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COMPUTER TASK GROUP INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations for the Quarter and Three Quarters Ended September 26, 2014(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This quarterly report on Form 10-Q 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 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 customers and talent, (iii) the Company's ability to protect confidential client data, (iv) the partial or complete loss of the revenue the Company generates from International Business Machines Corporation (IBM), (v) risks associated with operating in foreign jurisdictions, (vi) renegotiations, nullification, or breaches of contracts with customers, vendors, subcontractors or other parties, (vii) the change in valuation of recorded goodwill balances, (viii) 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, (ix) industry and economic conditions, including fluctuations in demand for IT services, (x) consolidation among the Company's competitors or customers, (xi) the need to supplement or change our IT services in response to new offerings in the industry, and (xii) the risks described in Item 1A of the most recently filed Form 10-K and from time to time in the Company's reports filed with the Securities and Exchange Commission (SEC). Industry Trends The Company operates in one industry segment, primarily providing IT services to its clients. These services include IT solutions and IT staffing, and related services. The market demand for the Company's services is heavily dependent on IT spending by major corporations, organizations and government entities in the markets and regions that it serves. The pace of technological change and changes in business requirements and practices of the Company's clients all have a significant impact on the demand for the services that we provide. Competition for new engagements and pricing pressure has been and, management believes, will continue to be strong. IT solutions and IT staffing revenue as a percentage of total revenue for the quarter and three quarters ended September 26, 2014 and September 27, 2013 was as follows: For the For the Three Quarter Ended Quarters Ended Sept. 26, 2014 Sept. 27, 2013 Sept. 26, 2014 Sept. 27, 2013 IT solutions 36.5 % 39.6 % 38.9 % 39.4 % IT staffing 63.5 % 60.4 % 61.1 % 60.6 % Total 100.0 % 100.0 % 100.0 % 100.0 % The Company promotes a significant portion of its services through four vertical market focus areas: Healthcare (which includes services provided to healthcare providers, health insurers, and life sciences companies), Technology Service Providers, Financial Services, and Energy. The Company focuses on these four vertical areas as it believes that these areas are either higher growth markets than the general IT services market and the general economy, or are areas that provide greater potential for the Company's growth due to the size of the vertical market. The remainder of CTG's revenue is derived from general markets. 13-------------------------------------------------------------------------------- Table of Contents The Company's revenue by vertical market as a percentage of total revenue for the quarter and three quarters ended September 26, 2014 and September 27, 2013 was as follows: For the For the Three Quarter Ended Quarters Ended Sept. 26, 2014 Sept. 27, 2013 Sept. 26, 2014 Sept. 27, 2013 Healthcare 27.0 % 31.4 % 29.5 % 31.9 % Technology service providers 29.3 % 26.7 % 26.6 % 28.6 % Financial services 7.8 % 6.7 % 7.8 % 6.5 % Energy 5.9 % 6.2 % 6.1 % 6.1 % General markets 30.0 % 29.0 % 30.0 % 26.9 % Total 100.0 % 100.0 % 100.0 % 100.0 % The IT services industry is extremely competitive and characterized by continuous changes in customer requirements and improvements in technologies. The Company's competition varies significantly by geographic region, as well as by the type of service provided. Many of the Company's 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 being impacted by the growing use of lower-cost offshore delivery capabilities (primarily India and other parts of Asia). Regularly, new IT products and services are introduced which may render our existing IT solutions and IT staffing services obsolete. The economic conditions in the markets we serve are continuously changing and may negatively impact our business if we can not adapt to negative conditions as they occur. Finally, our healthcare clients have been affected by the U.S. government sequestration cuts which began in 2013 and have lowered their reimbursements. There can be no assurance that CTG 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 persuasive evidence of an arrangement exists, when the services have been rendered, when the price is determinable, and when collectability of the amount due is reasonably assured. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with periodic billing schedules, primarily monthly, revenue is recognized as services are rendered to the customer. Revenue for fixed price contracts is recognized as per the proportional method of accounting using an input-based approach whereby salary and indirect labor costs incurred are measured and compared with the total estimate of costs at completion of a project. Revenue is recognized based upon the percent complete calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects which include significant amounts of material or other non-labor related costs which could distort the percent complete within a percentage-of-completion calculation. The Company's estimate of the total labor costs it expects to incur over the term of the contract is based on the nature of the project and our past experience on similar projects, and includes management judgments and estimates which affect the amount of revenue recognized on fixed-price contracts in any accounting period. The Company's revenue from contracts accounted for under time-and-material, progress billing and percentage-of-completion methods for the quarter and three quarters ended September 26, 2014 and September 27, 2013 was as follows: For the For the Three Quarter Ended Quarters Ended Sept. 26, 2014 Sept. 27, 2013 Sept. 26, 2014 Sept. 27, 2013 Time-and-material 86.2 % 88.0 % 86.6 % 89.1 % Progress billing 11.5 % 9.5 % 11.0 % 8.6 % Percentage-of-completion 2.3 % 2.5 % 2.4 % 2.3 % Total 100.0 % 100.0 % 100.0 % 100.0 % 14-------------------------------------------------------------------------------- Table of Contents Results of Operations The table below sets forth data as contained in the condensed consolidated statements of income with the percentage information calculated as a percentage of consolidated revenue. For the Quarter Ended: September 26, 2014 September 27, 2013 (amounts in thousands) Revenue 100.0 % $ 96,760 100.0 % $ 100,689 Direct costs 80.3 % 77,723 79.0 % 79,506 Selling, general and administrative expenses 15.0 % 14,466 15.0 % 15,129 Operating income 4.7 % 4,571 6.0 % 6,054 Interest and other expense, net - % (33 ) (0.1 )% (91 ) Income before income taxes 4.7 % 4,538 5.9 % 5,963 Provision for income taxes 1.9 % 1,812 2.1 % 2,100 Net income 2.8 % $ 2,726 3.8 % $ 3,863 For the Three Quarters Ended: September 26, 2014 September 27, 2013 (amounts in thousands) Revenue 100.0 % $ 295,002 100.0 % $ 316,301 Direct costs 79.3 % 233,835 79.0 % 249,872 Selling, general and administrative expenses 15.4 % 45,651 15.1 % 47,794 Operating income 5.3 % 15,516 5.9 % 18,635 Interest and other expense, net (0.1 )% (185 ) (0.1 )% (306 ) Income before income taxes 5.2 % 15,331 5.8 % 18,329 Provision for income taxes 2.1 % 6,206 2.0 % 6,354 Net income 3.1 % $ 9,125 3.8 % $ 11,975 The Company recorded revenue in the 2014 and 2013 periods as follows: Year-over- For the Quarter Ended: September 26, 2014 September 27, 2013 Year Change (amounts in thousands) North America 81.1 % $ 78,430 81.9 % $ 82,464 (4.9 )% Europe 18.9 % 18,330 18.1 % 18,225 0.6 % Total 100.0 % $ 96,760 100.0 % $ 100,689 (3.9 )% There were 63 billable days in both the 2014 and 2013 third quarters. Reimbursable expenses billed to customers and included in revenue totaled $1.9 million and $2.8 million in the 2014 and 2013 third quarters, respectively. Year-over- For the Three Quarters Ended: September 26, 2014 September 27, 2013 Year Change (amounts in thousands) North America 80.0 % $ 236,092 82.2 % $ 260,057 (9.2 )% Europe 20.0 % 58,910 17.8 % 56,244 4.7 % Total 100.0 % $ 295,002 100.0 % $ 316,301 (6.7 )% There were 189 billable days and 190 billable days in the 2014 and 2013 year-to-date periods, respectively. Reimbursable expenses billed to customers and included in revenue totaled $7.0 million and $9.0 million in the 2014 and 2013 year-to-date periods, respectively. 15-------------------------------------------------------------------------------- Table of Contents On a consolidated basis, IT solutions revenue decreased 11.4% and 7.9% in the 2014 third quarter and year-to-date period, respectively, as compared with the corresponding 2013 periods. Also on a consolidated basis, IT staffing revenue increased 1.0% and decreased 6.0% in the 2014 third quarter and 2014 year-to-date period, respectively, as compared with the corresponding 2013 periods. The Company's headcount was approximately 3,900 employees at September 26, 2014, which was a 3% increase from approximately 3,800 employees at September 27, 2013, and a 5% increase from approximately 3,700 employees at December 31, 2013. In North America, the revenue decrease in the 2014 third quarter as compared with the corresponding 2013 period was primarily due to a continuing reduction in spending from customers in our IT solutions healthcare business for electronic medical records implementation support. These decreases were modestly offset by a slight increase in demand from our staffing customers in the quarter, including our largest customer. The decrease in the 2014 year-to-date period as compared with the corresponding 2013 period was due to a overall decrease in demand for both the Company's IT staffing and IT solutions businesses. The Company began a data analytics IT solutions project in the 2014 second quarter which is scheduled to end in December 2014. In total, the Company's data analytics projects added approximately $1.9 million and $0.06 to our third quarter revenue and net income per diluted share, respectively, and they are estimated to generate approximately $6 million and $0.18 of revenue and net income per diluted share, respectively, in all of 2014. The increase in revenue in the Company's European operations in the 2014 third quarter and year-to-date periods as compared with the corresponding 2013 periods was primarily due to a modest increase in demand in our European IT solutions business. The revenue increase was supported by the strength relative to the U.S. dollar of the currencies of Belgium, Luxembourg, and the United Kingdom, the countries in which the Company's European subsidiaries operate. In Belgium and Luxembourg, the functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. In the 2014 third quarter as compared with the corresponding 2013 period, the average value of the Euro increased 0.6% and the average value of the British Pound increased 8.2%. A significant portion of the Company's revenue from its European operations is generated in Belgium and Luxembourg. If there had been no change in these exchange rates from the 2013 third quarter to the 2014 third quarter, total European revenue would have been approximately $0.1 million lower, or $18.2 million as compared with the $18.3 million reported. In the first three quarters of 2014 as compared with the corresponding 2013 period, the average value of the Euro increased 3.1% and the average value of the British Pound increased 8.1%. If there had been no change in the exchange rates from the first three quarters of 2013 to the corresponding 2014 period, total European revenue would have been approximately $1.9 million lower, or $57.0 million compared with the $58.9 million reported. Additionally, operating income in the third quarter and year-to-date period would have been approximately $31,000 higher and $31,000 lower, respectively, if there had been no change in the exchange rates year-over-year. In the 2014 third quarter, International Business Machines Corporation (IBM) was the Company's largest customer and accounted for $25.1 million or 26.0% of consolidated revenue as compared with $23.0 million or 22.9% of revenue in the comparable 2013 period. In the first three quarters of 2014, IBM accounted for $69.4 million or 23.5% of consolidated revenue, compared with $78.3 million or 24.7% of consolidated revenue in the comparable 2013 period. The National Technical Services Agreement ("NTS Agreement") with IBM extends to December 31, 2014. The Company and IBM are currently in the process of negotiating the terms of an extension of this agreement. The Company's accounts receivable from IBM at September 26, 2014 and September 27, 2013 totaled $11.4 million and $9.8 million, respectively. No other customer accounted for more than 10% of the Company's revenue in the third quarter or first three quarters of 2014 or 2013. In January 2014, IBM announced its intention to spin off its x86 server division to Lenovo, and the initial closing of that sale occurred on September 29, 2014. A portion of the Company's 2014 and 2013 third quarter and year-to-date revenue from IBM was related to the x86 server division. The Company expects to continue to retain a significant share of the revenue derived from the x86 server division despite the anticipated transition of the division from IBM to Lenovo. Direct costs, defined as the costs for billable staff including billable out-of-pocket expenses, were 80.3% of revenue in the 2014 third quarter as compared with 79.0% of revenue in the 2013 third quarter, and 79.3% of revenue in the first three quarters of 2014 as compared with 79.0% in the corresponding 2013 period. The Company's direct costs as a percentage of revenue increased in the 2014 third quarter and year-to-date periods as compared with the corresponding 2013 periods due to the percentage decrease in IT solutions business in the Company's revenue mix (primarily related to EMR implementations), which has a lower direct cost than our IT 16-------------------------------------------------------------------------------- Table of Contents staffing business, and pricing pressure from a large customer in our IT staffing business. The increase in direct costs was also affected by an increase in fringe benefit costs, primarily medical expense, in the 2014 second and third quarters. The increase in medical expense was due to continued higher utilization of the Company's self-insured plan during the third quarter. These increases in direct costs were partially offset by our data analytics projects which have a low direct cost. For 2015, as part of the requirements of the Patient Protection and Affordable Care Act, the Company is in the process of offering compliant health coverage to our hourly employees with the intention of passing these costs on to our customers. In the event we are unable to pass some or all of these costs to our customers, our direct cost will increase. Selling, general and administrative ("SG&A") expenses were 15.0% of revenue in the 2014 third quarter as compared with 15.0% in the corresponding 2013 period, and 15.4% of revenue in the first three quarters of 2014 as compared with 15.1% in the corresponding 2013 period. The increase in SG&A expenses as a percentage of revenue in the 2014 year-to-date period as compared with the corresponding 2013 period is primarily due to the loss of operating leverage from the decrease in revenue in the 2014 year-to-date period. Operating income was 4.7% of revenue in the 2014 third quarter as compared with 6.0% in the 2013 third quarter, and 5.3% of revenue in the first three quarters of 2014 as compared with 5.9% in the corresponding 2013 period. The decrease in operating income as a percentage of revenue in the 2014 third quarter and year-to-date period as compared with the corresponding 2013 periods is due, as previously noted under direct costs, to the decrease in IT solutions in the Company's business mix, the pricing pressure from a large IT staffing customer, and the increase in medical expense in direct costs, offset by our data analytics projects which have lower direct costs. Operating income from North American operations was $13.8 million and $16.8 million in the first three quarters of 2014 and 2013, respectively. European operations recorded operating income of $1.7 million and $1.8 million in the 2014 and 2013 year-to-date periods, respectively. The Company's effective tax rate ("ETR") is calculated quarterly based upon current assumptions relating to the full year's estimated operating results and various tax-related items. The Company's normal annual ETR ranges from 38% to 40% of pre-tax income. The 2014 third quarter ETR was 39.9% and the 2014 year-to-date ETR was 40.5%. The ETR was higher than the normal range in the 2014 year-to-date period primarily due to the expiration of certain federal income tax credits as of December 31, 2013. The Work Opportunity Tax Credit (WOTC) and the Research and Development Tax Credit had not been renewed by the U.S. federal government as of September 26, 2014. Should these credits be reinstated during 2014, in accordance with current accounting guidelines, the Company will recognize the benefit of those credits beginning in the quarter in which such legislation is enacted. The 2013 third quarter ETR was 35.2% and the 2013 year-to-date ETR was 34.7%. The ETR was below the normal range in the 2013 third quarter primarily due to the Company recording a tax benefit related to the reversal of certain tax reserves. The 2013 year-to-date ETR was below the normal range due to the Company recording a tax benefit for its 2012 research and development activities for all of 2012 in the 2013 first quarter, as required under current accounting guidelines, as the legislation extending the tax credit related to these expenses, the American Taxpayer Relief Act of 2012, was not passed by the U.S. federal government until January 2013. Additionally, the 2013 year-to-date ETR was below the normal range due to the tax benefit of the Company's 2013 research and development activities, the reversal of the reserves as noted above, and the tax benefit of the Company's participation in the WOTC program offered by the federal government to companies who have hired individuals who have traditionally faced barriers to employment. Net income for the 2014 third quarter was 2.8% of revenue or $0.17 per diluted share, compared with net income of 3.8% of revenue or $0.23 per diluted share in the 2013 third quarter. Net income for the first three quarters of 2014 was 3.1% of revenue or $0.56 per diluted share, compared with net income of 3.8% of revenue or $0.70 per diluted share in the first three quarters of 2013. Diluted earnings per share was calculated using 16.2 million and 16.9 million weighted-average equivalent shares outstanding for the quarters ended September 26, 2014 and September 27, 2013, respectively, and 16.3 million and 17.0 million weighted-average equivalent shares outstanding for the year-to-date periods ended September 26, 2014 and September 27, 2013, respectively. The decrease in weighted-average equivalent shares outstanding in 2014 is due to approximately 0.4 million shares repurchased under the Company's share repurchase plan in the first three quarters of 2014, and a lessor dilutive effect of outstanding equity-based compensation grants. 17-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Company's management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company's significant accounting 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 condensed consolidated financial statements. The Company identifies its 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 those related to income taxes, specifically relating to the valuation allowance for deferred income taxes and goodwill valuation. Goodwill Valuation The Company has a goodwill balance of $37.5 million related to its healthcare vertical market recorded as of September 26, 2014. This balance reflects an increase of approximately $2.0 million in the 2013 first quarter due to the acquisition of etrinity, a provider of IT services to the healthcare market in Belgium and the Netherlands. The balance is evaluated annually as of the Company's October fiscal month-end (the measurement date), or more frequently if facts and circumstances indicate impairment may exist. This evaluation, as applicable, is based on estimates and assumptions that may be used to analyze the appraised value of similar transactions from which the goodwill arose, the appraised value of similar companies, or estimates of future discounted cash flows. The estimates and assumptions on which the Company's evaluations are based involve judgments and are based on currently available information, any of which could prove wrong or inaccurate when made, or become wrong or inaccurate as a result of subsequent events. At the October 2013 measurement date the Company completed its annual valuation of the business to which the Company's goodwill relates. During 2013, the Company utilized the provisions under Accounting Standards Update No. 2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment," which allows public entities to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this new process, an entity is no longer required to calculate the fair value of a reporting unit unless the qualitative assessment shows that it is more likely than not that its fair value is less than its carrying amount. From its internal qualitative assessment completed in 2013, the Company believes that although the fair value of the business decreased from 2012, it continues to be substantially in excess of the carrying value of the business. Additionally, there are no other facts or circumstances that arose during the 2014 year-to-date period which led management to believe the goodwill balance was impaired. Income Taxes-Valuation Allowances on Deferred Tax Assets At September 26, 2014, the Company had a total of approximately $7.2 million of current and non-current deferred tax assets, net of deferred tax liabilities, recorded on its consolidated balance sheet. The deferred tax assets, net, primarily consist of deferred compensation and state taxes, offset by depreciation. The changes in deferred tax assets and liabilities from period to period are determined based upon the changes in 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 September 26, 2014, the Company had deferred tax assets recorded resulting from net operating losses totaling approximately $1.3 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 September 26, 2014, the Company had offset a portion of these assets with a valuation allowance totaling $1.2 million, resulting in a net deferred tax asset from net operating loss carryforwards of approximately $0.1 million. 18-------------------------------------------------------------------------------- Table of Contents 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 the third quarter of 2014 would have increased or decreased net income by approximately $45,400. 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, 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 used in operating activities was $9.0 million in the first three quarters of 2014, while operating activities provided $0.8 million in the first three quarters of 2013. In the first three quarters of 2014, net income was $9.1 million, while other non-cash adjustments, primarily consisting of depreciation expense, equity-based compensation, deferred income taxes, and deferred compensation, totaled $4.2 million. In the 2013 period, net income was $12.0 million while the corresponding non-cash adjustments netted to $3.7 million. Accounts receivable balances increased $5.0 million in the first three quarters of 2014 and increased $3.0 million in the first three quarters of 2013. The increase in the accounts receivable balance in the 2014 period primarily resulted from an increase in days sales outstanding (DSO), offset by a decrease in revenue year-over-year of approximately 4%. DSO was 67 days at September 26, 2014 and 62 days at December 31, 2013. The increase in DSO at September 26, 2014 was primarily due to a general slowdown in the timing of receipts prior to quarter-end. The increase in the accounts receivable balance in the 2013 period also primarily resulted from an increase in DSO. DSO was 68 days at September 27, 2013 and 61 days at December 31, 2012. The increase in DSO at September 27, 2013 was also primarily due to the timing of receipts prior to quarter-end. Other assets increased $1.5 million in the first three quarters of 2014 and $1.4 million in the in the first three quarters of 2013. The increases in both years are due to increases in the cash surrender value of insurance policies maintained by the Company. Accounts payable decreased $3.8 million and $2.3 million in the 2014 and 2013 year-to-date periods, respectively, primarily due to the timing of certain payments near period-end and generally fewer purchases due to a reduction in the size of the business. Accrued compensation decreased $7.8 million in the first three quarters of 2014 primarily due to one less week of payroll accrued at the end of the 2013 third quarter, and lower incentive accruals in 2014 as compared with the first three quarters of 2013. Accrued compensation decreased $4.2 million in the 2013 period primarily due to lower incentive accruals in 2013 as compared with the first three quarters of 2012. Income taxes receivable/payable decreased $2.1 million and $0.9 million in the 2014 and 2013 year-to-date periods, respectively, due to lower taxable income and the amount of estimated tax payments made prior to quarter-end. Investing activities used $2.3 million and $5.6 million of cash in the 2014 and 2013 first three quarters, respectively. The Company used cash for additions to property and equipment of $1.1 million in 2014 and $1.7 million in 2013, additions to capitalized software totaling $1.4 million in 2014 and $1.2 million in 2013, and the change in the Company's deferred compensation plans totaled net proceeds of $0.1 million in 2014, and a usage of funds of $0.3 million in 2013. The Company has no significant commitments for the purchase of property or equipment at September 26, 2014, and does not expect the amount to be spent in the 2014 fourth quarter on additions to property, equipment and capitalized software to significantly vary from the amount spent in the first three quarters. In the 2013 first quarter, the Company also used $2.5 million, net of cash received, to complete the acquisition of etrinity. Financing activities used $5.9 million and $4.4 million of cash in the first three quarters of 2014 and the corresponding 2013 period, respectively. The Company recorded $2.6 million and $1.4 million in the 2014 and 2013 first three quarters, respectively, from the proceeds from stock option exercises and excess tax benefits from 19-------------------------------------------------------------------------------- Table of Contents equity-based compensation transactions. Cash overdrafts were $0.2 million and $0.8 million in the first three quarters of 2014 and 2013, respectively. The Company initiated a quarterly dividend in 2013, initially payable in the 2013 second quarter, and paid $2.5 million and $1.5 million in the first three quarters of 2014 and 2013, respectively. The Company also used $6.4 million to purchase approximately 386,000 shares for treasury in the first three quarters of 2014, and used $5.3 million to purchase approximately 283,000 shares in the first three quarters of 2013. At September 26, 2014, a total of 750,541 shares are available under the Company's authorization to purchase shares in future periods. The Company's revolving credit agreement expired in April 2014 and previously allowed the Company to borrow up to $35.0 million. During April 2014, the Company entered into a new, demand line of credit with its banks totaling $40.0 million. At both September 26, 2014 or September 27, 2013, there were no amounts outstanding under either of these credit agreements. Although there were no borrowings outstanding, at September 27, 2013 there was a $0.6 million letter of credit issued under the revolving credit agreement. 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 Company has not borrowed any funds under its credit agreements since November 2011. The Company was previously required to meet certain financial covenants in order to maintain borrowings under its revolving credit line, pay dividends, and make acquisitions. There are no measured financial covenants under the new demand line of credit. The Company was in compliance with its previously required covenants at December 31, 2013. Of the total cash and cash equivalents reported on the consolidated balance sheet at September 26, 2014 of $28.3 million, approximately $10.2 million was 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 required to meet the working capital needs of our foreign operations. The Company believes existing internally available funds, cash potentially generated from future operations, and borrowings available under the Company's demand line of credit totaling $40.0 million at September 26, 2014 are sufficient to meet foreseeable working capital and capital expenditure needs, pay dividends (if any are declared), fund stock repurchases (if any are made), and allow for future internal growth and expansion. Off-Balance Sheet Arrangements The Company did not have off-balance sheet arrangements or transactions in the 2014 or 2013 third quarters other than guarantees in our European operations which support office leases and performance under government contracts. These guarantees totaled approximately $2.1 million at September 26, 2014. Contractual Obligations The company did not enter into any significant contractual obligations during the quarter ended September 26, 2014. Recently Issued Accounting Standards In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09"). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures. 20-------------------------------------------------------------------------------- Table of Contents |