| 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 and the unpredictability and severity of a civil unrest or outbreak of war or hostilities. Such estimates primarily relate to the recognition of revenue, leased assets and liabilities, the purchase accounting for acquisitions and the valuation of goodwill, the valuation allowance for deferred tax assets, actuarial assumptions including discount rates and expected return on assets, as applicable, for the Company’s defined benefit plans, the valuation of stock options and restricted stock for recording equity-based compensation expense, the allowance for doubtful accounts receivable, investment valuation, legal matters, other contingencies, and estimates of progress toward completion and direct profit or loss on contracts, as applicable. Management believes that the information and disclosures provided herein are adequate to present fairly the condensed consolidated financial position, results of operations, comprehensive income, cash flows, and shareholders’ equity of the Company. There were no subsequent events as of the date of this filing from the end of the fiscal first quarter on April 1, 2022 that require recognition or disclosure in these unaudited interim condensed consolidated financial statements. The Company operates in three segments within its business, North America IT Solutions and Services, Europe IT Solutions and Services, and Non-Strategic Technology Services. The Company provides information and technology-related services to its clients. CTG provides these services to all of the markets that it serves. The services provided typically encompass the IT business solution life cycle, including phases for planning, developing, implementing, managing, and ultimately maintaining the IT solution. These services ensure that our clients utilize the right information technology to meet their business needs, maximize their IT systems’ value, and operate efficiently and effectively. A typical client is an organization with large, complex technology, information, and data processing requirements . The segment revenue for the quarters ended April 1, 2022 and April 2, 2021 was as follows:
For the Quarter Ended
Year-over-Year
(amounts in thousands)
April 1, 2022
April 2, 2021
Change
North America IT Solutions and Services
22.9
%
$
20,435
19.0
%
$
18,454
10.7
%
Europe IT Solutions and Services
47.5
%
42,478
47.4
%
46,007
(7.7
)%
Non-Strategic Technology Services
29.6
%
26,504
33.6
%
32,668
(18.9
)%
Total
100.0
%
$
89,417
100.0
%
$
97,129
(7.9
)% The Company focuses a significant portion of its services through five vertical market focus areas: technology service providers, healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), financial services, manufacturing, and energy. The Company focuses on these five vertical areas as it believes that these areas are either higher growth markets than the general IT services market and the general economy, or are areas that provide greater potential for the Company’s growth due to the size of the vertical market. The remainder of CTG’s revenue is derived from general markets. The Company’s revenue by vertical market as a percentage of total revenue for the quarters ended April 1, 2022 and April 2, 2021 was as follows:
For the Quarter Ended
April 1, 2022
April 2, 2021
Technology service providers
23.8
%
30.8
%
Healthcare
17.4
%
15.5
%
Financial services
16.5
%
17.0
%
Manufacturing
13.9
%
12.4
%
Energy
5.3
%
5.5
%
General markets
23.1
%
18.8
%
Total
100.0
%
100.0
% Revenue Recognition The Company recognizes revenue when control of the promised good or service is transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with progress billing schedules (i.e. progress billing), primarily monthly, revenue is recognized as services are rendered to the client. Revenue for fixed-price contracts is recognized over time using an input-based approach. Revenue recognition over time best portrays the Company’s performance in transferring control of the goods or services to the client. On most fixed price contracts, revenue recognition is supported through contractual clauses that require the client to pay for work performed to date, including cost plus a reasonable profit margin, for goods or services that have no alternative use to the Company. On certain contracts, revenue recognition is supported through contractual clauses that indicate the client controls the asset, or work in process, as the Company creates or enhances the asset. On a given project, actual salary and indirect labor costs incurred are measured and compared with the total estimate of costs of such items at the completion of the project. Revenue is recognized based upon the percentage-of-completion calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects that include significant amounts of material or other non-labor related costs that could distort the percent complete within a percentage-of-completion calculation. The Company’s estimate of the total labor costs it expects to incur over the term of the contract is based on the nature of the project and our experience on similar projects, and includes management judgments and estimates that affect the amount of revenue recognized on fixed-price contracts in any accounting period. Losses on fixed-price projects are recorded when identified. 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 1, 2022 and April 2, 2021 was as follows:
For the Quarter Ended
April 1, 2022
April 2, 2021
Time-and-material
77.2
%
79.1
%
Progress billing
18.9
%
18.4
%
Percentage-of-completion
3.9
%
2.5
%
Total
100.0
%
100.0
% The Company recorded revenue in the quarters ended April 1, 2022 and April 2, 2021 as follows:
For the Quarter Ended:
April 1, 2022
April 2, 2021
Year-over-Year Change
(amounts in thousands)
North America
51.7
%
$
46,262
51.0
%
$
49,504
(6.5
)%
Europe
48.3
%
43,155
49.0
%
47,625
(9.4
)%
Total
100.0
%
$
89,417
100.0
%
$
97,129
(7.9
)%
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 and progress billing contracts, the timing of the Company’s satisfaction of its performance obligations is consistent with the timing of payment. 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 right to invoice practical expedient that allows the Company to recognize revenue in the amount for which it has the right to invoice for time-and-material and progress billing contracts. Bill 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 our contracts with clients. Advance billings represent contract liabilities for cash payments received in advance of our performance. Unbilled receivables are reported within “accounts receivable” on the consolidated balance sheets. Accounts receivable and contract liability balances fluctuate based on the timing of the client’s billing schedule and the Company’s period-end date. There are no significant costs to obtain or fulfill contracts clients. Transaction Price Allocated to Remaining Performance Obligations As of April 1, 2022, the aggregate transaction price allocated to unsatisfied or partially unsatisfied performance obligations for fixed-price and all managed-support contracts was approximately $14.3 million and $55.2 million, respectively. Approximately $48.0 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2022, and approximately $21.5 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2023 and beyond 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 1, 2022 and December 31, 2021, the carrying amounts of the Company’s cash of $38.7 million and $35.6 million, respectively, approximated fair value. As described in Note 3 of the condensed consolidated financial statements, the Company acquired 100% of the equity of StarDust in the 2020 first quarter. Level 3 inputs were used to estimate the fair values of the assets acquired and liabilities assumed. The valuation techniques used to assign fair values to intangible assets included the relief-from-royalty and excess earnings methods. 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. As of April 1, 2022, the fair value of the contingent consideration liability was determined to be zero as the consolidated direct profit targets were not met by StarDust for the fiscal year 2021. 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 78 years old. Those policies have generated cash surrender value and the Company has taken loans against the policies. At April 1, 2022, the insurance policies that have been borrowed against have a gross cash surrender value of $28.5 million, outstanding loans and interest totaling $25.6 million, and a net cash surrender value of $2.9 million. At December 31, 2021, these insurance policies had a gross cash surrender value of $28.3 million, outstanding loans and interest totaling $25.2 million, and a net cash surrender value of $3.1 million. The net cash surrender values are included on the condensed consolidated balance sheets in “Cash surrender value of life insurance, net” under non-current assets. At both April 1, 2022 and December 31, 2021, the total death benefit for the remaining policies was approximately $36.0 million. Currently, upon the death of all of the remaining plan participants, the Company would expect to receive approximately $10.1 million after the payment of obligations, and, under current tax regulations, record a non-taxable gain of approximately $7.1 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. The Company does not fund its bank accounts for the checks it has written until the checks are presented to the bank for payment. In the event the Company has no available cash at the bank for which it writes its checks, 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 1, 2022 and December 31, 2021, 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 As part of our working capital management, 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 $4.5 million and $15.5 million in the quarters ended April 1, 2022 and April 2, 2021, 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 1, 2022 and April 2, 2021, respectively. Property, Equipment and Capitalized Software Costs Property, equipment and capitalized software at April 1, 2022 and December 31, 2021 were recorded as follows:
(amounts in thousands)
April 1, 2022
December 31, 2021
Property, equipment and capitalized software
$
14,431
$
15,628
Accumulated depreciation and amortization
(9,654
)
(10,386
)
Property, equipment and capitalized software, net
$
4,777
$
5,242
The Company capitalizes software projects developed for commercial use. The change in the Company’s capitalized software cost balance during the quarters ended April 1, 2022 and April 2, 2021 was as follows:
For the Quarter Ended
(amounts in thousands)
April 1, 2022
April 2, 2021
Capitalized software, beginning balance
$
1,607
$
2,397
Foreign currency translation
(34
)
26
Capitalized software
$
1,573
$
2,423
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 1, 2022 and April 2, 2021 are as follows:
For the Quarter Ended
(amounts in thousands)
April 1, 2022
April 2, 2021
Accumulated amortization, beginning balance
$
978
$
1,280
Amortization expense
72
135
Accumulated amortization
$
1,050
$
1,415
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 $3.1 million at both April 1, 2022 and December 31, 2021, and have expiration dates ranging from April 2022 through October 2034. Goodwill The goodwill recorded on the Company's condensed consolidated balance sheet at April 1, 2022 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 1, 2022 was as follows:
(amounts in thousands)
Balance at December 31, 2021
$
19,676
Foreign currency translation
(502
)
Balance at April 1, 2022
$
19,174
The Company’s goodwill at April 1, 2022 totaled $19.2 million, including $17.8 million in the Europe IT Solutions and Services segment and $1.4 million in the North America IT Solutions and Services segment. At December 31, 2021, the Company’s goodwill balance totaled $19.7 million, which included $18.3 million in the Company’s Europe IT Solutions and Services segment and $1.4 million in the North America IT Solutions and Services segment. Acquired Intangible Assets Acquired intangible assets at April 1, 2022 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
$
(1,426
)
$
(106
)
$
—
Technology
10 years
591
(122
)
(5
)
464
Customer relationships
7-13 years
10,496
(3,276
)
(847
)
6,373
Total
$
12,619
$
(4,824
)
$
(958
)
$
6,837
Acquired intangible assets at December 31, 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
$
(1,454
)
$
(70
)
$
8
Technology
10 years
591
(110
)
10
491
Customer relationships
7-13 years
10,496
(3,121
)
(594
)
6,781
Total
$
12,619
$
(4,685
)
$
(654
)
$
7,280
Estimated amortization expense for the remainder of 2022, the five succeeding years, and thereafter is as follows:
Year
Annual Amortization
(amounts in thousands)
2022 (remaining)
$
749
2023
999
2024
999
2025
999
2026
999
2027
584
Thereafter
1,508
Total
$
6,837
Recently Issued Accounting Standards 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. 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. Early adoption is permitted. The Company adopted this new standard on January 1, 2021 on a prospective basis and the adoption did not have a material impact on the Company’s consolidated financial statements. |
