COMPUTER TASK GROUP INC - Annual Report: 2020 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2020

OR

For the Transition period from                      to                    

Commission File No. 1-9410

COMPUTER TASK GROUP, INCORPORATED

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (716) 882-8000 

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES ☐    NO ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES ☐    NO ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES ☒    NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES ☒    NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “an emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES ☐    NO ☒

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold on the last business day of the registrant’s most recently completed second quarter was $60.4 million. Solely for the purposes of this calculation, all persons who are or may be executive officers or directors of the registrant have been deemed to be affiliates.

The total number of shares of Common Stock of the Registrant outstanding at March 5, 2021 was 15,192,845.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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SEC Form 10-K Index

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As used in this annual report on Form 10-K, references to “CTG,” “the Company” or “the Registrant” refer to Computer Task Group, Incorporated and its subsidiaries, unless the context suggests otherwise.

PART I

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements made by the management of Computer Task Group, Incorporated (“CTG,” the “Company” or the “Registrant”) that are subject to a number of risks and uncertainties. These forward-looking statements are based on information as of the date of this report. The Company assumes no obligation to update these statements based on information from and after the date of this report. Generally, forward-looking statements include words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “could,” “may,” “might,” “should,” “will” and words and phrases of similar impact. The forward-looking statements include, but are not limited to, statements regarding future operations, industry trends or conditions and the business environment, and statements regarding future levels of or trends in business strategy and expectations, new business opportunities, cost control initiatives, business wins, market demand, revenue, operating expenses, capital expenditures, and financing. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including the following: (i) the availability to CTG of qualified professional staff, (ii) domestic and foreign industry competition for clients and talent, including technical, sales and management personnel, (iii) increased bargaining power of large clients, (iv) the Company's ability to protect confidential client data, (v) the partial or complete loss of the revenue the Company generates from International Business Machines Corporation (IBM) and other significant clients, (vi) the uncertainty of clients' implementations of cost reduction projects, (vii) the effect of healthcare reform and initiatives, (viii) the mix of revenue between staffing and solutions, (ix) currency exchange risks, (x) risks associated with operating in foreign jurisdictions, (xi) renegotiations, nullification, or breaches of contracts with clients, vendors, subcontractors or other parties, (xii) the impact of current and future laws and government regulation, as well as repeal or modification of such, affecting the information technology (IT) solutions and staffing industry, taxes and the Company's operations in particular, (xiii) industry and economic conditions, including fluctuations in demand for IT services, (xiv) consolidation among the Company's competitors or clients, (xv) the need to supplement or change our IT services in response to new offerings in the industry or changes in client requirements for IT products and solutions, (xvi) the risks associated with acquisitions, (xvii) actions of activist shareholders, (xviii) the effects of the COVID-19 pandemic and the regulatory, social, and business responses thereto on the Company’s business, operations, employees, contractors, and clients, and (xix) the risks described in Item 1A of this annual report on Form 10-K and from time to time in the Company's reports filed with the Securities and Exchange Commission (SEC).

Overview

CTG was incorporated in Buffalo, New York on March 11, 1966, and its corporate headquarters are located at 300 Corporate Parkway, Suite 214N, Amherst, New York 14226 (716-882-8000). CTG is an information and technology solutions company with operations in North and South America, Western Europe, and India. CTG’s employees and billable subcontractors total approximately 3,900 people worldwide at December 31, 2020. During 2020, the Company had thirteen operating subsidiaries: Computer Task Group of Canada, Inc. and La Societe de Tests StarDust Inc., providing services in Canada; Computer Task Group Belgium N.V., CTG ITS S.A., Computer Task Group IT Solutions, S.A., Computer Task Group Luxembourg PSF S.A., Computer Task Group (U.K.) Limited, CTG Health Solutions N.V., Soft Company SAS (“CTG France”), and StarDust SAS, each primarily providing services in Europe; Computer Task Information Technology Private Services Limited, providing services in India and CTG LATAM SAS, providing services in Colombia. The parent corporation, CTG, Inc., and CTG Federal Systems, LLC primarily provide services in North America.

The Company operates in one industry segment, providing information technology and related services to its clients. These services include information and technology-related solutions, including supplemental staffing as a solution. With solution services, the Company generally takes responsibility for the deliverables and some level of project and staff management, and services may include high-end advisory or business-related consulting. When providing staffing services, including managed staffing, staff augmentation, and volume staffing, personnel are provided to clients, who then, in turn, take their direction from the clients’ managers.

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Services

CTG is a leading provider of IT solutions and services, serving as a catalyst for our clients’ digital transformation. We increase project momentum and the speed at which our clients achieve their desired outcomes. Our solutions portfolio addresses critical challenges for clients in North America, South America, Western Europe, and India in high-growth industries. Clients we typically support are organizations with large, complex technology, information, and data requirements. Some have begun their digital transformation and are struggling to drive their desired results, while many are just starting to define their transformation needs and strategy.

CTG's Digital Transformation Solutions portfolio spans three areas that collectively address many of our clients' most pressing transformation challenges and are designed to address their unique business, technology, and operational needs. Our capabilities ensure that our clients utilize the right information technology to meet their business needs, maximize their IT systems' value, and operate efficiently and effectively. The following describes the typical services provided:

CTG’s staffing services address a range of information and technology resource needs, from filling specific talent gaps to managing high-volume staffing programs. CTG recruits, retains, and manages IT talent for its clients, which are primarily large technology service providers and other companies with multiple locations and a significant need for high-volume professional IT resources.

IT solutions and IT and other staffing revenue as a percentage of consolidated revenue for the three years ended December 31, 2020, 2019, and 2018 is as follows:

Capabilities

Our expertise in key technologies–what we call Digital Accelerators–underpins our solutions and ensure our clients get the most value from their digital technologies and methodologies. CTG's Digital Accelerators evolve to meet market needs and address the most innovative technology platforms and thinking. These Digital Accelerators include Agile and DevSecOps, Internet of Things (IoT), Intelligent Automation, Data and Analytics, Cloud, and Automated Testing.

As the pace of change accelerates, CTG accelerates our clients' digital environment through a unique combination of Transformation Solutions, Digital Accelerators, leading industry talent, domain expertise, innovative tools and methodologies, a partner ecosystem, and a Global Delivery Network.

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Vertical Markets

The Company provides a majority of its services through five vertical market focus areas: technology service providers, financial services, healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), manufacturing, and energy. The remainder of CTG’s revenue is derived from general markets.

CTG’s revenue by vertical market as a percentage of consolidated revenue for the three years ended December 31, 2020, 2019, and 2018 is as follows:

Revenue for the Company's technology service providers vertical market as a percentage of consolidated revenue increased slightly in 2020 as compared with 2019. Overall, the Company’s revenue decreased in 2020 as the global COVID-19 pandemic reduced demand for the Company’s staffing services. However, demand from our largest staffing client, IBM, which is included in this vertical market, decreased at a rate consistent with the Company’s overall decrease in revenue. The revenue as a percentage of consolidated revenue decrease in 2019 as compared with 2018 was due to a change in business mix as the Company focused on selling its IT Solutions services, which are not included in this vertical market.

Revenue for the Company’s financial services vertical market as a percentage of consolidated revenue increased in 2020 as compared with 2019 due to acquisitions completed by the Company in 2019 and 2020. Revenue decreased in 2019 as compared to 2018 due to lower demand in this vertical market throughout our European operations.

In 2020, the demand from our healthcare clients decreased at a rate that was above the overall revenue decrease for the Company, which caused the percentage of total revenue to decrease. Additionally, a significant project in this vertical market was essentially complete by the end of 2019 and was not replaced in 2020. This was a reversal of the trend of an increase in 2019 as compared with 2018 as revenue increased in that year due to the large project previously mentioned.

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The revenue in our manufacturing vertical market is primarily generated from several large staffing clients, including Lenovo (through SDI as a vendor manager for Lenovo), which is our second largest client. Revenue from Lenovo and other large clients decreased in 2020 as compared with 2019, and in 2019 as compared with 2018, as the demand for these services, which include some non-IT staffing, decreased in recent years. Additionally, the Company continues to disengage from its lowest margin staffing business, which is generally included in this vertical market.

Revenue for the Company's energy vertical market increased as a percentage of consolidated revenue in both 2020 and 2019 given strong demand for our services in this vertical market.

For the year ended December 31, 2020, CTG provided its services to 601 clients, primarily in North America and Europe. In North America, the Company operates in the United States and Canada, with about 99% of 2020 North American revenue generated in the United States. In Europe, the Company operates in Belgium, Luxembourg, France, and the United Kingdom. Of total 2020 consolidated revenue of $366.1 million, approximately 56% was generated in North America and 44% in Europe. Revenue generated in India and Colombia was insignificant. One client, IBM, accounted for greater than 10% of CTG’s consolidated revenue in 2020.

Revenue Recognition and Backlog

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, 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. Over time revenue recognition best portrays the Company’s performance in transferring control of the goods or services to the client. On most fixed-price contracts, revenue recognition is supported through contractual clauses that require the client to pay for work performed to date, including cost plus a reasonable profit margin, for goods or services that have no alternative use to the Company. On certain contracts, revenue recognition is supported through contractual clauses that indicate the client controls the asset, or work in process, as the Company creates or enhances the asset. On a given project, actual salary and indirect labor costs incurred are measured and compared with the total estimate of costs of such items at the completion of the project. Revenue is recognized based upon the percentage-of-completion calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects that include significant amounts of material or other non-labor related costs that could distort the percent complete within a percentage-of-completion calculation. The Company’s estimate of the total labor costs it expects to incur over the term of the contract is based on the nature of the project and our experience on similar projects, and includes management judgments and estimates that affect the amount of revenue recognized on fixed-price contracts in any accounting period. Losses on fixed-price projects are recorded when identified.

The Company’s revenue from contracts accounted for under time-and-material, progress billing, and percentage-of-completion methods as a percentage of consolidated revenue for the three years ended December 31, 2020, 2019, and 2018 is as follows:

As of December 31, 2020 and 2019, the backlog for fixed-price and all managed-support contracts was approximately $50.9 million and $53.6 million, respectively. Approximately 70% or $35.7 million of the December 31, 2020 backlog is expected to be earned in 2021. Approximately 56% of the $53.6 million of backlog at December 31, 2019, or $30.3 million, was earned in 2020. Revenue is subject to slight seasonal variations, with a minor slowdown and a decrease in billable resource utilization in months of high vacation and legal holidays (July, August, and December). Backlog does not tend to be seasonal; however, it does fluctuate based upon the timing of entry into long-term contracts.

Competition

The IT services market, for both information and technology solutions and IT and professional staffing services, is highly competitive. The market is also highly fragmented with many providers and no single competitor maintaining clear market leadership. Competition varies by location, the type of service, and the client to whom services are provided. The Company’s competition comes from four major channels: large national or international companies, including major accounting and consulting firms and large companies headquartered in India; hardware vendors and suppliers of

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packaged software systems; small local firms or individuals specializing in specific programming services or applications; and from a client’s internal IT staff. CTG competes against all four of these channels for its share of the market. The Company believes that to compete successfully, it is necessary to have a local geographic presence, offer appropriate IT solutions, provide skilled professional resources, and price its services competitively.

Intellectual Property

The Company has registered its symbol and logo with the U.S. Patent and Trademark Office and has taken steps to preserve its rights in other countries where it operates. We regard patents, trademarks, copyrights and other intellectual property as important to our success, and we rely on them in the United States and foreign countries to protect our investments in products and technology. Our patents expire at various times, but we believe that the loss or expiration of any individual patent would not materially affect our business. We, like any other company, may be subject to claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties from time to time in the ordinary course of business. CTG has entered into agreements with various software and hardware vendors from time to time in the normal course of business, and has capitalized certain costs under software development projects.

Human Capital Resources

Employees

CTG’s business depends on the Company’s ability to attract, develop and retain qualified professional staff to execute our strategy and provide services to its clients. The Company has a structured recruiting organization that works with its clients to meet their requirements by recruiting, retaining, and providing high quality, motivated staff. As the Company works with a number of subcontractors within CTG France, which was acquired on February 15, 2018, the Company now includes subcontractors in its total headcount, which equals approximately 3,900 total resources worldwide, with approximately 2,450 in the United States and Canada and 1,450 in Europe, as of December 31, 2020. Of these resources, approximately 91% are IT professionals and 9% are individuals who work in sales, recruiting, delivery, administrative and support positions. The Company believes that its relationship with its employees is good and supported by the Company’s 2020 recognition as a Great Place to Work® in North America, Belgium, and Luxembourg. No employees are covered by a collective bargaining agreement or are represented by a labor union. CTG is an equal opportunity employer.

COVID-19 Response

The health, well-being and safety of our employees, clients and communities is our top priority. The Company began to focus on COVID-19 as a potentially significant issue during the first quarter of 2020 as we followed global developments and observed the impacts of COVID-19 in several European markets where we operate. Our senior management team initiated regular COVID-19 planning sessions to address the critical safety, operational and business risks associated with the pandemic. With our continued commitment to monitor, assess and implement guidance and best practices for the Company as recommended by the World Health Organization (WHO) and Centers for Disease Control and Prevention (CDC), we have been able to maintain the continuity of the essential services that we provide to our clients, while also managing the impact of the spread of the virus within our business, as well as promoting the health, well-being and safety of our employees, clients and communities.

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Financial Information About Geographic Areas

The following table sets forth certain financial information relating to the performance of the Company for the three years ended December 31, 2020, 2019, and 2018. This information should be read in conjunction with the audited consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” included in this report.

Available Company Information

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act), and reports pertaining to the Company filed under Section 16 of the Exchange Act are available without charge on the Company’s website at www.ctg.com as soon as reasonably practicable after the Company electronically

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files the information with, or furnishes it to, the SEC. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company’s code of ethics (Code of Conduct), committee charters and governance policies (including a fraud and insider trading policy) are also available without charge on the Company’s website at http://investors.ctg.com/corporate-governance/governance-documents. If applicable, the Company intends to disclose future amendments to, or waivers from, certain provisions of the Code of Conduct on the Company's website or in a current report on Form 8-K.

Item 1A.Risk Factors

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. The risk factors below represent what we believe are the known material risk factors with respect to the Company and our business. Any of the following risks could materially adversely affect our business, operations, financial position or future financial results.

Global Pandemic and Related Risks

The impact of the COVID-19 pandemic has had, and is expected to continue to have, an adverse effect on our business and our financial results.

The COVID-19 pandemic has negatively affected the global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. The COVID-19 pandemic has had and is expected to continue to have an adverse effect on our business and financial performance. The extent of the impact of the COVID-19 pandemic, including our ability to execute our business strategies as planned, will depend on future developments, including the duration and severity of the pandemic, which are highly uncertain and cannot be predicted.

The future impact of COVID-19 on our business and financial results will depend on, among other factors, the duration and spread of the pandemic, the implementation or recurrence of shelter in place or similar orders in the future, new information that may emerge concerning the severity of new strains of the virus, and the effectiveness of vaccines. Therefore, we cannot reasonably estimate the full extent of the COVID-19 pandemic’s impact on our future business and financial results.

Business Related Risks

Our business depends on the availability of a large number of highly qualified IT professionals, sales and management personnel, and our ability to recruit and retain these individuals.

We actively compete with many other IT service providers for qualified personnel, including professional IT staff, recruiters, sales and business development specialists, and management. The availability of qualified personnel may affect our ability to provide services and meet the requirements of our clients. An inability to fulfill client requirements at agreed-upon rates due to a lack of available qualified personnel may adversely affect our revenue and operating results in the future.

Decreases in demand for IT Solutions and IT and Other Staffing services in the future would have an adverse effect on our revenue and operating results.

The Company’s revenue and operating results are significantly impacted by changes in demand for its services. In the past, when the world economy deteriorated, there was a significant decline in demand for the Company’s services that negatively affected the Company’s revenue and operating results as compared with prior years. Declines in demand for the requirement for our IT services in 2021 or future years would adversely affect our revenue and operating results as it has in the past.

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Our client contracts generally have a short term or are terminable on short notice, and a significant number of failures to renew contracts in place, or early terminations or renegotiations of our existing client contracts could adversely affect our results of operations.

Our clients typically retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts. We performed 81.0% of our services on a time-and-materials basis during 2020. As such, our clients generally have the right to terminate a contract with us upon written notice without the payment of any financial penalty. Client projects may involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional stages of a project, or that a client will cancel or delay additional planned engagements. These terminations, cancellations, or delays could result from factors that are beyond our control and are unrelated to our work product or the progress of the project but could be related to business or financial conditions of the client, changes in client strategies or the economy in general. When contracts are terminated, we lose the anticipated future revenue and we may not be able to eliminate the associated costs that would have been required to support those contracts in a timely manner. Consequently, our operating results in subsequent periods may be lower than expected. Our clients can cancel or reduce the scope of their engagements with us on short notice. If they do so, we may be unable to reassign our professionals to new engagements without delay. The cancellation or reduction in scope of an engagement could, therefore, reduce the utilization rate of our professionals, which would have a negative impact on our business, financial condition, and results of operations. As a result of these and other factors, our past financial performance should not be relied on as a guarantee of similar or improved future performance. Due to these factors, we believe that our results from operations in the future may fluctuate from period to period.

Competition Related Risks

Increased competition and the bargaining power of our large clients may cause our billing rates to decline, which would have an adverse effect on our revenue and, if we are unable to control our personnel costs accordingly, on our margins and operating results.

We have experienced reductions in the rates we bill a number of our larger clients for services due to highly competitive market conditions. Additionally, we actively compete against many other companies for business at both new and existing clients. Billing rate reductions or competitive pressures may lead to a decline in revenue. When faced with such pressures, if we are unable to make commensurate reductions in our personnel costs, our margins and operating results would be adversely affected.

Existing and potential clients may outsource or consider outsourcing their IT requirements to foreign countries in which we may not currently have operations, which could have an adverse effect on our ability to retain existing clients or obtain new clients.

In recent years, more companies are using, or are considering using, low-cost offshore outsourcing centers to perform technology-related work and complete projects. Currently, we have partnered with clients to perform services outside of North America in both India and Colombia to mitigate and reduce this risk to our Company. However, the risk of additional outsourcing of IT solutions overseas to countries where we do not have operations could have a material, adverse impact on our future operations.

The IT services industry is highly competitive and fragmented, which means that our clients have a number of choices for providers of IT services and we may not be able to compete effectively.

The market for our services is highly competitive. The market is fragmented, and no company holds a dominant position. Consequently, our competition for client requirements and experienced personnel varies significantly by geographic area and by the type of service provided. Some of our competitors are larger and have greater technical, financial, and marketing resources, and greater name recognition than we have in the markets we collectively serve. In addition, clients may elect to increase their internal IT system resources to satisfy their custom software development and integration needs. Finally, our industry is being impacted by the growing use of lower-cost offshore delivery capabilities (primarily India and other parts of Asia). There can be no assurance that we will be able to continue to compete successfully with existing or future competitors or that future competition will not have a material adverse effect on our results of operations and financial condition.

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The introduction of new IT services or changes in client requirements for IT services may render our existing IT Solutions or IT and Other Staffing offerings obsolete or unnecessary, which, if we are unable to keep pace with these corresponding changes, could have an adverse effect on our business.

Our success depends, in part, on our ability to implement and deliver IT Solutions or IT and other staffing services that anticipate and keep pace with rapid and continuing changes in technology, industry standards, and client preferences and requirements. We may not be successful in anticipating or responding to these developments on a timely basis, and our offerings may not be successful in the marketplace. Also, services, solutions, and technologies developed by our competitors may make our solutions or staffing offerings uncompetitive or obsolete. Any one of these circumstances could have a material adverse effect on our ability to obtain and successfully complete client engagements.

Operations Related Risks

We derive a significant portion of our revenue from one client, and a significant reduction in the amount of requirements requested by this client would have an adverse effect on our revenue and operating results.

IBM is CTG’s largest client, and we provide services to various IBM divisions in a number of locations. During the fourth quarter of 2020, the National Technical Services Agreement (NTS Agreement) with IBM was renewed and now expires on October 27, 2023. In 2020, 2019, and 2018, IBM accounted for $77.5 million or 21.2%, $84.9 million or 21.5%, and $80.6 million or 22.5% of the Company’s consolidated revenue, respectively. The Company’s accounts receivable from IBM at December 31, 2020 and 2019 totaled $11.3 million and $23.0 million, respectively.

If we are unable to bill for our services or collect our receivables, our results of operations, financial condition, and cash flows could be adversely affected.

Our business depends on our ability to obtain payment from our clients of the amounts they owe us for work performed. We evaluate the financial condition of our clients and typically bill and collect on reasonable cycles. However, we might not accurately assess the creditworthiness of our clients, or macroeconomic conditions could result in financial difficulties for our clients, including bankruptcy and insolvency. In certain industries, some clients have requested longer payment terms, which has adversely affected, and may continue to adversely affect, our cash flows. The timely collection of client balances also depends on our ability to complete our contractual commitments as required. If we are unable to meet our commitments or bill our clients on a timely basis, our results of operations and cash flows could be adversely affected. We have established allowances for losses of receivables and unbilled services where we deem amounts to be uncollectible. The uncollectible amounts due to the Company from clients could differ from those that we currently anticipate.

If we repatriate our cash balances from our foreign operations, we may be subject to additional tax liabilities.

We earn a portion of our operating income outside of the United States, and any repatriation or deemed repatriation of funds currently held in foreign jurisdictions to the United States may result in additional tax liabilities for the Company. In addition, there have been changes to the tax laws in the United States that impact how United States-based multinational corporations are taxed on foreign earnings. Any further changes in these tax laws could have a material adverse impact on our tax expense and cash flows.

Ineffective internal controls could affect the Company's business and operating results. 

The Company's internal control over financial reporting may not prevent or detect misstatements because of the inherent limitations of internal controls, including the possibility of human error, the circumvention or overriding of controls, poorly designed or ineffective controls, or fraud. Internal controls that are deemed to be effective can provide only reasonable assurance with respect to the preparation and fair presentation of the Company's consolidated financial statements. If the Company fails to maintain the adequacy of its internal controls, including the failure to implement new or improve existing controls, or fails to properly execute or properly test these controls, the Company's business and operating results could be adversely impacted and the Company could fail to meet its financial reporting obligations.

Changing economic conditions and the effect of such changes on accounting estimates could have a material impact on our results of operations.

The Company has also made a number of estimates and assumptions relating to the reporting of its assets and liabilities and the disclosure of contingent assets and liabilities to prepare its consolidated financial statements pursuant to the rules and regulations of the SEC and other accounting rulemaking authorities. Such estimates primarily relate to the valuation of stock options for recording equity-based compensation expense, allowances for doubtful accounts receivable, investment valuation, discount rates associated with pension plans, incurred but not recorded claims related to the

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Company's self-insured medical plan, valuation allowances for deferred tax assets, goodwill, acquisition and related accounting, legal matters, other contingencies and estimates of progress toward completion and direct profit or loss on contracts, as applicable. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Changes in the economic climates in which the Company operates may affect these estimates and will be reflected in the Company’s consolidated financial statements in the event they occur. Such changes could result in a material impact on the Company’s results of operations.

Cyber Related Risks

We could be subject to liability and damage to our reputation resulting from cyber-attacks or data breaches.

Cyber risks for companies providing global information technology (IT) and professional services, especially in regulated industries, continue to increase. This increase in risk may be attributed to the increasing value and dependence on data, including organizations’ intellectual property and citizens’ personal data that could be misused for identity theft and fraud. While the value and dependence of data has increased, likewise the reliance on electronic communications, mobile technologies, social networking, hybrid and cloud-based resources, smart devices, and emerging technologies continues to grow. In some regions, the regulatory compliance requirements surrounding data protection and privacy have also increased. In addition, the sophistication, motivation, and organization of cyber attacks continues to evolve, as does the sophistication of threat actors such as organized crime, hackers, terrorists, activists, insider threats, foreign governments, and third parties.

The Company’s business, operations, and its clients rely on the secure processing, transmission, storage, integrity, and availability of data, services, and resources provided by its IT environments and operational processes. The Company’s complex IT environments support a variety of technologies, industries, delivery services, regulatory compliance requirements, and clients globally.

Although the Company has not experienced any prior material data breaches, regulatory non-compliance incidents, or cyber security incidents, its environments may be impacted by cyber attacks or cyber security incidents caused via the aforementioned threat actors or the Company's personnel. These incidents could result in data loss, result in the disruption of the Company's internal or client-supporting operations and services, adversely affect its adherence with regulatory requirements, or result in a data breach. Data losses and data breaches could include the unauthorized disclosure, misuse, loss, and destruction of both the Company’s and its clients’ intellectual property, financial information, or other regulated or privacy-related information.  This includes but is not limited to United States personally identifiable information (PII), personal data under the European General Data Protection Regulation (GDPR), data covered under Luxembourg Law on the Financial Sector, and protected health information (PHI) under the United States Health Insurance Portability and Accountability Act of 1996 (HIPAA).

The Company’s failure to protect sensitive data and address the regulatory compliance requirements of data and associated internal or delivery services under the Company’s control could result in reputational damage, fines and penalties, litigation costs, external investigations, compensation costs including reimbursement and monetary awards, prohibition of providing services in a region or industry, and/or additional compliance costs that could have a material, adverse impact on the Company's operations. It could also have an adverse impact on the Company’s ability to maintain and execute new contracts with clients that produce or work with similar data, and make it more difficult to retain and recruit qualified personnel to perform its services in the future. As the cyber threat and regulatory compliance landscape continues to evolve and the Company’s risk profile changes, it will be required to expend additional resources to enhance and implement new risk mitigation strategies.

Regulatory or Legislative Related Risks

The foreign currency exchange, legislative, tax, regulatory and economic risks associated with international operations could have an adverse effect on our operating results if we are unable to mitigate or hedge these risks.

We have operations in the United States and Canada in North America, in Belgium, Luxembourg, France, and the United Kingdom in Europe, in India, and in Colombia. Although our foreign operations conduct their business in their local currencies, these operations are subject to their own currency fluctuations, legislation, employment and tax law changes, and economic climates. These factors as they relate to our foreign operations are different from those of the United States. Although we actively manage these foreign operations with local management teams, our overall operating results may be negatively affected by local economic conditions, changes in foreign currency exchange rates, or tax, regulatory or other economic changes beyond our control.

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In addition, any widespread outbreak of an illness, pandemic or other local or global health issue (including COVID-19), natural disasters, climate change impacts, or uncertain political climates, international hostilities, or any terrorist activities, could adversely affect customer demand, the Company’s operations, and its ability to source and deliver services to its customers, which could have a material adverse effect on the Company’s financial results. For instance, the U.K. referendum to exit from the European Union, commonly referred to as “Brexit,” has caused global economic, trade and regulatory uncertainty. The Company continues to monitor the impact that the United Kingdom’s exit from the European Union (Brexit) has had on its operations. To date, there has been a nominal impact on the Company’s operating results from Brexit. As the total revenue generated by our British subsidiary is immaterial as compared with the Company’s total consolidated revenue, we do not expect the nominal impact the exit has had on the Company’s operations to date to change in the foreseeable future.

Government cuts in healthcare programs, such as Medicare, and delays in legislative or regulatory healthcare mandates could cause a reduction in IT spending by our healthcare clients, which could materially and adversely affect our revenue and results of operations.

The Company’s growth efforts include a focus on the healthcare market. Growth in this market depends on continued spending by our healthcare clients on IT projects. Cuts in government healthcare programs, such as sequestration, which has periodically cut Medicare reimbursements to hospitals and health systems, may result in reduced expenditures by our healthcare clients on IT projects. If additional government cuts in healthcare programs occur, whether due to the failure of Congress to adopt a budget, pass appropriations bills or raise the U.S. debt ceiling or for other reasons, there may be delays, reductions or cessation of funding to our clients, which could cause our clients to purchase less IT services from us, and materially and adversely affect our revenue and results of operations.

In addition, delays in implementation of legislative or regulatory healthcare mandates could adversely affect the IT spending by our healthcare clients to implement such mandates. If the implementation of existing or contemplated legislative or regulatory healthcare mandates are deferred, the resulting reduction in IT spending by our healthcare clients could materially and adversely affect our revenue and results of operations.

Changes in government regulations and laws affecting the IT services industry, and the industries in which our clients operate, including accounting principles and interpretations, and the taxation of domestic operations could adversely affect our results of operations.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Patient Protection and Affordable Care Act (PPACA), and new SEC regulations, create uncertainty for companies such as ours. These laws, regulations, and standards are subject to varying interpretations which, in many instances, is due to their lack of specificity. As a result, the application of these standards and regulations in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, tax regulations and other standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

The Financial Accounting Standards Board (FASB), the SEC, and the Public Company Accounting Oversight Board (PCAOB) or other accounting rule making authorities have issued and may continue to issue new accounting rules or auditing standards that are different from those that we presently apply to our financial results. Such new accounting rules or auditing standards could require significant changes from the way we currently report our financial condition, results of operations or cash flows.

U.S. generally accepted accounting principles have been the subject of frequent changes in interpretations, and the frequency of future accounting policy changes may accelerate. Such future changes in financial accounting standards may have a significant effect on our reported results of operations, including results of transactions entered into before the effective date of the changes.

We are subject to income and other taxes in the United States (federal and state) and numerous foreign jurisdictions. Our provisions for income and other taxes and our tax liabilities in the future could be adversely affected by numerous factors. These factors include, but are not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in various federal, state and international tax laws,

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regulations, accounting principles or interpretations thereof, which could adversely impact our financial condition, results of operations, and cash flows in future periods.

Acquisition Related Risks

Risks to the Company from acquisitions include integration challenges, disruptions of the Company's core business, a failure to achieve objectives, and the assumption of liabilities.  

The Company regularly evaluates acquisitions to aid the Company's growth in revenue and profits by expanding the services the Company offers in the geographies in which the Company operates, and its client base. Acquisitions often present significant challenges and risks relating to the integration of the business into the Company, and there can be no assurances that the Company will manage acquisitions successfully, that the Company's core business will not be significantly disrupted after an acquisition is finalized, or that strategic acquisition opportunities will be available to the Company on acceptable terms. The risks from an acquisition include the Company failing to achieve strategic objectives and anticipated revenue and profit improvements, borrowing a significant amount of money to fund the acquisitions which creates financial stress for the Company's operations, as well as failing to retain the key personnel of the acquired business. Additionally, failure to meet financial objectives of an acquisition could lead to impairment charges of intangible assets and goodwill in future periods. Finally, the assumption of liabilities related to litigation or other legal proceedings involving the acquired business may present a significant risk.

Capital Resources Related Risks

We may require additional capital to support our business, and this capital may not be available to us on acceptable terms, if at all.

The Company has a credit and security agreement (the “Credit and Security Agreement”) with its bank, which provides for a three-year revolving credit facility in an aggregate principal amount of $45.0 million, including a sublimit of $10.0 million for letters of credit. The Credit and Security Agreement was amended on December 23, 2019 to extend its term for three years and now expires in December 2022. At December 31, 2020, we had no borrowings outstanding under our revolving credit facility. The Company may be dependent on our revolving credit facility to meet working capital and operational requirements, and access to our facility is dependent on, among other things, compliance with applicable covenants, including fixed charge coverage ratio, consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) targets, and a limit on annual expenditures for property, plant, equipment, and capitalized software. The fixed charge coverage ratio is only tested if availability on a measurement date is below a threshold. The amount available for borrowing under the revolving credit facility could be significantly reduced due to poor operational performance, or other factors. Any loss or material reduction of our ability to access funds under the revolving credit facility could materially and negatively impact our liquidity.

Risk from Activist Shareholders

Actions of activist stockholders could cause us to incur substantial costs, divert management’s and the board’s attention and resources, and have an adverse effect on our business and stock price.

From time to time, we may be subject to proposals by stockholders urging us to take certain corporate actions. If activist stockholder activities ensue, our business could be adversely affected as responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of management and our board of directors, all of which could interfere with our ability to execute our strategic plan. We may be required to retain the services of various professionals to advise us on activist stockholder matters, including legal, financial and communications advisors, the costs of which may adversely affect our financial results. In addition, the perceived uncertainties as to our future direction, strategy or leadership created as a consequence of activist stockholder initiatives may result in the loss of potential business opportunities, harm our ability to attract new investors, clients, and employees, and cause our stock price to experience periods of volatility or stagnation.

Share Price Related Risks

Our share price could fluctuate and be difficult to predict.

Our share price has fluctuated in the past and could continue to fluctuate in the future in response to various factors, both external and internal. These factors include:

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None.

The Company previously owned a corporate administrative building at 700 Delaware Avenue, and the corporate headquarters at 800 Delaware Avenue, located in Buffalo, New York. The Company sold its 700 Delaware Avenue corporate administrative building in February 2018 for $1.8 million, and as the book value was $1.6 million, we recorded an immaterial gain on the sale. During the 2020 second quarter, the Company sold its 800 Delaware Avenue corporate headquarters. As the sale price of the building was $2.5 million, and the book value of the building was approximately $1.6 million, the Company recorded a gain on the sale after related fees of about $0.8 million in the 2020 second quarter.

All of the remaining Company locations, totaling approximately 25 sites, are leased facilities. Most of these facilities are located in the United States, with 11 of these locations in Europe in the countries of Belgium, Luxembourg, France and the United Kingdom, where our European operations are located, and one each in Canada, India, and Colombia. These facilities generally serve as sales and support offices and their size varies with the number of people employed at each office, ranging from approximately 200 to 23,000 square feet. The Company’s lease terms vary from periods of less than a year to fifteen years and typically have flexible renewal options. The Company believes that its leased facilities are adequate to support its current and anticipated future needs.

The Company and its subsidiaries are involved from time to time in various legal proceedings arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving the Company and its subsidiaries cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not expect these matters, if any, to have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

Not applicable.

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PART II

Stock Market Information

The Company’s common stock is traded on The NASDAQ Stock Market LLC under the symbol CTG. The following table sets forth the high and low sales prices for the Company’s common stock for each quarter of the previous two years.

On March 5, 2021, there were 1,226 holders of record of the Company’s common shares. The Company currently does not pay a dividend. A dividend was last paid in the 2016 fourth quarter. At December 31, 2020, under the terms of the Company's revolving credit facility, the Company is required to meet certain financial covenants in order to pay dividends. The Company was in compliance with these financial covenants at both December 31, 2020 and 2019. For additional information regarding these financial covenants, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Liquidity." The determination of the timing, amount and the payment of dividends, if any, on the Company’s common stock in the future is at the discretion of the Board of Directors and will depend upon, among other things, the Company’s profitability, liquidity, financial condition, capital requirements, and compliance with the covenants under the Company's Credit and Security agreement. The Company currently has no intention to pay a dividend in the foreseeable future.

For information concerning common stock issued in connection with the Company’s equity compensation plans, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Issuer Purchases of Equity Securities

The Company’s Board of Directors has authorized the repurchase of its stock up to a total of $30.0 million. As of March 12, 2021, the Company had repurchased approximately $22.3 million shares pursuant to the authorization, leaving a remaining authorization of approximately $7.7 million. No shares were purchased during 2020 under this authorization.

The information below for the fiscal fourth quarter of 2020 does not include shares withheld by or surrendered to the Company either to satisfy the exercise cost for the cashless exercise of employee stock options, or to satisfy tax withholding obligations associated with employee equity awards as the number of shares is minor.

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Company Performance Graph

The following graph displays a five-year comparison of cumulative total shareholder returns for the Company’s common stock, the S&P 500 Index, and the Dow Jones U.S. Computer Services Index, assuming a base index of $100 at the end of 2015. The cumulative total return for each annual period within the five years presented is measured by dividing (1) the sum of (A) the cumulative amount of dividends for the period, assuming dividend reinvestment, and (B) the difference between the Company’s share price at the end and the beginning of the period by (2) the share price at the beginning of the period. The calculations were made excluding trading commissions and taxes.

The information included under this section entitled “Company Performance Graph” is deemed not to be “soliciting material” or “filed” with the SEC, is not subject to the liabilities of Section 18 of the Exchange Act, and shall not be deemed incorporated by reference into any of the filings previously made or made in the future by the Company under the Exchange Act or the Securities Act of 1933, except to the extent the Company specifically incorporates any such information into a document that is filed.

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Consolidated Summary—Five-Year Selected Financial Information

The selected operating data and financial position information set forth below for each of the years in the five-year period ended December 31, 2020 has been derived from the Company’s audited consolidated financial statements. This information should be read in conjunction with the audited consolidated financial statements and notes thereto in Item 8, “Financial Statements and Supplementary Data” included in this report.

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Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements made by the management of Computer Task Group, Incorporated (“CTG,” the “Company” or the “Registrant”) that are subject to a number of risks and uncertainties. These forward-looking statements are based on information as of the date of this report. The Company assumes no obligation to update these statements based on information from and after the date of this report. Generally, forward-looking statements include words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “could,” “may,” “might,” “should,” “will” and words and phrases of similar impact. The forward-looking statements include, but are not limited to, statements regarding future operations, industry trends or conditions and the business environment, and statements regarding future levels of or trends in business strategy and expectations, new business opportunities, cost control initiatives, business wins, market demand, revenue, operating expenses, capital expenditures, and financing. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including the following: (i) the availability to CTG of qualified professional staff, (ii) domestic and foreign industry competition for clients and talent, including technical, sales and management personnel, (iii) increased bargaining power of large clients, (iv) the Company's ability to protect confidential client data, (v) the partial or complete loss of the revenue the Company generates from International Business Machines Corporation (IBM) and other significant clients, (vi) the uncertainty of clients' implementations of cost reduction projects, (vii) the effect of healthcare reform and initiatives, (viii) the mix of revenue between staffing and solutions, (ix) currency exchange risks, (x) risks associated with operating in foreign jurisdictions, (xi) renegotiations, nullification, or breaches of contracts with clients, vendors, subcontractors or other parties, (xii) the impact of current and future laws and government regulation, as well as repeal or modification of such, affecting the information technology (IT) solutions and staffing industry, taxes and the Company's operations in particular, (xiii) industry and economic conditions, including fluctuations in demand for IT services, (xiv) consolidation among the Company's competitors or clients, (xv) the need to supplement or change our IT services in response to new offerings in the industry or changes in client requirements for IT products and solutions, (xvi) the risks associated with acquisitions, (xvii) actions of activist shareholders, (xviii) the effects of the COVID-19 pandemic and the regulatory, social, and business responses thereto on the Company’s business, operations, employees, contractors, and clients, and (xix) the risks described in Item 1A of the Company’s most recently filed annual report on Form 10-K, and from time to time, in the Company's reports filed with the Securities and Exchange Commission (SEC).

Industry Trends

The market demand for the Company’s services is heavily dependent on information and technology-related spending by major corporations, organizations and government entities in the markets and regions that we serve. The pace of technology advances, changes in business requirements, and the practices of our clients all have a significant impact on the demand for the services we provide. Competition for new engagements and pricing pressure has been strong as there are numerous competitors. The demand for the Company's information and technology-related solutions business, primarily in our healthcare vertical market in North America, improved in 2018 and 2019. In 2020, demand was significantly reduced, primarily in our staffing business, as the COVID-19 global pandemic (“Pandemic”) had a significant negative impact on the economies of the countries and the markets we serve. To offset this decrease in demand, the Company took action to reduce its expenses, including a full-time furlough for certain employees and a 20% furlough for nearly all other non-billable employees, including the senior management team. This furlough was in place for about six months, and ended with the close of the Company’s fiscal third quarter.

The Company also actively participated in government-sponsored programs in its European operations, including Belgium, France and Luxembourg, that partially reimbursed the Company for the costs of employees that were made idle by the Pandemic.  This primarily included employees that were previously billable on an engagement, but the client made a decision to stop or end a project prior to completion. The Company is continuing to participate in these programs, but the benefit to the Company’s European operations was diminished subsequent to August 2020 as the respective governments reduced the reimbursement under these programs at that time. The Company believes that if these employees had remained billable throughout 2020, the revenue they would have generated would have approximated the reimbursements received from the various governments.

The Company operates in one industry segment, providing information technology and related services to its clients. These services include information and technology-related solutions, including supplemental staffing as a solution. With solution services, the Company generally takes responsibility for the deliverables and some level of project and staff management, and services may include high-end advisory or business-related consulting. When providing staffing services, including managed staffing, staff augmentation, and volume staffing, personnel are provided to clients, who then, in turn, take their direction from the clients’ managers.

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IT solutions and IT and other staffing revenue as a percentage of consolidated revenue for the three years ended December 31, 2020, 2019, and 2018 is as follows:

The Company provides a majority of its services in five vertical market focus areas: technology service providers, financial services, healthcare (which includes services provided to healthcare providers, health insurers (payers), and life sciences companies), manufacturing, and energy. The remainder of CTG’s revenue is derived from general markets.

CTG’s revenue by vertical market as a percentage of consolidated revenue for the three years ended December 31, 2020, 2019, and 2018 is as follows:

The IT services industry is extremely competitive and characterized by continuous changes in client requirements and improvements in technologies. Our competition varies significantly by geographic region, as well as by the type of service provided. Many of our competitors are larger than CTG, and have greater financial, technical, sales, and marketing resources. In addition, the Company frequently competes with a client’s own internal IT staff. Our industry is impacted by the growing use of lower-cost offshore delivery capabilities (primarily India and other parts of Asia). There can be no assurance that we will be able to continue to compete successfully with existing or future competitors or that future competition will not have a material adverse effect on our results of operations and financial condition.

Revenue 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, 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. Over time revenue recognition best portrays the Company’s performance in transferring control of the goods or services to the client. On most fixed price contracts, revenue recognition is supported through contractual clauses that require the client to pay for work performed to date, including cost plus a reasonable profit margin, for goods or services that have no alternative use to the Company. On certain contracts, revenue recognition is supported through contractual clauses that indicate the client controls the asset, or work in process, as the Company creates or enhances the asset. On a given project, actual salary and indirect labor costs incurred are measured and compared with the total estimate of costs of such items at the completion of the project. Revenue is recognized based upon the percentage-of-completion calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects that include significant amounts of material or other non-labor related costs that could distort the percent complete within a percentage-of-completion calculation. The Company’s estimate of the total labor costs it expects to incur over the term of the contract is based on the nature of the project and our experience on similar projects, and includes management judgments and estimates that affect the amount of revenue recognized on fixed-price contracts in any accounting period. Losses on fixed-price projects are recorded when identified

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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 three years ended December 31, 2020, 2019, and 2018 is as follows:

Results of Operations

The table below sets forth percentage information calculated as a percentage of consolidated revenue as reported on the Company’s consolidated statements of operations as included in Item 8, “Financial Statements and Supplementary Data” in this report.

2020 as compared with 2019

The Company recorded revenue in 2020 and 2019 as follows:

The Company’s strategy throughout its operations is to expand the amount of IT solutions services it provides to its clients as compared with IT staffing services, and to focus on delivering digital solutions. IT Solutions provide significant value to our clients, and drive higher bill rates and margins for the Company. Our existing solutions include business, technology, and operations solutions that aid our clients in digitally transforming their company, and ultimately meet the needs of their clients. The digital services the Company delivers includes the Internet of Things, Intelligent Automation, Data and Analytics, Cloud and Automated Testing.

The revenue decrease in North America in 2020 as compared with 2019 was primarily due to a significant decrease in demand for the Company's IT staffing business due to the impact the Pandemic had on the economies in the markets we serve. Additionally, the Company continues to disengage from its lowest margin staffing services as part of its strategy. Demand in some areas of our IT solutions business, primarily in our healthcare vertical market, also declined driven by the impact of the Pandemic. The revenue increase in Europe was primarily due to strong demand for the Company’s services in the European markets we serve, and the acquisition of StarDust on March 3, 2020, which at the time of acquisition had estimated annual revenue of approximately $6 million. Reimbursable expenses billed to clients and included in revenue totaled $1.9 million and $2.6 million in 2020 and 2019, respectively.

On a consolidated basis, IT solutions revenue decreased $3.0 million or 2.1% in 2020 as compared with 2019. The decrease is primarily due to a decrease in IT solutions services in North America in our healthcare vertical market. In our European operations, IT solutions revenue remained strong and was complemented by the acquisition of StarDust, a company that provides crowd testing and quality assurance services in France and Canada. As a percentage of consolidated revenue, IT solutions revenue increased 2.0% to 37.8% of total revenue.

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Also on a consolidated basis, IT and other staffing revenue decreased $25.1 million or 9.9% during 2020 as compared with 2019. The IT staffing revenue decrease was again primarily due to a significant decrease in demand resulting from the Pandemic. Additionally, given the Company’s strategic focus on becoming a digital solutions company, starting in the second half of 2019 the Company critically evaluated each significant staffing engagement as it came up for renewal to determine if the Company would continue to provide those services to its client. These decisions are based on, among other factors, critically evaluating the work performed, the availability of the resources, the client, the long-term opportunities for the services provided at the client, and the revenue and profit associated with the engagement. The Company made a decision to disengage from several small engagements and a large staffing engagement late in 2019. While these decisions negatively affected revenue during 2020, the Company believes the reallocation of resources away from these engagements to other higher margin, IT solutions services will positively impact the Company’s operations in the long-term, and aid in the execution of the strategy to become a digital transformation solution provider.  

Following the acquisition of CTG France (formerly Soft Company) in 2018, which relies heavily on billable subcontractors (non-employees), the Company revised how it defines and calculates headcount in order to report all billable consultants, including both employees and subcontractors. Accordingly, the Company’s total headcount was approximately 3,900 at December 31, 2020, which was a 1.3% decrease from approximately 3,950 at December 31, 2019.  Approximately 91% of this headcount is for technical resources and 9% for support positions.

The increase in revenue in the Company’s European operations in 2020 as compared with 2019 was in part due to the strength relative to the U.S. dollar of the currencies in Belgium, Luxembourg, France, and the United Kingdom, the countries in which the Company’s European subsidiaries operate. In Belgium, Luxembourg, and France, the functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. In 2020 as compared with 2019, the average value of the Euro increased 2.0%, and the average value of the British Pound increased 0.5%. A significant portion of the Company's revenue from its European operations is recorded in Belgium, Luxembourg, and France. Had there been no change in these exchange rates from 2019 to 2020, total European revenue would have been approximately $3.0 million lower, or $158.8 million as compared with the $161.8 million reported. When considering the year-over-year change in revenue in constant currencies, revenue from our European operations increased 5.1%. Operating income was positively impacted by $0.1 million in 2020 as compared with 2019 given the increase in the exchange rates year-over-year.

The Company continues to monitor the impact that the United Kingdom’s exit from the European Union (Brexit) has had on its operations. To date, there has been a nominal impact on the Company’s operating results from Brexit. As the total revenue generated by our British subsidiary is immaterial as compared with the Company’s total consolidated revenue, we do not expect the nominal impact the exit has had on the Company’s operations to date to change in the foreseeable future.

International Business Machines Corporation (IBM) was CTG’s largest client and accounted for $77.5 million or 21.2% and $84.9 million or 21.5% of the Company’s consolidated revenue in 2020 and 2019, respectively. The National Technical Services Agreement with IBM was renewed and now expires on October 27, 2023. As part of the National Technical Services Agreement, the Company provides its services as a predominant supplier primarily to IBM’s Integrated Technology Services and the Systems and Technology Group business units. This agreement accounted for approximately 66% of all of the services provided to IBM by the Company in 2020. The Company’s accounts receivable from IBM at December 31, 2020 and 2019 totaled $11.3 million and $23.0 million, respectively.

We expect to continue to derive a significant portion of our revenue from IBM in future years; however, a significant decline or the loss of the revenue from this client would have a significant negative effect on our operating results. No other client accounted for more than 10% of the Company’s revenue in 2020 or 2019.

Direct costs, defined as costs for billable staff including billable out-of-pocket expenses, were 79.0% and 80.9% of consolidated revenue in 2020 and 2019, respectively. In 2020, direct costs as a percentage of revenue fell as the Company’s strategy to focus on selling IT solutions, which has lower direct costs as a percentage of revenue, had an increasing impact on the Company’s overall financial results as the percentage of solutions revenue grew. Additionally, the decision to disengage from a large, low margin staffing engagement, as well as other smaller engagements late in 2019, had a modest impact on the year’s direct cost percentage.

Selling, general and administrative (SG&A) expenses were 18.5% of revenue in 2020 as compared with 17.3% of revenue in 2019. The increase in SG&A expenses as a percentage of revenue in 2020 as compared with 2019 is primarily due to the loss of operating leverage from lower revenue, and the continued investment in business development, solutions, recruiting and marketing that support IT solutions services in order to focus on the Company’s long-term growth.

Operating income was 2.5% of revenue in 2020 as compared with 1.8% of revenue in 2019. Operating income from the North American operations was $0.6 million in 2020 after allocations of $1.8 million to foreign operations, compared

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with operating income of $2.3 million in 2019 after allocations of $1.6 million. Operating income from our European operations was $8.5 million in 2020 after allocations of $1.8 million from our North American operations, compared with $4.6 million in 2019 after allocations of $1.6 million.

Other income (expense) was 0.4% of revenue in 2020 and (0.2)% of revenue in 2019. In 2020, the Company recorded non-taxable life insurance gains of approximately $1.0 million as two of its former executives passed away, and gains of approximately $0.8 million from the sale of a building.

The Company’s effective tax rate (ETR) is calculated based upon the full year's operating results and various tax related items. The ETR in 2020 was 28.3%, while the 2019 ETR was 34.4%. The ETR in 2020 was impacted by a number of items, including non-taxable life insurance gains, a one-time tax benefit of approximately $0.08 per share for a change in tax legislation, offset by higher effective tax rates in the Company’s European operations where the Company generated most of its income in 2020.

Net income for 2020 was 2.1% of revenue or $0.53 per diluted share, compared with 1.0% of revenue or $0.29 per diluted share in 2019. Diluted earnings per share were calculated using 14.4 million weighted-average equivalent shares outstanding in 2020 and 14.0 million in 2019.

2019 as compared with 2018

The Company recorded revenue in 2019 and 2018 as follows:

The revenue increase in North America in 2019 as compared with 2018 was primarily due to a significant increase in demand for the Company's IT solutions business, primarily in our healthcare vertical market, and a modest increase in demand for our IT and other staffing business, primarily in our technology services provider vertical market. The revenue increase in Europe is primarily due to strong demand for the Company’s services in the European markets we serve, and the acquisition of Tech-IT on February 6, 2019, which at the time of acquisition had estimated annual revenue of approximately $20 million. Reimbursable expenses billed to clients and included in revenue totaled $2.6 million and $3.2 million in 2019 and 2018, respectively.

On a consolidated basis, IT solutions revenue increased $28.2 million or 24.9% in 2019 as compared with 2018. The increase was primarily due to an increase in IT solutions services in both North America and Europe and the addition of Tech-IT, which conducts its operations in Luxembourg. In North America, we continue to shift our focus to IT solutions services, as the profit on those engagements is significantly higher than the profit on our IT staffing services. In our European operations, greater than 50% of the services we provide to clients are IT solutions, and those operations have consistently grown organically at a rate that far exceeds the growth rate for IT services of 3-5% in the markets in which we conduct business. The acquisition of Tech-IT expanded our IT solutions services by adding software and hardware services, including consulting, infrastructure and software design and development, infrastructure integration, project management, and training.

Also on a consolidated basis, IT and other staffing revenue increased $7.2 million or 2.9% during 2019 as compared with 2018. The IT staffing revenue increase was primarily due to growth in IT staffing in North America with our largest client, IBM.

Additionally, given the Company’s strategic focus on becoming a more solutions-centric company, a decision was made, starting in the second half of 2019, to critically evaluate each significant staffing engagement as it comes up for renewal to determine if the Company wants to continue to provide those services to its client. Those decisions are based on, among other factors, critically evaluating the work performed, the availability of the resources, the client, the long-term opportunities for the service provided at the client, and the revenue and profit associated with the engagement. Accordingly, the Company made a decision to disengage from several small engagements and a large staffing engagement late in 2019. While these decisions negatively affected revenue during 2020, the Company believes the reallocation of resources away from these engagements to other higher margin, IT solutions services will positively impact the Company in the long-term, and aid in the transformation to a more solutions-centric IT services provider.

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Following the acquisition of CTG France (Soft Company) in 2018, which relies heavily on billable subcontractors (non-employees), we revised how we define and calculate headcount in order to report all billable consultants, including both employees and subcontractors. Accordingly, the Company’s billable consultants were approximately 3,950 at December 31, 2019, which was a 4.8% decrease from approximately 4,150 billable consultants at December 31, 2018.  Approximately 91% of this headcount was for technical resources and 9% for support positions. The decrease in headcount year-over-year was due to disengaging from several IT staffing projects late in 2019.

The significant increase in revenue in the Company’s European operations in 2019 as compared with 2018 was due to an increase in demand for the Company’s IT solutions services across a number of the vertical markets we serve. The weakness relative to the U.S. dollar of the currencies in Belgium, Luxembourg, France, and the United Kingdom, the countries in which the Company’s European subsidiaries operate, offset this significant increase. In Belgium, Luxembourg, and France, the functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. In 2019 as compared with 2018, the average value of the Euro decreased 5.2%, and the average value of the British Pound decreased 4.3%. A significant portion of the Company's revenue from its European operations is recorded in Belgium, Luxembourg, and France. Had there been no change in these exchange rates from 2018 to 2019, total European revenue would have been approximately $8.4 million higher, or $160.3 million as compared with the $152.0 million reported. When considering the year-over-year change in revenue in constant currencies, revenue from our European operations increased 27.2%. Operating income was negatively impacted by $0.3 million in 2019 as compared with 2018 given the decrease in the exchange rates year-over-year.

The Company continues to assess the potential impact, if any, that the United Kingdom’s exit from the European Union will have its operations. As the total revenue generated by our British subsidiary is immaterial when compared with the Company’s total consolidated revenue, we do not expect the impact of the pending exit to have a material impact on the Company’s operations, and we have not experienced any material impact to date.

International Business Machines Corporation (IBM) was CTG’s largest client and accounted for $84.9 million or 21.5% and $80.6 million or 22.5% of the Company’s consolidated revenue in 2019 and 2018, respectively. At December 31, 2019, the National Technical Services Agreement with IBM was extended for four months to May 1, 2020. The contract extension was later signed in 2020, and now expires in October 2023. As part of the National Technical Services Agreement, the Company provides its services as a predominant supplier primarily to IBM’s Integrated Technology Services and the Systems and Technology Group business units. This agreement accounted for approximately 70% of all of the services provided to IBM by the Company in 2019. The Company’s accounts receivable from IBM at December 31, 2019 and 2018 totaled $23.0 million and $22.1 million, respectively. No other client accounted for more than 10% of the Company’s revenue in 2019 or 2018.

Direct costs, defined as costs for billable staff including billable out-of-pocket expenses, were 80.9% of consolidated revenue in both 2019 and 2018. In 2019, direct costs as a percentage of revenue fell throughout the year from a high of 81.8% in the first quarter to a low of 79.6% in the fourth quarter as the Company’s strategy to focus on selling IT solutions had an increasing impact on the Company’s financial results as the year went on. Additionally, the decision to disengage from a large, low margin staffing engagement, as well as other smaller engagements late in 2019, had a modest impact on the year’s direct cost percentage.

Selling, general and administrative (SG&A) expenses were 17.3% of revenue in 2019 as compared with 18.5% of revenue in 2018. The decrease in SG&A expenses as a percentage of revenue in 2019 as compared with 2018 was primarily due to a concerted effort to reduce certain support costs while continuing to invest in sales and other resources that support IT solutions services in order to focus on the Company’s long-term growth. Additionally, SG&A in 2019 included acquisition-related costs of $2.3 million, primarily the amortization of intangible assets resulting from our recent acquisitions. SG&A in 2018 includes acquisition-related costs totaling $2.0 million, and $0.7 million in severance.

Operating income was 1.8% of revenue in 2019 as compared with 0.6% of revenue in 2018. Operating income from the North American operations was $0.8 million in 2019 before allocations of $1.6 million to foreign operations, compared with a loss of $2.4 million in 2018 before allocations of $0.9 million.  The 2018 loss was impacted by investments in business development, recruiting, and marketing, totaling approximately $3.5 million.

Operating income from our European operations was $6.1 million in 2019 before allocations of $1.6 million from our North American operations, compared with $6.3 million in 2018 before allocations of $0.9 million.

Other income (expense) was (0.2)% of revenue in 2019 and 0.1% of revenue in 2018. In 2018, the Company recorded a non-taxable life insurance gain of approximately $0.8 million as one of its former executives passed away.

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The Company’s effective tax rate (ETR) is calculated based upon the full year's operating results and various tax related items. The ETR in 2019 was 34.4%, while the 2018 ETR was 224.2%.

The ETR in 2019 was impacted as a large portion of the Company’s profits result from the Company’s European operations where the effective tax rates are generally higher than in the U.S. Additionally, the ETR was higher in 2019 primarily due to non-deductible acquisition costs related to the Tech-IT and Soft Company acquisitions.

The ETR was high in 2018 primarily due to the Company recording a valuation allowance for its deferred tax assets in the U.S. totaling $3.8 million as the Company had recurring pre-tax losses in recent years and uncertainty as to income in future years.  The Company also incurred approximately $0.7 million of tax associated with the GILTI provisions of the 2017 Tax Cut and Jobs Act, and $0.3 million of tax from non-deductible acquisition-related costs in our European operations.  These items, which caused additional tax expense, were offset by a non-taxable life insurance gain, the reversal of the valuation for deferred tax assets in the United Kingdom, the Tax Cuts and Jobs Act which reduced the US federal corporate tax rate to 21%, and tax benefits for the Work Opportunity Tax Credit (WOTC) and Research and Development tax credit (R&D).

Net income for 2019 was 1.0% of revenue or $0.29 per diluted share, compared with net loss of (0.8)% of revenue or $(0.20) per diluted share in 2018. Diluted earnings per share were calculated using 14.0 million weighted-average equivalent shares outstanding in 2019 and 13.8 million in 2018.

Critical Accounting Policies and Estimates

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 consolidated financial statements and accompanying notes. The Company’s significant accounting policies are included in Note 1 to the consolidated financial statements contained in this annual report on Form 10-K under Item 8, “Financial Statements and Supplementary Data.” These policies, along with the underlying assumptions and judgments made by the Company’s management in their application, have a significant impact on the Company’s consolidated financial statements. The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company’s financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. The Company’s critical accounting policies are related to the valuation allowance for deferred income taxes, and the valuation of goodwill.

Income Taxes—Valuation Allowances on Deferred Tax Assets

At December 31, 2020, the Company had a total of approximately $0.4 million of deferred tax assets, and approximately $2.2 million of deferred tax liabilities recorded on its consolidated balance sheet. The deferred tax assets, net, primarily consist of deferred compensation, loss carryforwards, and state taxes. The changes in deferred tax assets and liabilities from period to period are determined based upon the changes in the differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax purposes, as measured by the enacted tax rates when these differences are estimated to reverse. The Company has made certain assumptions regarding the timing of the reversal of these assets and liabilities, and whether taxable income in future periods will be sufficient to recognize all or a part of any gross deferred tax asset of the Company.

At December 31, 2020, the Company had deferred tax assets recorded resulting from net operating losses in previous years totaling approximately $0.4 million. The Company has analyzed each jurisdiction’s tax position, including forecasting potential taxable income in future periods and the expiration of the net operating loss carryforwards as applicable, and determined that it is unclear whether all of these deferred tax assets will be realized at any point in the future. Accordingly, at December 31, 2020, the Company had offset a portion of these assets with a valuation allowance totaling approximately $0.2 million, resulting in a net deferred tax asset from net operating loss carryforwards of approximately $0.2 million.

In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that all or some portion of the deferred tax assets will be realized, or that a valuation allowance is required. Management considers all available evidence, both positive and negative, in assessing realizability of its deferred tax assets. A key component of this assessment is management’s critical evaluation of current and future impacts of business and economic factors on the Company’s ability to generate future taxable income. Factors that may affect the Company’s ability to generate taxable income include, but are not limited to increased competition, a decline in revenue or margins, a loss of market share, the availability of qualified professional staff, and a decrease in demand for

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the Company’s services. The Company had a total of $5.2 million of deferred tax assets in its North American operations that were fully offset by a valuation allowance at December 31, 2020.

The Company’s deferred tax assets and their potential realizability are evaluated each quarter to determine if any changes should be made to the valuation allowance. Any change in the valuation allowance in the future could result in a change in the Company’s ETR. A 1% change in the ETR in 2020 would have increased or decreased net income by approximately $107,000, or less than $0.01 per diluted share.

Goodwill Valuation

As of December 31, 2020, goodwill recorded on the Company's consolidated balance sheet totaled $21.3 million, which relates to the acquisitions completed by the Company in 2018, 2019, and 2020. The acquisition of Soft Company in 2018 and StarDust in 2020 are in the France reporting unit, while the 2019 acquisition of Tech-IT is in the Luxembourg reporting unit. In connection with our annual goodwill impairment test, we make various assumptions to determine the estimated fair value of the reporting units to which the goodwill relates. We perform the annual impairment review in the fourth quarter of each year.

The goodwill impairment test is performed at least annually, unless indicators of an impairment exist in interim periods. The Company compared the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.

As of October 2020 fiscal month-end, we performed our annual goodwill impairment test in conjunction with an external consultant and estimated the fair value of our reporting units based on a combination of the income (estimates of future discounted cash flows) and the market approach (market multiples for similar companies). The income approach uses a discounted cash flow (DCF) method that utilizes the present value of cash flows to estimate fair value of the reporting unit. The future cash flows for the reporting units were projected based upon on our estimates of future revenue, operating income and other factors such as working capital and capital expenditures. As part of our projections, we took into account expected industry and market conditions for the industries in which the reporting units operate, as well as trends currently impacting the reporting units. The market approach utilizes multiples of earnings before interest expense, taxes, depreciation and amortization (EBITDA) to estimate the fair value of the reporting unit. The market multiples used for our reporting units were based on competitor industry data, along with the market multiples for the Company and other factors.

As part of our DCF analysis, we projected revenue and operating profits, and assumed a long-term revenue growth rates in the “terminal year” for both of the reporting units. We also utilized a weighted-average cost of capital (WACC) of 16.0% for the France reporting unit and 15.0% for the Luxembourg reporting unit. The carrying value as of October 2020 was approximately $17.6 million and $13.2 million for the France and Luxembourg reporting units, respectively.  

Finally, we compared our estimates of fair value to the consolidated Company’s October 2020 month-end total public market capitalization, which included factoring in the business operations that do not have goodwill, and assessed implied control premiums. Based on the results of this analysis, we concluded that the estimated fair value determined under our approach for the annual goodwill impairment test for our France and Luxembourg reporting units was reasonable.

We concluded that the goodwill assigned to the France and Luxembourg reporting units as of October 2020 were not impaired. However, the estimates and assumptions on which the Company’s evaluations are based involve judgments and are based on current available information, any of which could prove wrong or inaccurate when made, or become wrong or inaccurate as a result of subsequent events. In the event the business significantly under achieves its goals for revenue and profit growth in the future, the carrying value for this business unit may not be supportable using a discounted cash flow projection, and an impairment charge may exist.

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Other Estimates

The Company has also made a number of estimates and assumptions relating to the reporting of its assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements pursuant to the rules and regulations of the SEC, the FASB, and other regulatory authorities. Such estimates primarily relate to the valuation of stock options for recording equity-based compensation expense, allowances for doubtful accounts receivable, investment valuation, discount rates associated with pension plans, incurred but not reported healthcare claims, acquisition and related accounting, legal matters, and estimates of progress toward completion and direct profit or loss on contracts, as applicable. As future events and their effect on the Company's operating results cannot be determined with precision, actual results could differ from these estimates. Changes in the economic climates in which the Company operates may affect these estimates and will be reflected in the Company’s financial statements in the event they occur.

Financial Condition and Liquidity

Cash provided by (used in) operating activities was $30.7 million, $8.5 million, and $(0.3) million in 2020, 2019, and 2018, respectively. In 2020, net income was $7.6 million, while other non-cash adjustments, primarily consisting of depreciation and amortization expense, equity-based compensation, deferred income taxes, non-taxable life insurance gains, a gain from a sale of a building, impairment of capitalized software, and deferred compensation totaled $4.4 million. In 2019 and 2018, net income (loss) was $4.1 million and $(2.8) million, respectively, while the corresponding non-cash adjustments netted to $4.3 million and $6.3 million, respectively.

Accounts receivable balances decreased $17.0 million in 2020 as compared with 2019, increased $3.6 million in 2019 as compared with 2018, and increased $8.7 million in 2018 as compared with 2017. The decrease in the accounts receivable balance in 2020 resulted from a decrease in the Company’s days sales outstanding (DSO) as compared with 2019. DSO is calculated by dividing accounts receivable obtained from the consolidated balance sheet by average daily revenue for the fourth quarter of the respective year. DSO was 74 days at December 31, 2020 as compared with 85 days December 31, 2019. The decrease in DSO was primarily driven by the Company entering into an arrangement with its largest customer to factor outstanding receivables, which decreases the time of payment from 90 days to as little as 15 days based upon the Company’s direction. DSO was 85 days at December 31, 2019 as compared with DSO at December 31, 2018 of 82 days.

The cash surrender value of life insurance policies decreased $0.7 million in 2020, decreased $1.0 million in 2019, and increased $1.4 million in 2018. The increase or decrease in each of the years was due to normal appreciation of the existing cash surrender value of the outstanding policies at each respective point in time, which in turn was reduced by the benefits paid upon the death of former executives in 2020 (two) and 2018 (one). Accounts payable decreased $0.6 million in 2020, increased $3.9 million in 2019, and increased less than 0.1 million in 2018. The decrease in 2020 was primarily due to the timing of certain payments near year-end, while the increase in 2019 was primarily due to the growth in the size of the Company and the timing of payments made near year-end. Accrued compensation decreased $3.1 million in 2020 primarily due to the US operations reducing its payroll lag from two weeks in 2019 to one week in 2020, and increased $2.2 million in 2019 primarily due to significant growth in the Company’s operations and higher incentives for 2019 paid early in 2020. Accrued compensation increased $2.6 million in 2018 primarily due to significant growth in the Company’s operations and headcount. Income taxes receivable increased by $1.3 million in 2020 due to a change in tax legislation which created a one-time benefit of approximately $1.1 million, and increased $0.2 million in 2019 due to refunds received from the federal government and higher taxable income. Income taxes receivable decreased $0.5 million in 2018 due to refunds received from the federal government. Deferred payroll taxes increased $6.7 million in 2020. The increase was due to the Company’s participation in a U.S. government program that allows companies under the CARES ACT to defer the payment of the employer portion of payroll taxes until 2021 and 2022. Advance billings increased $1.3 million in 2020, decreased $2.8 million in 2019, and increased $0.2 million in 2018. The change in advance billings in any given period is determined by the nature and type of existing projects, and the advance payments, if any, associated with those projects.

Investing activities used $5.0 million, $11.5 million, and $12.6 million of cash in 2020, 2019, and 2018, respectively. Cash paid for the acquisition of StarDust, net of cash acquired, was approximately $4.3 million. In 2019, net cash paid for the acquisition of Tech-IT totaled $8.5 million, while in 2018, cash paid for the acquisition of Soft Company was $13.8 million. The Company also used cash for additions to property, equipment and capitalized software of $2.9 million in 2020, $2.4 million in 2019, and $2.2 million in 2018. The Company expects the amount to be spent in 2021 on additions to property, equipment and capitalized software to be similar to the amount spent in 2020. The Company has no material commitments for future capital expenditures. The Company received approximately $1.8 million of proceeds from the sale of its corporate administrative building in the first quarter of 2018. As the carrying value of the building was $1.6 million, the Company recorded a gain of $0.1 million after applicable fees. During the 2020 second quarter, the Company sold its

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remaining owned real estate for $2.5 million. As the book value of the building was approximately $1.6 million, the Company recorded a gain of approximately $0.8 million, after fees. The Company paid premiums for life insurance totaling $0.6 million in both 2020 and 2019, and $0.7 million for life insurance in 2018. The Company received a total of $0.4 million of proceeds from life insurance policies on former executives in the 2020. Net cash received from the Company's deferred compensation plans was less than $0.1 million in 2020, and $0.2 million in 2019 and 2018.

Financing activities provided (used) $(5.7) million, $1.8 million, and $14.6 million of cash in 2020, 2019, and 2018, respectively. Net cash received (paid) under the Company’s revolving credit agreement was $(5.3) million in 2020, $1.7 million in 2019, and $(0.8) million in 2018. Payments made to taxing authorities that represent the value of shares withheld for taxes in employee equity-based compensation transactions totaled $0.2 million in both 2020 and 2019, and $0.3 million in 2018. Cash overdrafts relate to the amount of outstanding checks at a point in time, and netted to $(0.4) million, less than $0.1 million, and $(0.5) million in the 2020, 2019, and 2018 periods, respectively. In 2018, the Company borrowed $29.3 million against the cash surrender value of its life insurance policies, primarily to return capital to shareholders through the “Dutch Auction” tender offer, fund the acquisition of Soft Company, and for general working capital purposes. The Company also used $14.9 million to purchase 1,767,000 shares for treasury under its buyback program in the 2018 period, including 1,530,990 shares purchased under the “Dutch Auction” tender offer in the 2018 second quarter. As of December 31, 2020, $7.7 million was available under the Company's authorization to purchase shares in future periods. The Company recorded $0.0 million, $0.1 million, and $1.8 million during 2020, 2019, and 2018, respectively, from the proceeds from stock option exercises.

No dividends were paid in 2020, 2019, or 2018.

The Company’s Credit and Security Agreement provides for a three-year revolving credit facility in an aggregate principal amount of $45.0 million, including a sublimit of $10.0 million for letters of credit.

The Credit and Security Agreement expires in December 2022, and has interest rates ranging from 150 to

200 basis points over LIBOR or the greater of (i) the prime rate, (ii) the federal funds effective rate plus 50 basis points, and (iii) adjusted LIBOR plus 100 basis points plus a spread ranging from 50 to 100 basis points based on the amounts outstanding under the Credit and Security Agreement. The Company can borrow under the agreement with either rate at its discretion.

There was $0.0 million, $5.3 million, and $3.6 million outstanding under the Company’s lines of credit at December 31, 2020, 2019, and 2018, respectively. The Company borrows or repays its debt as needed based upon its working capital obligations, including the timing of the U.S. bi-weekly payroll.

The maximum amount outstanding under its credit agreements in 2020, 2019, and 2018 was $12.0 million, $22.3 million, and $12.8 million, respectively. The average amounts outstanding during 2020, 2019, and 2018 were $6.4 million, $10.4 million, and $4.1 million, respectively, and carried weighted-average interest rates of 1.9%, 2.8%, and 3.4%, respectively. Total commitment fees incurred in 2020 totaled $0.2 million, and $0.3 million in both 2019 and 2018, while interest paid in 2020 totaled $0.2 million, $0.4 million in 2019, and $0.2 million in 2018.

Under the Credit and Security Agreement, the Company is required to meet certain financial covenants in order to maintain borrowings under its revolving credit line, pay dividends, and make acquisitions. The covenants are measured quarterly, and at December 31, 2020, included a fixed charge coverage ratio, which must be less than 1.10 to 1.00, consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted for equity-based compensation and severance expense, must be no less than $5.0 million for the trailing twelve months, and capital expenditures for property, plant, equipment, and capitalized software must be no more than $5.0 million in any annual period. The fixed charge coverage ratio is only tested if availability on a measurement date is less than approximately $5.6 million. Actual borrowings by CTG under the Credit and Security Agreement are subject to a borrowing base, which is a formula based on certain eligible receivables and reserves. Total availability as of December 31, 2020 was approximately $21.2 million.  The Company was in compliance with these covenants at December 31, 2020 as EBITDA, as defined above, was $15.4 million and capital expenditures for property, equipment and capitalized software were $2.0 million in 2020.  The Company was also in compliance with its covenants at December 31, 2019 and December 31, 2018.

Of the total cash and cash equivalents reported on the consolidated balance sheet at December 31, 2020 of $32.9 million, approximately $26.3 million is held by the Company’s foreign operations and is considered to be indefinitely reinvested in those operations. The Company has not repatriated any of its cash and cash equivalents from its foreign operations in the past five years, and has no intention of doing so in the foreseeable future as the funds are generally required to meet the working capital needs of its foreign operations.

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At December 31, 2020, the Company believes existing internally available funds, cash potentially generated from future operations, and funds potentially available under the Company's revolving line of credit (subject to collateral limits) totaling $20.0 million, will be sufficient to meet foreseeable working capital and capital expenditure needs, fund stock repurchases, pay a dividend (if any), fund acquisitions, and allow for future internal growth and expansion.

Off-Balance Sheet Arrangements

The Company did not have off-balance sheet arrangements or transactions in 2020, 2019, and 2018 other than guarantees in our European operations which support office leases and performance under government contracts. These guarantees totaled approximately $3.2 million at December 31, 2020. Also, the Company has purchase obligations in 2021, 2022, and 2023 for certain software, recruiting and other services totaling $2.5 million.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk exposure consists of foreign currency exchange risk associated with the Company’s European operations. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in this report.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Topic 842 supersedes the previous leases standard, ASC 840, Leases. This guidance is effective for reporting periods beginning after December 15, 2018. On January 1, 2019, the Company adopted the new lease standard using the modified retrospective transition approach and elected the transition method to apply the new lease standard as of the January 1, 2019 adoption date. Results for the reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with accounting under Topic 840. In addition, the Company elected the package of practical expedients, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification, and initial direct costs. The Company has also elected the practical expedient to separate lease and non-lease components for its office leases and has elected to group lease and non-lease components for its vehicle leases. Upon adoption of Topic 842 on January 1, 2019, the Company recorded approximately $13.1 million of operating lease right-of-use assets and lease liabilities. The adoption of Topic 842 did not have a significant impact on the Company’s consolidated statements of income, comprehensive income (loss), or its consolidated statements of cash flows. The new lease standard does not affect the Company’s compliance with financial covenants associated with its Credit and Security Agreement.

In January 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI)”, which gives entities the option to reclassify to retained earnings the tax effects resulting from the Act related to items in AOCI that the FASB refers to as having been stranded in AOCI. The guidance required new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in AOCI. The Company reclassified approximately $0.3 million to retained earnings due to the adoption of ASU 2018-02 in the 2018 fourth quarter.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, which requires the immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables. The allowance for credit losses will be the difference between the amortized cost balance of a financial asset and the amount of amortized cost expected to be collected over the remaining contractual life. When determining the allowance, expected credit losses over the contractual term of the financial assets will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.  Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment. This guidance is effective for reporting periods beginning after December 15, 2019; however, early adoption is permitted. The Company adopted the new credit loss standard on January 1, 2020. The Company estimated its allowance for credit losses by pooling assets with similar risk characteristics, reviewing historical losses within the last five years and taking into consideration any reasonable supportable forecasts of

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future economic conditions. The Company cannot guarantee that the rate of future credit losses will be similar to past experience, but considers all available information when assessing the adequacy of its allowance for credit losses each quarter. As the impact from this standard on the Company was immaterial, no adjustment was made to the beginning retained earnings balance.

In January 2017, the FASB issued ASU 2017-04,”Simplifying the Test for Goodwill Impairment”, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This guidance is effective for reporting periods beginning after December 15, 2019; however, early adoption is permitted. The Company adopted the new standard on January 1, 2020 for the year ending December 31, 2020 on a prospective basis and the adoption did not have a material impact on the Company’s operations. 

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which helps entities evaluate the accounting for fees paid in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for fiscal years beginning after December 15, 2019; however, early adoption is permitted. The Company adopted the new standard on January 1, 2020 for the year ending December 31, 2020 on a prospective basis and the adoption did not have a material impact on the Company’s operations.

In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)". The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures, and adding disclosure requirements identified as relevant. The new ASU is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The Company adopted this new standard retrospectively for the year ending December 31, 2020, and the adoption did not have a material impact on its consolidated financial statements and associated disclosures.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for accounting contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference the London Interbank Offering Rate (“LIBOR”) or another reference rate expected to be discontinued due to the reference rate reform. It is effective for all entities between March 12, 2020 and December 31, 2022. The Company does not expect a significant impact from the adoption of this standard as provisions have been made in our Credit and Security Agreement to use an alternate benchmark interest rate when the use of LIBOR is discontinued.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” Among other clarifications and simplifications related to income tax accounting, the new standard simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently reviewing the provisions of this new pronouncement, but does not expect adoption of this guidance to have a material impact on its consolidated financial statements.

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Contractual Obligations

The Company intends to satisfy its contractual obligations from operating cash flows, and, if necessary, from draws on its demand credit line. A summary of the Company’s contractual obligations at December 31, 2020 is as follows:

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The Company’s primary market risk exposure consists of foreign currency exchange risk associated with the Company’s European operations.

During 2020, revenue was impacted by the year-over-year foreign currency exchange rate changes of Belgium, Luxembourg, France, and the United Kingdom, the countries in which the Company’s European subsidiaries operate. In Belgium, Luxembourg, and France, the functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. Had there been no change in these exchange rates from 2019 to 2020, total European revenue would have been approximately $3.0 million lower in 2020, or $158.8 million as compared with the $161.8 million reported. Operating income in the Company’s European operations would have been $0.1 million lower if there had been no change in foreign currency exchange rates year-over-year.

The Company has historically not used any market rate sensitive instruments to hedge its foreign currency exchange risk as it conducts its foreign operations in local currencies, which generally limits risk. The Company believes the market risk related to intercompany balances in future periods will not have a material effect on its results of operations.

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Computer Task Group, Incorporated

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Computer Task Group, Incorporated (a New York corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 12, 2021 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill impairment assessment

The Company’s consolidated goodwill balance was $21.3 million as of December 31, 2020.  As described in Note 1 to the consolidated financial statements, the Company evaluates goodwill impairment for each reporting unit every fourth quarter, or on an interim basis if an indicator of impairment is present. If management determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then quantitative impairment testing is performed utilizing a combination of the income and market approach. If the book value of a reporting unit is greater than its fair value, an impairment loss is recorded for the excess. The fair value of a reporting unit is judgmental and requires assumptions and estimates of many critical factors such as forecasted revenue, operating income margins, long-term discount rate, and estimated valuation multiples.  We identified the estimation of the fair value of each reporting unit included in the Company’s annual goodwill impairment assessment as a critical audit matter.  

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are (1) there was significant judgment and estimation by management when

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developing the fair value measurement of the reporting units and (2) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s cash flow projections and significant assumptions for certain of the reporting units, including forecasted revenue, operating income margins, long-term discount rate and estimated valuation multiples to other public companies.

Our audit procedures related to the goodwill impairment analysis of certain reporting units included the following, among others. We tested the design and operating effectiveness of key controls over the Company's goodwill impairment assessment process including controls over the development and review of significant assumptions used in the determination of the fair value of each reporting unit. We tested the significant assumptions discussed above by assessing the reasonableness of management’s forecasts compared to current results and forecasted industry trends. We performed sensitivity analyses of certain assumptions to evaluate changes in the fair value that would result from changes in the assumptions. With the assistance of our valuation specialists, we evaluated the selection of the long-term discount rate and perpetual growth rate, including testing the underlying source information and the mathematical accuracy of the calculations by developing a range of independent estimates and comparing those to the rates selected by management. We also involved our valuation specialists to evaluate the market approach, including evaluating the reasonableness of estimated valuation multiples.

Assessment of realizability of deferred tax assets

As disclosed in Note 5 to the consolidated financial statements, the Company records a deferred tax valuation allowance based on the assessment of the realizability of the Company’s deferred tax assets. For the year ended December 31, 2020, the Company had U.S. deferred tax assets before valuation allowances of $5.2 million. We identified the assessment of the realizability of the Company’s U.S. deferred tax assets as a critical audit matter.

The principal consideration for our determination that the assessment of the realizability of deferred tax assets is a critical audit matter is the significant judgment and estimation by management in determining whether sufficient future taxable income, including projected pre-tax income, will be generated to support the realization of the existing U.S. deferred tax assets.

Our audit procedures related to the assessment of realizability of U.S. deferred tax assets included the following, among others. We tested the design and operating effectiveness of key controls related to the realizability of U.S. deferred tax assets, including controls over management’s projection of pre-tax income. We evaluated the assumptions used by the Company to develop projections of future taxable income, including the pre-tax income by jurisdiction and tested the completeness and accuracy of the underlying data used in the projections. We compared the projections of pre-tax income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends, including the impact of COVID-19. We compared the projections of future pre-tax income with other forecasted financial information prepared by the Company. We also performed a sensitivity analysis of future taxable income to evaluate the recoverability of deferred tax assets resulting from changes in assumptions.

/s/ GRANT THORNTON LLP

Cleveland, Ohio

March 12, 2021

We have served as the Company’s auditor since 2019.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
Computer Task Group, Incorporated:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of operations, comprehensive income (loss), cash flows, and shareholders’ equity of Computer Task Group, Incorporated and subsidiaries (the Company) for the year ended December 31, 2018, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ KPMG LLP

We served as the Company’s auditor from 2003 to 2019.

Rochester, New York
March 15, 2019

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Consolidated Statements of Operations

The accompanying notes are an integral part of these consolidated financial statements.

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Consolidated Statements of Comprehensive Income (Loss)

The accompanying notes are an integral part of these consolidated financial statements.

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Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements.

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Consolidated Statements of Cash Flows