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TMCNet:  COMPUTER TASK GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 22, 2013]

COMPUTER TASK GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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, 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 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).


Industry Trends 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 we serve. The pace of technology advances and changes in business requirements and practices of our clients all have a significant impact on the demand for the services that we provide. Competition for new engagements and pricing pressure has been strong. During 2009 through 2011, we experienced an increase in demand for our services, primarily in the healthcare provider solution and general IT staffing businesses. While demand in our healthcare vertical market remained strong in 2012, demand for our IT staffing services was modest which limited revenue growth for these services in 2012 as compared with 2011. We added new electronic medical records (EMR) projects throughout 2012 ranging from one to three years in duration, and have a total of 17 significant EMR engagements in process as of December 31, 2012. We anticipate a continuation of the strong demand for our EMR healthcare solutions services in 2013 due to the continuation of U.S. government funding for such projects, and the greater demand for healthcare services in the U.S. due to the aging population.

We provide two main services to our customers, which are providing IT solutions and IT staffing to our clients. With IT solutions services, we generally take responsibility for the deliverables on a project and the services may include high-end consulting services. When providing IT staffing services, we typically supply personnel to our customers who then, in turn, take their direction from the client's managers. IT solutions and IT staffing revenue as a percentage of total revenue for the years ended December 31, 2012, 2011 and 2010 is as follows: 2012 2011 2010 IT solutions 41 % 37 % 34 % IT staffing 59 % 63 % 66 % Total 100 % 100 % 100 % The Company promotes a majority 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 remainder of CTG's revenue is derived from general markets.

16 -------------------------------------------------------------------------------- Table of Contents CTG's revenue by vertical market for the years ended December 31, 2012, 2011 and 2010 is as follows: 2012 2011 2010 Healthcare 33 % 30 % 27 % Technology service providers 31 % 34 % 36 % Financial services 6 % 7 % 6 % Energy 6 % 6 % 7 % General markets 24 % 23 % 24 % Total 100 % 100 % 100 % The IT services industry is extremely competitive and characterized by continuous changes in customer 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 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.

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 collectibility of the amounts due is reasonably assured. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with periodic billing schedules, primarily monthly, revenue is recognized as services are rendered to the customer. Revenue for fixed-price contracts is recognized as per the proportional method of accounting using an input-based approach whereby salary and indirect labor costs incurred are measured and compared with the total estimate of costs of such items at completion for a project. Revenue is recognized based upon the percentage-of-completion calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects that include significant amounts of material or other non-labor related costs which could distort the percent completed 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.

In 2010, the Company entered into a series of contracts with a customer that provided for application customization and integration services, as well as post contract support (PCS) services, specifically utilizing one of several of the software tools the Company has internally developed. These services were provided under a software-as-a-service model. As the contracts were closely interrelated and dependent on each other, for accounting purposes the contracts were considered to be one arrangement. Additionally, as the project included significant modification and customization services to transform the previously developed software tool into an expanded tool intended to meet the customer's requirements, the percentage-of-completion method of contract accounting was being utilized for the project. Total revenue and costs were recognized equally until completion of the application customization and integration services portion of the project. The remaining unrecognized portion of the contract value was recognized on a straight-line basis over the term of the PCS period which ended on December 31, 2011.

The Company's revenue from contracts accounted for under time-and-material, progress billing, and percentage-of-completion methods for the years ended December 31, 2012, 2011 and 2010 is as follows: 2012 2011 2010 Time-and-material 90 % 91 % 91 % Progress billing 8 % 7 % 6 % Percentage-of-completion 2 % 2 % 3 % Total 100 % 100 % 100 % 17-------------------------------------------------------------------------------- Table of Contents 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 income as included in Item 8, "Financial Statements and Supplementary Data" in this report.

Year Ended December 31, 2012 2011 2010 (percentage of revenue) Revenue 100.0 % 100.0 % 100.0 % Direct costs 78.4 % 78.7 % 78.5 % Selling, general and administrative expenses 15.8 % 16.4 % 17.3 % Operating income 5.8 % 4.9 % 4.2 % Interest and other income (expense), net 0.2 % (0.1 )% (0.1 )% Income before income taxes 6.0 % 4.8 % 4.1 % Provision for income taxes 2.2 % 1.8 % 1.6 % Net income 3.8 % 3.0 % 2.5 % 2012 as compared with 2011 The Company recorded revenue in 2012 and 2011 as follows: Year-over- Year Ended December 31, % of total 2012 % of total 2011 Year Change (dollars in thousands) North America 83.8 % $ 355,805 83.1 % $ 329,295 8.1 % Europe 16.2 % 68,610 16.9 % 66,980 2.4 % Total 100.0 % $ 424,415 100.0 % $ 396,275 7.1 % Reimbursable expenses billed to customers and included in revenue totaled $13.4 million and $12.7 million in 2012 and 2011, respectively.

In North America, the significant revenue increase in 2012 as compared with 2011 was due to strong demand for the Company's IT solutions services. On a consolidated basis, IT solutions revenue increased $26.4 million or 17.9%, and was primarily driven by an increase in the Company's EMR work for providers in the healthcare vertical market in North America. The Company expects demand for its EMR solutions and other healthcare related services to remain strong in 2013. IT staffing revenue increased $1.8 million or 0.7% as demand for these services significantly slowed due to the continuing challenging economic conditions in the United States. During 2010 and 2011, the Company had strong demand for its IT staffing services as customers backfilled for positions that they had eliminated in 2009 due to the onset of the recession in North America in late 2008.

The Company's European operations include Belgium, Luxembourg and the United Kingdom. The increase in year-over-year revenue in the Company's European operations was primarily due to strength in the Company's European IT solutions business. When considering the year-over-year change in revenue in constant currencies, the revenue from our European operations increased 10.9%. This revenue increase was offset by the weakness relative to the U.S. dollar of the currencies of Belgium, Luxembourg, and the United Kingdom. In Belgium and Luxembourg, the functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. In 2012 as compared with 2011, the average value of the Euro decreased 7.7%, while the average value of the British Pound decreased 1.2%. A significant portion of the Company's revenue from its European operations is generated in Belgium and Luxembourg. Had there been no change in these exchange rates from 2011 to 2012, total European revenue would have been approximately $5.4 million higher, or $74.0 million as compared with the $68.6 million reported.

IBM is CTG's largest customer. CTG provides services to various IBM divisions in many locations. During 2011, the NTS Agreement was renewed for three years until December 31, 2014. As part of the NTS Agreement, the Company also provides its services as a predominant supplier to IBM's Integrated Technology Services unit and as the sole provider to the Systems and Technology Group business unit.

These agreements accounted for 18 -------------------------------------------------------------------------------- Table of Contents approximately 91.9% of all of the services provided to IBM by the Company in 2012. In 2012, 2011, and 2010, IBM accounted for $113.5 million or 26.7%, $116.5 million or 29.4%, and $102.3 million or 30.9% of the Company's consolidated revenue, respectively. In 2012, IBM spun its retail business off to another large company. While CTG retained the work, this reduced our revenue from IBM in 2012 by $3.2 million. 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 IBM would have a significant negative effect on our operating results. The Company's accounts receivable from IBM at December 31, 2012 and 2011 amounted to $12.6 million and $12.8 million, respectively. No other customer accounted for more than 10% of the Company's revenue in 2012, 2011 or 2010.

Direct costs, defined as costs for billable staff including billable out-of-pocket expenses, were 78.4% of consolidated revenue in 2012 and 78.7% of consolidated revenue in 2011. The decrease in direct costs as a percentage of revenue in 2012 compared with 2011 was due to a continued shift in the Company's business mix to a higher percentage of solutions business, which incurs lower direct costs as a percentage of revenue than the Company's staffing business.

Selling, general and administrative (SG&A) expenses were 15.8% of revenue in 2012 as compared with 16.4% of revenue in 2011. The SG&A decrease as a percentage of revenue in 2012 as compared with 2011 is primarily due to disciplined cost management and the effect of operating leverage resulting from revenue growth.

Operating income was 5.8% of revenue in 2012 as compared with 4.9% of revenue in 2011. The increase in operating income year-over-year was primarily due to the favorable change in business mix to more solutions services in 2012, and lower SG&A costs as a percentage of revenue. Operating income from North American operations was $21.3 million and $16.6 million in 2012 and 2011, respectively, while European operations generated operating income of $3.2 million and $2.7 million in 2012 and 2011, respectively. Operating income in 2012 in the Company's European operations would have been approximately $0.2 million higher if there had been no change in foreign currency exchange rates year-over-year.

Interest and other income (expense), net was 0.2% of revenue in 2012 and (0.1)% of revenue in 2011. Net other income in 2012 primarily resulted from the receipt of life insurance proceeds totaling approximately $1.3 million for two former executives that passed away during 2012. This income in 2012 was partially offset by bank fees. In 2011, partially offsetting net interest and other expenses that resulted from bank fees and a loss on intercompany balances settled or intended to be settled at year-end, was approximately $0.1 million resulting from a gain on a sale of property.

The Company's effective tax rate (ETR) is calculated based upon the full year's operating results, and various tax related items. The Company's normal ETR ranges from 38% to 42%. The ETR in 2012 was 36.5%, while the 2011 ETR was 37.6%.

The ETR in 2012 was lower due to approximately $0.5 million in tax expense related to non-taxable life insurance proceeds received during the year. In addition, the Company recorded an additional $0.2 million reduction of state tax expense as a result of the recording of certain favorable provision-to-return adjustments associated with the Company's 2011 income tax returns. The ETR during 2011 was reduced as the Company recorded $0.3 million of tax credits related to research and development activities, and $0.3 million of federal tax credits related to the retention of certain individuals hired during 2010. The impact of these credits was partially offset by an increase in the valuation allowance of $0.2 million associated with net operating losses incurred by certain foreign subsidiaries.

The Company did not record a tax benefit for its research and development activities during 2012 as the legislation extending the tax credit related to these expenses, the American Taxpayer Relief Act of 2012, was not passed by the U.S. federal government until January 2013. As required under current accounting guidelines, the Company expects to recognize a tax benefit of approximately $0.3 million for these 2012 credits in the 2013 first quarter.

Net income for 2012 was 3.8% of revenue or $0.96 per diluted share, compared with net income of 3.0% of revenue or $0.71 per diluted share in 2011. Diluted earnings per share were calculated using 16.8 million weighted-average equivalent shares outstanding in 2012 and 16.7 million in 2011. The increase in shares year-over-year is due to the dilutive effect of incremental shares outstanding under the Company's equity-based compensation plans. This increase was partially offset by purchases of approximately 0.3 million shares for treasury by the Company during 2012.

19 -------------------------------------------------------------------------------- Table of Contents 2011 as compared with 2010 The Company recorded revenue in 2011 and 2010 as follows: Year-over- Year Ended December 31, % of total 2011 % of total 2010 Year Change (dollars in thousands) North America 83.1 % $ 329,295 81.7 % $ 270,694 21.6 % Europe 16.9 % 66,980 18.3 % 60,713 10.3 % Total 100.0 % $ 396,275 100.0 % $ 331,407 19.6 % Reimbursable expenses billed to customers and included in revenue totaled $12.7 million and $9.1 million in 2011 and 2010, respectively.

In North America, the significant revenue increase in 2011 as compared with 2010 was due to strong demand for both the Company's IT solutions and IT staffing services as general economic conditions continued to improve from those that existed during the recession in 2008/2009. IT solutions revenue increased 33.1% and IT staffing revenue increased 12.7% in 2011 as compared with 2010. The IT solutions revenue increase totaled $36.9 million and was primarily driven by an increase in the Company's EMR work. The IT staffing revenue increase totaled $28.0 million as the Company's customers filled staffing requirements that had remained open from 2009 due to the economic recession in the United States.

The Company's European operations include Belgium, Luxembourg and the United Kingdom. The increase in year-over-year revenue in the Company's European operations was primarily due to modest strength in the Company's European IT staffing business, much of which is due to work with government ministries associated with the European Union. This revenue increase was supported by the strength relative to the U.S. dollar of the currencies of Belgium, Luxembourg, and the United Kingdom. In Belgium and Luxembourg, the functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. In 2011 as compared with 2010, the average value of the Euro increased 4.9%, while the average value of the British Pound increased 3.8%. Had there been no change in these exchange rates from 2010 to 2011, total European revenue would have been approximately $3.0 million lower, or $64.0 million as compared with the $67.0 million reported.

IBM is CTG's largest customer. CTG provides services to various IBM divisions in many locations. During the 2011 fourth quarter, the NTS Agreement was renewed for three years until December 31, 2014. As part of the NTS Agreement, the Company also provides its services as a predominant supplier to IBM's Integrated Technology Services unit and as the sole provider to the Systems and Technology Group business unit. These agreements accounted for approximately 94% of all of the services provided to IBM by the Company in 2011. In 2011, 2010, and 2009, IBM accounted for $116.5 million or 29.4%, $102.3 million or 30.9%, and $71.2 million or 25.8% of the Company's consolidated revenue, respectively. The Company continued to derive a significant portion of its revenue from IBM in 2012. However, a significant decline or the loss of the revenue from IBM in 2013 or future years would have a significant negative effect on our operating results. The Company's accounts receivable from IBM at December 31, 2011 and 2010 amounted to $12.8 million and $13.1 million, respectively. No other customer accounted for more than 10% of the Company's revenue in 2011, 2010 or 2009.

Direct costs, defined as costs for billable staff including billable out-of-pocket expenses, were 78.7% of consolidated revenue in 2011 and 78.5% of consolidated revenue in 2010. The increase in direct costs as a percentage of revenue in 2011 compared with 2010 was due to an increase in employee benefit costs, primarily unemployment insurance, in 2011.

Selling, general and administrative (SG&A) expenses were 16.4% of revenue in 2011 as compared with 17.3% of revenue in 2010. The SG&A decrease as a percentage of revenue in 2011 as compared with 2010 is primarily due to disciplined cost management and the economies of scale, especially pertaining to fixed costs, associated with the revenue growth experienced in 2011 as compared with 2010.

Operating income was 4.9% of revenue in 2011 as compared with 4.2% of revenue in 2010. Operating income from North American operations was $16.6 million and $12.4 million in 2011 and 2010, respectively, while European operations generated operating income of $2.7 million and $1.5 million in 2011 and 2010, respectively. Operating income in the Company's European operations increased by approximately $0.2 million due to the change in foreign currency exchange rates year-over-year.

20 -------------------------------------------------------------------------------- Table of Contents Interest and other expense, net was 0.1% of revenue in both 2011 and 2010. This balance primarily consisted of interest expense on borrowings under the Company's revolving line of credit, bank fees, and foreign exchange losses. The Company recorded a net exchange loss on intercompany balances totaling less than $0.1 million in both 2011 and 2010, resulting from balances settled during the year or those intended to be settled as of December 31, 2011. In 2011, partially offsetting the net interest and other expense balance was approximately $0.1 million resulting from a gain on a sale of property.

The Company's ETR is calculated based upon the full year's operating results, and various tax related items. The Company's normal ETR ranges from 38% to 42%.

The 2011 ETR was 37.6%, and the 2010 ETR was 39.2%. The ETR during 2011 was reduced as the Company recorded $0.3 million of tax credits related to research and development activities, and $0.3 million of federal tax credits related to the retention of certain individuals hired during 2010. The impact of these credits was partially offset by an increase in the valuation allowance of $0.2 million associated with net operating losses incurred by certain foreign subsidiaries.

Net income for 2011 was 3.0% of revenue or $0.71 per diluted share, compared with net income of 2.5% of revenue or $0.52 per diluted share in 2010. Diluted earnings per share were calculated using 16.7 million weighted-average equivalent shares outstanding in 2011 and 16.1 million in 2010. The increase in shares year-over-year was due to the dilutive effect of incremental shares outstanding under the Company's equity-based compensation plans. This increase was partially offset by purchases of approximately 0.3 million shares for treasury by the Company during 2011.

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 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 those related to goodwill valuation, and the valuation allowance for deferred income taxes.

Goodwill Valuation The Company has a goodwill balance of $35.7 million. The balance is evaluated annually as of the Company's October fiscal month-end (the measurement date), or more frequently if facts and circumstances indicate impairment may exist. This evaluation, as applicable, is based on estimates and assumptions that may be used to analyze the appraised value of similar transactions from which the goodwill arose, the appraised value of similar companies, or estimates of future discounted cash flows. The estimates and assumptions on which the Company's evaluations are based involve judgments and are based on currently available information, any of which could prove wrong or inaccurate when made, or become wrong or inaccurate as a result of subsequent events.

At the respective measurement dates for 2012, 2011, and 2010, the Company completed its annual valuation of the business to which the Company's goodwill relates. During 2012, the Company utilized the provisions under Accounting Standards Update No. 2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment," which allow public entities to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this new process, an entity 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. During 2011 and 2010, the company utilized the assistance of an independent third party appraiser to complete its review.

The 2010 and 2011 measurement date valuations indicated that the estimated fair value of the business was substantially in excess of its carrying value, with the estimated fair value of the unit exceeding the carrying value by 116% in 2011, and 31% in 2010. From its internal qualitative assessment completed in 2012, the Company believes the fair value of the business has increased from 2011, and continues to be substantially in excess of the carrying value of the business. Additionally, there are no other facts or 21 -------------------------------------------------------------------------------- Table of Contents circumstances that arose during 2012, 2011 or 2010 which led management to believe the goodwill balance was impaired.

Income Taxes-Valuation Allowances on Deferred Tax Assets At December 31, 2012, the Company had a total of approximately $7.6 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, loss carryforwards and state taxes.

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 December 31, 2012, the Company had deferred tax assets recorded resulting from net operating losses in previous years totaling approximately $1.1 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, 2012, the Company had offset a portion of these assets with a valuation allowance totaling $1.0 million, resulting in a net deferred tax asset from net operating loss carryforwards of approximately $0.1 million.

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 2012 would have increased or decreased net income by approximately $255,000, or approximately $0.02 per diluted share.

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 provided by operating activities was $21.2 million, $8.6 million and $9.2 million in 2012, 2011 and 2010, respectively. In 2012, net income was $16.2 million, while other non-cash adjustments, primarily consisting of depreciation expense, equity-based compensation, deferred income taxes, and deferred compensation totaled $5.9 million. In 2011 and 2010, net income was $11.9 million and $8.4 million, respectively, while the corresponding non-cash adjustments netted to $1.9 million and $2.6 million, respectively. The increase in non-cash adjustments in 2012 as compared with 2011 was primarily due to an increase in depreciation and amortization expense of $0.6 million, equity-based compensation of $0.6 million, deferred taxes of $1.0 million, and deferred compensation of $1.6 million. The decrease in non-cash adjustments in 2011 as compared with 2010 was primarily due to an increase in depreciation and amortization expense of $0.6 million and equity-based compensation expense of $0.3 million, offset by a decrease in deferred taxes of $0.7 million and deferred compensation of $0.7 million. The increases in 2012 and 2011 for depreciation and amortization expense was due to the completion of all existing capitalized software projects and the corresponding initiation of depreciation expense on those projects. The change in 2012 from 2011 for deferred compensation primarily relates to a change in the discount rate for the Netherlands defined-benefit plan.

Accounts receivable balances increased $2.2 million in 2012 as compared with 2011, $10.6 million in 2011 as compared with 2010, and $13.2 million in 2010 as compared with 2009. The increase in the accounts receivable balance in 2012 resulted from an increase in revenue in the 2012 fourth quarter of approximately 6.9% when compared with the 2011 fourth quarter. The increase in revenue was offset by a decrease in days sales outstanding (DSO). DSO is calculated by dividing accounts receivable obtained from the consolidated balance sheet by 22 -------------------------------------------------------------------------------- Table of Contents average daily revenue for the fourth quarter of the respective year. DSO was 61 days at December 31, 2012 , whereas the DSO at December 31, 2011 was 62 days.

The increase in the accounts receivable balance in 2011 as compared with 2010 resulted from an increase in revenue in the 2011 fourth quarter of approximately 16% when compared with the 2010 fourth quarter. DSO also increased to 62 days at December 31, 2011 from 60 days at December 31, 2010. The increase in the accounts receivable balance in 2010 resulted from an increase in revenue in the 2010 fourth quarter of approximately 29% when compared with the 2009 fourth quarter.

Other assets decreased less than $0.1 million in 2012, approximately $1.1 million in 2011, and approximately $1.3 million in 2010. The decrease in 2011 from 2010 was primarily due to a decrease in the actuarially determined asset recorded for the Netherlands defined benefit plan, while the decrease in 2010 from 2009 was due to the timing of the Company's borrowings against the cash surrender value of insurance policies it owns. Accounts payable decreased $0.3 million in 2012, increased $1.3 million in 2011, and decreased $0.6 million in 2010. The increase in accounts payable in 2011 is primarily due to a general increase in the size of the Company and the timing of payments near year-end.

The decrease in accounts payable in 2010 is primarily due to the timing of certain payments near year-end. Accrued compensation increased $1.0 million in 2012 primarily due to an increase in employee headcount of about 200 from 2011, $1.5 million in 2011 primarily due to an increase in employee headcount of about 300 from 2010, and increased $10.0 million in 2010 primarily due to a significant increase in headcount of greater than 500 employees year-over-year and the accrual of year-end incentives due to higher profitability in 2010 as compared with 2009. Income taxes payable decreased $1.0 million in 2012 due to the timing of payments made in 2012 and certain provision-to-return adjustments made when filing the Company's 2011 tax returns. Income taxes payable increased $1.2 million in 2011 and $0.5 million in 2010 due to higher taxable income in 2011 and 2010, and the timing and amount of estimated tax payments near year-end.

Investing activities used $2.0 million, $1.7 million, and $2.0 million of cash in 2012, 2011 and 2010, respectively, primarily due to additions to property, equipment and capitalized software of $1.9 million in 2012, $1.9 million in 2011, and $2.0 million in 2010. The Company has no significant commitments for the purchase of property or equipment at December 31, 2012, and does not expect the amount to be spent in 2013 on additions to property, equipment and capitalized software to significantly vary from the amount spent in 2012.

Financing activities used $1.3 million of cash in 2012, provided $1.0 million of cash in 2011, and used $2.1 million of cash in 2010. The Company received $3.8 million, $3.8 million, and $1.0 million during 2012, 2011, and 2010, respectively, from the proceeds from stock option exercises and excess tax benefits from equity-based compensation transactions. These increases in 2012 and 2011 were larger as compared with 2010 due to a significant increase in the Company's stock price during 2011 and 2012 which led to a higher level of stock option exercises.

During 2012, 2011 and 2010, the Company used $4.6 million, $3.6 million, and $3.0 million, respectively, to purchase approximately 0.3 million, 0.3 million, 0.4 million shares of its stock for treasury. During February 2011, the Company's Board of Director's authorized 1.0 million additional shares for future stock repurchases under this program. Approximately 0.5 million, 0.9 million, and 0.2 million shares remain authorized for future purchases under the Company's share repurchase plan at December 31, 2012, 2011 and 2010, respectively. At December 31, 2012, 2011, and 2010, the Company also experienced changes in its cash account overdrafts, which are primarily due to timing of cash payments at year-end, of $(0.8) million, $0.5 million, and $(0.3) million, respectively.

The Company did not have any borrowings outstanding under its revolving line of credit (LOC) at December 31, 2012, 2011 or 2010. The term of the LOC was renewed during 2010 and now extends to April 2014. The LOC totals $35.0 million and can be used for borrowings or letter of credit commitments. Letters of credit at December 31, 2012, 2011, and 2010 totaled $0.5 million, $0.4 million, and $0.4 million, respectively. The Company borrows or repays the LOC as needed based upon its working capital obligations, including the timing of the U.S. bi-weekly payroll. The Company did not borrow any amounts under the line of credit during 2012. The average outstanding balances under the Company's LOC for 2011 and 2010 were approximately $0.4 million and $1.3 million, respectively.

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, 2012 include a leverage ratio which must be no more than 2.75 to 1, a calculation of minimum tangible net worth which must be no less than $51.2 million, and total expenditures for property, equipment and capitalized software cannot exceed $5.0 million annually. The Company was in compliance with these covenants at December 31, 2012 as its leverage ratio was 0.0, its minimum tangible net worth was $66.7 million, and 2012 expenditures for property, equipment and capitalized software were $1.9 million. The Company was also in 23 -------------------------------------------------------------------------------- Table of Contents compliance with its required covenants at December 31, 2011 and December 31, 2010. When considering current market conditions and the Company's current operating results, the Company believes it will be able to meet its covenants, as applicable, in 2013 and future years.

Of the total cash and cash equivalents reported on the consolidated balance sheet at December 31, 2012 of $40.6 million, approximately $14.7 million is held by the Company's foreign operations and is considered to be indefinitely reinvested in those operations. During January 2013, the Company used a portion of its cash held by its foreign operations to purchase etrinity, a company with operations in Belgium and the Netherlands. 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 its foreign operations.

The Company believes existing internally available funds, cash potentially generated from operations, and borrowings available under the Company's LOC totaling approximately $34.5 million at December 31, 2012, will be sufficient to meet foreseeable working capital and capital expenditure needs, fund stock repurchases, and to allow for future internal growth and expansion.

Off-Balance Sheet Arrangements The Company did not have off-balance sheet arrangements or transactions in 2012, 2011 or 2010 other than guarantees in our European operations that support office leases and the performance under government contracts. These guarantees totaled approximately $2.5 million at December 31, 2012.

Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk exposures consist of interest rate risk associated with variable rate borrowings and foreign currency exchange risk associated with the Company's European operations. See Item 7A, "Quantitative and Qualitative Disclosure about Market Risk" in this report.

Contractual Obligations The Company intends to satisfy its contractual obligations from operating cash flows, and, if necessary, from draws on its revolving credit line. A summary of the Company's contractual obligations at December 31, 2012 is as follows: Less More than Years Years than (in millions) Total 1 year 2-3 4-5 5 years Long-term debt A $ - $ - $ - $ - $ - Capital lease obligations B - - - - - Operating lease obligations C 13.9 4.7 6.2 2.2 0.8 Purchase obligations D 2.0 1.6 0.4 - -Deferred compensation benefits (U.S.) E 8.4 1.0 1.5 1.3 4.6 Deferred compensation benefits Europe F 3.8 0.1 0.3 0.4 3.0 Other long-term liabilities G 0.4 - 0.1 0.1 0.2 Total $ 28.5 $ 7.4 $ 8.5 $ 4.0 $ 8.6 A A $35.0 million revolving credit agreement (Agreement) that expires in April 2014. The Company uses this Agreement to fund its working capital obligations as needed, primarily funding the U.S. bi-weekly payroll. There were no borrowings outstanding under the Agreement at December 31, 2012. The Company does currently have one outstanding letter of credit under the Agreement totaling approximately $0.5 million that collateralizes an employee benefit program.

B The Company does not have any capital lease obligations outstanding at December 31, 2012.

C Operating lease obligations relate to the rental of office space, office equipment, and automobiles leased in the Company's European operations. Total rental expense under operating leases in 2012, 2011, and 2010 was approximately $6.3 million, $6.8 million, and $6.4 million, respectively.

24-------------------------------------------------------------------------------- Table of Contents D The Company's purchase obligations in 2013, 2014 and 2015 total approximately $2.0 million, including $0.8 million for software maintenance, support and related fees, $0.3 million for telecommunications, $0.3 million for computer-based training courses, $0.2 million for professional organization memberships, $0.2 million for facilities, and $0.2 million for recruiting services.

E The Company is committed for deferred compensation benefits in the U.S. under two plans. The Executive Supplemental Benefit Plan (ESBP) provides certain former key executives with deferred compensation benefits. The ESBP was amended as of November 30, 1994 to freeze benefits for participants at that time. Currently, 15 individuals are receiving benefits under this plan. The ESBP is deemed to be unfunded as the Company has not specifically identified Company assets to be used to discharge the deferred compensation benefit liabilities.

The Company also has a non-qualified defined-contribution deferred compensation plan for certain key executives. Contributions to this plan in 2012 were $0.4 million. The Company anticipates making contributions totaling approximately $0.3 million in 2013 to this plan for amounts earned in 2012.

F The Company retained a contributory defined-benefit plan for its previous employees located in the Netherlands when the Company disposed of its subsidiary, CTG Nederland B.V. This plan was curtailed on January 1, 2003 for additional contributions. The Company does not anticipate making additional contributions to fund the plan in future years.

G The Company has other long-term liabilities including payments for a postretirement benefit plan for six retired employees and their spouses, totaling nine participants.

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