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 July 1, 2011
¨
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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
x
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 July 25, 2011
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Common stock, par value $.01 per share
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18,570,422
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SEC Form 10-Q Index
2
PART I. FINANCIAL INFORMATION
Item 1.
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Financial Statements.
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COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
(Unaudited)
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For the
Quarter Ended
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For the Two
Quarters Ended
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July 1,
2011
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July 2,
2010
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July 1,
2011
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July 2,
2010
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Revenue
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$
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98,327
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$
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81,142
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$
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194,236
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$
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159,631
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Direct costs
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77,594
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63,350
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153,706
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124,831
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Selling, general and administrative expenses
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16,056
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14,303
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31,254
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28,222
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Operating income
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4,677
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3,489
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9,276
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6,578
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Interest and other income
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32
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4
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63
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31
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Interest and other expense
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(80
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)
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(75
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)
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(148
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)
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(149
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)
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Income before income taxes
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4,629
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3,418
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9,191
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6,460
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Provision for income taxes
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1,799
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1,513
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3,533
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2,769
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Net income
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$
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2,830
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$
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1,905
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$
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5,658
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$
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3,691
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Net income per share:
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Basic
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$
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0.19
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$
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0.13
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$
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0.38
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$
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0.25
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Diluted
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$
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0.17
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$
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0.12
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$
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0.34
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$
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0.23
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Weighted average shares outstanding:
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Basic
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15,050
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14,728
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14,909
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14,725
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Diluted
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16,864
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16,095
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16,759
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16,051
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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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July 1,
2011
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Dec. 31,
2010
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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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13,002
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$
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14,837
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Accounts receivable, net of allowances of $392 and $860 in 2011 and 2010, respectively
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66,766
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57,540
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Prepaid and other current assets
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2,182
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1,991
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Income taxes receivable
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907
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0
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Deferred income taxes
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1,030
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1,111
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Total current assets
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83,887
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75,479
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Property, equipment and capitalized software, net of accumulated depreciation and amortization of $18,444 and $17,497 in 2011 and
2010, respectively
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8,641
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8,364
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Goodwill
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35,678
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35,678
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Deferred income taxes
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6,288
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6,099
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Other assets
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5,566
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4,022
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Investments
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756
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631
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Total assets
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$
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140,816
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$
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130,273
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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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8,464
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$
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6,595
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Accrued compensation
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30,853
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29,646
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Advance billings on contracts
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1,535
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2,331
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Other current liabilities
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3,494
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3,313
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Income taxes payable
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0
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549
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Total current liabilities
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44,346
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42,434
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Deferred compensation benefits
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9,303
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9,422
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Other long-term liabilities
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517
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497
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Total liabilities
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54,166
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52,353
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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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|
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|
270
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Capital in excess of par value
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114,787
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113,678
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Retained earnings
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77,199
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71,541
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Less: Treasury stock of 8,434,258 and 8,963,035 shares at cost, in 2011 and 2010, respectively
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(45,406
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)
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(46,178
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)
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Stock Trusts of 3,363,351 shares at cost in both periods
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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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(197
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)
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(147
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)
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Accumulated other comprehensive loss
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(4,920
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)
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(6,161
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)
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|
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Total shareholders equity
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86,650
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77,920
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|
|
|
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|
|
|
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Total liabilities and shareholders equity
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$
|
140,816
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$
|
130,273
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|
|
|
|
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|
|
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
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For the Two
Quarters Ended
|
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July 1,
2011
|
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July 2,
2010
|
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Cash flow from operating activities:
|
|
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|
|
|
|
|
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Net income
|
|
$
|
5,658
|
|
|
$
|
3,691
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
978
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|
|
|
798
|
|
Equity-based compensation expense
|
|
|
696
|
|
|
|
678
|
|
Deferred income taxes
|
|
|
(222
|
)
|
|
|
(17
|
)
|
Gain on sales of property and equipment
|
|
|
(20
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)
|
|
|
(4
|
)
|
Deferred compensation
|
|
|
(2
|
)
|
|
|
(117
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(7,922
|
)
|
|
|
(7,463
|
)
|
Increase in prepaid and other current assets
|
|
|
(170
|
)
|
|
|
(804
|
)
|
(Increase) decrease in other assets
|
|
|
(1,428
|
)
|
|
|
168
|
|
Decrease in accounts payable
|
|
|
(284
|
)
|
|
|
(1,497
|
)
|
Increase in accrued compensation
|
|
|
619
|
|
|
|
6,351
|
|
Increase (decrease) in income taxes receivable/payable
|
|
|
(1,492
|
)
|
|
|
283
|
|
Decrease in advance billings on contracts
|
|
|
(837
|
)
|
|
|
(65
|
)
|
Increase (decrease) in other current liabilities
|
|
|
70
|
|
|
|
(356
|
)
|
Increase in other long-term liabilities
|
|
|
18
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(4,338
|
)
|
|
|
1,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
Additions to property, equipment and capitalized software
|
|
|
(1,197
|
)
|
|
|
(1,110
|
)
|
Deferred compensation plan investments, net
|
|
|
(109
|
)
|
|
|
24
|
|
Proceeds from sales of property and equipment
|
|
|
22
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,284
|
)
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
1,778
|
|
|
|
456
|
|
Excess tax benefits from equity-based compensation
|
|
|
1,714
|
|
|
|
160
|
|
Change in cash overdraft, net
|
|
|
609
|
|
|
|
(318
|
)
|
Proceeds from Employee Stock Purchase Plan
|
|
|
138
|
|
|
|
80
|
|
Purchase of stock for treasury
|
|
|
(1,177
|
)
|
|
|
(1,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,062
|
|
|
|
(1,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
725
|
|
|
|
(1,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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Net decrease in cash and cash equivalents
|
|
|
(1,835
|
)
|
|
|
(1,839
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
14,837
|
|
|
|
10,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of quarter
|
|
$
|
13,002
|
|
|
$
|
8,584
|
|
|
|
|
|
|
|
|
|
|
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 consist of a 13-week fiscal
quarter where the last day of each of the first three quarters is a Friday. The 2011 second quarter began on April 2, 2011 and ended on July 1, 2011. The 2010 second quarter began on April 3, 2010 and ended July 2, 2010. There
were 64 billable days in both the second quarters of 2011 and 2010, and 129 total billable days in the first two quarters of both 2011 and 2010.
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
two quarters ended July 1, 2011 and July 2, 2010 are as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter Ended
|
|
|
For the Two
Quarters Ended
|
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
IT solutions
|
|
|
37
|
%
|
|
|
32
|
%
|
|
|
36
|
%
|
|
|
32
|
%
|
IT staffing
|
|
|
63
|
%
|
|
|
68
|
%
|
|
|
64
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 two quarters ended July 1, 2011 and July 2, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter Ended
|
|
|
For the Two
Quarters Ended
|
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
Technology service providers
|
|
|
35
|
%
|
|
|
37
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Healthcare
|
|
|
29
|
%
|
|
|
27
|
%
|
|
|
28
|
%
|
|
|
27
|
%
|
Energy
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
Financial services
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
General markets
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
25
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software Revenue Recognition
The Company has 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. Total revenue and costs were recognized equally until completion of the application customization and integration services portion of the project. The remaining unrecognized portion of the contract value is being
recognized on a straight-line basis over the term of the PCS period.
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 July 1, 2011 and December 31, 2010, the reported balances of the Companys cash and cash equivalents of $13.0 million
and $14.8 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 quarters or year-to-date periods ended July 1, 2011 or July 2, 2010.
Capitalized Software Costs
During the quarter and two quarters ended July 1, 2011, the Company recorded capitalized software costs of $130,000 and $351,000,
respectively, and as of that date has capitalized a total of $5.2 million for projects either developed for internal use or developed to be leased or otherwise marketed. Accumulated amortization for these projects totaled $0.9 million as of
July 1, 2011, and the tools being expensed have amortization periods ranging from three to five years.
Life Insurance Policies
The Company has purchased life insurance on the lives of certain plan participants in the non-qualified defined-benefit
Executive Supplemental Benefit Plan. Those policies have generated cash surrender value, and the Company has taken loans against the policies. At July 1, 2011 and December 31, 2010, these insurance policies have a gross cash surrender
value of $27.6 million and $25.9 million, respectively, loans have been taken totaling $24.7 million and $24.3 million, respectively, and the net cash surrender value balance of $2.9 million and $1.6 million, respectively, is included on the
condensed consolidated balance sheet in Other Assets under non-current assets.
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.
8
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 representing change in cash overdraft, net on the
condensed consolidated statements of cash flows represents the increase or decrease in outstanding checks for the periods presented.
Guarantees
The Company
has several guarantees in place in our European operations that support office leases, and performance under government projects. These guarantees total approximately $1.8 million at July 1, 2011.
Basic and diluted earnings per share for the quarter and two quarters ended July 1, 2011 and July 2, 2010 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter Ended
|
|
|
For the Two
Quarters Ended
|
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
|
(amounts in thousands, except per share data)
|
|
Weighted-average number of shares outstanding during period
|
|
|
15,050
|
|
|
|
14,728
|
|
|
|
14,909
|
|
|
|
14,725
|
|
Common Stock equivalents incremental shares primarily under stock option plans
|
|
|
1,814
|
|
|
|
1,367
|
|
|
|
1,850
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares on which diluted earnings per share is based
|
|
|
16,864
|
|
|
|
16,095
|
|
|
|
16,759
|
|
|
|
16,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,830
|
|
|
$
|
1,905
|
|
|
$
|
5,658
|
|
|
$
|
3,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.13
|
|
|
$
|
0.38
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.12
|
|
|
$
|
0.34
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain options representing 0.2 million and 0.4 million shares of common stock were
outstanding at July 1, 2011 and July 2, 2010, 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 July 1, 2011 and December 31, 2010, the Companys investment balances, which are classified as trading securities, totaled approximately $0.8 million and
$0.6 million, respectively, 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 2011 and 2010 second quarters and year-to-date periods.
9
5.
|
Accumulated Other Comprehensive Loss
|
The components that make up accumulated other comprehensive loss on the condensed consolidated balance sheets at
July 1, 2011 and December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 1,
2011
|
|
|
Dec. 31,
2010
|
|
|
|
(amounts in thousands)
|
|
Foreign currency adjustment
|
|
$
|
(3,135
|
)
|
|
|
(4,298
|
)
|
Pension loss adjustment, net of tax of $1,096 in 2011 and $1,141 in 2010
|
|
|
(1,785
|
)
|
|
|
(1,863
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(4,920
|
)
|
|
|
(6,161
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income for the quarter and two quarters ended July 1, 2011 and July 2, 2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter Ended
|
|
|
For the Two
Quarters Ended
|
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
|
(amounts in thousands)
|
|
Net income
|
|
$
|
2,830
|
|
|
$
|
1,905
|
|
|
$
|
5,658
|
|
|
$
|
3,691
|
|
Foreign currency
|
|
|
255
|
|
|
|
(1,115
|
)
|
|
|
1,163
|
|
|
|
(1,850
|
)
|
Pension loss
|
|
|
38
|
|
|
|
0
|
|
|
|
78
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,123
|
|
|
$
|
790
|
|
|
$
|
6,899
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 annual ETR typically ranges from 38% to 42% of pre-tax income. The 2011 second quarter ETR was 38.9% and the 2011 year-to-date ETR was
38.4%.
The 2010 second quarter ETR was 44.3%, and the 2010 year-to-date ETR was 42.9%. During the second quarter of 2010, the
Company incurred severance expense related to the downsizing of one of its foreign subsidiaries, which caused the subsidiary to incur a loss during the quarter. Management determined that the realizability of the tax benefit of the losses incurred
by that subsidiary in 2010 was uncertain. As a result of this uncertainty, management recorded a full valuation allowance against this taxable loss. In addition, as of July 2, 2010, the U.S. federal government had not extended the Credit
for Increasing Research Activities, which had in previous years reduced the Companys ETRs. These two factors were the primary reasons that the 2010 second quarter and year-to-date ETRs were above the normal range.
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.
10
Net periodic pension cost for the quarter and two quarters ended July 1, 2011 and
July 2, 2010 for the ESBP are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter Ended
|
|
|
For the Two
Quarters Ended
|
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
|
(amounts in thousands)
|
|
Interest cost
|
|
$
|
102
|
|
|
$
|
113
|
|
|
$
|
204
|
|
|
$
|
226
|
|
Amortization of unrecognized net loss
|
|
|
52
|
|
|
|
42
|
|
|
|
104
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
154
|
|
|
$
|
155
|
|
|
$
|
308
|
|
|
$
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2011 and future years.
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 was approximately $1,000 in both the quarters ended July 1, 2011 and
July 2, 2010, and $2,000 in both the year-to-date periods ended July 1, 2011 and July 2, 2010.
The Company
does not anticipate making significant contributions to the NDBP in 2011 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 at any point in time. 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 2010, the plan investments had a targeted minimum return to the Company of 4%, which is consistent with historical returns and the 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 2011.
The change in the fair value of the plan assets for the NDBP from December 31, 2010 to July 1, 2011 is as follows:
|
|
|
|
|
(amounts in thousands)
|
|
|
|
|
|
Fair value of plan assets at December 31, 2010
|
|
$
|
7,831
|
|
Return on plan assets
|
|
|
166
|
|
Contributions
|
|
|
42
|
|
Benefits paid
|
|
|
(53
|
)
|
Effect of exchange-rate changes
|
|
|
692
|
|
|
|
|
|
|
Fair value of plan assets at July 1, 2011
|
|
$
|
8,678
|
|
|
|
|
|
|
11
The Company maintains the 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 2010 totaling $0.3
million in the 2011 first quarter. The investments in the plan are included in the total assets of the Company, and are discussed in Note 4, Investments. Participants in the plan have the ability to exchange a portion of their
investments for stock units which represent shares of the Companys common stock. In exchange for the funds received, the Company will issue stock out of treasury stock equivalent to the number of share units received by each 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 participants as prescribed by their respective payment
elections under the plan.
The Company maintains the Non-Employee Director Deferred Compensation Plan for its non-employee
directors. During both the 2011 second quarter and year-to-date period, cash contributions totaling $ 0.1 million were made to the plan for certain of these directors. At the time the contributions were made, one of 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, in exchange for
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 holder will not receive dividends if
any are paid. The shares are being held by the Company, and will be released to the non-employee director as prescribed by their respective payment election under the plan.
8.
|
Equity-Based Compensation
|
During the 2011 second quarter, the Company granted stock options to its independent directors. No options were granted
during the 2010 second quarter. The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock options granted on the date of grant. The stock options granted, the weighted-average fair value of an option, and the
weighted-average assumptions used to calculate the fair value of a stock option are as follows:
|
|
|
|
|
|
|
For the
Quarter Ended
July 1, 2011
|
|
Stock options granted
|
|
|
120,000
|
|
Weighted-average fair value
|
|
|
$2.83
|
|
Expected volatility
|
|
|
47.9
|
%
|
Risk-free interest rate
|
|
|
0.2
|
%
|
Expected term (years)
|
|
|
1.2
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
The Company used historical volatility calculated using daily closing prices for its common stock over
periods that match the expected term of the option granted to estimate the expected volatility for the grants made in the 2011 second quarter. The risk-free interest rate assumption was based upon U.S. Treasury yields appropriate for the expected
term of the Companys stock options based upon the date of grant. The expected term of the stock options granted was based upon the options expected vesting schedule and historical exercise patterns. The expected dividend yield was based
upon the Companys recent history of not paying dividends, and the expectation of not paying dividends in the foreseeable future.
12
During the 2011 second quarter, the Company used approximately $0.6 million to purchase 44,000 shares of its stock for
treasury pursuant to the Companys share repurchase program. For the year-to-date period ended July 1, 2011, the Company used approximately $1.2 million to purchase 94,000 shares pursuant to the repurchase program. In February 2011, the
Companys Board of Directors authorized the addition of one million shares to the repurchase program. At July 1, 2011, approximately 1.1 million shares remained authorized for future purchases. The Company issued 0.3 million
shares and 0.8 million shares out of treasury stock to fulfill the share requirements from stock option exercises and restricted stock grants during the 2011 second quarter and year-to-date 2011 period, respectively.
During the 2010 second quarter, the Company used approximately $0.8 million to purchase 101,000 shares of its stock for treasury pursuant
to the Companys share repurchase program. For the year-to-date period ended July 2, 2010, the Company used approximately $1.7 million to purchase 232,000 shares pursuant to the repurchase program. At July 2, 2010, approximately
0.3 million shares remained authorized for future purchases. The Company issued 0.1 million and 0.2 million shares out of treasury stock to fulfill the share requirements from stock option exercises and restricted stock grants during
the 2010 second quarter and year-to-date 2010 period, respectively.
In the 2011 second quarter, International Business Machines Corporation (IBM) was the Companys
largest customer, accounting for $29.5 million or 30.0% of consolidated revenue as compared with $25.6 million or 31.5% of revenue in the comparable 2010 period. In the first two quarters of 2011, IBM accounted for $58.1 million or 29.9% of
consolidated revenue, compared with $48.2 million or 30.2% of consolidated revenue in the comparable 2010 period. The Companys accounts receivable from IBM at July 1, 2011 and July 2, 2010 totaled $15.0 million and $13.5 million,
respectively.
13
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations for the Quarter and Two Quarters Ended July 1, 2011
|
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 International Business Machines Corporation (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
Company operates in one industry segment, providing IT services to its clients. These services include IT solutions and IT staffing. 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 its 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 two quarters ended July 1, 2011 and July 2, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter Ended
|
|
|
For the Two
Quarters Ended
|
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
IT solutions
|
|
|
37
|
%
|
|
|
32
|
%
|
|
|
36
|
%
|
|
|
32
|
%
|
IT staffing
|
|
|
63
|
%
|
|
|
68
|
%
|
|
|
64
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
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 two quarters ended July 1, 2011 and July 2, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter Ended
|
|
|
For the Two
Quarters Ended
|
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
Technology service providers
|
|
|
35
|
%
|
|
|
37
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Healthcare
|
|
|
29
|
%
|
|
|
27
|
%
|
|
|
28
|
%
|
|
|
27
|
%
|
Energy
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
Financial services
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
General markets
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
25
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
15
The Company has 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. Total revenue and costs were recognized equally until completion of the application customization and
integration services portion of the project. The remaining unrecognized portion of the contract value is being recognized on a straight-line basis over the term of the PCS period.
The Companys revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods
for the quarter and two quarters ended July 1, 2011 and July 2, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Quarter Ended
|
|
|
For the Two
Quarters Ended
|
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
|
July 1,
2011
|
|
|
July 2,
2010
|
|
Time-and-material
|
|
|
90
|
%
|
|
|
93
|
%
|
|
|
91
|
%
|
|
|
92
|
%
|
Progress payment
|
|
|
8
|
%
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
5
|
%
|
Percentage-of-completion
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter ended:
|
|
July 1, 2011
|
|
|
July 2, 2010
|
|
|
|
(amounts in thousands)
|
|
Revenue
|
|
|
100.0
|
%
|
|
$
|
98,327
|
|
|
|
100.0
|
%
|
|
$
|
81,142
|
|
Direct costs
|
|
|
78.9
|
%
|
|
|
77,594
|
|
|
|
78.1
|
%
|
|
|
63,350
|
|
Selling, general, and administrative expenses
|
|
|
16.3
|
%
|
|
|
16,056
|
|
|
|
17.6
|
%
|
|
|
14,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4.8
|
%
|
|
|
4,677
|
|
|
|
4.3
|
%
|
|
|
3,489
|
|
Interest and other expense, net
|
|
|
(0.1
|
)%
|
|
|
(48
|
)
|
|
|
(0.1
|
)%
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4.7
|
%
|
|
|
4,629
|
|
|
|
4.2
|
%
|
|
|
3,418
|
|
Provision for income taxes
|
|
|
1.8
|
%
|
|
|
1,799
|
|
|
|
1.9
|
%
|
|
|
1,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.9
|
%
|
|
$
|
2,830
|
|
|
|
2.3
|
%
|
|
$
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Two Quarters ended:
|
|
July 1, 2011
|
|
|
July 2, 2010
|
|
|
|
(amounts in thousands)
|
|
Revenue
|
|
|
100.0
|
%
|
|
$
|
194,236
|
|
|
|
100.0
|
%
|
|
$
|
159,631
|
|
Direct costs
|
|
|
79.1
|
%
|
|
|
153,706
|
|
|
|
78.2
|
%
|
|
|
124,831
|
|
Selling, general, and administrative expenses
|
|
|
16.1
|
%
|
|
|
31,254
|
|
|
|
17.7
|
%
|
|
|
28,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4.8
|
%
|
|
|
9,276
|
|
|
|
4.1
|
%
|
|
|
6,578
|
|
Interest and other expense, net
|
|
|
(0.1
|
)%
|
|
|
(85
|
)
|
|
|
(0.1
|
)%
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4.7
|
%
|
|
|
9,191
|
|
|
|
4.0
|
%
|
|
|
6,460
|
|
Provision for income taxes
|
|
|
1.8
|
%
|
|
|
3,533
|
|
|
|
1.7
|
%
|
|
|
2,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.9
|
%
|
|
$
|
5,658
|
|
|
|
2.3
|
%
|
|
$
|
3,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
In the 2011 second quarter, the Company recorded revenue of $98.3 million, an increase of
21.2% compared with revenue of $81.1 million recorded in the 2010 second quarter. There were 64 billable days in both the 2011 and 2010 second quarters. Revenue from the Companys North American operations totaled $81.0 million in the 2011
second quarter, an increase of 21.4% when compared with revenue in the 2010 second quarter of $66.7 million. Revenue from the Companys European operations in the 2011 second quarter totaled $17.3 million, an increase of 20.3% when compared
with revenue in the 2010 second quarter of $14.4 million. The European revenue represented 17.6% and 17.8% of 2011 and 2010 second quarter consolidated revenue, respectively. The Companys revenue included reimbursable expenses billed to
customers, which totaled $3.1 million and $2.2 million in the 2011 and 2010 second quarters, respectively.
In the first two
quarters of 2011, the Company recorded revenue of $194.2 million, an increase of 21.7% compared with revenue of $159.6 million recorded in the first two quarters of 2010. There were 129 billable days in the first two quarters of both 2011 and 2010.
Revenue from the Companys North American operations totaled $159.8 million in the first two quarters of 2011, an increase of 24.2% when compared with revenue in the first two quarters of 2010 of $128.6 million. Revenue from the Companys
European operations in the first two quarters of 2011 totaled $34.4 million, an increase of 11.1% when compared with revenue in the first two quarters of 2010 of $31.0 million. The European revenue represented 17.7% and 19.4% of 2011 and 2010
year-to-date consolidated revenue, respectively. The Companys revenue included reimbursable expenses billed to customers, which totaled $6.3 million and $4.1 million in the 2011 and 2010 year-to-date periods, respectively.
The revenue increase in the 2011 second quarter and first two quarters as compared with the corresponding 2010 periods is due to strong
demand for both the Companys IT solutions and IT staffing services. IT solutions revenue increased 36.7% and 35.3% in the 2011 second quarter and year-to-date period, respectively, as compared with the corresponding 2010 periods. The IT
solutions revenue increase was primarily driven by an increase in the electronic medical records work from providers in the Companys healthcare vertical market. IT staffing revenue increased 13.7% and 15.2% in the 2011 second quarter and
year-to-date period, respectively, as compared with the corresponding 2010 periods. The Companys headcount was approximately 3,700 employees at July 1, 2011, which was an increase of approximately 300 employees from 3,400 at
December 31, 2010, and an increase of approximately 500 employees from 3,200 at July 2, 2010.
The increase in
revenue in the Companys European operations in both the 2011 second quarter and first two quarters as compared with the corresponding 2010 periods was partially due to modest strength in the Companys European IT staffing business. This
revenue increase was supported by the strength of the currencies of Belgium, Luxembourg, and the United Kingdom, the countries in which the Companys European subsidiaries operate. In Belgium and Luxembourg, the functional currency is the Euro,
while in the United Kingdom the functional currency is the British Pound. In the 2011 second quarter as compared with the 2010 second quarter, the average value of the Euro increased 13.0% while the average value of the British Pound increased 9.4%.
A significant portion of the Companys revenue from its European operations is generated in Belgium and Luxembourg. If there had been no change in these exchange rates from the 2010 second quarter to the 2011 second quarter, total European
revenue would have been approximately $1.9 million lower, or $15.4 million as compared with the $17.3 million reported. In the first two quarters of 2011 as compared with the first two quarters of 2010, the average value of the Euro increased 5.6%
while the average value of the British Pound increased 5.9%. If there had been no change in the exchange rates from the first two quarters of 2010 to the corresponding 2011 period, total European revenue would have been approximately $1.8 million
lower, or $32.6 million as compared with the $34.4 million reported.
17
In the 2011 second quarter, IBM was the Companys largest customer, accounting for
$29.5 million or 30.0% of consolidated revenue as compared with $25.6 million or 31.5% of revenue in the comparable 2010 period. In the first two quarters of 2011, IBM accounted for $58.1 million or 29.9% of consolidated revenue, compared with $48.2
million or 30.2% in the comparable 2010 period. During the 2011 second quarter, the Companys current National Technical Services (NTS Agreement) contract with IBM was extended for three months from June 30, 2011 to
September 28, 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 September 2011, and that the Company will continue to derive a significant portion of its revenue from IBM throughout the remainder of 2011 and in future years. However, a significant decline in 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 July 1, 2011 and July 2, 2010 totaled $15.0 million and $13.5 million, respectively. No other customer
accounted for more than 10% of the Companys revenue in either the second quarter or year to date periods of 2011 or 2010.
Direct costs, defined as the costs for billable staff including billable out-of-pocket expenses, were 78.9% of revenue in the 2011 second
quarter as compared with 78.1% of revenue in the 2010 second quarter, and 79.1% of revenue in the 2011 first two quarters as compared with 78.2% in the 2010 corresponding period. The increase in direct costs as a percentage of revenue in the 2011
second quarter and first two quarters when compared with the corresponding 2010 periods is primarily due to an increase in employee benefit costs, mainly unemployment insurance. Additionally, the increase in direct costs in 2011 is due to a
significant portion of the increase in the Companys IT staffing business being from the Companys lowest margin IT staffing business, which has significantly higher direct costs than the Companys IT solutions business.
Selling, general and administrative (SG&A) expenses were 16.3% of revenue in the 2011 second quarter and 17.6% in the
2010 corresponding period, and 16.1% in the first two quarters of 2011 as compared with 17.7% in the corresponding 2010 period. The SG&A decrease as a percentage of revenue in both the 2011 second quarter and first two quarters as compared with
the corresponding 2010 periods is primarily due to disciplined cost management and the economies of scale associated with revenue growth.
Operating income was 4.8% of revenue in the 2011 second quarter as compared with 4.3% in the 2010 second quarter, and 4.8% in the first two quarters of 2011 as compared with 4.1% in the corresponding 2010
period. Operating income from North American operations was $7.7 million and $5.8 million in the 2011 and 2010 first two quarters, respectively, while European operations recorded operating income of $1.6 million and $0.8 million, respectively, in
the corresponding 2011 and 2010 periods.
Net income for the 2011 second quarter was 2.9% of revenue or $0.17 per diluted
share, compared with net income of 2.3% of revenue or $0.12 per diluted share, in the 2010 second quarter. Net income for the first two quarters of 2011 was 2.9% of revenue or $0.34 per diluted share, compared with net income of 2.3% of revenue or
$0.23 per diluted share, in the comparable 2010 period. Diluted earnings per share were calculated using 16.9 million and 16.1 million weighted-average equivalent shares outstanding for the quarters ended July 1, 2011 and July 2,
2010, respectively. Diluted earnings per share were calculated using 16.8 million and 16.1 million weighted-average equivalent shares outstanding for the year-to-date periods ended July 1, 2011 and July 2, 2010, 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
240,000 shares into treasury stock pursuant to the Companys share repurchase program for the twelve month period ended July 1, 2011.
18
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 July 1, 2011, the Company had a total of $7.3 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 July 1, 2011, the Company had deferred tax assets recorded resulting from net operating losses totaling approximately
$3.0 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 July 1, 2011, the Company has offset substantially all of these deferred tax assets with a valuation allowance totaling $2.9
million, resulting in a net deferred tax asset from net operating loss carryforwards of approximately $0.1 million.
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 effective tax rate (ETR). A 1% change in the ETR in the 2011 second quarter would have increased or decreased net income in the quarter by approximately $46,000.
Goodwill Valuation
The Company has a goodwill balance of $35.7 million recorded as of July 1, 2011. As of the fiscal
month-end October 2010, 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 carrying value by approximately 31%. Additionally, no facts or circumstances have arisen since October 2010 that have led management to believe the goodwill may be impaired.
19
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
Operating activities used cash of $4.3 million in the first two quarters of 2011 (2011 period), and provided $1.6 million of cash in the first two quarters of 2010 (2010 period).
In the 2011 period, net income totaled $5.7 million, while other non-cash adjustments, primarily consisting of depreciation and amortization expense, equity-based compensation expense, deferred income taxes, and deferred compensation totaled a net
of $1.4 million. In the 2010 period, net income was $3.7 million, while the corresponding non-cash adjustments netted to $1.3 million. Accounts receivable balances increased $7.9 million in the 2011 period, and increased $7.5 million in the 2010
period. The increase in the accounts receivable balance in the 2011 period resulted from the 22% increase in revenue year-over-year and an increase in days sales outstanding (DSO) to 62 days at July 1, 2011, as compared with 57 days
at July 2, 2010. The increase in accounts receivable in the 2010 period resulted from the 13.1% increase in revenue year-over-year.
Other assets increased $1.4 million in the 2011 period due to the timing of payment of insurance premiums prior to quarter-end in the 2011 period, and subsequent to quarter-end in the 2010 period. Accrued
compensation increased $0.6 million in the 2011 period due to an increase in employee headcount of approximately 300, or 9% in the 2011 period. Income taxes receivable/payable decreased $1.5 million in the 2011 period due to the timing of estimated
tax payments and excess tax benefits received from equity-based compensation transactions.
Investing activities used $1.3
million in the 2011 period as compared with $1.1 million in the 2010 period. The cash used in the 2011 period primarily represented the additions to property, equipment and capitalized software of $1.2 million and net contributions to the Computer
Task Group, Incorporated Non-qualified Key Employee Deferred Compensation Plan (non-qualified Plan) of $0.1 million. Additions to property and equipment in the 2010 period totaled approximately $1.1 million. The Company has no
significant commitments for the purchase of property or equipment at July 1, 2011.
Financing activities provided $3.1
million of cash in the 2011 period as compared with a usage of $1.3 million in the 2010 period. The cash provided in the 2011 period primarily related to exercises of stock options under the Companys equity-based compensation plans. The
Company did not have any amount outstanding under its revolving credit line, the term of which extends to April 2014, at July 1, 2011 or July 2, 2010. 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 2011 period, the average outstanding daily balance under the Companys revolving line of credit was approximately $0.5 million, while the average outstanding
balance under this line of credit was $2.2 million in the 2010 period.
20
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 July 1, 2011 include a leverage ratio which must be no more than 2.75 to 1, a calculation of minimum tangible net worth which
must be no less than $39.2 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 July 1, 2011 as its leverage ratio was 0.0,
tangible net worth was $49.8 million, and 2011 year-to-date expenditures for property, equipment and capitalized software were $1.2 million. The Company was also in compliance with its required covenants at July 2, 2010. 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 2011 and in future years.
During the 2011 period, the Company used $1.2 million to purchase approximately 94,000 shares of its stock for treasury. At
July 1, 2011, a total of approximately 1.1 million shares are authorized for future purchases. During the 2010 period, the Company used $1.7 million to purchase approximately 232,000 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 July 1, 2011 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 2011 or 2010 second quarters or year-to-date periods.
Contractual Obligations
The Company did not enter into any significant
contractual obligations during year-to-date period ended July 1, 2011.
21
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 2014 and allows the Company to borrow up to $35.0
million. At both July 1, 2011 and July 2, 2010, there were no amounts outstanding under the credit agreement. At both July 1, 2011 and July 2, 2010, there were $0.4 million of letters of credit issued under the credit agreement.
The largest amounts outstanding under the Companys credit agreements during the quarters ended July 1, 2011 and
July 2, 2010 were $5.8 million and $7.8 million, respectively. Average bank borrowings outstanding for such quarters were $0.7 million and $2.4 million, respectively. Accordingly, a one percent increase or decrease in the weighted-average
interest rate in 2011 would increase or decrease annual interest expense by $7,000.
During the 2011 second quarter, revenue
was affected by the strength of the currencies of Belgium, Luxembourg, and the United Kingdom, the countries in which the Companys European subsidiaries operate. In Belgium and Luxembourg, the functional currency is the Euro, while in the
United Kingdom the functional currency is the British Pound. In the 2011 second quarter as compared with the 2010 second quarter, the average value of the Euro increased 13.0% while the average value of the British Pound increased 9.4%. A
significant portion of the Companys revenue from its European operations is generated in Belgium and Luxembourg. If there had been no change in these exchange rates from the 2010 second quarter to the 2011 second quarter, total European
revenue would have been approximately $1.9 million lower, or $15.4 million as compared with the $17.3 million reported. In the first two quarters of 2011 as compared with the first two quarters of 2010, the average value of the Euro increased 5.6%
while the average value of the British Pound increased 5.9%. If there had been no change in the exchange rates from the first two quarters of 2010 to the corresponding 2011 period, total European revenue would have been approximately $1.8 million
lower, or $32.6 million as compared with the $34.4 million reported. Operating income in Europe would have been approximately $0.1 million lower in the 2011 second quarter, and approximately $0.2 million lower in the first two quarters of 2011
as compared with the corresponding 2010 periods due to the change in exchange rates year-over-year.
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.
22
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
July 1, 2011, that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
23
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, 2010.
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*
|
|
April 2 April 30
|
|
|
18,800
|
|
|
$
|
13.16
|
|
|
|
18,800
|
|
|
|
1,099,488
|
|
May 1 May 31
|
|
|
25,000
|
|
|
$
|
13.23
|
|
|
|
25,000
|
|
|
|
1,074,488
|
|
June 1 July 1
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,074,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,800
|
|
|
$
|
13.20
|
|
|
|
43,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The Companys share repurchase program (originally announced on May 12, 2005) does not have an expiration date, nor was it terminated during the 2011 second
quarter. During February 2011, the Companys Board of Directors authorized the addition of one million shares to the repurchase program. The information in this table does not include shares tendered to the Company either to satisfy the
exercise cost for the cashless exercise of employee stock options, or tax withholding obligations associated with employee equity awards.
|
**
|
Excludes broker commissions
|
Item 3.
|
Default Upon Senior Securities
|
None
Item 4.
|
Removed and Reserved
|
Item 5.
|
Other Information
|
None
24
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
Page
|
|
|
|
|
31. (a)
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
27
|
|
|
|
|
31. (b)
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
28
|
|
|
|
|
32.
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
29
|
|
|
|
|
101.
|
|
Interactive data files pursuant to Rule 405 of Regulation S-T: the Condensed Consolidated Statements of Income for the three and six-month periods Ending July 1, 2011 and July 2,
2010, the Condensed Consolidated Balance Sheets as of July 1, 2011 and December 31, 2010, the Condensed Consolidated Statements of Cash Flows for the six-month periods ended July 1, 2011 and July 2, 2010, and the Notes to the Condensed Consolidated
Financial Statements
|
|
|
|
|
* * * * * * *
25
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: August 2, 2011
26
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