The financial statements and supplementary
data required by this item are filed as part of this Annual Report on Form 10-K. See Index to Consolidated Financial Statements on page 32 of this Annual Report on Form 10-K.
The accompanying Consolidated Financial Statements of Mastech Holdings, Inc. and subsidiaries have been prepared by management, which is
responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America and necessarily include amounts based on managements best estimates
and judgments.
The Companys Consolidated Financial Statements for the year ended December 31, 2015 have been audited by UHY LLP, an
Independent Registered Public Accounting Firm, whose report thereon appears on page 33 of this Annual Report on Form 10-K.
The Board
of Directors pursues its responsibility for the Companys financial reporting and accounting practices through its Audit Committee, all of the members of which are independent directors. The Audit Committees duties include recommending to
the Board of Directors the Independent Registered Public Accounting Firm to audit the Companys financial statements, reviewing the scope and results of the independent accountants activities and reporting the results of the
committees activities to the Board of Directors. The Independent Registered Public Accounting Firm has met with the Audit Committee in the presence of management representatives to discuss the results of their audit work. Additionally, the
Independent Registered Public Accounting Firm has direct access to the Audit Committee.
John J. Cronin, Jr.
The accompanying notes are an integral part of these Consolidated Financial Statements.
The accompanying notes are an integral part of these Consolidated Financial Statements.
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying notes are an integral part of these Consolidated Financial Statements.
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Summary of Significant Accounting Policies:
|
Basis of Presentation
Mastech Holdings, Inc. (referred to in this report as Mastech, the Company, us, our or
we) is a provider of information technology staffing services. Our business combines technical expertise with business process experience to deliver a broad range of services within business intelligence / data warehousing; service
oriented architecture; web services; enterprise resource planning & customer resource management; and e-Business solutions segments. Headquartered in the Pittsburgh, Pennsylvania area, we have approximately 850 consultants that provide services
across a broad spectrum of industry verticals on a national basis.
Accounting Principles
The Companys Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP).
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these
estimates.
Recent Developments
On February 29, 2016, D. Kevin Horner resigned as our President and Chief Executive Officer and as a member of our Board of Directors. On March
1, 2016, our Board of Directors appointed Vivek Gupta as our President and Chief Executive Officer and as a member of our Board of Directors. On January 28, 2016, we entered into an Executive Employment Agreement with Mr. Gupta, to be effective on
March 1, 2016, a description of which is contained in the Current Report on Form 8-K filed by the Company with the SEC on March 3, 2016. On March 11, 2016, Denis D. Deet ceased to be Vice President of Technology and Chief Information Officer of the
Company.
On June 15, 2015, the Company completed the $17 million acquisition of Hudson Global Resources Management, Inc.s U.S. IT
staffing business (Hudson IT) as more fully described in Note 2 Business Combinations to the Consolidated Financial Statements. Hudson IT is a domestic IT staffing business with offices in Chicago, Boston, Tampa and Orlando.
In support of this business combination, the Company entered into an amendment to its existing loan agreement with PNC Bank, N.A. The amended terms included the addition of a $9 million term loan and a $3 million reduction to the Companys
existing credit facility for revolver credit loans and letters of credit. Other pertinent terms and conditions are more fully described in Note 6 Credit Facility to the Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash and highly liquid debt investments with maturities of three months or less when purchased. Cash
equivalents are stated at cost, which approximates market value.
39
Accounts Receivable and Unbilled Receivables
The Company extends credit to clients based upon managements assessment of their creditworthiness. A substantial portion of the
Companys revenue, and the resulting accounts receivable, are from Fortune 1000 companies, major systems integrators and other staffing organizations. The Company does not generally charge interest on delinquent accounts receivable.
Unbilled receivables represent amounts recognized as revenues based on services performed and, in accordance with the terms of the client
contract, will be invoiced in a subsequent period.
Allowance for Uncollectible Accounts
Accounts receivable are reviewed periodically to determine the probability of loss. The Company records an allowance for uncollectible accounts
when it is probable that the related receivable balance will not be collected based on historical collection experience, client-specific collection issues, and other matters the Company identifies in its collection monitoring.
The Allowance for Uncollectible Accounts was $313,000 and $260,000 at December 31, 2015 and 2014, respectively. There was $53,000 of bad debt
expense charges reflected in the Consolidated Statements of Operations for the year ended December 31, 2015. There was no bad debt expense charges from continuing operations reflected in the Consolidated Statements of Operations for the two years
ended December 31, 2014.
Equipment, Enterprise Software and Leasehold Improvements
Equipment, enterprise software and leasehold improvements are stated at historical cost. The Company provides for depreciation using the
straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of (a) the remaining term of the lease or (b) the estimated useful life of the improvements. Repairs and maintenance, which do
not extend the useful life of the respective assets, are charged to expense as incurred. Upon disposal, assets and related accumulated depreciation are removed from the Companys accounts and the resulting gains or losses are reflected in the
Companys Consolidated Statement of Operations.
The estimated useful lives of depreciable assets are primarily as follows:
|
|
|
Laptop Computers
|
|
18 months
|
Equipment
|
|
3-5 years
|
Enterprise Software
|
|
3 years
|
Depreciation and amortization expense related to fixed assets totaled $219,000, $143,000 and, $153,000 for the
years ended December 31, 2015, 2014 and 2013, respectively.
Deferred Financing Costs
The Company capitalizes expenses directly related to securing its credit facilities. These deferred costs are amortized as interest
expense over the term of the underlying facilities.
Goodwill and Intangible Assets
Identifiable intangible assets are recorded at fair value when acquired in a business combination. In connection with our acquisition of Hudson
IT, intangible assets were recorded at their estimated fair value on June 15, 2015. Identifiable intangible assets consisted of client relationships, a covenant not-to-compete and a trade name, which are being amortized using the straight-line
method over their estimated useful lives ranging
40
from 3-years to 12-years, as more fully described in Note 2 Business Combinations to the Consolidated Financial Statements.
Excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired are recorded as
goodwill. Goodwill is not amortized but is tested for impairment at least on an annual basis. If impairment is indicated, a write-down to fair value is recorded based on the excess of the carrying value of the asset over its fair market
value.
We review goodwill assets for impairment annually as of October 1
st
or more
frequently if events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Intangible assets are reviewed for impairment if events or changes in circumstances indicate that the carrying value of the
assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from use of the assets and their eventual disposition. Measurement of any impairment
loss is based on the excess carrying value of the assets over their fair market value.
In conducting our annual impairment testing, we
have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than
its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting units fair value is less than its carrying amount, we are then required to perform a quantitative impairment test.
We also may elect not to perform the qualitative assessment, and instead, proceed directly to the quantitative impairment test.
In 2015,
we performed a qualitative assessment in which we considered relevant events and circumstances, including changes in customers demand outlooks, activities levels and margin tends general economic conditions in the U.S., and material changes in
the competitive landscape of our business. Additionally, we considered the results and assumptions related to our most recent quantitative assessment conducted as of our Hudson IT acquisition date (June 15, 2015). Based on this qualitative
assessment, we believe that were no indications of impairment associated with the carrying amount of goodwill.
Business Combinations
The Company accounts for acquisitions in accordance with guidance found in ASC 808,
Business Combinations
(ASC805). This
guidance requires consideration given (including contingent consideration), assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and
development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition transaction costs will generally be expensed as incurred; (3) restructuring costs associated with a business combination will generally be expensed
subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will effect income tax expense.
ASC 805 requires that any excess purchase price over fair value of assets acquired (including identifiable intangibles) and liabilities
assumed be recognized as goodwill. Additionally, any excess fair value of acquired net assets over acquisition consideration results in a bargain purchase gain. Prior to recording a gain, the acquiring entity must reassess whether all
acquired assets and assumed liabilities have been identified and must perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have all been properly valued.
The Hudson IT financial results are included in the Companys Consolidated Financial Statements from the date of the acquisition of June
15, 2015.
Income Taxes
The Company records an estimated liability for income and other taxes based on what management determines will likely be paid in the various
tax jurisdictions in which we operate. Management uses its best
41
judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters, including the resolution of the tax audits in the various
affected tax jurisdictions, and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the
amount recorded.
Management determines the Companys income tax provision using the asset and liability method. Under this method,
deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Companys assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates
in effect for the year in which we expect to recover or settle the temporary differences. The effect of a change in tax rates on deferred taxes is recognized in the period that the change is enacted. The Company evaluates its deferred tax assets and
records a valuation allowance when, in managements opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. For the periods presented, no valuation allowance has been provided.
The Company accounts for uncertain tax positions in accordance with ASC Topic 740-10,
Accounting for Uncertainty in Income
Taxes
. Accordingly, the Company has reported a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in a tax return. As of December 31, 2015 and 2014, the Company provided $135,000
and $138,000 for uncertain tax positions, including interest and penalties, related to various state income tax matters.
During 2013, the
Companys 2011 federal tax return was audited by the Internal Revenue Service (IRS) resulting in no adjustments to our filed return. During 2011, the IRS completed its examination of the Companys federal income tax returns for
the years 2008 (post spin-off) and 2009. Amendments to our income tax returns as a result of such examination were immaterial. All periods remain subject to examination by various federal and state authorities, conditioned upon statutory
limitations.
Segment Reporting
The Company has one reportable segment in accordance with ASC Topic 280
Disclosures About Segments of an Enterprise and Related
Information
.
Revenue Recognition
The Company recognizes revenue on time-and-material contracts as services are performed and expenses are incurred. Time-and-material contracts
typically bill at an agreed upon hourly rate, plus out-of-pocket expense reimbursement. Out-of-pocket expense reimbursement amounts vary by assignment, but on average represent approximately 2% of total revenues. Revenue is earned when the
Companys consultants are working on projects. Revenue recognition is negatively impacted by holidays and consultant vacation and sick days.
In certain situations related to client direct hire assignments, where the Companys fee is contingent upon the hired resources
continued employment with the client, revenue recognition is deferred until such employment conditions are satisfied.
Stock-Based
Compensation
Effective October 1, 2008, the Company adopted a Stock Incentive Plan (the Plan) which, as amended, provides
that up to 1,200,000 shares of the Companys common stock shall be allocated for issuance to directors, executive management and key personnel. Grants under the Plan can be made in the form of stock options, stock appreciation rights,
performance shares or stock awards. The Plan is administered by the Compensation Committee of the Board of Directors. Stock options are granted at an exercise price equal to the closing share price of the Companys common stock at the grant
date and generally vest over a four-year period.
42
The Company accounts for stock-based compensation expense in accordance with ASC Topic 718
Share-based Payments
which requires us to measure all share-based payments based on their estimated fair value and recognize compensation expense over the requisite service period. The fair value of our stock options is determined
at the date of grant using the Black-Scholes option pricing model.
Treasury Stock
The Company maintains a stock repurchase program which expires on December 22, 2016. Under this program, the Company may make treasury stock
purchases in the open market or through privately negotiated transactions, subject to market conditions and normal trading restrictions. At December 31, 2015, the Company held 816,638 shares in its treasury at a cost of $4.1 million.
Comprehensive Income
Comprehensive income as presented in the Consolidated Statements of Comprehensive Income consists of net income and unrealized gains or losses,
net of taxes, on cash flow hedging transactions related to foreign exchange derivative contracts and interest rate swap contracts.
Derivative Instruments and Hedging Activities
Foreign Currency Forward Contracts:
The Company is exposed to foreign currency risks largely as a result of its Indian-based global recruitment centers. During 2012, the
Companys expenditures in Indian rupees, in support of these operations, increased significantly. Accordingly, to mitigate and manage the risk of changes in foreign currency exchange rates, the Company entered into foreign currency forward
contracts in June 2012 and continued its hedging strategy through 2015. These forward contracts have been designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815,
Derivatives and
Hedging.
The Company does not enter into derivative contracts for speculative purposes.
All derivatives are recognized on the
balance sheet at fair value. The effective portion of the changes in fair value on these instruments are recorded in other comprehensive income (loss) and are reclassified into the Consolidated Statement of Operations on the same line item and in
the same period in which the underlying hedge transactions affect earnings. Changes in the fair value of these instruments deemed ineffective are recognized in the Consolidated Statement of Operations as foreign exchange gains (losses). Forward
points (premiums/discounts) are excluded from the assessment of hedge effectiveness and are recognized in the Consolidated Statement of Operations as foreign exchange gains/ (losses).
Interest Rate Swap Contracts:
Concurrent with the Companys borrowings under the $9 million term loan facility on June 15, 2015, the Company entered into an
interest-rate swap to convert the debts variable interest rate to a fixed rate of interest. These swap contracts have been designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815. These
contracts are recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these contacts is recorded in other comprehensive income (loss) and is reclassified into the Consolidated Statements of Operations as
interest expense in the same period in which the underlying transaction affects earnings.
With respect to derivatives designated as
hedges, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking such transactions. The Company evaluates hedge effectiveness at the time a
contract is entered into and on an ongoing basis. If a contract is deemed ineffective, the change in the fair value of the derivative is recorded in the Consolidated Statement of Operations.
43
Earnings Per Share
Basic earnings per share are computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per
share are computed using the weighted-average number of common shares outstanding during the period, plus the incremental shares outstanding assuming the exercise of dilutive stock options and the vesting of restricted shares and performance shares,
calculated using the treasury stock method.
Discontinued Operations
In August 2013, the Company sold its healthcare staffing business to Accountable Healthcare Staffing, Inc. The healthcare staffing segment
meets the criteria for being reported as a discontinued operation. Accordingly, the Consolidated Statements of Operations and Cash Flow for all periods presented have been recast to reflect the healthcare staffing business as discontinued
operations.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASC Update No. 2014-09,
Revenue from Contracts with Customers
, which was amended in July 2015
that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of ASC 2014-09 is that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expected to be entitled in exchange for those goods or services. Entities can use either of two methods: (i)
retrospective to each prior period presented with the option to elect certain practical expedients as defined within ASC 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASC 2014-09 recognized at the date of initial
application and providing certain additional disclosures as defined per ASC 2014-09. ASC 2014-09 is effective for annual reporting periods (including interim periods therein) beginning after December 15, 2017 for public companies with early adoption
permitted for annual reporting periods (including interim periods therein) beginning after December 15, 2016. Accordingly, we plan to adopt this ASU on January 1, 2018.
The Company is evaluating the method of adoption and the impact of the adoption of this ASU, but does not expect the adoption of the ASU to
have a material impact on its consolidated financial statements.
In June 2014, the FASB issued Update 2014-12,
CompensationStock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
. Generally, share-based payment
awards require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. Also, an award with a performance target generally requires an employee to render service until the performance target is
achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of
whether the employee is rendering service on the date the performance target is achieved. This Update is intended to resolve the diverse accounting treatment of those awards in practice.
The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated
as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in
estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the
period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized
prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and
44
should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the
performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. For all entities, the
amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company plans to adopt this ASU in the first quarter of 2016, but it
does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In April 2015, the Financial
Accounting Standards Board (FASB) issued ASU No. 2015-03,
InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
The amendments in ASU 2015-03 are intended to
simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The presentation and subsequent cost associated with lines of credit, may be presented as an asset and amortized ratably over the term of the line of credit agreement, regardless of whether there are any borrowings on
the agreement. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim
periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is evaluating the method of adoption and the impact of adoption of this ASU, but it does not expect the
adoption of this ASU to have a material impact on its consolidated financial statements which it plans to adopt in the first quarter of 2016.
In September 2015, the FASB issued Update 2015-16
Business CombinationsSimplifying the Accounting for Measurement-Period
Adjustments.
The amendments in this Update apply to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination
occurs and during the measurement period have an adjustment to provisional amounts recognized. The main provisions of this Update require that an acquirer: 1) recognize adjustments to provisional amounts that are identified during the measurement
period in the reporting period in which the adjustment amounts are determined; 2) record, in the same periods financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result
of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date; and 3) present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in
current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company elected to adopt this new guidance in 2015.
In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17,
Balance Sheet Classification
of Deferred Taxes.
Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Stakeholders informed the FASB that the
requirement results in little or no benefit to users of financial statements because the classification does not generally align with the time period in which the recognized deferred tax amounts are expected to be recovered or settled. In addition,
there are costs incurred by an entity to separate deferred income tax liabilities and assets into a current and noncurrent amount. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax
liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred
tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in this Update will align the presentation of deferred income tax assets
and liabilities with International Financial Reporting Standards (IFRS). IAS 1,
Presentation of Financial Statements,
requires deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position.
45
The amendments in this Update are effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. Accordingly, we plan to adopt this ASU on January 1,
2017.
A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting
organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any, that the implementation of such proposed standards would have on the
Companys consolidated financial statements.
On June 15, 2015, the Company completed the cash acquisition of Hudson IT. The acquisition supports Mastechs growth
strategy as a premier provider of IT staffing services by expanding its existing client base, increasing its domestic recruitment capabilities and strengthening its management talent. The acquisition was structured as an asset purchase and was
accounted for using the acquisition method of accounting. The acquisition method of accounting requires that the assets acquired and liabilities assumed be measured at their fair values as of the closing date.
The financial terms of the acquisition included a $16,987,000 cash purchase price and the assumption of $13,000 of net current liabilities,
with the seller retaining essentially all working capital.
The cash purchase price at closing was paid with funds obtained from the
following sources:
|
|
|
|
|
(in thousands)
|
|
Amounts
|
|
Cash balances on hand
|
|
$
|
2,000
|
|
Term loan facility
|
|
|
9,000
|
|
Revolving line of credit
|
|
|
5,987
|
|
|
|
|
|
|
Cash paid at Closing
|
|
$
|
16,987
|
|
|
|
|
|
|
The allocation of purchase price was based on estimates of the fair value of assets acquired and liabilities
assumed as of June 15, 2015, as set forth below. The excess purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce. All
goodwill is expected to be deductible for tax purposes. The valuation of net assets acquired is as follows:
|
|
|
|
|
(in thousands)
|
|
Amounts
|
|
Current Assets
|
|
$
|
18
|
|
Fixed Assets
|
|
|
6
|
|
Identifiable intangible assets:
|
|
|
|
|
Client relationships
|
|
|
7,999
|
|
Covenant not-to-compete
|
|
|
319
|
|
Trade name
|
|
|
249
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
|
8,567
|
|
Goodwill
|
|
|
8,427
|
|
Current liabilities
|
|
|
(31
|
)
|
|
|
|
|
|
Net Assets Acquired
|
|
$
|
16,987
|
|
|
|
|
|
|
The fair value of identifiable intangible assets has been estimated using the income approach through a
discounted cash flow analysis. Specifically, the Company used the income approach through an excess earnings
46
analysis to determine the fair value of client relationships. The value applied to the covenant not-to-compete was based on an income approach using a with or without analysis of this
covenant in place. The trade name was valued using the income approach relief from royalty method. All identifiable intangibles are considered level 3 inputs under the fair value measurement and disclosures guidance.
The Company incurred $624,000 of direct transaction costs related to the acquisition in 2015. These costs are included in selling, general and
administrative expenses in the accompanying Consolidated Statement of Operations.
Included in the Consolidated Statement of Operations
for the twelve month period ended December 31, 2015 are revenues of $15.9 million and net income of approximately $0.8 million applicable to the Hudson IT operations from our June 15, 2015 acquisition date through December 31, 2015.
The following reflects the Companys unaudited pro forma results had the results of Hudson IT been included for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
(Amounts in Thousands)
|
|
Revenue
|
|
$
|
137,199
|
|
|
$
|
149,709
|
|
|
$
|
148,489
|
|
Net income
|
|
$
|
3,009
|
|
|
$
|
5,132
|
|
|
$
|
5,269
|
|
Earnings per sharediluted
|
|
$
|
.68
|
|
|
$
|
1.15
|
|
|
$
|
1.21
|
|
The information above does not reflect all of the operating efficiencies or inefficiencies that may result
from the Hudson IT acquisition. Therefore, the unaudited pro forma information above is not necessarily indicative of results that would have been achieved had the business been combined during all periods presented or the results that the Company
will experience going forward.
3.
|
Goodwill and Other Intangible Assets, net
|
Goodwill related to our June 15, 2015 acquisition of Hudson IT totaled $8.4 million.
A reconciliation of the beginning and ending amounts of goodwill for the three years ended December 31, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
(Amounts in thousands)
|
|
Goodwill, beginning balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
405
|
|
Addition in current period
|
|
|
8,427
|
|
|
|
|
|
|
|
|
|
Reduction in current period
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, ending balance
|
|
$
|
8,427
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is amortizing the identifiable intangible assets on a straight-line basis over estimated average
lives ranging from 3 to 12 years. Identifiable intangible assets were comprised of the following as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
(Amounts in thousands)
|
|
Amortization
Period (In Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulative
Amortization
|
|
|
Net Carrying
Value
|
|
Client relationships
|
|
|
12
|
|
|
$
|
7,999
|
|
|
$
|
361
|
|
|
$
|
7,638
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
319
|
|
|
|
35
|
|
|
|
284
|
|
Trade name
|
|
|
3
|
|
|
|
249
|
|
|
|
45
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
8,567
|
|
|
$
|
441
|
|
|
$
|
8,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Amortization expense for the twelve month period ended December 31, 2015 was $441,000 and is
included in selling, general and administrative expenses in the Consolidated Statement of Operations. There was no amortization expense for acquired intangible assets for the two year period ended December 31, 2014.
The estimated aggregate amortization expense for intangible assets for the years ending December 31, 2016 through 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
(Amounts in thousands)
|
|
Amortization expense
|
|
$
|
813
|
|
|
$
|
813
|
|
|
$
|
769
|
|
|
$
|
731
|
|
|
$
|
696
|
|
4.
|
Discontinued Operations
|
In August 2013, the Company sold its healthcare staffing business to Accountable Healthcare Staffing, Inc. Under the
terms of the Sale and Purchase Agreement, the purchase price totaled $1.15 million and consisted of $1.0 million of cash consideration at closing, plus the assumption of certain liabilities by the buyer. Total net assets sold excluded cash
balances on hand, accounts receivables and other current assets which approximated $1.5 million, net of current liabilities retained by the Company at the transaction date.
The healthcare staffing business meets the criteria for being reported as a discontinued operation and has been segregated from continuing
operations. Accordingly, the Consolidated Statements of Operations and Cash Flows for all periods presented have been recast to reflect the healthcare staffing business as discontinued operations. Unless otherwise indicated, all disclosures in the
Notes to the Consolidated Financial Statements relate to the Companys continuing operations.
The statement of operations of
discontinued operations was as follows for the three years ended December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013*
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,058
|
|
Costs of revenues
|
|
|
|
|
|
|
|
|
|
|
5,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
1,202
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
1,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
162
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Results through the sale transaction date (August 12, 2013).
|
The gain on the August 2013 sale
of the healthcare business was as follows (in thousands):
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
Pretax gain on sale transaction
|
|
$
|
485
|
|
Income tax expense
|
|
|
43
|
|
|
|
|
|
|
Net gain after income taxes
|
|
$
|
442
|
|
|
|
|
|
|
Income tax expense in 2013 on the sale transaction included the utilization of $147,000 of tax benefits
(capital loss carry-forwards) which were previously deemed non-realizable by the Company.
48
The statements of cash flows of discontinued operations were as follows for the three-years ended
December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
536
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Bad debt (credit) expense
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
Deferred income taxes, net
|
|
|
|
|
|
|
24
|
|
|
|
(16
|
)
|
(Gain) on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
(442
|
)
|
Working capital items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and unbilled receivables
|
|
|
|
|
|
|
66
|
|
|
|
1,720
|
|
Prepaid and other current assets
|
|
|
|
|
|
|
|
|
|
|
144
|
|
Accounts payable
|
|
|
|
|
|
|
(17
|
)
|
|
|
(134
|
)
|
Accrued payroll and related costs
|
|
|
|
|
|
|
|
|
|
|
(363
|
)
|
Other accrued liabilities
|
|
|
|
|
|
|
(160
|
)
|
|
|
(84
|
)
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by (used in) operating activities of discontinued operations
|
|
|
|
|
|
|
(87
|
)
|
|
|
1,332
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery of (Increase in) non-current deposits
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Proceeds from sale of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by investing activities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow provided by (used in) discontinued operations
|
|
$
|
|
|
|
$
|
(87
|
)
|
|
$
|
2,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Cash and Cash Equivalents
|
The Company had cash and cash equivalents consisting of cash balances on hand and money market funds that totaled $0.8
million at December 31, 2015 and $2.6 million at December 31, 2014. There were no restrictions on the Companys cash balances during the periods presented.
On June 15, 2015, the Company entered into a First Amendment to its Second Amended and Restated Loan Agreement (the
Amendment) with PNC Bank, N.A. (PNC). The amended terms set forth in the Amendment include the following: (1) a reduction in the maximum principal amount available under the credit facility for revolving credit loans and
letters of credit from $20 million to $17 million and an extension of the facility to June 15, 2018 from July 14, 2017; (2) the addition of a term-loan component in the principle amount of $9 million with an expiration date of June 15, 2020;
(3) the approval of the Companys acquisition of Hudson IT; and (4) an amendment to the financial covenant relating to the Companys fixed charge ratio and the elimination of a financial covenant relating to the Companys senior
leverage ratio, as more fully described in the Amendment filed as Exhibit 10.1 to the Companys Form 8-K, filed with the SEC on June 17, 2015.
Advances under the credit facility for revolving credit loans are limited to a borrowing base that consists of the sum of 85% of eligible
accounts receivable and 60% of eligible unbilled receivables. Amounts borrowed
49
under the facility may be used for working capital and general corporate purposes, for the issuance of standby letters of credit, and to facilitate other acquisitions and stock repurchases.
Initial borrowings under the revolving credit facility for the acquisition of Hudson IT totaled $6.0 million. Amounts borrowed under the term loan were limited to use for the Companys acquisition of Hudson IT. The term loan is payable in 60
consecutive monthly installments each in the amount of $150,000 commencing on July 1, 2015 and on the first day of each calendar month thereafter followed by a final payment of all outstanding principal and interest due on June 15, 2020.
Borrowings under the credit facility for revolving credit loans and the term loan will, at the Companys election, bear interest at
either (a) the higher of PNCs prime rate or the federal funds rate plus 0.50%, plus an applicable margin determined based upon the Companys leverage ratio or (b) an adjusted LIBOR rate, plus an applicable margin determined based upon the
Companys leverage ratio. The applicable margin on the base rate is between 0.25% and 0.75% on revolving credit loans and between 1.50% and 2.00% on term loans. The applicable margin on the adjusted LIBOR rate is between 1.25% and 1.75% on
revolving credit loans and between 2.50% and 3.00% on term loans. A 20 basis point per annum commitment fee on the unused portion of the credit facility for revolving credit loans is charged and due monthly in arrears through June 15, 2018.
The Company has pledged substantially all of its assets in support of the credit facility. The loan agreement contains standard financial
covenants, including but not limited to, covenants related to the Companys leverage ratio and fixed charge ratio (as defined under the loan agreement) and limitations on liens, indebtedness, guarantees, contingent liabilities, loans and
investments, distributions, leases, asset sales, stock repurchases and mergers and acquisitions. As of December 31, 2015, the Company was in compliance with all provisions under the facility.
In connection with securing the Amendment, the Company paid a commitment fee and incurred transaction costs totaling $75,000, which are being
amortized as interest expense over the lives of the facilities.
As of December 31, 2015, the Companys outstanding borrowings under
the credit facility for revolving credit loans totaled $4.4 million and unused borrowing capacity available was $11 million. The Companys outstanding borrowings under the term loan were $8.1 million at December 31, 2015. The Company believes
the eligible borrowing base on the revolving credit facility will not fall below current outstanding borrowings for a period of time exceeding one year and has classified the $4.4 million outstanding debt balance at December 31, 2015 as long-term.
As of December 31, 2015, the annual aggregate maturities of our outstanding debt during each of the next five years are as follows:
|
|
|
|
|
|
|
Total Amount
|
|
|
|
(Amounts in thousands)
|
|
2016
|
|
$
|
1,800
|
|
2017
|
|
|
1,800
|
|
2018
|
|
|
6,238
|
|
2019
|
|
|
1,800
|
|
2020
|
|
|
900
|
|
|
|
|
|
|
Total
|
|
$
|
12,538
|
|
|
|
|
|
|
50
7.
|
Commitments and Contingencies
|
Lease Commitments
The Company rents certain office facilities and equipment under noncancelable operating leases, which provide for the following future minimum
rental payments as of December 31, 2015:
|
|
|
|
|
|
|
Total Amount
|
|
|
|
(Amounts in thousands)
|
|
2016
|
|
$
|
894
|
|
2017
|
|
|
803
|
|
2018
|
|
|
835
|
|
2019
|
|
|
848
|
|
2020
|
|
|
502
|
|
Thereafter
|
|
|
187
|
|
|
|
|
|
|
Total
|
|
$
|
4,069
|
|
|
|
|
|
|
Rental expense for the years ended December 31, 2015, 2014 and 2013, totaled $1.0 million, $596,000 and
$577,000, respectively. The increase in rent expense in 2015 from prior years was largely due to the Hudson IT acquisition and our move to a larger facility in New Delhi, India.
Contingencies
In the
ordinary course of business, the Company is involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, management believes, after consultation with legal counsel, that the
disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
The Company provides an Employee Retirement Savings Plan (the Retirement Plan) under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the Code), that covers substantially all U.S.-based salaried employees. Concurrent with the acquisition of Hudson IT, the Company expanded employee eligibility under the Retirement Plan to
include all U.S. based W-2 hourly employees. Employees may contribute a percentage of eligible compensation to the Retirement Plan, subject to certain limits under the Code. For Hudson IT employees enrolled in the Hudson Employee Retirement Savings
Plan at the acquisition date, the Company provides a matching contribution of 50% of the first 6% of the participants contributed pay, subject to vesting based on their combined tenure with Hudson and Mastech. For all other employees, the
Company did not provide for any matching contributions for the three years ended December 31, 2015. Mastechs total contributions to the Retirement Plan related to the Hudson IT employees totaled $48,000 for the year ended December 31, 2015.
9.
|
Stock-Based Compensation
|
Effective October 1, 2008, the Company adopted a Stock Incentive Plan (the Plan) which, as amended, provides
that up to 1,200,000 shares of the Companys common stock shall be allocated for issuance to directors, executive management and key personnel. Grants under the Plan can be made in the form of stock options, stock appreciation rights,
performance shares or stock awards. As of December 31, 2015, the Company had 720,000 outstanding and/or exercised stock options, 207,000 outstanding and/or vested performance shares and 113,000 outstanding and/or released restricted stock units that
were issued under the Plan. Thus, as of December 31, 2015, the Company has 160,000 shares available for future grants under the Plan.
The
Plan is administered by the Compensation Committee of the Board of Directors. All grants awarded under the Plan are recommended by the Committee to the Board of Directors for approval. The exercise price of stock options is set on the grant date and
is not to be less than the fair market value per share of our closing stock
51
price on that date. Grants of stock options and restricted stock awards generally vest over a four-year period and options expire after ten years from the grant date. Performance shares vest
upon the achievement of the performance criteria and approval by the Compensation Committee of the Board of Directors.
On February 6,
2013, the Compensation Committee of the Board of Directors determined that, in accordance with the provisions of the Plan, equitable adjustments to outstanding equity grants issued under the Plan were required to preserve the intrinsic value related
to non-participation in the Companys special shareholder distribution (special one-time dividend), made on December 21, 2012. Accordingly, the Committee approved adjustments to the exercise price of all stock options, outstanding prior to this
distribution, to preserve the stock options pre-distribution value. Further, the Committee approved the issuance of additional restricted shares and performance shares, sufficient to preserve the pre-distribution value of those securities,
with the same service and performance requirements as stated in the original grants. These equitable adjustments, in accordance with the Plan, do not constitute a modification to the original grants under the provisions of ASC Topic 718
Share-based Payments.
Following is a summary of Mastech stock option activity for the three years ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2012
|
|
|
331,000
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
(64,000
|
)
|
|
$
|
2.05
|
|
Cancelled / forfeited
|
|
|
(2,000
|
)
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
265,000
|
|
|
$
|
1.01
|
*
|
Granted
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
(10,000
|
)
|
|
$
|
1.43
|
*
|
Cancelled / forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
255,000
|
|
|
$
|
1.00
|
*
|
Granted
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
(19,000
|
)
|
|
$
|
0.81
|
*
|
Cancelled / forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
236,000
|
|
|
$
|
1.01
|
*
|
|
|
|
|
|
|
|
|
|
*
|
Reflects equitable adjustments to the exercise price as referenced above.
|
As of December 31,
2015, the Companys outstanding in the money stock options using the year-end share price of $7.31 had an aggregate intrinsic value of $1.5 million. As of December 31, 2015, the intrinsic value of vested and expected to vest stock
options totaled $1.5 million. The total intrinsic value of options exercised during 2015, 2014 and 2013 totaled $183,000, $131,000 and $754,000, respectively. The measurement date fair value of stock options vested during 2015, 2014 and 2013 totaled
$69,000, $69,000 and $112,000, respectively.
52
The table below summarizes information regarding the Companys outstanding and exercisable
stock options as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices:
|
|
Options
Outstanding
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted Average
Exercise Price
|
|
$0.01 to $2.00
|
|
|
213,000
|
|
|
|
5.8
|
|
|
$
|
.81
|
|
$2.01 to $4.00
|
|
|
17,000
|
|
|
|
4.0
|
|
|
$
|
2.36
|
|
$4.01 to $6.00
|
|
|
6,000
|
|
|
|
1.7
|
|
|
$
|
4.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,000
|
|
|
|
5.6
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices:
|
|
Options
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted Average
Exercise Price
|
|
$0.01 to $2.00
|
|
|
213,000
|
|
|
|
5.8
|
|
|
$
|
.81
|
|
$2.01 to $4.00
|
|
|
17,000
|
|
|
|
4.0
|
|
|
$
|
2.36
|
|
$4.01 to $6.00
|
|
|
6,000
|
|
|
|
1.7
|
|
|
$
|
4.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,000
|
|
|
|
5.6
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No stock options were issued during the three years ended December 31, 2015.
Following is a summary of Mastechs restricted stock activity for the three years ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Beginning outstanding balance
|
|
|
72,741
|
|
|
|
39,863
|
|
|
|
9,375
|
|
Awarded
|
|
|
18,000
|
|
|
|
45,000
|
|
|
|
31,250
|
|
Awarded as equitable adjustments
|
|
|
|
|
|
|
|
|
|
|
3,544
|
|
Released
|
|
|
(23,371
|
)
|
|
|
(12,122
|
)
|
|
|
(4,306
|
)
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending outstanding balance
|
|
|
67,370
|
|
|
|
72,741
|
|
|
|
39,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average grant date fair value of restricted stock awarded in 2015 was $9.35. The aggregate intrinsic value
of restricted stock units outstanding at December 31, 2015 was $492,000. The total intrinsic value of restricted shares released during 2015 totaled $194,000.
Following is a summary of Mastech performance share activity for the three years ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Beginning outstanding balance
|
|
|
103,273
|
|
|
|
206,554
|
|
|
|
131,250
|
|
Awarded
|
|
|
|
|
|
|
|
|
|
|
68,750
|
|
Awarded as equitable adjustments
|
|
|
|
|
|
|
|
|
|
|
49,616
|
|
Vested
|
|
|
(26,854
|
)
|
|
|
(103,281
|
)
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
(43,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending outstanding balance
|
|
|
76,419
|
|
|
|
103,273
|
|
|
|
206,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
The total intrinsic value of performance shares vested during 2015 totaled $262,000. The
aggregate intrinsic value of performance shares outstanding at December 31, 2015 was $559,000, based on our December 31, 2015 closing share price of $7.31. However, management believes that the performance objective required for vesting will
not be achieved and these outstanding performance shares will likely expire unvested on June 30, 2016.
Stock-based compensation expense
of $262,000, $330,000, and $532,000 was recognized in the Consolidated Statements of Operations for the years ended December 31, 2015, 2014, and 2013, respectively. The Company has recognized related tax benefits associated with its share-based
compensation arrangements for the years ended December 31, 2015, 2014, and 2013 of $99,000, $125,000 and $193,000, respectively. As of December 31, 2015, the total remaining unrecognized compensation expense related to non-vested stock options
totaled $0; the total remaining unrecognized compensation expense related to restricted stock units amounted to $668,000, which will be amortized over the weighted-average remaining requisite service period of 2.5 years; and the total remaining
unrecognized compensation expense related to performance shares amounted to $0, as management believes the performance objective required for vesting will not be achieved prior to their June 30, 2016 expiration date.
The components of income before income taxes from continuing operations, as shown in the accompanying Consolidated Statement
of Operations, consisted of the following for the years ended December 31, 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
(Amounts in thousands)
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
4,425
|
|
|
$
|
5,508
|
|
|
$
|
5,225
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
4,425
|
|
|
$
|
5,508
|
|
|
$
|
5,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While all of the Companys revenues and income is generated within the United States, the Company does
have a foreign subsidiary in India which provides recruitment services to its U.S. operations. Accordingly, the Company allocates a portion of its income to this subsidiary based on a transfer pricing model. No provision for U.S. income
taxes has been made for the undistributed earnings of its Indian subsidiary as of December 31, 2015, as those earnings are expected to be permanently reinvested outside the U.S. If these foreign earnings were to be repatriated in the future, the
U.S. tax liability may be reduced by any foreign income taxes previously paid on such earnings, which would make this U.S. tax liability immaterial. The determination of the amount of unrecognized deferred tax liability related to these earnings is
not practicable.
The provision for income taxes from continuing operations, as shown in the accompanying Consolidated Statement of
Operations, consisted of the following for the years ended December 31, 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
(Amounts in thousands)
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,518
|
|
|
$
|
1,835
|
|
|
$
|
1,915
|
|
State
|
|
|
143
|
|
|
|
191
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
1,661
|
|
|
|
2,026
|
|
|
|
2,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10
|
|
|
|
51
|
|
|
|
(115
|
)
|
State
|
|
|
1
|
|
|
|
8
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
11
|
|
|
|
59
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
1,672
|
|
|
$
|
2,085
|
|
|
$
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
The reconciliation of income taxes from continuing operations computed using our statutory U.S.
income tax rate and the provision for income taxes for the years ended December 31, 2015, 2014 and 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands)
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
1,505
|
|
|
|
34.0
|
%
|
|
$
|
1,873
|
|
|
|
34.0
|
%
|
|
$
|
1,777
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
144
|
|
|
|
3.3
|
|
|
|
199
|
|
|
|
3.6
|
|
|
|
156
|
|
|
|
3.0
|
|
Other
|
|
|
23
|
|
|
|
0.5
|
|
|
|
13
|
|
|
|
0.3
|
|
|
|
23
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,672
|
|
|
|
37.8
|
%
|
|
$
|
2,085
|
|
|
|
37.9
|
%
|
|
$
|
1,956
|
|
|
|
37.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(Amounts in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts and employee advances
|
|
$
|
121
|
|
|
$
|
102
|
|
Accrued vacation, bonuses and severance
|
|
|
289
|
|
|
|
228
|
|
Stock-based compensation expense
|
|
|
150
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
560
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
193
|
|
|
|
210
|
|
Depreciation, intangibles and other
|
|
|
58
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
251
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
309
|
|
|
|
308
|
|
Less: current deferred tax asset
|
|
|
217
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Total long-term deferred tax asset
|
|
$
|
92
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits related to uncertain tax
positions, including interest and penalties, for the three years ended December 31, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands)
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Unrecognized tax benefits, beginning balance
|
|
$
|
138
|
|
|
$
|
111
|
|
|
$
|
78
|
|
Additions related to current period
|
|
|
35
|
|
|
|
40
|
|
|
|
33
|
|
Additions related to prior periods
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions related to prior periods
|
|
|
(38
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, ending balance
|
|
$
|
135
|
|
|
$
|
138
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax
expense. As of December 31, 2015, 2014 and 2013, the Company had $16,000, $16,000 and $15,000, respectively, accrued for interest and penalties.
11.
|
Derivative Instruments and Hedging Activities
|
Interest Rate Risk Management
Concurrent with the Companys June 15, 2015 borrowings under the $9 million term loan facility, the Company entered into a five-year
interest-rate swap to convert the debts variable interest rate to a fixed rate of interest. Under the swap contracts, the Company pays interest at a fixed rate of 1.515% and receives interest at a
55
variable rate equal to the daily U.S. LIBOR rate on a notional amount of $5,000,000. Both the debt and the swap contracts mature in 60-monthly installments commencing on July 1, 2015. These swap
contracts have been designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815, Derivatives and Hedging. These contracts are recognized on the balance sheet at fair value. The effective
portion of the changes in fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Consolidated Statements of Operations as interest expense in the same period in which the underlying hedge
transaction affects earnings. Changes in the fair value of interest rate swap contracts deemed ineffective are recognized in the Consolidated Statement of Operations as interest expense. The fair value of the interest rate swap contracts at December
31, 2015 was a liability of $31,000 and is reflected in the Consolidated Balance Sheet as other current liabilities.
Foreign Currency
Risk Management
In 2012 through 2015, the Company entered into foreign currency forward contracts (derivative contracts)
to mitigate and manage the risk of changes in foreign exchange rates related to highly probable expenditures in support of its Indian-based global recruitment operations. These forward contracts have been designated as cash flow hedging instruments
and qualified as effective hedges at inception under ASC Topic 815,
Derivatives and Hedging
. In December 2015, the decision was made not to hedge the Indian rupee in 2016 given that the likelihood of an expanding interest rate
environment in the U.S. should mitigate any appreciation in the Indian rupee relative to the U.S. dollar. Thus, at December 31, 2015 there were no outstanding currency hedge positions.
All derivatives are recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these instruments are
recorded in other comprehensive income and are reclassified into the Consolidated Statement of Operations on the same line item and in the same period in which the underlying hedge transaction affects earnings. Changes in the fair value of foreign
currency contracts deemed ineffective are recognized in the Consolidated Statement of Operations as foreign exchange gains (losses). Hedge effectiveness is assessed based on changes in the fair value of the forward contracts related to the
difference between the spot price and the forward price. Forward points (premiums/discounts) on the foreign currency forward contracts are excluded from the assessment of hedge effectiveness and are recognized in the Consolidated Statement of
Operations as foreign exchange gains/(losses).
The following table presents information related to foreign currency forward contracts and
interest rate swap contracts held by the Company:
The effect of derivative instruments on the Consolidated Statements of Operations and Comprehensive
Income for the year ended December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivatives in
ASC Topic 815
Cash
Flow
Hedging
Relationships
|
|
Amount of
Gain / (Loss)
recognized in OCI
on Derivatives
|
|
Location of
Gain / (Loss)
reclassified from
Accumulated OCI
to Income
|
|
Amount of
Gain / (Loss)
reclassified from
Accumulated OCI
to Income
|
|
Location of
Gain / (Loss)
reclassified in
Income on
Derivatives
|
|
Amount of
Gain / (Loss)
recognized in
Income on
Derivatives
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Ineffective Portion/Amounts excluded from
effectiveness testing)
|
Currency
|
|
|
|
|
|
|
|
|
|
|
Forward
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$41
|
|
SG&A Expense
|
|
$(77)
|
|
Other Income/ (Expense)
|
|
$68
|
Interest-Rate
|
|
|
|
|
|
|
|
|
|
|
Swap
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$(31)
|
|
Interest Expense
|
|
$(35)
|
|
Interest Expense
|
|
$
|
56
The effect of derivative instruments on the Consolidated Statements of Operations and Comprehensive Income for
the year ended December 31, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivatives in
ASC Topic 815
Cash
Flow
Hedging
Relationships
|
|
Amount of
Gain / (Loss)
recognized
in OCI on
Derivatives
|
|
Location of
Gain / (Loss)
reclassified
from Accumulated
OCI to Income
|
|
Amount of
Gain / (Loss)
reclassified
from Accumulated
OCI to Income
|
|
Location of
Gain / (Loss)
reclassified in
Income on
Derivatives
|
|
Amount of
Gain / (Loss)
recognized in
Income on
Derivatives
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Ineffective Portion/Amounts excluded from
effectiveness testing)
|
Currency
|
|
|
|
|
|
|
|
|
|
|
Forward
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$(67)
|
|
SG&A Expense
|
|
$51
|
|
Other Income/
(Expense)
|
|
$77
|
Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Derivative Instruments
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Currency Forward Contracts
|
|
None
|
|
$
|
0
|
|
|
Other Current Liabilities
|
|
$
|
38
|
|
Interest-Rate Swap Contracts
|
|
Other Current Liabilities
|
|
$
|
31
|
|
|
None
|
|
$
|
0
|
|
The estimated amount of pretax (losses) as of December 31, 2015 that is expected to be reclassified from other
comprehensive income (loss) into earnings, within the next 12 months is approximately ($0.1 million).
On October 22, 2014, the Companys Board of Directors approved the extension of the Companys existing Share
Repurchase Program for an additional two-year period, through December 22, 2016. Repurchases under the program may be made through open market purchases or privately negotiated transactions in accordance with applicable securities laws. During 2015,
2014 and 2013, the Company purchased 12,654, 32,149 and 2,743 shares respectively, under the Share Repurchase Program. These share repurchases were completed at an average share price, inclusive of transaction cost, of $9.49, $11.75 and $5.59 per
share for 2015, 2014 and 2013, respectively. As of December 31, 2015, there were approximately 472,238 shares available for purchase under the Share Repurchase Program. Additionally in 2015, the Company purchased an additional 8,921 shares at an
average price of $9.62 to satisfy employee tax obligations related to the vesting of performance and restricted shares, in accordance with the Plan provisions. In 2014, the Company purchased an additional 29,182 shares at an average share price of
$13.63 to satisfy these employee tax obligations.
13.
|
Revenue Concentration
|
The Company did not have any client that exceeded 10% of total revenues in 2015. In 2014 and 2013, Accenture was the
Companys only client that exceeded 10% of total revenues, generating 11.7% and 11.4% of total revenues, respectively. Additionally, Accenture accounted for 13.4% of the Companys accounts receivable balance at December 31, 2014.
The Companys top ten clients represented approximately 51%, 59% and 57% of total revenues in 2015, 2014 and 2013, respectively.
The computation of basic earnings per share (EPS) is based on the Companys net income divided by the
weighted average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options and restricted share units were exercised / released. The dilutive effect of stock options
and restricted share units were calculated using the treasury stock method. Performance shares for which the performance objectives were achieved as of December 31, 2014 and 2013, were included in the dilutive earnings per share calculation for the
respective years as though such shares were outstanding for the entire quarter in which the performance objectives were achieved.
57
For the years ended 2015, 2014 and 2013, there were no anti-dilutive stock options excluded
from the computation of diluted earnings per share.
The following table sets forth the denominators of the basic and diluted EPS
computations. All shares outstanding for the period shown below have been adjusted to reflect the November 2013 five-for-four stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands):
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,338
|
|
|
|
4,320
|
|
|
|
4,193
|
|
Stock options and restricted share units
|
|
|
103
|
|
|
|
139
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,441
|
|
|
|
4,459
|
|
|
|
4,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the computation of basic EPS utilizing net income from continuing operations
and the Companys weighted-average common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands, except per share data):
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Net income
|
|
$
|
2,753
|
|
|
$
|
3,423
|
|
|
$
|
3,269
|
|
Basic weighted-average shares outstanding
|
|
|
4,338
|
|
|
|
4,320
|
|
|
|
4,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
.63
|
|
|
$
|
.79
|
|
|
$
|
.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the computation of diluted EPS utilizing net income from continuing operations
and the Companys weighted-average common stock outstanding plus the weighted-average of stock options, restricted shares and performance shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands, except per share data):
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Net income
|
|
$
|
2,753
|
|
|
$
|
3,423
|
|
|
$
|
3,269
|
|
Diluted weighted-average shares outstanding
|
|
|
4,441
|
|
|
|
4,459
|
|
|
|
4,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
.62
|
|
|
$
|
.77
|
|
|
$
|
.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Fair Value Measurements
|
The Company has adopted the provisions of ASC 820,
Fair Value Measurements and Disclosures
(ASC
820), related to certain financial and nonfinancial assets and liabilities. ASC 820 establishes the authoritative definition of fair value; sets out a framework for measuring fair value; and expands the required disclosures about fair value
measurements. The valuation techniques required by ASC 820 are based on observable and unobservable inputs using the following three-tier hierarchy:
|
|
|
Level 1 Inputs are observable quoted prices (unadjusted) in active markets for identical assets and liabilities.
|
|
|
|
Level 2 Inputs are observable, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are directly or indirectly observable in the marketplace.
|
|
|
|
Level 3 Inputs are unobservable that are supported by little or no market activity.
|
58
The following table summarizes the basis used to measure financial assets and (liabilities) at
fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2015
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest-Rate Swap Contracts
|
|
$
|
0
|
|
|
$
|
(31
|
)
|
|
$
|
0
|
|
|
$
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2014
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Currency Forward Contracts
|
|
$
|
0
|
|
|
$
|
(38
|
)
|
|
$
|
0
|
|
|
$
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
Quarterly Financial Information (Amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Gross
Profit
|
|
|
Net
Income
|
|
|
Earnings Per
Share
|
|
Year Ended December 31, 2015
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
First quarter
|
|
$
|
27,060
|
|
|
$
|
4,687
|
|
|
$
|
195
|
|
|
$
|
.05
|
|
|
$
|
.04
|
|
Second quarter
|
|
|
29,305
|
|
|
|
5,515
|
|
|
|
382
|
|
|
|
.09
|
|
|
|
.09
|
|
Third quarter
|
|
|
34,565
|
|
|
|
6,879
|
|
|
|
887
|
|
|
|
.20
|
|
|
|
.20
|
|
Fourth quarter
|
|
|
32,540
|
|
|
|
6,718
|
|
|
|
1,289
|
|
|
|
.30
|
|
|
|
.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
$
|
123,470
|
|
|
$
|
23,799
|
|
|
$
|
2,753
|
|
|
$
|
.63
|
|
|
$
|
.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Gross
Profit
|
|
|
Net
Income
|
|
|
Earnings Per
Share
|
|
Year Ended December 31, 2014
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
First quarter
|
|
$
|
28,684
|
|
|
$
|
5,225
|
|
|
$
|
869
|
|
|
$
|
.20
|
|
|
$
|
.20
|
|
Second quarter
|
|
|
27,656
|
|
|
|
5,106
|
|
|
|
893
|
|
|
|
.21
|
|
|
|
.20
|
|
Third quarter
|
|
|
28,634
|
|
|
|
5,227
|
|
|
|
879
|
|
|
|
.20
|
|
|
|
.20
|
|
Fourth quarter
|
|
|
28,549
|
|
|
|
5,228
|
|
|
|
782
|
|
|
|
.18
|
|
|
|
.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
$
|
113,523
|
|
|
$
|
20,786
|
|
|
$
|
3,423
|
|
|
$
|
.79
|
|
|
$
|
.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company incurred severance costs of $305,000, $0 and $0 in 2015, 2014 and 2013, respectively. Severance costs during
2015 related to a change in executive sales leadership.
On February 29, 2016, D. Kevin Horner resigned as our President and Chief Executive Officer and as a member of our Board of
Directors. On March 1, 2016, our Board of Directors appointed Vivek Gupta as our President and Chief Executive Officer and as a member of our Board of Directors. On January 28, 2016, we entered into an Executive Employment Agreement with Mr. Gupta,
to be effective on March 1, 2016, a description of which is contained in the Current Report on Form 8-K filed by the Company with the SEC on March 3, 2016. On March 11, 2016, Denis D. Deet ceased to be Vice President of Technology and Chief
Information Officer of the Company.
59