Notes to Consolidated Financial Statements
|
|
1.
|
Summary of Significant Accounting Policies
|
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of Computer Task Group, Incorporated, and its subsidiaries (the Company or CTG), located primarily in North America and Europe. There are no unconsolidated entities, or off-balance sheet arrangements other than certain guarantees supporting office leases or the performance under government contracts in the Company's European operations. All inter-company accounts and transactions have been eliminated. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Such estimates primarily relate to the valuation of goodwill, valuation allowances for deferred tax assets, actuarial assumptions including discount rates and expected rates of return, as applicable, for the Company’s defined benefit and postretirement benefit plans, the allowance for doubtful accounts receivable, assumptions underlying stock option valuation, investment valuation, legal matters, other contingencies and estimates of progress toward completion and direct profit or loss on contracts. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Actual results could differ from those estimates.
The Company operates in
one
industry segment, providing 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. The Company promotes a significant portion of its services through
four
vertical market focus areas: Healthcare (which includes services provided to healthcare providers, health insurers, and life sciences companies), Technology Service Providers, Financial Services, and Energy. 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 Company’s growth due to the size of the vertical market. The remainder of CTG’s revenue is derived from general markets.
CTG’s revenue by vertical market for the years ended
December 31, 2012
,
2011
and
2010
is as follows:
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|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Healthcare
|
33
|
%
|
|
30
|
%
|
|
27
|
%
|
Technology service providers
|
31
|
%
|
|
34
|
%
|
|
36
|
%
|
Financial services
|
6
|
%
|
|
7
|
%
|
|
6
|
%
|
Energy
|
6
|
%
|
|
6
|
%
|
|
7
|
%
|
General markets
|
24
|
%
|
|
23
|
%
|
|
24
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
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 collectibility of the amounts 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 of such items at completion for a 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 which 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 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.
The Company’s revenue from contracts accounted for under time-and-material, progress billing, and percentage-of-completion methods for the years ended
December 31, 2012
,
2011
and
2010
is as follows:
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|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Time-and-material
|
90
|
%
|
|
91
|
%
|
|
91
|
%
|
Progress billing
|
8
|
%
|
|
7
|
%
|
|
6
|
%
|
Percentage-of-completion
|
2
|
%
|
|
2
|
%
|
|
3
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The Company includes billable expenses in its accounts as both revenue and direct costs. These billable expenses totaled $
13.4
million, $
12.7
million, and $
9.1
million in
2012
,
2011
and
2010
, respectively.
Software Revenue Recognition
In 2010, the Company entered into a series of contracts with a customer that provided for application customization and integration services, as well as post contract support (PCS) services, specifically utilizing one of several of the software tools the Company has internally developed. These services were provided under a software-as-a-service model. As the contracts were closely interrelated and dependent on each other, for accounting purposes the contracts were considered to be one arrangement. Additionally, as the project included significant modification and customization services to transform the previously developed software tool into an expanded tool intended to meet the customer’s requirements, the percentage-of-completion method of contract accounting was 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 was recognized on a straight-line basis over the term of the PCS period which ended on December 31, 2011.
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 December 31,
2012
and
2011
, the carrying amounts of the Company’s cash of $
40.6
million and $
22.4
million, respectively, approximated fair value.
The Company is also allowed to elect an irrevocable option to measure, on a contract by contract basis, specific financial instruments and certain other items that are currently not being measured at fair value. The Company did not elect to apply the fair value provisions of this standard for any specific contracts during the years ended December 31,
2012
or
2011
.
Life Insurance Policies
The Company has purchased life insurance on the lives of certain plan participants who are former employees 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 December 31,
2012
and December 31,
2011
, these insurance policies have a gross cash surrender value of $
24.8
million and $
27.4
million, respectively, loans have been taken totaling $
23.1
million and $
25.6
million, respectively, and the net cash surrender value balance of $
1.7
million and $
1.8
million, respectively, is included on the consolidated balance sheet in “Other Assets” under non-current assets.
During 2012, the Company received life insurance proceeds totaling approximately $
1.3
million for two former plan participants that passed away during the year. At December 31,
2012
, the total death benefit for the remaining policies is approximately $
37.1
million. Currently, upon the death of all of the remaining plan participants, the company would expect to receive approximately $
13.5
million after the payment of outstanding loans, and record a gain of approximately $
12.2
million.
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 and expenses are not grossed up as such taxes are recorded and presented on a net basis.
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 had no cash equivalents at December 31,
2012
and
2011
. Additionally, 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, represents the increase or decrease in outstanding checks year-over-year.
Trade Accounts Receivable
Trade accounts receivable balances are expected to be received on average approximately 60 days from the date of invoice. Generally, the Company does not work on any projects where amounts due are expected to be received greater than one year from the date of the invoice. Accordingly, the recorded book value for the Company’s accounts receivable equals fair value. Outstanding trade accounts receivable are generally considered past due when they remain unpaid after the contractual due date has past. An allowance for doubtful accounts receivable (allowance) is established using management’s judgment. Specific identification of balances that are significantly past due and where customer payments have not been recently received are generally added to the allowance unless the Company has direct knowledge that the customer intends to make payment. Additionally, any balances which relate to a customer that has declared bankruptcy or ceased its business operations are added to the allowance at the amount not expected to be received.
Bad debt expense, net of recoveries, was approximately $
(40,000)
, $
0.7
million, and $
(0.2)
million in
2012
,
2011
, and
2010
, respectively.
Property and Equipment and Capitalized Software Costs
Property and equipment are generally stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives of
one
year to
30
years, and begins after an asset has been put into service. Leasehold improvements are generally depreciated over the shorter of the term of the lease or the useful life of the improvement. The cost of property or equipment sold or otherwise disposed of, along with related accumulated depreciation, is eliminated from the accounts, and the resulting gain or loss, if any, is reflected in current earnings. Maintenance and repairs are charged to expense when incurred, while significant improvements to existing assets are capitalized.
As of both December 31,
2012
and December 31,
2011
, the Company has capitalized a total of approximately $
5.1
million for software projects developed for internal use. Amortization periods range from
two
to
five
years, and are evaluated annually for propriety. Amortization expense for these projects totaled $
1.7
million, $
1.1
million, and $
0.3
million in
2012
,
2011
, and
2010
, respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such circumstances exist, the recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell. The Company does not have any long-lived assets that are impaired or that it intends to dispose of at December 31,
2012
.
Leases
The Company is obligated under a number of short and long-term operating leases primarily for the rental of office space, office equipment, and automobiles based in Europe. In instances where the Company has negotiated leases that contain rent holidays or escalation clauses, the expense for those leases is recognized monthly on a straight-line basis over the term of the lease.
Goodwill
The Company has a goodwill balance of $
35.7
million. The balance is evaluated annually as of the Company’s October fiscal month-end (the measurement date), or more frequently if facts and circumstances indicate impairment may exist. This evaluation, as applicable, is based on estimates and assumptions that may be used to analyze the appraised value of similar transactions from which the goodwill arose, the appraised value of similar companies, or estimates of future discounted cash flows. The estimates and assumptions on which the Company’s evaluations are based involve judgments and are based on currently available information, any of which could prove wrong or inaccurate when made, or become wrong or inaccurate as a result of subsequent events.
At the respective measurement dates for
2012
,
2011
, and
2010
, the Company completed its annual valuation of the business to which the Company’s goodwill relates. During 2012, the Company utilized the provisions under Accounting Standards Update No. 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” which allow public entities to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this new process, an entity no longer would be required to calculate the fair value of a reporting unit unless the qualitative assessment shows that it is more likely than not that its fair value is less than its carrying amount. During 2011 and 2010, the company utilized the assistance of an independent third party appraiser to complete its review.
The 2010 and 2011 valuations indicated that the estimated fair value of the business was substantially in excess of its carrying value, with the estimated fair value of the unit exceeding the carrying value by
116%
in
2011
, and
31%
in
2010
. From its internal review completed in 2012, the Company believes the fair value of the business has increased from 2011, and therefore continues to be substantially in excess of the carrying value of the business. Additionally, there are no other facts or circumstances which arose during
2012
,
2011
or
2010
that led management to believe the goodwill balance was impaired.
Income Taxes
The Company provides for deferred income taxes for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. In assessing the realizability of deferred tax assets, management considers within each tax jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax-planning strategies in making this assessment. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense.
Equity-Based Compensation
The Company records the fair value of equity-based compensation expense for all equity-based compensation awards granted subsequent to January 1, 2006, and for the unvested portion of previously granted awards outstanding as of that date. The calculated fair value cost of its equity-based compensation awards is recognized in the Company’s income statement over the period in which an employee or director is required to provide the services for the award. Compensation cost is not recognized for employees or directors that do not render the requisite services. The Company recognized the expense for equity-based compensation in its
2012
,
2011
, and
2010
statements of income on a straight-line basis based upon awards that are ultimately expected to vest. See note 10, “Equity-Based Compensation.”
Net Income Per Share
Basic and diluted earnings per share (EPS) for the years ended December 31,
2012
,
2011
, and
2010
are as follows:
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|
|
|
|
|
|
|
|
|
For the year ended
|
Net
Income
|
|
Weighted
Average
Shares
|
|
Earnings
per
Share
|
(amounts in thousands, except per-share data)
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
Basic EPS
|
$
|
16,165
|
|
|
15,172
|
|
|
$
|
1.07
|
|
Dilutive effect of outstanding equity instruments
|
—
|
|
|
1,669
|
|
|
(0.11
|
)
|
Diluted EPS
|
$
|
16,165
|
|
|
16,841
|
|
|
$
|
0.96
|
|
December 31, 2011
|
|
|
|
|
|
Basic EPS
|
$
|
11,938
|
|
|
14,968
|
|
|
$
|
0.80
|
|
Dilutive effect of outstanding equity instruments
|
—
|
|
|
1,763
|
|
|
(0.09
|
)
|
Diluted EPS
|
$
|
11,938
|
|
|
16,731
|
|
|
$
|
0.71
|
|
December 31, 2010
|
|
|
|
|
|
Basic EPS
|
$
|
8,372
|
|
|
14,697
|
|
|
$
|
0.57
|
|
Dilutive effect of outstanding equity instruments
|
—
|
|
|
1,376
|
|
|
(0.05
|
)
|
Diluted EPS
|
$
|
8,372
|
|
|
16,073
|
|
|
$
|
0.52
|
|
Weighted-average shares represent the average number of issued shares less treasury shares and shares held in the Stock Trusts, and for the basic EPS calculations, unvested restricted stock.
Certain options representing
0.1
million,
0.3
million, and
0.3
million shares of common stock were outstanding at December 31,
2012
,
2011
, and
2010
, respectively, but were not included in the computation of diluted earnings per share as their effect on the computation would have been anti-dilutive.
Accumulated Other Comprehensive Loss
The components that comprise accumulated other comprehensive loss on the consolidated balance sheets at December 31,
2012
,
2011
, and
2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
(amounts in thousands)
|
|
|
|
|
|
Foreign currency adjustment
|
$
|
(4,254
|
)
|
|
$
|
(4,624
|
)
|
|
$
|
(4,298
|
)
|
Pension loss adjustment, net of tax of $1,040 in 2012, $1,436 in 2011, and $1,141 in 2010
|
(6,426
|
)
|
|
(3,606
|
)
|
|
(1,863
|
)
|
|
$
|
(10,680
|
)
|
|
$
|
(8,230
|
)
|
|
$
|
(6,161
|
)
|
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for assets and liabilities using current exchange rates in effect at the balance sheet date, for equity accounts using historical exchange rates, and for revenue and expense activity using the applicable month’s average exchange rates. The Company recorded no gains (losses) in
2012
, $
(0.1)
million in
2011
, and less than $
0.1
million in
2010
from foreign currency transactions for balances settled during the year or intended to be settled as of each respective year-end.
Guarantees
The Company has several guarantees in place in our European operations which support office leases and performance under government projects. These guarantees total approximately $
2.5
million and $
2.1
million at December 31,
2012
and
2011
, respectively, and generally have expiration dates ranging from January 2013 through June 2019.
Acquisition
In January 2013, the Company acquired etrinity, a provider of IT services to the healthcare market in Belgium and the Netherlands. Founded in 2000, etrinity's 2012 revenue approximated U.S. $
3
million. The firm's IT services are targeted to the healthcare provider market and include clinical systems integration and implementation, application management, technology support for medical imaging, training, and technical resources.
2. Property, Equipment and Capitalized Software
Property, equipment and capitalized software at December 31,
2012
and
2011
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Useful Life
|
|
2012
|
|
2011
|
(amounts in thousands)
|
(years)
|
|
|
|
|
Land
|
0
|
|
$
|
378
|
|
|
$
|
378
|
|
Buildings
|
30
|
|
4,376
|
|
|
4,419
|
|
Equipment
|
2-5
|
|
7,244
|
|
|
6,876
|
|
Furniture
|
5-10
|
|
3,217
|
|
|
3,035
|
|
Capitalized software
|
2-5
|
|
5,088
|
|
|
5,088
|
|
Other software
|
1-5
|
|
2,626
|
|
|
2,674
|
|
Leasehold improvements
|
3-10
|
|
3,976
|
|
|
3,031
|
|
|
|
|
26,905
|
|
|
25,501
|
|
Accumulated depreciation and amortization
|
|
|
(19,989
|
)
|
|
(17,532
|
)
|
|
|
|
$
|
6,916
|
|
|
$
|
7,969
|
|
The Company did not record any additions to capitalized software during the year ended December 31,
2012
, and recorded $
0.4
million during the year ended December 31,
2011
. As of both dates the Company had capitalized a total of $
5.1
million solely for software projects developed for internal use. Accumulated amortization for these projects totaled $
3.2
million and $
1.5
million as of December 31,
2012
and
2011
, respectively.
The Company’s investments consist of mutual funds which are part of the Computer Task Group, Incorporated Non-qualified Key Employee Deferred Compensation Plan. At both December 31,
2012
and
2011
, the Company’s investment balances, which are classified as trading securities, totaled approximately $
0.6
million, and are measured at fair value. As there is an active trading market for these funds, fair value was determined using Level 1 inputs (see note 1 “Summary of Significant Accounting Policies—Fair Value”). Unrealized gains and losses on these securities are recorded in earnings and were nominal in
2012
,
2011
, and
2010
.
The Company's revolving credit agreement (Agreement) allows the Company to borrow up to $
35.0
million, is unsecured, has a term of
three
years, and expires in April 2014. The Agreement has interest rates ranging from 0 to 50 basis points over the
prime
rate and 175 to 225 basis points over
LIBOR
. At both December 31,
2012
and
2011
, there were no amounts outstanding under this Agreement. However, there were $
0.5
million and $
0.4
million assigned to letters of credit under this Agreement at December 31,
2012
and
2011
, respectively.
There were no amounts outstanding under the Agreement during 2012. The maximum amounts outstanding under the Agreement during
2011
and
2010
were $
5.8
million, and $
7.8
million, respectively. Average bank borrowings outstanding for the years
2011
and
2010
were $
0.4
million and $
1.3
million, respectively, and carried weighted-average interest rates of
2.3%
and
2.1%
, respectively. The Company incurred commitment fees totaling approximately $
0.1
million in each of
2012
,
2011
and
2010
relative to the Agreement. Interest paid totaled less than $
0.1
million in both
2011
and
2010
.
The Company is required to meet certain financial covenants in order to maintain borrowings under the Agreement, pay dividends, and make acquisitions. The covenants are measured quarterly, and at December 31,
2012
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 $
51.2
million, and total expenditures for property, equipment and capitalized software cannot exceed $
5.0
million annually. The Company was in compliance with these covenants at December 31,
2012
as its leverage ratio was
0.0
, its minimum tangible net worth was $
66.7
million, and
2012
expenditures for property, equipment and capitalized software were $
1.9
million. The Company was also in compliance with its required covenants at December 31,
2011
and December 31,
2010
.
The provision for income taxes for
2012
,
2011
, and
2010
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
(amounts in thousands)
|
|
|
|
|
|
Domestic and foreign components of income before income taxes are as follows:
|
|
|
|
|
|
Domestic
|
$
|
23,028
|
|
|
$
|
17,070
|
|
|
$
|
12,921
|
|
Foreign
|
2,417
|
|
|
2,053
|
|
|
848
|
|
Total income before income taxes
|
$
|
25,445
|
|
|
$
|
19,123
|
|
|
$
|
13,769
|
|
The provision (benefit) for income taxes consists of:
|
|
|
|
|
|
Current tax:
|
|
|
|
|
|
U.S. federal
|
$
|
6,778
|
|
|
$
|
5,419
|
|
|
$
|
3,633
|
|
Foreign
|
1,393
|
|
|
1,508
|
|
|
1,199
|
|
U.S. state and local
|
993
|
|
|
1,135
|
|
|
718
|
|
Total current tax
|
9,164
|
|
|
8,062
|
|
|
5,550
|
|
Deferred tax:
|
|
|
|
|
|
U.S. federal
|
55
|
|
|
(834
|
)
|
|
(193
|
)
|
Foreign
|
—
|
|
|
—
|
|
|
—
|
|
U.S. state and local
|
61
|
|
|
(43
|
)
|
|
40
|
|
Total deferred tax
|
116
|
|
|
(877
|
)
|
|
(153
|
)
|
Total tax
|
$
|
9,280
|
|
|
$
|
7,185
|
|
|
$
|
5,397
|
|
The effective and statutory income tax rate can be reconciled as follows:
|
|
|
|
|
|
Tax at statutory rate of 35% / 34%
|
$
|
8,906
|
|
|
$
|
6,502
|
|
|
$
|
4,682
|
|
State tax, net of federal benefit
|
685
|
|
|
728
|
|
|
469
|
|
Non-taxable income
|
(993
|
)
|
|
(495
|
)
|
|
(572
|
)
|
Non-deductible expenses
|
796
|
|
|
745
|
|
|
694
|
|
Change in estimate primarily related to foreign taxes
|
41
|
|
|
234
|
|
|
327
|
|
Change in estimate primarily related to state taxes and tax reserves
|
50
|
|
|
66
|
|
|
(24
|
)
|
Change in estimate primarily related to U.S. federal taxes
|
(157
|
)
|
|
—
|
|
|
—
|
|
Tax credits
|
—
|
|
|
(609
|
)
|
|
(140
|
)
|
Other, net
|
(48
|
)
|
|
14
|
|
|
(39
|
)
|
Total tax
|
$
|
9,280
|
|
|
$
|
7,185
|
|
|
$
|
5,397
|
|
Effective income tax rate
|
36.5
|
%
|
|
37.6
|
%
|
|
39.2
|
%
|
The Company’s effective tax rate (ETR) is calculated based upon the full year's operating results, and various tax related items. The Company’s normal ETR ranges from
38%
to
42%
. The ETR in 2012 was lower due to approximately
$0.5 million
in tax expense related to non-taxable life insurance proceeds received during the year. In addition, the Company recorded an additional
$0.2 million
reduction of state tax expense as a result of the recording of certain favorable provision-to-return adjustments associated with the Company
'
s 2011 income tax returns. The ETR during 2011 was reduced as the Company recorded $
0.3
million of federal tax credits related to research and development activities, and $
0.3
million of federal tax credits related to the retention of certain
individuals hired during 2010. The impact of these credits was partially offset by an increase in the valuation allowance of $
0.2
million associated with net operating losses incurred by certain foreign subsidiaries.
The Company did not record a tax benefit for its research and development activities during 2012 as the legislation extending the tax credit related to these expenses, the American Taxpayer Relief Act of 2012, was not passed by the U.S. federal government until January 2013. As required under current accounting guidelines, the Company expects to recognize a tax benefit of approximately
$0.3 million
for these 2012 credits in the 2013 first quarter.
The expected relationship between foreign income before taxes and the foreign provision for income taxes differs from the actual relationship above as a result of certain foreign losses incurred for which no tax benefit has been recognized. Management has determined that it is unclear whether operations in those jurisdictions will produce taxable income in future years sufficient to realize the benefit of the losses in those jurisdictions. In addition, certain costs deducted for financial statement purposes are not deductible for tax purposes in some foreign jurisdictions, such as various employee benefit costs, resulting in a substantial increase to foreign taxable income.
The Company’s deferred tax assets and liabilities at December 31,
2012
and
2011
consist of the following:
|
|
|
|
|
|
|
|
|
December 31,
|
2012
|
|
2011
|
(amounts in thousands)
|
|
|
|
Assets
|
|
|
|
Deferred compensation
|
$
|
8,065
|
|
|
$
|
6,671
|
|
Loss carryforwards
|
1,094
|
|
|
1,120
|
|
Accruals deductible for tax purposes when paid
|
457
|
|
|
412
|
|
Depreciation
|
57
|
|
|
358
|
|
Allowance for doubtful accounts
|
289
|
|
|
316
|
|
Amortization
|
—
|
|
|
84
|
|
State taxes
|
792
|
|
|
811
|
|
Gross deferred tax assets
|
10,754
|
|
|
9,772
|
|
Deferred tax asset valuation allowance
|
(2,269
|
)
|
|
(1,404
|
)
|
Gross deferred tax assets less valuation allowance
|
8,485
|
|
|
8,368
|
|
Liabilities
|
|
|
|
Depreciation
|
(820
|
)
|
|
(77
|
)
|
Other
|
(85
|
)
|
|
(8
|
)
|
Gross deferred tax liabilities
|
(905
|
)
|
|
(85
|
)
|
Net deferred tax assets
|
$
|
7,580
|
|
|
$
|
8,283
|
|
Net deferred tax assets and liabilities are recorded as follows:
|
|
|
|
Net current assets
|
$
|
1,145
|
|
|
$
|
1,221
|
|
Net non-current assets
|
6,435
|
|
|
7,062
|
|
Net deferred tax assets
|
$
|
7,580
|
|
|
$
|
8,283
|
|
In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Factors that may affect the Company’s ability to achieve sufficient forecasted taxable income in future periods may include, but are not limited to, the following: increased competition, a decline in sales or margins, a loss of market share, the availability of qualified professional staff, and a decrease in demand for IT services. Based upon the levels of historical taxable income and projections for future taxable income over the years in which the deferred tax assets are deductible, at December 31,
2012
, management believes that it is more likely than not that the Company will realize the benefits, net of the established valuation allowance, of these deferred tax assets in the future.
For tax purposes, the Company has various U.S. state net operating loss carryforwards which began to expire in 2011, and have approximately $
2.1
million remaining. These net operating losses have a carryforward period of
5
to
20
years. The Netherlands net operating loss carryforward began to expire in 2011 and has $
1.5
million remaining, while in the United Kingdom the net operating loss carryforward is approximately $
2.8
million, and has no expiration date.
At December 31,
2012
, the Company has a deferred tax asset before the valuation allowance in the United States resulting from net operating losses in various states of approximately $
0.1
million, in the United Kingdom of approximately $
0.6
million, and in the Netherlands of approximately $
0.4
million. Management has analyzed each jurisdiction’s tax position, including forecasting potential taxable income in future years, and the expiration of the net operating loss carryforwards as applicable, and determined that it is unclear whether all of the deferred tax asset totaling $
1.1
million will be realized at any point in the future. Accordingly, at December 31,
2012
, the Company has offset most of the asset with a valuation allowance totaling $
1.0
million, resulting in a net deferred tax asset from net operating loss carryforwards of approximately $
0.1
million. During
2012
, the net increase in the valuation allowance was $
0.9
million, primarily relating to an increase in the valuation reserve associated with certain deferred tax assets related to the Netherlands defined-benefit pension plan.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2008.
A reconciliation of unrecognized tax benefits for
2012
and
2011
is as follows:
|
|
|
|
|
(amounts in thousands)
|
|
Balance at January 1, 2011
|
$
|
57
|
|
Additions based on tax positions related to the current year
|
50
|
|
Additions for tax positions of prior years
|
16
|
|
Reductions for lapse of statute of limitations
|
—
|
|
Settlements
|
—
|
|
Balance at December 31, 2011
|
123
|
|
Additions based on tax positions related to the current year
|
50
|
|
Additions for tax positions of prior years
|
—
|
|
Reductions for lapse of statute of limitations
|
—
|
|
Settlements
|
—
|
|
Balance at December 31, 2012
|
$
|
173
|
|
The balance at December 31,
2012
of $
173,000
represents gross unrecognized tax benefits that if recognized would impact the Company’s effective tax rate. No significant increase or decrease in the total amount of unrecognized tax benefits is expected within the next twelve months.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. At December 31,
2012
, the Company had approximately $
9,000
(less the associated tax benefit) accrued for the payment of interest and penalties, as applicable.
The Company has established its unrecognized tax benefits based upon the anticipated outcome of tax positions taken for financial statement purposes compared with positions taken on the Company’s tax returns. The Company records the benefit for unrecognized tax benefits only when it is more likely than not that the position will be sustained upon examination by the taxing authorities. The Company reviews its unrecognized tax benefits on a quarterly basis. Such reviews include consideration of factors such as the cause of the action, the degree of probability of an unfavorable outcome, the Company’s ability to estimate the liability, and the timing of the liability and how it will impact the Company’s other tax attributes. At December 31,
2012
, the Company believes it has adequately provided for its tax-related liabilities.
Undistributed earnings of the Company’s foreign subsidiaries at December 31,
2012
are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.
In
2012
,
2011
, and
2010
, a total of
461,000
,
465,000
, and
101,000
shares of common stock, respectively, were issued through the exercise of non-qualified stock options or through the disqualifying disposition of incentive stock options. The tax benefit to the Company from these transactions, which was credited to capital in excess of par value rather than recognized as a reduction of income tax expense, was
$2.2 million
,
$1.6 million
, and
$0.2 million
in
2012
,
2011
, and
2010
, respectively. These tax benefits have also been recognized in the consolidated balance sheets as a reduction of income taxes payable.
Net income tax payments during
2012
,
2011
, and
2010
totaled $
6.5
million, $
4.6
million, and $
4.8
million, respectively.
At December 31,
2012
, the Company was obligated under a number of long-term operating leases, some of which contain renewal options with escalation clauses commensurate with local market fluctuations, however, generally limiting the increase to no more than
5.0%
of the existing lease payment.
Minimum future obligations under such leases are summarized as follows:
|
|
|
|
|
Year Ending December 31,
|
|
(amounts in thousands)
|
|
2013
|
$
|
4,756
|
|
2014
|
3,642
|
|
2015
|
2,546
|
|
2016
|
1,512
|
|
2017
|
647
|
|
Later years
|
783
|
|
Minimum future obligations
|
$
|
13,886
|
|
The operating lease obligations relate to the rental of office space, office equipment, and automobiles leased in Europe. Total rental expense under such operating leases for
2012
,
2011
, and
2010
was approximately $
6.3
million, $
6.8
million, and $
6.4
million, respectively.
|
|
7.
|
Deferred Compensation 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 plan was amended as of November 30, 1994, to freeze benefits for the participants in the plan at that time.
Net periodic pension cost for the years ended December 31,
2012
,
2011
, and
2010
for the ESBP is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Pension Cost—ESBP
|
2012
|
|
2011
|
|
2010
|
(amounts in thousands)
|
|
|
|
|
|
Interest cost
|
$
|
338
|
|
|
$
|
408
|
|
|
$
|
451
|
|
Amortization of actuarial loss
|
279
|
|
|
208
|
|
|
166
|
|
Net periodic pension cost
|
$
|
617
|
|
|
$
|
616
|
|
|
$
|
617
|
|
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. This plan was curtailed for additional contributions in January 2003. Net periodic pension (cost) benefit was approximately $
(118,000)
, $
(77,000)
, and $
5,000
for the years ending December 31,
2012
,
2011
and
2010
, respectively.
The change in benefit obligation and reconciliation of fair value of plan assets for the years ended December 31,
2012
and
2011
for the ESBP and NDBP are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESBP
|
|
NDBP
|
Changes in Benefit Obligation
|
2012
|
|
2011
|
|
2012
|
|
2011
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
$
|
9,508
|
|
|
$
|
9,024
|
|
|
$
|
7,925
|
|
|
$
|
6,580
|
|
Interest cost
|
338
|
|
|
408
|
|
|
360
|
|
|
323
|
|
Benefits paid
|
(727
|
)
|
|
(793
|
)
|
|
(113
|
)
|
|
(106
|
)
|
Actuarial loss (gain)
|
(714
|
)
|
|
869
|
|
|
3,475
|
|
|
1,391
|
|
Effect of exchange rate changes
|
—
|
|
|
—
|
|
|
266
|
|
|
(263
|
)
|
Benefit obligation at end of period
|
8,405
|
|
|
9,508
|
|
|
11,913
|
|
|
7,925
|
|
Reconciliation of Fair Value of Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
—
|
|
|
—
|
|
|
7,811
|
|
|
7,831
|
|
Actual return on plan assets
|
—
|
|
|
—
|
|
|
336
|
|
|
314
|
|
Employer contributions
|
727
|
|
|
793
|
|
|
—
|
|
|
42
|
|
Benefits paid
|
(727
|
)
|
|
(793
|
)
|
|
(113
|
)
|
|
(106
|
)
|
Administrative costs
|
—
|
|
|
—
|
|
|
(57
|
)
|
|
(81
|
)
|
Effect of exchange rate changes
|
—
|
|
|
—
|
|
|
166
|
|
|
(189
|
)
|
Fair value of plan assets at end of period
|
—
|
|
|
—
|
|
|
8,143
|
|
|
7,811
|
|
Accrued benefit cost
|
$
|
8,405
|
|
|
$
|
9,508
|
|
|
$
|
3,770
|
|
|
$
|
114
|
|
Accrued benefit cost is included in the consolidated balance sheet as follows:
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
729
|
|
|
$
|
759
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-current liabilities
|
$
|
7,676
|
|
|
$
|
8,749
|
|
|
$
|
3,770
|
|
|
$
|
114
|
|
Discount rates:
|
|
|
|
|
|
|
|
Benefit obligation
|
3.02
|
%
|
|
3.71
|
%
|
|
2.80
|
%
|
|
4.60
|
%
|
Net periodic pension cost
|
3.71
|
%
|
|
4.73
|
%
|
|
4.60
|
%
|
|
4.70
|
%
|
Salary increase rate
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected return on plan assets
|
—
|
%
|
|
—
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
For the ESBP, the accumulated benefit obligation at December 31,
2012
and 2011 was $
8.4
million and $
9.5
million, respectively. The amounts included in other comprehensive loss relating to the pension loss adjustment in
2012
and 2011, net of tax, were approximately $
0.6
million and $
0.4
million, respectively. The discount rate used in
2012
was
3.02%
, which is reflective of a series of bonds that are included in the Moody’s Aa long-term corporate bond yield whose cash flow approximates the payments to participants under the ESBP for the remainder of the plan. This rate was a decrease of
69
basis points from the rate used in the prior year and resulted in an increase in the plan’s liabilities of approximately $
0.4
million. However, the accumulated benefit obligation decreased year-over-year as two participants in the plan passed away during 2012. Benefits paid to participants are funded by the Company as needed, and are expected to total approximately $
0.7
million in 2013. The plan is deemed unfunded as the Company has not specifically identified Company 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 considered 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 current year benefit payments as required in 2013 or future years.
For the NDBP, the accumulated benefit obligation at December 31, 2012 and 2011 was $
11.9
million and $
7.9
million, respectively. The discount rate used in 2012 was
2.80%
, which is reflective of a series of corporate bonds whose cash flow approximates the payments to participants under the NDBP for the remainder of the plan. This rate was a decrease of
180
basis points from the rate used in the prior year, and resulted in an increase in the plan’s liabilities of
$3.7 million
in
2012
.
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 plan’s assets equals the amount allocated to the NDBP in any given year. The fair value of the assets is determined using a Level 3 methodology (see note 1 “Summary of Significant Accounting Policies—Fair Value”). The calculation of fair value includes determining the present value of the future expected payments under the plan, 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 2012 and 2011, the plan investments had a targeted minimum return to the Company of
4.0%
, which is consistent with historical returns and the guaranteed
4.0%
return guaranteed to the participants of the plan. The Company, in conjunction with Aegon, intends to maintain the current investment strategy of investing plan assets solely in government bonds in 2013.
Anticipated benefit payments for the ESBP and the NDBP expected to be paid in future years are as follows:
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
ESBP
|
|
NDBP
|
(amounts in thousands)
|
|
|
|
2013
|
$
|
697
|
|
|
$
|
137
|
|
2014
|
739
|
|
|
155
|
|
2015
|
725
|
|
|
159
|
|
2016
|
659
|
|
|
177
|
|
2017
|
640
|
|
|
200
|
|
2018-2022
|
2,943
|
|
|
1,460
|
|
Total
|
$
|
6,403
|
|
|
$
|
2,288
|
|
For the ESBP and the NDBP, the amounts included in accumulated other comprehensive loss, net of tax, that have not yet been recognized as components of net periodic benefit cost as of December 31,
2012
are $
1.7
million and $
4.8
million, respectively, for unrecognized actuarial losses. The amounts included in accumulated other comprehensive loss, net of tax, that had not yet been recognized as components of net periodic benefit cost as of December 31, 2011 were $
2.3
million and $
1.2
million, respectively, also for unrecognized actuarial losses.
The amounts recognized in other comprehensive loss, net of tax, for 2012, 2011, and 2010, which primarily consist of an actuarial loss, totaled $
2.8
million, $
1.7
million, and $
0.5
million, respectively. Net periodic pension cost (benefit), and the amounts recognized in other comprehensive loss, net of tax, for the ESBP and the NDBP for 2012, 2011, and 2010 totaled $
(2.1)
million, $
(1.1)
million, and $
0.1
million, respectively.
The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2013 for the ESBP and the NDBP for unrecognized actuarial losses total $
0.3
million.
The Company also maintains the Key Employee Non-Qualified Deferred Compensation Plan for certain key executives. Company contributions to this plan, if any, are based on annually defined financial performance objectives. There were $
0.4
million in contributions to the plan in 2012 for amounts earned in 2011, $
0.3
million in contributions to the plan in 2011 for amounts earned in 2010, and $
0.1
million in contributions to the plan in
2010
for amounts earned in 2009. The Company anticipates making contributions in 2013 totaling approximately $
0.3
million to this plan for amounts earned in 2012. The investments in the plan are included in the total assets of the Company, and are discussed in note 3, “Investments.” During 2012 and 2011, several participants in the plan exchanged a portion of their investments for stock units which represent shares of the Company’s common stock. In exchange for the funds received, the Company issued shares out of treasury stock equivalent to the number of share units received by the participants. These shares of common stock are not entitled to any voting rights and the holders will not receive dividends, if any are paid. The shares are being held by the Company, and will be released to the participants as prescribed by their payment elections under the plan.
The Company maintains the Non-Employee Director Deferred Compensation Plan for its non-employee directors. Cash contributions were made to the plan for certain of these directors totaling approximately $
0.1
million for each of 2012, 2011 and 2010. At the time the contributions were made, one of the non-employee directors elected to exchange his cash contributions to the plan for the purchase of stock units which represent shares of the Company’s 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 payment election under the plan, as either shares of stock or the cash equivalent.
401(k) Profit-Sharing Retirement Plan
The Company maintains a contributory 401(k) profit-sharing retirement plan covering substantially all U.S. employees. At its discretion, the Company may match up to
50%
of the first
6%
of eligible wages contributed by the participants. Company contributions, which currently consist of cash and may include the Company’s stock, were funded and charged to operations in the amounts of $
2.8
million, $
2.6
million, and $
2.2
million for
2012
,
2011
, and
2010
, respectively.
Other Retirement Plans
The Company maintains various other defined contribution retirement plans covering substantially all of the remaining European employees. Company contributions charged to operations were $
0.1
million in each of
2012
,
2011
, and
2010
.
Employee Health Insurance
The Company provides various health insurance plans for its employees, including a self-insured plan for its salaried employees in the U.S. The Company currently provides only limited health insurance coverage for its hourly employees in the U.S. Under recently issued legislation, the Company will be required to offer healthcare coverage to those employees in 2014, or pay penalties currently totaling at least
$2,000
per person.
Employee Stock Purchase Plan
Under the Company’s First Employee Stock Purchase Plan (ESPP), employees may apply up to
10%
of their compensation to purchase the Company’s common stock. Shares are purchased at the closing market price on the business day preceding the date of purchase. At the Company's annual meeting in May 2012, the Company's shareholders approved the addition of
250,000
shares for this plan. As of December 31,
2012
, approximately
261,000
shares remain unissued under the ESPP. During
2012
,
2011
, and
2010
, approximately
19,000
,
22,000
, and
22,000
shares, respectively, were purchased under the ESPP at an average price of
$15.29
,
$12.49
, and
$7.98
per share, respectively.
Stock Trusts
The Company maintains a Stock Employee Compensation Trust (SECT) to provide funding for existing employee stock plans and benefit programs. Shares of the Company’s common stock are purchased by and released from the SECT by the trustee of the SECT at the request of the compensation committee of the Board of Directors. As of December 31,
2012
, all shares remaining in the SECT were unallocated and, therefore, are not considered outstanding for purposes of calculating earnings per share. There were no shares purchased or released by the SECT during
2012
,
2011
, or
2010
, and there were
3.3
million shares in the SECT at each of December 31,
2012
,
2011
and
2010
.
The Company created an Omnibus Stock Trust (OST) to provide funding for various employee benefit programs. Shares of the Company’s common stock are released from the OST by the trustee at the request of the compensation committee of the Board of Directors. There were no shares purchased or released by the OST during
2012
,
2011
, or
2010
, and there were
59,000
shares in the OST at each of December 31,
2012
,
2011
and
2010
.
Preferred Stock
At December 31,
2012
and
2011
, the Company had
2,500,000
shares of par value
$0.01
preferred stock authorized for issuance, but none outstanding.
10. Equity-Based Compensation
The Company issues stock options and restricted stock in exchange for employee and director services. In accordance with current accounting standards, the calculated cost of its equity-based compensation awards is recognized in the Company’s consolidated statements of income over the period in which an employee or director is required to provide the services for the award. Compensation cost will not be recognized for employees or directors that do not render the requisite services. The Company recognizes the expense for equity-based compensation in its consolidated income statements on a straight-line basis based upon awards that are ultimately expected to vest.
Equity-based compensation expense, tax benefit and net equity-based compensation cost for
2012
,
2011
and
2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
(amounts in thousands)
|
|
|
|
|
|
Equity-based compensation
|
$
|
2,236
|
|
|
$
|
1,654
|
|
|
$
|
1,349
|
|
Tax benefit
|
788
|
|
|
566
|
|
|
462
|
|
Net equity-based compensation expense
|
$
|
1,448
|
|
|
$
|
1,088
|
|
|
$
|
887
|
|
On May 12, 2010, the shareholders approved the Company’s 2010 Equity Award Plan (2010 Plan). Under the provisions of the 2010 Plan, stock options, restricted stock, stock appreciation rights, and other awards may be granted or awarded to employees and directors of the company, as well as non-employees. The compensation committee of the Board of Directors determines the nature, amount, pricing and vesting of the grants or awards. All options and awards remain in effect until the earliest of the expiration, exercise, or surrender date. Options generally become exercisable in
four
equal installments, typically beginning
one
year from the date of grant, and expire no more than
15
years from the date of grant. A total of
900,000
shares may be granted or awarded under the 2010 plan,
414,000
of which are available for grant as of December 31,
2012
.
On April 26, 2000, the shareholders approved the Company’s 2000 Equity Award Plan (Equity Plan). Under the provisions of the Equity Plan, stock options, restricted stock, stock appreciation rights, and other awards could previously be granted or awarded to employees and directors of the Company. The compensation committee of the Board of Directors determines the nature, amount, pricing, and vesting of the grants or awards. All options and awards remain in effect until the earlier of the expiration, exercise, or surrender date. Options generally become exercisable in
three
or
four
equal annual installments, typically beginning
one
year from the date of grant, and expire no more than
15
years from the date of grant. In certain limited instances, options granted at fair market value are expected to vest nine and one-half years from the date of grant. There are
no
shares or options available for grant under this plan as of December 31,
2012
.
On April 24, 1991, the shareholders approved the Company’s 1991 Employee Stock Option Plan (1991 Plan). Under the provisions of the 1991 Plan, options could previously be granted to employees and directors of the Company. The exercise price for options granted under this plan were equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. All options remain in effect until the earlier of the expiration, exercise, or surrender date. There are no shares or options available for grant under this plan as of December 31,
2012
.
Under the Company’s 1991 Restricted Stock Plan, a total of
800,000
shares of restricted stock may be granted to certain key employees, and
277,000
shares are available for grant as of December 31,
2012
.
The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock options granted on the date of grant. The per-option weighted-average fair value on the date of grant of stock options granted in
2012
,
2011
, and
2010
was
$5.47
,
$4.57
, and
$3.09
, respectively.
The fair value of the options at the date of grant was estimated using the following weighted-average assumptions for the years ended December 31,
2012
,
2011
and
2010
:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Expected life (years)
|
2.7
|
|
|
2.8
|
|
|
3.1
|
|
Dividend yield
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Risk-free interest rate
|
0.4
|
%
|
|
1.0
|
%
|
|
1.5
|
%
|
Expected volatility
|
61.3
|
%
|
|
55.6
|
%
|
|
65.3
|
%
|
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
2010
,
2011
and
2012
. The risk-free interest rate assumption was based upon U.S. Treasury yields appropriate for the expected term of the Company’s 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 Company’s recent history of paying dividends, and the expectation of paying dividends in the foreseeable future.
During
2010
,
2011
and
2012
, the Company issued restricted stock to certain employees, and in
2010
, to its independent directors. For the employees, the stock vests over a period of
four
years, with
25%
of the stock issued vesting
one
year from the date of grant, and another
25%
vesting each year thereafter until the stock is fully vested. The Company is recognizing compensation expense for these shares ratably over the expected term of the restricted stock, or four years. For the independent directors, the issued stock vests at retirement. As the directors are eligible for retirement from the Company’s Board of Directors at any point in time, the Company recognized the expense associated with these shares on the date of grant. The shares of restricted stock issued are considered outstanding, can be voted, and are eligible to receive dividends, if any are paid. However, the restricted shares do not include a non-forfeitable right for the holder to receive dividends and none will be paid in the event the awards do not vest. Accordingly, only vested shares of outstanding restricted stock are included in the calculation of basic earnings per share.
As of December 31,
2012
, total remaining stock-based compensation expense for non-vested equity-based compensation is approximately $
3.9
million, which is expected to be recognized on a weighted-average basis over the next
16
months. Historically, the Company has issued shares out of treasury stock or the SECT to fulfill the share requirements from stock option exercises and restricted stock grants.
A summary of stock option activity under the 2010 Plan and Equity Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Plan
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Equity Plan
Options
|
|
Weighted-
Average
Exercise
Price
|
Outstanding at December 31, 2009
|
—
|
|
|
$
|
—
|
|
|
3,710,817
|
|
|
$
|
4.14
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
366,150
|
|
|
$
|
7.18
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
(154,955
|
)
|
|
$
|
4.27
|
|
Canceled or forfeited
|
—
|
|
|
$
|
—
|
|
|
(19,287
|
)
|
|
$
|
4.62
|
|
Expired
|
—
|
|
|
$
|
—
|
|
|
(7,250
|
)
|
|
$
|
3.74
|
|
Outstanding at December 31, 2010
|
—
|
|
|
$
|
—
|
|
|
3,895,475
|
|
|
$
|
4.42
|
|
Granted
|
275,500
|
|
|
$
|
12.86
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
(660,338
|
)
|
|
$
|
4.01
|
|
Canceled or forfeited
|
(10,000
|
)
|
|
$
|
12.16
|
|
|
(55,687
|
)
|
|
$
|
5.57
|
|
Expired
|
—
|
|
|
$
|
—
|
|
|
(4,375
|
)
|
|
$
|
3.50
|
|
Outstanding at December 31, 2011
|
265,500
|
|
|
$
|
12.89
|
|
|
3,175,075
|
|
|
$
|
4.49
|
|
Granted
|
225,596
|
|
|
$
|
14.41
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
(20,750
|
)
|
|
$
|
13.53
|
|
|
(574,353
|
)
|
|
$
|
3.58
|
|
Canceled or forfeited
|
(5,250
|
)
|
|
$
|
13.81
|
|
|
(13,175
|
)
|
|
$
|
5.42
|
|
Expired
|
—
|
|
|
$
|
—
|
|
|
(3,000
|
)
|
|
$
|
3.56
|
|
Outstanding at December 31, 2012
|
465,096
|
|
|
$
|
13.59
|
|
|
2,584,547
|
|
|
$
|
4.68
|
|
Options Exercisable at December 31, 2012
|
215,923
|
|
|
$
|
13.46
|
|
|
2,406,076
|
|
|
$
|
4.56
|
|
For
2012
, there were
20,750
shares exercised under the 2010 plan, and the intrinsic value of those exercised shares was $
55,000
. For both
2011
and
2010
, there were
no
shares exercised under the 2010 plan. For
2012
,
2011
, and
2010
, the intrinsic value of the options exercised under the Equity Plan was $
7.4
million, $
6.0
million, and $
0.7
million, respectively. At December 31,
2012
, there are
153,000
options remaining outstanding under the 1991 Plan, and the intrinsic value of the options exercised under the 1991 Plan for
2012
,
2011
, and
2010
was $
0.0
million, $
0.3
million, and $
0.1
million, respectively.
A summary of restricted stock activity under the Equity Plan and the 1991 Restricted Stock Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Plan
Restricted
Stock
|
|
Weighted-
Average
Fair Value
|
|
1991
Restricted
Stock Plan
|
|
Weighted-
Average
Fair Value
|
Outstanding at December 31, 2009
|
229,125
|
|
|
$
|
5.00
|
|
|
151,375
|
|
|
$
|
4.82
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
77,000
|
|
|
$
|
7.18
|
|
Released
|
(7,625
|
)
|
|
$
|
4.65
|
|
|
(45,875
|
)
|
|
$
|
4.79
|
|
Canceled or forfeited
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at December 31, 2010
|
221,500
|
|
|
$
|
5.01
|
|
|
182,500
|
|
|
$
|
5.83
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
160,000
|
|
|
$
|
12.19
|
|
Released
|
—
|
|
|
$
|
—
|
|
|
(62,125
|
)
|
|
$
|
5.54
|
|
Canceled or forfeited
|
—
|
|
|
$
|
—
|
|
|
(18,000
|
)
|
|
$
|
8.88
|
|
Outstanding at December 31, 2011
|
221,500
|
|
|
$
|
5.01
|
|
|
262,375
|
|
|
$
|
9.57
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
127,500
|
|
|
$
|
15.04
|
|
Released
|
(40,000
|
)
|
|
$
|
4.97
|
|
|
(90,626
|
)
|
|
$
|
8.38
|
|
Canceled or forfeited
|
—
|
|
|
$
|
—
|
|
|
(7,500
|
)
|
|
$
|
11.14
|
|
Outstanding at December 31, 2012
|
181,500
|
|
|
$
|
5.02
|
|
|
291,749
|
|
|
$
|
12.29
|
|
Options Outstanding at December 31,
2012
A summary of stock options that are outstanding at December 31,
2012
for the 2010 Plan and the Equity Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices:
|
Number of
Options Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual Life in Years
|
|
Aggregate
Intrinsic Value
|
2010 Plan
|
|
|
|
|
|
|
|
$12.16 – $13.75
|
349,000
|
|
|
$
|
13.08
|
|
|
11.8
|
|
$
|
1,798,695
|
|
$15.04 – $15.90
|
116,096
|
|
|
$
|
15.14
|
|
|
9.8
|
|
359,084
|
|
|
465,096
|
|
|
$
|
13.59
|
|
|
11.3
|
|
$
|
2,157,779
|
|
Equity Plan
|
|
|
|
|
|
|
|
$2.35 – $3.26
|
526,625
|
|
|
$
|
3.14
|
|
|
5.2
|
|
$
|
7,948,056
|
|
$3.48 – $4.90
|
1,316,147
|
|
|
$
|
4.47
|
|
|
5.0
|
|
18,105,505
|
|
$5.25 – $7.18
|
741,775
|
|
|
$
|
6.15
|
|
|
7.2
|
|
8,959,119
|
|
|
2,584,547
|
|
|
$
|
4.68
|
|
|
5.7
|
|
$
|
35,012,680
|
|
At December 31,
2012
, there are also
153,000
options remaining outstanding under the 1991 stock option plan, with
127,000
options ranging in prices from
$2.88
to
$6.00
, and
26,000
options ranging in prices from
$16.19
to
$26.06
, all with a remaining average contractual life of
2.4 years
, and having an intrinsic value of $
1.6
million.
Options Exercisable at December 31,
2012
A summary of stock options that are exercisable at December 31,
2012
for the 2010 Plan and the Equity Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices:
|
Number of
Options Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual Life in Years
|
|
Aggregate
Intrinsic Value
|
2010 Plan
|
|
|
|
|
|
|
|
$12.16 – $13.75
|
209,375
|
|
|
$
|
13.38
|
|
|
13.0
|
|
$
|
1,015,056
|
|
$15.04 – $15.90
|
6,548
|
|
|
$
|
15.90
|
|
|
14.7
|
|
15,257
|
|
|
215,923
|
|
|
$
|
13.46
|
|
|
13.0
|
|
$
|
1,030,313
|
|
Equity Plan
|
|
|
|
|
|
|
|
$2.35 – $3.26
|
526,625
|
|
|
$
|
3.14
|
|
|
5.2
|
|
$
|
7,948,056
|
|
$3.48 – $4.90
|
1,251,024
|
|
|
$
|
4.45
|
|
|
5.0
|
|
17,237,415
|
|
$5.25 – $7.18
|
628,427
|
|
|
$
|
5.97
|
|
|
6.9
|
|
7,706,623
|
|
|
2,406,076
|
|
|
$
|
4.56
|
|
|
5.5
|
|
$
|
32,892,094
|
|
At December 31,
2012
, there are also
153,000
options remaining exercisable under the 1991 stock option plan, with
127,000
options ranging in prices from
$2.88
to
$6.00
, and
26,000
options ranging in prices from
$16.19
to
$26.06
, all with a remaining average contractual life of
2.4
years, and having an intrinsic value of $
1.6
million.
The aggregate intrinsic values as calculated in the above charts detailing options that are outstanding and those that are exercisable, respectively, are based upon the Company’s closing stock price on December 31,
2012
of
$18.23
per share.
11. Significant Customer
International Business Machines Corporation (IBM) is the Company’s largest customer. In
2012
,
2011
, and
2010
, IBM accounted for $
113.5
million or
26.7%
, $
116.5
million or
29.4%
, and $
102.3
million or
30.9%
of the Company’s consolidated revenue, respectively. The Company’s accounts receivable from IBM at December 31,
2012
and
2011
amounted to $
12.6
million and $
12.8
million, respectively. No other customer accounted for more than
10.0%
of revenue in
2012
,
2011
, or
2010
.
The Company and its subsidiaries are involved from time to time in various legal proceedings and tax audits arising in the ordinary course of business. At December 31,
2012
and
2011
, the Company was in discussion with various governmental agencies relative to tax matters, including income, sales and use, and property and franchise taxes. The outcome of these audits and legal proceedings, as applicable, involving the Company and its subsidiaries cannot be predicted with certainty, and the amount of any liability that could arise with respect to such audits cannot be accurately predicted. However, as none of these matters are individually or in the aggregate significant, and as management has recorded an estimate of its potential liability for these audits at December 31,
2012
and
2011
, and the Company does not have any open legal proceedings, the Company does not expect the conclusion of these matters to have a material adverse effect on the financial position, results of operations, or cash flows of the Company.
|
|
13.
|
Enterprise-Wide Disclosures
|
The Company operates in one industry segment, providing IT services to its clients. The services provided include strategic and flexible staffing and the planning, design, implementation, and maintenance of comprehensive IT solutions. All of the Company’s revenue is generated from these services. CTG’s reportable information is based on geographical areas. The accounting policies of the individual geographical areas are the same as those described in note 1, “Summary of Significant Accounting Policies.”
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Information About Geographic Areas
|
2012
|
|
2011
|
|
2010
|
(amounts in thousands)
|
|
|
|
|
|
Revenue from External Customers:
|
|
|
|
|
|
United States
|
$
|
355,022
|
|
|
$
|
328,422
|
|
|
$
|
269,071
|
|
Belgium
(1)
|
41,957
|
|
|
43,011
|
|
|
41,317
|
|
Other European countries
|
26,653
|
|
|
23,969
|
|
|
19,396
|
|
Other country
|
783
|
|
|
873
|
|
|
1,623
|
|
Total revenue
|
$
|
424,415
|
|
|
$
|
396,275
|
|
|
$
|
331,407
|
|
Long-lived Assets:
|
|
|
|
|
|
United States
|
$
|
6,102
|
|
|
$
|
7,119
|
|
|
$
|
7,730
|
|
Europe
|
814
|
|
|
850
|
|
|
634
|
|
Total long-lived assets
|
$
|
6,916
|
|
|
$
|
7,969
|
|
|
$
|
8,364
|
|
Deferred Tax Assets, Net of Valuation Allowance:
|
|
|
|
|
|
United States
|
$
|
8,485
|
|
|
$
|
8,368
|
|
|
$
|
7,261
|
|
Europe
|
—
|
|
|
—
|
|
|
—
|
|
Other country
|
—
|
|
|
—
|
|
|
—
|
|
Total deferred tax assets, net
|
$
|
8,485
|
|
|
$
|
8,368
|
|
|
$
|
7,261
|
|
|
|
(1)
|
Revenue for Belgium has been disclosed separately as it exceeds
10%
of consolidated revenue for certain of the years presented
|
14. Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
First
|
|
Second (1)
|
|
Third
|
|
Fourth (1)
|
|
Total
|
(amounts in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
103,367
|
|
|
$
|
106,705
|
|
|
$
|
106,418
|
|
|
$
|
107,925
|
|
|
$
|
424,415
|
|
Direct costs
|
81,515
|
|
|
83,810
|
|
|
83,283
|
|
|
84,478
|
|
|
333,086
|
|
Gross profit
|
21,852
|
|
|
22,895
|
|
|
23,135
|
|
|
23,447
|
|
|
91,329
|
|
Selling, general, and administrative expenses
|
16,253
|
|
|
16,752
|
|
|
16,812
|
|
|
17,050
|
|
|
66,867
|
|
Operating income
|
5,599
|
|
|
6,143
|
|
|
6,323
|
|
|
6,397
|
|
|
24,462
|
|
Interest and other income (expense), net
|
(50
|
)
|
|
384
|
|
|
(68
|
)
|
|
717
|
|
|
983
|
|
Income before income taxes
|
5,549
|
|
|
6,527
|
|
|
6,255
|
|
|
7,114
|
|
|
25,445
|
|
Provision for income taxes
|
2,189
|
|
|
2,404
|
|
|
2,442
|
|
|
2,245
|
|
|
9,280
|
|
Net income
|
$
|
3,360
|
|
|
$
|
4,123
|
|
|
$
|
3,813
|
|
|
$
|
4,869
|
|
|
$
|
16,165
|
|
Basic net income per share
|
$
|
0.22
|
|
|
$
|
0.27
|
|
|
$
|
0.25
|
|
|
$
|
0.32
|
|
|
$
|
1.07
|
|
Diluted net income per share
|
$
|
0.20
|
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.29
|
|
|
$
|
0.96
|
|
|
|
(1)
|
Included in interest and other income is
$0.4
million or
$0.03
basic and diluted net income per share, and
$0.8
million or
$0.05
basic and diluted net income per share in the second and fourth quarters, respectively, for life insurance proceeds received for former Company executives that passed away during the respective quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
(amounts in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
95,909
|
|
|
$
|
98,327
|
|
|
$
|
101,119
|
|
|
$
|
100,920
|
|
|
$
|
396,275
|
|
Direct costs
|
76,112
|
|
|
77,594
|
|
|
80,152
|
|
|
78,126
|
|
|
311,984
|
|
Gross profit
|
19,797
|
|
|
20,733
|
|
|
20,967
|
|
|
22,794
|
|
|
84,291
|
|
Selling, general, and administrative expenses
|
15,198
|
|
|
16,056
|
|
|
16,391
|
|
|
17,336
|
|
|
64,981
|
|
Operating income
|
4,599
|
|
|
4,677
|
|
|
4,576
|
|
|
5,458
|
|
|
19,310
|
|
Interest and other income (expense), net
|
(37
|
)
|
|
(48
|
)
|
|
50
|
|
|
(152
|
)
|
|
(187
|
)
|
Income before income taxes
|
4,562
|
|
|
4,629
|
|
|
4,626
|
|
|
5,306
|
|
|
19,123
|
|
Provision for income taxes
|
1,734
|
|
|
1,799
|
|
|
1,635
|
|
|
2,017
|
|
|
7,185
|
|
Net income
|
$
|
2,828
|
|
|
$
|
2,830
|
|
|
$
|
2,991
|
|
|
$
|
3,289
|
|
|
$
|
11,938
|
|
Basic net income per share
|
$
|
0.19
|
|
|
$
|
0.19
|
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
|
$
|
0.80
|
|
Diluted net income per share
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
|
$
|
0.71
|
|