The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
(Unaudited)
1.
|
Description of Business and Basis of Presentation:
|
References in this Quarterly Report
on Form 10-Q to we, our, Mastech Digital, Mastech or the Company refer collectively to Mastech Digital, Inc. and its wholly-owned operating subsidiaries, which are included in these
Condensed Consolidated Financial Statements (the Financial Statements).
Description of Business
We are a provider of IT staffing and digital transformation services. Our IT staffing 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; eBusiness solutions; mobile
applications; data management and analytics; and the implementation and support for cloud-based applications. We work with businesses and institutions with significant IT spending and recurring staffing service needs. We also support smaller
organizations with their project focused temporary IT staffing requirements. Our services span a broad range of industry verticals including: automotive; consumer products; education; financial services; government; healthcare;
manufacturing; retail; technology; telecommunications; transportation; and utilities.
Recent Developments
On September 12, 2016, the Company announced that it changed its name to Mastech Digital, Inc. The name change was part of the
Companys rebranding initiative that reflects its ongoing transformation into a digital technologies company. The rebranding also included a change in the Companys logo and a refreshed corporate website. The effective date of the name
change with the NYSE MKT was September 15, 2016. The ticker symbol MHH for its common stock listing remained the same.
Accounting Principles
The accompanying Financial Statements have been prepared by management in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and disclosures required by U.S. GAAP
for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and the accompanying notes. Actual results could differ from these estimates. These Financial
Statements should be read in conjunction with the Companys audited consolidated financial statements and accompanying notes for the year ended December 31, 2015, included in our Annual Report on Form 10-K filed with the SEC on
March 25, 2016. Additionally, our operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that can be expected for the year ending December 31, 2016 or for any other
period.
Principles of Consolidation
The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Critical Accounting Policies
Please refer to Note 1 Summary of Significant Accounting Policies of the Consolidated Financial Statements and
Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2015 for a more detailed
discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the nine months ended September 30, 2016.
Segment Reporting
The Company has one reportable segment in accordance with ASC Topic 280 Disclosures About Segments of an Enterprise and Related
Information.
7
On June 15, 2015, the Company completed the cash acquisition
of Hudson Global Resources Management, Inc.s U.S. IT staffing business (Hudson IT). The acquisition supports Mastech Digitals 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 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 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 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 $25,000 of direct transaction costs related to the acquisition for the three
months ended September 30, 2015 and $624,000 for the nine months ended September 30, 2015. These costs are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.
Included in the Condensed Consolidated Statement of Operations for the three and nine month periods ended September 30, 2016 are revenues
of $7.9 million and $22.2 million, respectively, and net income of approximately $0.4 million and $1.1 million, respectively, applicable to the Hudson IT operations. Included in the Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 2015 were revenues of $7.5 million and $8.8 million, and net income of approximately $0.4 million and $0.5 million, respectively, applicable to the Hudson IT operations.
The following reflects the Companys unaudited pro forma results had the results of Hudson IT been included for all periods presented:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Amounts in Thousands)
|
|
|
(Amounts in Thousands)
|
|
Revenue
|
|
$
|
34,263
|
|
|
$
|
34,565
|
|
|
$
|
99,606
|
|
|
$
|
104,659
|
|
Net income
|
|
$
|
924
|
|
|
$
|
887
|
|
|
$
|
1,880
|
|
|
$
|
1,720
|
|
Earnings per share - diluted
|
|
$
|
.21
|
|
|
$
|
.20
|
|
|
$
|
.42
|
|
|
$
|
.39
|
|
The information above related to the 2015 periods does not reflect all of the operating efficiencies or
inefficiencies that may have resulted from the Hudson IT acquisition. Therefore, the pro forma information for those periods 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.
The Company is amortizing the identifiable intangible assets on a straight-line basis over
estimated average lives ranging from 3 to 12 years. Intangible assets were comprised of the following as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
(Amounts in thousands)
|
|
Amortization
Period (In Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulative
Amortization
|
|
|
Net Carrying
Value
|
|
Client relationships
|
|
|
12
|
|
|
$
|
7,999
|
|
|
$
|
861
|
|
|
$
|
7,138
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
319
|
|
|
|
82
|
|
|
|
237
|
|
Trade name
|
|
|
3
|
|
|
|
249
|
|
|
|
108
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
8,567
|
|
|
$
|
1,051
|
|
|
$
|
7,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three and nine month periods ended September 30, 2016 was $204,000 and
$610,000 respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. Amortization expense for the three and nine month periods ended September 30, 2015 was $203,000 and
$237,000.
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.
|
Commitments and Contingencies
|
Lease Commitments
The Company rents certain office space and equipment under non-cancelable leases which provide for future minimum rental payments. Total lease
commitments have not materially changed from the amounts disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2015.
Contingencies
In
the ordinary course of our business, the Company is involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, the Companys 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.
9
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 employees
that were enrolled in the Hudson Employee Retirement Savings Plan under the Code 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 the
combined tenure with Hudson and Mastech Digital. For all other employees, the Company did not provide for any matching contributions for the nine months ended September 30, 2016 and September 30, 2015. Mastech Digitals total
contributions to the Retirement Plan for the three and nine months ended September 30, 2016 related to the Hudson IT employees totaled approximately $27,000 and $82,000, respectively. Mastech Digitals contributions to the Retirement Plan
for the three and nine months ended September 30, 2015 related to the Hudson IT employees totaled approximately $23,000 and $24,000, respectively.
6.
|
Stock-Based Compensation
|
In 2008, the Company adopted a Stock Incentive Plan (the
Plan) which, as amended, provides that up to 1,400,000 shares of the Companys Common Stock shall be allocated for issuance to directors, officers and key personnel. The most recent amendment, approved by shareholder vote at the
Companys Annual Meeting of Shareholders on May 18, 2016 increased the number of shares of Common Stock that may be issued pursuant to the Plan by 200,000 shares to a total of 1,400,000. Grants under the Plan can be made in the form of
stock options, stock appreciation rights, performance shares or stock awards. During the three and nine months ended September 30, 2016, there were 85,000 and 335,000 stock options grants made under the Plan. Additionally, during the nine
months ended September 30, 2016, approximately 79,000 performance shares expired unvested, as the underlying performance objective was not achieved. These shares are available for future grants under the Plan. During the three and nine months
ended September 30, 2015, there were 0 and 18,000 restricted stock grants made under the Plan. As of September 30, 2016 and December 31, 2015, there were 104,000 and 160,000 shares, respectively, available for grants under the Plan.
Stock-based compensation expense for the three months ended September 30, 2016 and 2015 was $113,000 and $106,000, respectively, and
for the nine months ended September 30, 2016 and 2015 was $298,000 and $299,000, respectively. Stock-based compensation expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
During the three and nine months ended September 30, 2016, the Company issued 71,250 and 75,750 shares, respectively, related to the
vesting of restricted stock and the exercising of stock options. During the three and nine months ended September 30, 2015, the Company issued 11,250 shares and 62,145 shares, respectively, related to the exercise of stock options and vesting
of restricted stock and performance shares.
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
principal 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 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
10
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 September 30, 2016, 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. During first quarter of 2016, we adopted ASU 2015-03 and ASU 2015-15 which resulted in no change to our presentation of these costs as the majority of our debt issuance costs related to
our line of credit continue to be presented as an asset on our balance sheet under the caption Deferred financing costs, net.
As of September 30, 2016, the Companys outstanding borrowings under the credit facility for revolving credit loans totaled
$9.3 million and unused borrowing capacity available was $7.7 million. The Companys outstanding borrowings under the term loan were $6.8 million at September 30, 2016. 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 $9.3 million outstanding debt balance at September 30, 2016 as long-term.
The components of income before income taxes, as shown in the accompanying
Financial Statements, consisted of the following for the three and nine months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Amounts in Thousands)
|
|
|
(Amounts in Thousands)
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,474
|
|
|
$
|
1,399
|
|
|
$
|
3,016
|
|
|
$
|
2,331
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,474
|
|
|
$
|
1,399
|
|
|
$
|
3,016
|
|
|
$
|
2,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2016, 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, as shown in the accompanying Financial Statements, consisted of the following for the
three and nine months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Amounts in Thousands)
|
|
|
(Amounts in Thousands)
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
349
|
|
|
$
|
386
|
|
|
$
|
932
|
|
|
$
|
816
|
|
State
|
|
|
25
|
|
|
|
14
|
|
|
|
89
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
374
|
|
|
|
400
|
|
|
|
1,021
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
155
|
|
|
|
97
|
|
|
|
102
|
|
|
|
(10
|
)
|
State
|
|
|
21
|
|
|
|
15
|
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
176
|
|
|
|
112
|
|
|
|
115
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
550
|
|
|
$
|
512
|
|
|
$
|
1,136
|
|
|
$
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the
provision for income taxes for the three and nine months ended September 30, 2016 and 2015 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Three Months Ended
September 30, 2015
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
501
|
|
|
|
34.0
|
%
|
|
$
|
476
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
46
|
|
|
|
3.1
|
|
|
|
29
|
|
|
|
2.1
|
|
Other net
|
|
|
3
|
|
|
|
0.2
|
|
|
|
7
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
550
|
|
|
|
37.3
|
%
|
|
$
|
512
|
|
|
|
36.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2015
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
1,025
|
|
|
|
34.0
|
%
|
|
$
|
793
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
102
|
|
|
|
3.4
|
|
|
|
61
|
|
|
|
2.6
|
|
Other net
|
|
|
9
|
|
|
|
0.3
|
|
|
|
13
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,136
|
|
|
|
37.7
|
%
|
|
$
|
867
|
|
|
|
37.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits related to uncertain tax
positions, including interest and penalties, are as follows:
|
|
|
|
|
(Amounts in thousands)
|
|
Nine Months Ended
September 30, 2016
|
|
Balance as of December 31, 2015
|
|
$
|
135
|
|
Additions related to current period
|
|
|
19
|
|
Additions related to prior periods
|
|
|
|
|
Reductions related to prior periods
|
|
|
(27
|
)
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
$
|
127
|
|
|
|
|
|
|
Although it is difficult to anticipate the final outcome of these uncertain tax positions, the Company
believes that the total amount of unrecognized tax benefits could be reduced by approximately $33,000 during the next twelve months due to the expiration of the statutes of limitation.
9.
|
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 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 Condensed 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 Condensed Consolidated Statements of Operations as interest expense. The fair value of the interest-rate swap contracts at September 30, 2016 was a liability of $48,000 and is reflected in
the Condensed Consolidated Balance Sheet as other current liabilities.
12
Foreign Currency Risk Management
During 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 were 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 material appreciation in the Indian rupee relative to the U.S. dollar. Thus, at September 30, 2016 there were no outstanding currency hedge positions.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Income are as follows (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
(Expense)
|
|
|
Amount of
Gain / (Loss)
reclassified
from
Accumulated
OCI to
Income
(Expense)
|
|
|
Location of
Gain / (Loss)
reclassified in
Income
(Expense)
on Derivatives
|
|
|
Amount of
Gain / (Loss)
recognized in
Income
(Expense)
on Derivatives
|
|
|
|
(Effective
Portion)
|
|
|
(Effective
Portion)
|
|
|
(Effective
Portion)
|
|
|
(Ineffective Portion/Amounts
excluded from
effectiveness
testing)
|
|
For the Three Months Ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest- Rate Swap Contract
|
|
$
|
18
|
|
|
|
Interest Expense
|
|
|
$
|
(10
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
For the Nine Months Ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest- Rate Swap Contract
|
|
$
|
(17
|
)
|
|
|
Interest Expense
|
|
|
$
|
(32
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
For the Three Months Ended September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Forward Contracts
|
|
$
|
(1
|
)
|
|
|
SG&A Expense
|
|
|
$
|
(26
|
)
|
|
|
Other Income/(Expense)
|
|
|
$
|
19
|
|
Interest- Rate Swap Contract
|
|
$
|
(24
|
)
|
|
|
Interest Expense
|
|
|
$
|
(16
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
For the Nine Months Ended September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Forward Contracts
|
|
$
|
11
|
|
|
|
SG&A Expense
|
|
|
$
|
(43
|
)
|
|
|
Other Income/(Expense)
|
|
|
$
|
62
|
|
Interest- Rate Swap Contract
|
|
$
|
(62
|
)
|
|
|
Interest Expense
|
|
|
$
|
(19
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Derivative Instruments
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
Interest-Rate Swap Contracts
|
|
|
Other Current Liabilities
|
|
|
$
|
48
|
|
|
|
Other Current Liabilities
|
|
|
$
|
31
|
|
The estimated amount of pretax losses as of September 30, 2016 that is expected to be reclassified from
other comprehensive income (loss) into earnings within the next 12 months is approximately ($0.1 million).
10.
|
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.
|
13
At September 30, 2016 and December 31, 2015, the Company carried the following
financial liabilities at fair value measured on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2016
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest-Rate Swap Contracts
|
|
$
|
0
|
|
|
$
|
(48
|
)
|
|
$
|
0
|
|
|
$
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016, the Company had 472,238 shares
available for purchase under its existing share repurchase program. Repurchases under the program may be made through open market purchases or privately negotiated transactions in accordance with applicable securities laws through December 22,
2016. During the nine months ended September 30, 2016, the Company did not repurchase any shares under this program. During the three months ended September 30, 2015, the Company repurchased no shares of common stock under this program.
During the nine months ended September 30, 2015, the Company repurchased 12,654 shares of common stock under this program at an average price of $9.49 per share.
Additionally, during the three and nine months ended September 30, 2016, the Company repurchased 1,158 shares to satisfy employee tax
obligations related to the vesting of restricted shares at an average price of $6.80. During the three and nine months ended September 30, 2015, the Company repurchased 0 shares and 8,237 shares, respectively, to satisfy employee tax
obligations related to the vesting of performance shares at a price of $9.74.
12.
|
Revenue Concentration
|
For the three months ended September 30, 2016, the Company
had one client that exceeded 10% of total revenues (CGI = 11.0%). For the three months ended September 30, 2015, the Company had no clients that exceeded 10% of total revenues. For the nine months ended September 30, 2016, the Company had
no clients that exceeded 10% of total revenues. For the nine months ended September 30, 2015, the Company had one client that exceeded 10% of total revenues (Accenture = 10.8%).
The Companys top ten clients represented approximately 45% and 47% of total revenues for the three months ended September 30, 2016
and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the Companys top ten clients represented approximately 44% and 52% of total revenues, respectively.
The computation of basic earnings per share 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 were exercised. The dilutive effect of stock
options was calculated using the treasury stock method.
For the three months ended September 30, 2016, there were 4,759
anti-dilutive stock options excluded from the computation of diluted earnings per share. For the nine months ended September 30, 2016, there were 200,014 anti-dilutive stock options excluded from the computation of diluted earnings per share.
For the three and nine months ended September 30, 2015, there were no anti-dilutive stock options excluded from the computation of diluted earnings per share.
During the three and nine month periods ending September 30,
2016, the Company incurred no severance costs and $780,000 (pre-tax) of severance costs, respectively. These severance costs related to several changes in executive leadership. The Company incurred severance costs of $305,000 (pre-tax) in the nine
month period ended September 30, 2015 related to a change in sales leadership. No severance costs were incurred during the three months ended September 30, 2015.
14
15.
|
Recently Issued Accounting Standards
|
In May 2014, the Financial Accounting Standards
Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, which provides for a single five-step model to be applied to all revenue contracts with customers. The new guidance also requires additional
financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Entities can use either a retrospective approach or a cumulative effect
adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12 as amendments
to ASU 2014-09 to clarify the implementation guidance for 1) principal versus agent considerations, 2) identifying performance obligations, 3) the accounting for licenses of intellectual property and 4) narrow scope improvements on assessing
collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. The Company is evaluating the method of adoption of this ASU, but does not expect the adoption to have a material
impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest Imputation of Interest
(Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires 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. Prior to the adoption of ASU 2015-03, we recognized debt issuance costs as assets on our balance sheet. The recognition and measurement guidance for debt issuance costs are not affected by ASU
2015-03. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted. In August 2015, the FASB issued ASU 2015-15, Interest Imputation of Interest (Subtopic 835-30):
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 clarifies that the SEC would not object to an entity deferring and presenting debt issuance costs related to a
line-of-credit arrangement as an asset on the balance sheet. We adopted ASU 2015-03 and ASU 2015-15 in the first quarter of 2016 and there was no material impact on our consolidated statement of financial position as the majority of our debt
issuance costs related to our line of credit, which continues to be presented as an asset on our balance sheet (under the caption Deferred financing costs, net), and neither ASU 2015-03 or ASU 2015-15 had an impact on our results of
operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes.
Current U.S. GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. To simplify the presentation of deferred income taxes, the amendments in this Update require that
deferred tax liabilities and assets be classified as noncurrent on the balance sheet. 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. Accordingly, we plan to adopt this ASU on January 1, 2017.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation and disclosure of financial
instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in
consolidation of the investee). This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are evaluating the impact the adoption of ASU 2016-01 will have on our
consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The main
difference between the current requirement under U.S. GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 requires that a lessee recognize in the
statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term
lease). The liability will be equal to the present value of the lease payment. The lease asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model,
requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current
capital leases). Classification will be based on the criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct
financing leases. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. ASU 2016-02 must be adopted using a modified retrospective transition and provides for certain
practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the potential impact of ASU 2016-02 and expect adoption will have a material
impact on our consolidated financial condition and results of operations. Contractual obligations on lease arrangements as of September 30, 2016 approximated $3.5 million.
15
In March, 2016, the FASB issued ASU 2016-09 Compensation Stock Compensation (Topic
718) - Improvements to Employee Share-Based Payment Accounting. The FASB issued this Update as part of its Simplification Initiative whose objective is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be
reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including
the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the
fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Notwithstanding the effects of stock market volatility, the Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements. The excess tax benefit from stock-based compensation arrangements was approximately $104,000 and $115,000 for the nine months ended September 30, 2016 and 2015, respectively.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash
Payments. Current U.S. GAAP either is unclear or does not include specific guidance on eight specific cash flow classification issues included in the amendments in this Update. The Update addresses these cash flow issues with the objective of
reducing the existing diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an
interim period. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
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.
16