| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis of Presentation and Consolidation These condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations. There are no unconsolidated entities, or off-balance sheet arrangements other than certain guarantees supporting office leases and the performance under government contracts in the Company's European operations. All intercompany 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 among others lingering effects of the COVID-19 pandemic, current macroeconomic conditions such as inflation, 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 credit losses, 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 (loss), cash flows, and shareholders’ equity of the Company. Subsequent Event Subsequent to the end of the 2023 third quarter on September 29, 2023, one of the Company’s former executives covered by one of the Company's life insurance policies passed away. The Company expects to receive approximately $ 1.3 million in non-taxable death benefit proceeds in the 2023 fourth quarter. The Company has evaluated all subsequent events through the filing date of this Form 10-K with the SEC and there were no other subsequent events which required recognition, adjustment to or disclosure in the financial statements . Acquisition of CTG by Cegeka On August 9, 2023, the Company and the IT solutions provider Cegeka Groep nv (“Cegeka”), a company headquartered in Hasselt, Belgium, entered into a transaction for Cegeka to purchase all of the outstanding shares of CTG for $ 10.50 per share in cash, which represents an implied equity value for the Company of approximately $ 170 million. The closing of the transaction will be subject to customary conditions, including the expiration or termination of certain regulatory periods and the tender of shares representing at least two-thirds of CTG’s outstanding common stock in a tender offer, as required by the merger approval requirements under applicable New York law. The transaction is expected to close later in 2023. Upon the successful completion of the tender offer, Cegeka’s acquisition subsidiary will be merged into CTG, and any remaining shares of common stock of CTG will be cancelled and converted into the right to receive the same $ 10.50 per share in cash. After closing, CTG will become a privately held company and shares of CTG common stock will no longer be listed on any public market. Additional information related to the tender offer can be found within the Form 8-K filed by the Company on August 9, 2023, Cegeka's Tender Offer Statement on Schedule TO filed by Cegeka on August 23, 2023, the Company's Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company on August 23, 2023 and in future filings by the Company related to the tender offer. 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 the Company's 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 quarter and three quarters ended September 29, 2023 and September 30, 2022 was as follows:
For the Quarter Ended: Year-over-Year
(amounts in thousands) September 29, 2023 September 30, 2022 Change
North America IT Solutions and Services 35.4 % $ 25,217 27.1 % $ 20,340 24.0 %
Europe IT Solutions and Services 51.1 % 36,472 44.4 % 33,258 9.7 %
Non-Strategic Technology Services 13.5 % 9,602 28.5 % 21,404 ( 55.1 )%
Total 100.0 % $ 71,291 100.0 % $ 75,002 ( 4.9 )%
For the Three Quarters Ended: Year-over-Year
(amounts in thousands) September 29, 2023 September 30, 2022 Change
North America IT Solutions and Services 33.2 % $ 74,410 24.7 % $ 61,114 21.8 %
Europe IT Solutions and Services 51.3 % 114,958 45.7 % 112,896 1.8 %
Non-Strategic Technology Services 15.5 % 34,713 29.6 % 73,168 ( 52.6 )%
Total 100.0 % $ 224,081 100.0 % $ 247,178 ( 9.3 )% The Company focuses a significant portion of its services through five vertical market focus areas: healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), financial services, technology service providers, 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 quarter and three quarters ended September 29, 2023 and September 30, 2022 was as follows:
For the Quarter Ended For the Three Quarters Ended
September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022
Healthcare 23.8 % 19.1 % 21.8 % 18.0 %
Financial services 15.1 % 15.1 % 16.4 % 15.6 %
Technology service providers 14.3 % 22.4 % 15.2 % 23.5 %
Manufacturing 13.5 % 16.9 % 14.6 % 15.2 %
Energy 6.6 % 5.7 % 6.5 % 5.8 %
General markets 26.7 % 20.8 % 25.5 % 21.9 %
Total 100.0 % 100.0 % 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 the Company's 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 consolidated revenue for the quarter and three quarters ended September 29, 2023 and September 30, 2022 was as follows:
For the Quarter Ended For the Three Quarters Ended
September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022
Time-and-material 73.2 % 76.3 % 75.5 % 77.2 %
Progress billing 20.3 % 17.9 % 18.0 % 18.0 %
Percentage-of-completion 6.5 % 5.8 % 6.5 % 4.8 %
Total 100.0 % 100.0 % 100.0 % 100.0 % The Company recorded revenue in the quarter and three quarters ended September 29, 2023 and September 30, 2022 as follows:
For the Quarter Ended: September 29, 2023 September 30, 2022 Year-over-Year
(amounts in thousands)
North America 48.5 % $ 34,605 55.3 % $ 41,500 ( 16.6 )%
Europe 51.5 % 36,686 44.7 % 33,502 9.5 %
Total 100.0 % $ 71,291 100.0 % $ 75,002 ( 4.9 )%
For the Three Quarters Ended: September 29, 2023 September 30, 2022 Year-over-Year
(amounts in thousands)
North America 48.4 % $ 108,434 53.7 % $ 132,804 ( 18.4 )%
Europe 51.6 % 115,647 46.3 % 114,374 1.1 %
Total 100.0 % $ 224,081 100.0 % $ 247,178 ( 9.3 )% 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 the Company accounts 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 the Company's contracts with clients. Advance billings represent contract liabilities for cash payments received in advance of the Company's 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 with clients. Transaction Price Allocated to Remaining Performance Obligations As of September 29, 2023 , the aggregate transaction price allocated to unsatisfied or partially unsatisfied performance obligations for fixed-price contracts was approximately $ 10.0 million. Approximately $ 4.7 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2023 , and approximately $ 5.3 million of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations is expected to be earned in 2024 and beyond . The Company uses the right to invoice practical expedient for time-and-material and progress billing contracts, therefore, no disclosure is required for unsatisfied performance obligations for contracts in which the Company recognized revenue at the amount to which it has 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 September 29, 2023 and December 31, 2022, the carrying amounts of the Company’s cash of $ 24.1 million and $ 25.1 million, respectively, approximated fair value. As described in Note 3 of the condensed consolidated financial statements, the Company acquired 100 % of the equity of Eleviant in the 2022 third 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 Eleviant of revenue and gross profit targets for fiscal 2022, 2023 and 2024. There is no payout if the achievements are below the target threshold. However, in subsequent years, if the preceding year’s targets were not met, an earn-out can be earned for both years if the combined total for gross profit or revenue for the two years exceeds the combined two-year targets. During the 2023 second quarter, the Company paid approximately $ 0.9 million related to the earn-out based on the achievement by Eleviant of the revenue and gross profit targets for fiscal 2022. The fair value of the contingent consideration as of September 29, 2023 was $ 3.1 million. 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 80 years old. Those policies have generated cash surrender value and the Company has taken loans against the policies. At September 29, 2023 , the insurance policies that have been borrowed against have a gross cash surrender value of $ 30.4 million, outstanding loans and interest totaling $ 26.6 million, and a net cash surrender value of $ 3.8 million. At December 31, 2022, these insurance policies had a gross cash surrender value of $ 29.5 million, outstanding loans and interest totaling $ 26.0 million, and a net cash surrender value of $ 3.5 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 September 29, 2023 and December 31, 2022, the total death benefit for the remaining policies was approximately $ 37.9 million and $ 37.0 million, respectively. Currently, upon the death of all of the remaining plan participants, the Company would expect to receive approximately $ 11.1 million after the payment of obligations, and, under current tax regulations, record a non-taxable gain of approximately $ 7.2 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 on the condensed consolidated statement of cash flows would be present, and represent 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 September 29, 2023 and December 31, 2022, 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 its working capital management, the Company has a factoring agreement 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. There were zero and $ 7.7 million trade accounts receivable sold under the factoring agreement during the quarters ended September 29, 2023 and September 30, 2022 , respectively. Total trade accounts receivable sold under the factoring agreement were approximately $ 12.4 million and $ 12.2 million in the year-to-date periods ended September 29, 2023 and September 30, 2022, respectively. Fees for the factoring arrangement were recorded in cost of services and were zero and $ 0.1 million in the quarter and year-to-date period ended September 29, 2023 , respectively, and were less than $ 0.1 million in both the quarter and year-to-date periods ended September 30, 2022 . Property, Equipment and Capitalized Software Costs Property, equipment and capitalized software at September 29, 2023 and December 31, 2022 were recorded as follows:
(amounts in thousands) September 29, 2023 December 31, 2022
Property, equipment and capitalized software $ 16,600 $ 15,086
Accumulated depreciation and amortization ( 10,555 ) ( 10,025 )
Property, equipment and capitalized software, net $ 6,045 $ 5,061 Depreciation expense for the Company totaled $ 0.6 million and $ 0.4 million in the quarters ended September 29, 2023 and September 30, 2022, respectively, and $ 1.5 million and $ 1.3 million in the year-to-date periods ended September 29, 2023, and September 30, 2022, respectively . The Company capitalizes software projects developed for commercial use. The change in the Company’s capitalized software cost balance during the quarter and three quarters ended September 29, 2023 and September 30, 2022 was as follows:
For the Quarter Ended For the Three Quarters Ended
(amounts in thousands) September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022
Capitalized software, beginning balance $ 2,248 $ 1,484 $ 1,484 $ 1,607
Additions 162 — 876 —
Foreign currency translation ( 39 ) ( 83 ) 11 ( 206 )
Capitalized software $ 2,371 $ 1,401 $ 2,371 $ 1,401 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 quarter and three quarters ended September 29, 2023 and September 30, 2022 are as follows:
For the Quarter Ended For the Three Quarters Ended
(amounts in thousands) September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022
Accumulated amortization, beginning balance $ 1,441 $ 1,084 $ 1,232 $ 978
Amortization expense 103 27 312 133
Accumulated amortization $ 1,544 $ 1,111 $ 1,544 $ 1,111 During the quarter and three quarters ended September 29, 2023 and September 30, 2022, the Company's change in work-in-progress costs related to software projects being developed was as follows:
For the Quarter Ended For the Three Quarters Ended
(amounts in thousands) September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022
Capitalized software, work-in-progress, beginning balance $ 396 $ — $ 473 $ —
Additions 570 — 1,207 —
Placed into service ( 162 ) — ( 876 ) —
Capitalized software, work-in-progress, ending balance $ 804 $ — $ 804 $ — 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 $ 1.4 million and $ 3.0 million at September 29, 2023 and December 31, 2022, respectively, and have expiration dates ranging from September 2023 through October 2034 . Goodwill The goodwill recorded on the Company's condensed consolidated balance sheet at September 29, 2023 relates to previous acquisitions, including Eleviant in 2022. 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. There were no impairment indicators noted in the quarter and three quarters ended September 29, 2023 and September 30, 2022. The changes in the carrying amount of goodwill for the three quarters ended September 29, 2023 are as follows:
(amounts in thousands)
Balance at December 31, 2022 $ 35,998
Working capital adjustment - acquisitions ( 82 )
Foreign currency translation ( 429 )
Balance at September 29, 2023 $ 35,487 The Company's goodwill by segment at September 29, 2023 and December 31, 2022 was as follows:
(amounts in thousands) September 29, 2023 December 31, 2022
North America IT Solutions and Services $ 18,429 $ 18,753
Europe IT Solutions and Services 17,058 17,245
Total goodwill $ 35,487 $ 35,998 Acquired Intangible Assets Acquired intangible assets at September 29, 2023 consist of the following:
(amounts in thousands) Estimated Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Carrying Amount
Trademarks 2 years $ 1,532 $ ( 1,365 ) $ ( 167 ) $ —
Technology 10 years 1,141 ( 257 ) ( 28 ) 856
Customer relationships 7 - 13 years 17,196 ( 5,158 ) ( 1,255 ) 10,783
Total $ 19,869 $ ( 6,780 ) $ ( 1,450 ) $ 11,639 Acquired intangible assets at December 31, 2022 consist of the following:
(amounts in thousands) Estimated Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Carrying Amount
Trademarks 2 years $ 1,532 $ ( 1,380 ) $ ( 152 ) $ —
Technology 10 years 1,141 ( 161 ) ( 23 ) 957
Customer relationships 7 - 13 years 17,196 ( 4,053 ) ( 1,157 ) 11,986
Total $ 19,869 $ ( 5,594 ) $ ( 1,332 ) $ 12,943 Amortization expense for the Company's acquired intangibles was $ 0.5 million and $ 0.2 million in the quarters ended September 29, 2023 and September 30, 2022, respectively, and $ 1.3 million and $ 0.7 million in the year-to-date periods ended September 29, 2023, and September 30, 2022, respectively. Estimated amortization expense for the remainder of 2023, the five succeeding years, and thereafter is as follows:
Year Annual Amortization
(amounts in thousands)
2023 (remaining) $ 420
2024 1,682
2025 1,682
2026 1,682
2027 1,284
2028 1,205
Thereafter 3,684
Total $ 11,639 Recently Issued Accounting Standards In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The objective of this ASU is to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Then in December 2022, the FASB issued ASU No. 2022-06 “Deferral of the Sunset Date of Topic 848” which amends and extends the sunset date to December 31, 2024. The Company has not elected any of the practical expedients or scope exceptions to date related to this standard. We will continue to review our contracts and arrangements that will be affected by a discontinued reference rate during the transition period. |
