| Summary of Significant Accounting Policies | 2.
Basis of Presentation and Consolidation These condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations. There are no unconsolidated entities, or off-balance sheet arrangements other than certain guarantees supporting office leases and the performance under government contracts in the Company's European operations. All inter-company accounts have been eliminated. The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Company's management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes, which could be impacted by existing market conditions and factors, including the COVID-19 pandemic. Such estimates primarily relate to the recognition of revenue, leased assets and liabilities, the purchase accounting for acquisitions and the valuation of goodwill, the valuation allowance for deferred tax assets, actuarial assumptions including discount rates and expected return on assets, as applicable, for the Company’s defined benefit plans, the valuation of stock options and restricted stock for recording equity-based compensation expense, the allowance for doubtful accounts receivable, investment valuation, legal matters, other contingencies, and estimates of progress toward completion and direct profit or loss on contracts, as applicable. Management believes that the information and disclosures provided herein are adequate to present fairly the condensed consolidated financial position, results of operations, comprehensive income, cash flows, and shareholders’ equity of the Company. There were no subsequent events as of the date of this filing from the end of the fiscal first quarter on April 2, 2021 that require recognition or disclosure in these unaudited interim condensed consolidated financial statements. The Company operates in one industry segment, providing information and technology-related services to its clients. These services include information and technology-related solutions, including staffing as a solution. CTG provides these services to all of the markets that it serves. The services provided typically encompass the IT business solution life cycle, including phases for planning, developing, implementing, managing, and ultimately maintaining the IT solution. These services ensure that our clients utilize the right information technology to meet their business needs, maximize their IT systems’ value, and operate efficiently and effectively. A typical client is an organization with large, complex technology, information, and data requirements. IT solutions and IT and other staffing revenue as a percentage of total revenue for the quarters ended April 2, 2021 and March 27, 2020 was as follows:
For the Quarter Ended
April 2, 2021
March 27, 2020
IT solutions
44.3
%
39.5
%
IT and other staffing
55.7
%
60.5
%
Total
100.0
%
100.0
% The Company promotes a significant portion of its services through five vertical market focus areas: technology service providers, financial services, healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), manufacturing, and energy. The Company focuses on these five vertical areas as it believes that these areas either are higher growth markets than the general IT services market and the general economy, or are areas that provide greater potential for the Company’s growth due to the size of the vertical market. The remainder of CTG’s revenue is derived from general markets. The Company’s revenue by vertical market as a percentage of total revenue for the quarters ended April 2, 2021 and March 27, 2020 was as follows:
For the Quarter Ended
April 2, 2021
March 27, 2020
Technology service providers
30.8
%
35.3
%
Financial services
17.0
%
14.5
%
Healthcare
15.5
%
13.6
%
Manufacturing
12.4
%
15.2
%
Energy
5.5
%
6.4
%
General markets
18.8
%
15.0
%
Total
100.0
%
100.0
% Revenue Recognition The Company recognizes revenue when control of the promised good or service is transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with progress billing schedules (i.e. progress billing), primarily monthly, revenue is recognized as services are rendered to the client. Revenue for fixed-price contracts is recognized over time using an input-based approach. Revenue recognition over time best portrays the Company’s performance in transferring control of the goods or services to the client. On most fixed price contracts, revenue recognition is supported through contractual clauses that require the client to pay for work performed to date, including cost plus a reasonable profit margin, for goods or services that have no alternative use to the Company. On certain contracts, revenue recognition is supported through contractual clauses that indicate the client controls the asset, or work in process, as the Company creates or enhances the asset. On a given project, actual salary and indirect labor costs incurred are measured and compared with the total estimate of costs of such items at the completion of the project. Revenue is recognized based upon the percentage-of-completion calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects that include significant amounts of material or other non-labor related costs that could distort the percent complete within a percentage-of-completion calculation. The Company’s estimate of the total labor costs it expects to incur over the term of the contract is based on the nature of the project and our experience on similar projects, and includes management judgments and estimates that affect the amount of revenue recognized on fixed-price contracts in any accounting period. Losses on fixed-price projects are recorded when identified. The Company’s revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods as a percentage of conso lidate d r evenue for the quarter s ended April 2, 2021 and March 27, 2020 was as follows:
For the Quarter Ended
April 2, 2021
March 27, 2020
Time-and-material
79.1
%
82.4
%
Progress billing
18.4
%
14.0
%
Percentage-of-completion
2.5
%
3.6
%
Total
100.0
%
100.0
% The Company recorded revenue in the quarters ended April 2, 2021 and March 27, 2020 as follows:
For the Quarter Ended:
April 2, 2021
March 27, 2020
Year-over-Year Change
(amounts in thousands)
North America
51.0
%
$
49,504
57.9
%
$
50,307
(1.6
)%
Europe
49.0
%
47,625
42.1
%
36,642
30.0
%
Total
100.0
%
$
97,129
100.0
%
$
86,949
11.7
%
Significant Judgments With the exception of cost estimates on certain fixed-price projects, there are no other significant judgments used to determine the timing of the satisfaction of performance obligations or determining the transaction price and amounts allocated to performance obligations. The Company allocates the transaction price based on standalone selling prices for contracts with clients that include more than one performance obligation. We determine standalone selling price based on the expected cost of the good or service plus margin approach. Certain clients may qualify for discounts and rebates, which we account for as variable consideration. We estimate variable consideration and reduce revenue recognized based on the amount we expect to provide to clients. Contract Balances For time-and-material contracts and contracts with periodic billing schedules, the timing of the Company’s satisfaction of its performance obligations is consistent with the timing of billing. For these contracts, the Company has the right to payment in the amount that corresponds directly with the value of the Company’s performance to date. The Company uses the practical expedient that allows it to recognize revenue in the amount for which it has the right to invoice for time-and-material contracts and contracts with periodic billing schedules. Billing schedules for fixed-price contracts are generally consistent with the Company’s performance in transferring control of the goods or services to the client. There are no significant financing components in contracts with clients. The Company records advanced billings that represent contract liabilities for cash payments received in advance of performance on the condensed consolidated balance sheet. Unbilled receivables are reported within “accounts receivable” on the condensed consolidated balance sheet. Accounts receivable and advanced billing balances fluctuate based on the timing of the client’s billing schedule and the Company’s month-end date. There are no significant costs to obtain or fulfill contracts with clients. Transaction Price Allocated to Remaining Performance Obligations As of April 2, 2021, the aggregate transaction price allocated to unsatisfied or partially unsatisfied performance obligations for fixed-price and all managed-support contracts was approximately $9.2 million and $53.7 million, respectively. Approximately $38.9 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2021, and approximately $24.0 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2022 and beyond. The Company uses the right to invoice practical expedient. Therefore, no disclosure is required for unsatisfied performance obligations for contracts in which we recognize revenue at the amount to which we have the right to invoice for services performed. Taxes Collected from Clients The Company records taxes collected from its clients for remittance to governmental authorities, primarily in its international locations, on a net basis in the condensed consolidated financial statements. Fair Value Fair value is defined as the exchange price that would be received for an asset or paid for a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants. The Company utilizes a fair value hierarchy for its assets and liabilities, as applicable, based upon three levels of input, which are: Level 1—quoted prices in active markets for identical assets or liabilities (observable) Level 2—inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable or can be supported by observable market data for essentially the full term of the asset or liability (observable) Level 3—unobservable inputs that are supported by little or no market activity, but are significant to determining the fair value of the asset or liability (unobservable) At April 2, 2021 and December 31, 2020, the carrying amounts of the Company’s cash of $33.5 million and $32.9 million, respectively, approximated fair value. As described in Note 3 of the condensed consolidated financial statements, the Company acquired 100% The Company has recorded a contingent consideration liability related to the earn-out provision of which a portion will be payable in each period subject to the achievement by StarDust of consolidated direct profit targets for fiscal 2020 and 2021. There is no payout if the achievements are below the target threshold. The fair value of this contingent consideration liability is determined using level 3 inputs. The fair value assigned to the contingent consideration liability is determined using the real options method, which requires inputs such as consolidated direct profit forecasts, discount rate, and other market variables to assess the probability of StarDust achieving their revenue and EBIT targets. The Company expects to make the payment for Stardust for 2020 in the second quarter of 2021. No earn-out was earned or recorded for Tech-IT for 2020. Life Insurance Policies The Company has purchased life insurance on the lives of a number of former employees who are plan participants in the non-qualified defined benefit Executive Supplemental Benefit Plan. In total, there are policies currently on 16 individuals, whose average age is 77 years old. Those policies have generated cash surrender value and the Company has taken loans against the policies. At April 2, 2021, these insurance policies have a gross cash surrender value of $27.3 million, outstanding loans and interest totaling $24.7 million, and a net cash surrender value of $2.6 million. At December 31, 2020, these insurance policies had a gross cash surrender value of $27.1 million, outstanding loans and interest totaling $24.4 million, and a net cash surrender value of $2.7 million. The net cash surrender values are included on the condensed consolidated balance sheet in “Cash surrender value of life insurance” under non-current assets. At both April 2, 2021 and December 31, 2020, the total death benefit for the remaining policies was approximately $35.0 million. Currently, upon the death of all of the remaining plan participants, the Company would expect to receive approximately $10.0 million after the payment of obligations, and, under current tax regulations, record a non-taxable gain of approximately $7.4 million. Cash and Cash Equivalents, and Cash Overdrafts For purposes of the statement of cash flows, cash and cash equivalents are defined as cash on hand, demand deposits, and short-term, highly liquid investments with a maturity of three months or less. As the Company does not fund its bank accounts for the checks it has written until the checks are presented to the bank for payment, the "change in cash overdraft, net" line item as presented on the condensed consolidated statement of cash flows represents the increase or decrease in outstanding checks for a given period. The cash in the Company’s U.S. banks is insured by the Federal Deposit Insurance Corporation up to the insurable limit of $ 250,000 . As of April 2, 2021 and December 31, 2020 , the Company has multiple accounts that carry balances in excess of this insurable limit. The Company’s cash in its foreign bank accounts is not insured . Accounts Receivable Factoring The Company entered into a factoring agreement during the 2020 first quarter to sell certain trade accounts receivables associated with its largest client on a non-recourse basis to a third-party financial institution. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the condensed consolidated statements of cash flows. Total trade accounts receivable sold under the factoring agreement was approximately $15.5 million and $11.9 million during the quarters ended April 2, 2021 and March 27, 2020, respectively. Fees for the factoring arrangement were recorded in cost of services and were less than $0.1 million in each of the quarters ended April 2, 2021 and March 27, 2020. Property, Equipment and Capitalized Software Costs Property, equipment and capitalized software at April 2, 2021 and December 31, 2020 are recorded as follows:
(amounts in thousands)
April 2, 2021
December 31, 2020
Property, equipment and capitalized software
$
15,192
$
14,543
Accumulated depreciation and amortization
(9,393
)
(9,028
)
Property, equipment and capitalized software, net
$
5,799
$
5,515
The Company capitalizes software projects developed for commercial use. The Company recorded capitalized software costs during the quarters ended April 2, 2021 and March 27, 2020 as follows:
For the Quarter Ended
(amounts in thousands)
April 2, 2021
March 27, 2020
Capitalized software, beginning balance
$
2,397
$
2,147
Additions
—
291
Foreign currency exchange
26
—
Capitalized software
$
2,423
$
2,438
Capitalized software amortization periods range from three to five years, and are evaluated periodically for propriety. Amortization expense and accumulated amortization for these projects for the quarters ended April 2, 2021 and March 27, 2020 are as follows:
For the Quarter Ended
(amounts in thousands)
April 2, 2021
March 27, 2020
Accumulated amortization, beginning balance
$
1,280
$
866
Amortization expense
135
105
Accumulated amortization
$
1,415
$
971
Guarantees The Company has a number of guarantees in place in its European operations that support office leases and performance under government contracts. These guarantees totaled approximately $3.2 million at both April 2, 2021 and December 31, 2020, and generally have expiration dates ranging from April 2021 through October 2034. Goodwill The goodwill recorded on the Company's condensed consolidated balance sheet at April 2, 2021 relates to the acquisitions of Soft Company in 2018, Tech-IT in 2019, and StarDust in 2020. In accordance with current accounting guidance for “Intangibles - Goodwill and Other,” the Company performs goodwill impairment testing at least annually (in the Company’s fourth quarter), unless indicators of impairment exist in interim periods. T here were no impairment indicators noted in the quarters ended and . The changes in the carrying amount of goodwill for the quarter ended April 2, 2021 are as follows:
(amounts in thousands)
Balance at December 31, 2020
$
21,275
Foreign currency translation
(860
)
Balance at April 2, 2021
$
20,415
Acquired Intangible Assets Acquired intangible assets at April 2, 2021 consist of the following:
(amounts in thousands)
Estimated Economic Life
Gross Carrying Amount
Accumulated Amortization
Foreign Currency Translation
Net Carrying Amount
Trademarks
2 years
$
1,532
$
(1,469
)
$
(15
)
$
48
Technology
10 years
591
(68
)
33
556
Customer relationships
7-13 years
10,496
(2,487
)
(222
)
7,787
Total
$
12,619
$
(4,024
)
$
(204
)
$
8,391
Estimated amortization expense as of April 2, 2021 are as follows:
Year
Annual Amortization
(amounts in thousands)
2021 (remaining)
$
837
2022
1,072
2023
1,064
2024
1,064
2025
1,064
2026
1,064
Thereafter
2,226
Total
$
8,391
Recently Issued Accounting Standards In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)". The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures, and adding disclosure requirements identified as relevant. The new ASU is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The Company adopted this new standard retrospectively for the year ending December 31, 2020, and the adoption did not have a material impact on its condensed consolidated financial statements and associated disclosures. In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” Among other clarifications and simplifications related to income tax accounting, the new standard simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted this new standard for the quarter ended April 2, 2021, and the adoption did not have a material impact on its condensed consolidated financial statements and associated disclosures. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for accounting contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference the London Interbank Offering Rate (“LIBOR”) or another reference rate expected to be discontinued due to the reference rate reform. It is effective for all entities between March 12, 2020 and December 31, 2022. The Company does not expect a significant impact from the adoption of this standard as provisions have been made in our Credit and Security Agreement to use an alternate benchmark interest rate when the use of LIBOR is discontinued. |
