008 period.
Other assets decreased $0.7 million in the 2010 period and increased $1.6 million in the 2009 period due to changes in the cash surrender value of certain insurance policies the Company owns, net of
borrowings on such policies, as applicable. Accounts payable decreased $0.2 million in the 2010 period as compared with a decrease of $2.4 million in the 2009 period due to the timing of certain payments near quarter-end. Accrued compensation
increased $6.8 million in the 2010 period due to an increase in employee headcount of approximately 500, or 17% in 2010, while accrued compensation decreased $3.3 million in the 2009 period primarily due to the timing of the U.S. bi-weekly payroll
and lower headcount in 2009 of approximately 700 employees as compared with 2008.
Investing activities used $1.6 million in
the 2010 period as compared with $2.5 million in the 2009 period. The cash used in the 2010 period primarily represented the additions to property, equipment and capitalized software of $1.6 million. Additions to property and equipment in the 2009
period totaled approximately $2.3 million, while net purchases of investments in the Computer Task Group, Incorporated Non-qualified Key Employee Deferred Compensation Plan totaled $0.2 million. The Company has no significant commitments for the
purchase of property or equipment at October 1, 2010.
19
Financing activities
used $1.3 million of cash in the 2010 period as compared with $2.2 million in the 2009 period. At both October 1, 2010 and October 2, 2009, the Company had no amounts outstanding under its revolving credit line, the term of which extends
to April 2011. The Company is currently in the process of negotiating a new, long-term agreement which it believes will be in place well before the expiration of the existing agreement. The Company borrows or repays its revolving debt as needed
based upon its working capital obligations, including the timing of the U.S. bi-weekly payroll. During the 2010 period, the average outstanding daily balance under the Companys revolving line of credit was approximately $1.8 million, while the
average outstanding balance under this line of credit was $0.3 million in the 2009 period.
The Company is required to meet
certain financial covenants in order to maintain borrowings under its revolving credit line, pay dividends, and make acquisitions. The covenants are measured quarterly, and at October 1, 2010 include a leverage ratio which must be no more than
3.25 to 1, a calculation of minimum tangible net worth which must be no less than $33.5 million, and total expenditures for property, equipment and capitalized software can not exceed $5.0 million annually. The Company was in compliance with these
covenants at October 1, 2010 as its leverage ratio was 0.0, tangible net worth was $41.2 million, and 2010 year-to-date expenditures for property, equipment and capitalized software were $1.6 million. The Company was also in compliance with its
required covenants at October 2, 2009. When considering current market conditions and operating results, and the Companys current estimate of future operating results, the Company believes it will be able to meet its covenants, as
applicable, for the remainder of 2010 and in future years.
During the 2010 period, the Company used $2.4 million to purchase
approximately 320,000 shares of its stock for treasury. At October 1, 2010, a total of approximately 0.2 million shares are authorized for future purchases. During the 2009 period, the Company used $3.4 million to purchase approximately
0.6 million shares of its stock for treasury.
The Company believes existing internally available funds, cash potentially
generated from future operations, and borrowings available under the Companys revolving line of credit totaling $34.6 million at October 1, 2010 are sufficient to meet foreseeable working capital and capital expenditure needs, fund stock
repurchases, and allow for future internal growth and expansion.
Off-Balance Sheet Arrangements
The Company did not have off-balance sheet arrangements or transactions in the 2010 or 2009 third quarters or year-to-date periods.
Contractual Obligations
The Company did not enter into any significant contractual obligations during the year-to-date period ended October 1, 2010.
20
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
The Companys primary market risk exposures consist of interest rate risk associated with variable rate borrowings and foreign currency exchange risk associated with the Companys European
operations.
The Companys credit agreement currently expires in April 2011. The Company is currently in the process of
negotiating a new, long-term agreement which it believes will be in place by December 31, 2010. The current credit agreement allows the Company to borrow up to $35.0 million based upon available collateral. At both October 1, 2010 and
October 2, 2009, there were no amounts outstanding under the credit agreement. At October 1, 2010 and October 2, 2009, there was $0.4 million and $0.5 million outstanding under letters of credit under the credit agreement,
respectively.
The largest amounts outstanding under the Companys credit agreements during the quarters ended
October 1, 2010 and October 2, 2009 were $5.7 million and $4.1 million, respectively. Average bank borrowings outstanding for such quarters were $1.1 million and $0.7 million, respectively. Accordingly, a one percent increase or decrease
in the weighted-average interest rate would increase or decrease annual interest expense by $11,000.
During the 2010 third
quarter, European revenue was affected by the weakness of the currencies of Belgium, the United Kingdom, Luxembourg, and Germany, the countries in which the Companys European subsidiaries operate. In Belgium, Luxembourg and Germany, the
functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. If there had been no change in these exchange rates from the 2009 third quarter to the 2010 third quarter, total European revenue would have
been approximately $1.5 million higher, or $15.3 million as compared with the $13.8 million reported. Operating income was not significantly affected in the 2010 third quarter as compared with the 2009 third quarter due to the change in exchange
rates year-over-year. Revenue for the first three quarters of 2010 would have been approximately $1.6 million higher, or $46.4 million as compared with the $44.8 million reported if there had been no change in the year-over-year exchange rates.
Operating income was reduced by approximately $0.1 million in the first three quarters of 2010 due the change in the exchange rates.
The Company has historically not used any market risk sensitive instruments to hedge its foreign currency exchange risk. The Company believes the market risk related to intercompany balances in future
periods will not have a material affect on its results of operations.
21
Item 4.
|
Controls and Procedures
|
Evaluation of
Disclosure Controls and Procedures
The Companys management has evaluated, under the supervision and with the
participation of the Companys Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operations of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures
were effective as of the end of the period covered by this periodic report.
Changes in Internal Control over Financial Reporting
The Company reviews its internal controls on a continuous basis. The Companys management, including its Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys internal control over financial reporting as of the end of the period covered by this report, and concluded that the Companys internal control
over financial reporting was effective as of the end of the period covered by this report. There were no changes in the Companys internal control over financial reporting that occurred during the period covered by this report, which ended on
October 1, 2010, that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
22
PART II. OTHER
INFORMATION
Item 1.
|
Legal Proceedings
|
None
There were
no material changes in the Companys risk factors from those previously disclosed in the Companys Form 10-K for the period ended December 31, 2009.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares
Purchased
|
|
|
Average Price
Paid per Share**
|
|
|
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or
Programs
|
|
|
Maximum
Number of
Shares that may
yet be Purchased
Under the Plans
or
Programs*
|
|
Jul. 3 Jul. 31
|
|
|
67,550
|
|
|
$
|
7.60
|
|
|
|
67,550
|
|
|
|
249,791
|
|
Aug. 1 Aug. 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249,791
|
|
Sept. 1 Oct. 1
|
|
|
21,785
|
|
|
$
|
7.09
|
|
|
|
21,785
|
|
|
|
228,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
89,335
|
|
|
$
|
7.48
|
|
|
|
89,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The Companys share repurchase program (originally announced on May 12, 2005) does not have an expiration date, nor was it terminated during the first three
quarters of 2010.
|
**
|
Excludes broker commissions
|
Item 3.
|
Default Upon Senior Securities
|
None
Item 5.
|
Other Information
|
None
23
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
Page
|
|
|
|
|
10.1
|
|
2010 Equity Award Plan (incorporated by reference to Appendix B to the Companys Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on
March 31, 2010
|
|
|
+
|
|
|
|
|
31. (a)
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
26
|
|
|
|
|
31. (b)
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
27
|
|
|
|
|
32.
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
28
|
|
+
|
Management contract or compensatory plan or arrangement
|
* * * * * * *
24
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/ Brendan M. Harrington
|
|
|
Brendan M. Harrington
|
Title:
|
|
Chief Financial Officer
|
Date: October 28, 2010
25
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