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 31 of this Annual Report on Form 10-K.
The accompanying Consolidated Financial Statements of Mastech Digital, 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, 2016 have been audited by UHY
LLP, an Independent Registered Public Accounting Firm, whose report thereon appears on page 32 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 Digital, Inc. (referred to in this report as Mastech, the Company, us, our or
we) is a domestic provider of information technology (IT) staffing and digital transformation services to mostly large and medium-sized organizations. The Companys IT staffing services span across digital and mainstream
technologies, while its digital transformation services include Salesforce.com, SAP HANA and Digital Learning service offerings. Headquartered in the Pittsburgh, Pennsylvania area, we have approximately 900 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.
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.
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.
38
The Allowance for Uncollectible Accounts was $388,000 and $313,000 at December 31, 2016 and
2015, respectively. There was $75,000, $53,000 and $0 of bad debt expense charges for the years ended December 31, 2016, 2015 and 2014, respectively, which amounts are reflected in the Consolidated Statements of Operations.
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
|
|
3-5 years
|
Depreciation and amortization expense related to fixed assets totaled $203,000, $219,000 and, $143,000for the
years ended December 31, 2016, 2015 and 2014, 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 from three years to twelve 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 and intangible 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
39
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 2016, we performed a quantitative impairment test. The results of this testing indicated no impairment associated with the carrying amount
of goodwill and intangible assets.
Business Combinations
The Company accounts for acquisitions in accordance with guidance found in ASC 805,
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 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, 2016 and 2015, the Company provided
$128,000 and $135,000 for uncertain tax positions, including interest and penalties, related to various state income tax matters.
40
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 less than 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 is not fully recognized 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
1,400,000 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 to five year period.
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 maintained a stock repurchase program which expired on December 22, 2016. Under this program, the Company could make treasury
stock purchases in the open market or through privately negotiated transactions, subject to market conditions and normal trading restrictions. At December 31, 2016, the Company held 818,569 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.
41
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 and continuing
through 2015, the Company entered into foreign currency forward contracts to mitigate and manage the risk of changes in foreign currency exchange rates. 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 2016, the decision was made not to hedge the Indian rupee, given managements belief 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.
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 as interest expense.
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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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, ASU 2016-12 and ASU 2016-20 to amend ASU 2014-09 for technical corrections and improvements
and to
42
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 was permitted. In August 2015, the FASB issued ASU 2015-15,
InterestImputation 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 Securities and Exchange Commission
(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 are 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 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 ASU require that deferred tax liabilities and assets be
classified as noncurrent on the balance sheet. The amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently
evaluating the impact the adoption of ASU 2015-17 will have on our consolidated financial statements.
In January 2016, the FASB issued
ASU 2016-01, Financial InstrumentsOverall (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 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). The classification of these leases 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
43
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 December 31, 2016 approximated $3.3 million.
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 ASU as part of its Simplification Initiative, which has the objective of identifying, evaluating, and
improving areas of 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 ASU 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 ASU are effective for annual
periods beginning after December 15, 2016 and, accordingly, we adopted this ASU on January 1, 2017. 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 $241,000 and $103,000 for the twelve months ended December 31, 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 GAAP either is unclear or does not include specific guidance on eight specific cash flow classification issues included in the amendments in this ASU. The ASU addresses these cash flow issues with the objective of reducing
the existing diversity in practice. The amendments in this ASU 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.
In
January 2017, the FASB issued ASU 2017-04, IntangiblesGoodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment which removes the requirement to perform a hypothetical purchase price allocation to measure
goodwill impairment. Under this ASU, a goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual and interim
periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. We do not expect ASU 2017-04 to have a material impact on our 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.
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.
44
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 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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Amounts in Thousands)
|
|
Revenue
|
|
$
|
132,008
|
|
|
$
|
137,199
|
|
|
$
|
149,709
|
|
Net income
|
|
$
|
2,520
|
|
|
$
|
3,009
|
|
|
$
|
5,132
|
|
Earnings per sharediluted
|
|
$
|
.56
|
|
|
$
|
.68
|
|
|
$
|
1.15
|
|
45
The information above does not reflect all of the operating efficiencies or inefficiencies that
may have resulted from the Hudson IT acquisition in those periods prior to our 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.
3.
|
Goodwill and Other Intangible Assets, net
|
Goodwill related to our June 15, 2015
acquisition of Hudson IT totaled $8.4 million. Based upon the Companys quantitative testing in 2016, no goodwill impairment was indicated.
A reconciliation of the beginning and ending amounts of goodwill for the three years ended December 31, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Amounts in thousands)
|
|
Goodwill, beginning balance
|
|
$
|
8,427
|
|
|
$
|
|
|
|
$
|
|
|
Addition in current period
|
|
|
|
|
|
|
8,427
|
|
|
|
|
|
Reduction in current period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, ending balance
|
|
$
|
8,427
|
|
|
$
|
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, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
(Amounts in thousands)
|
|
Amortization
Period (In Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulative
Amortization
|
|
|
Net Carrying
Value
|
|
Client relationships
|
|
|
12
|
|
|
$
|
7,999
|
|
|
$
|
1,027
|
|
|
$
|
6,972
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
319
|
|
|
|
99
|
|
|
|
220
|
|
Trade name
|
|
|
3
|
|
|
|
249
|
|
|
|
128
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
8,567
|
|
|
$
|
1,254
|
|
|
$
|
7,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2016 and 2015 totaled $813,000 and $441,000,
respectively 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 year ended December 31, 2014.
The estimated aggregate amortization expense for intangible assets for the years ending December 31, 2017 through 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
(Amounts in thousands)
|
|
Amortization expense
|
|
$
|
813
|
|
|
$
|
769
|
|
|
$
|
731
|
|
|
$
|
696
|
|
|
$
|
667
|
|
46
4.
|
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, 2016 and $0.8 million at December 31, 2015. 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 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 London Interbank Offered
Rate (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, 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. Debt financing costs of $59,000 and $97,000 (net of amortization) are presented as long-term assets in the consolidated balance sheet.
As of December 31, 2016 and 2015, the Companys outstanding borrowings under the credit facility for revolving credit loans totaled
$3.6 million and $4.4 million, respectively, and unused borrowing capacity available was $12 million and $11 million, respectively. The Companys outstanding borrowings under the term
47
loan were $6.3 million and $8.1 million at December 31, 2016 and 2015, respectively. 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 $3.6 million outstanding debt balance at December 31, 2016 as long-term.
As of December 31, 2016, the annual aggregate maturities of our outstanding debt during each of the next five years are as follows:
|
|
|
|
|
|
|
Total Amount
|
|
|
|
(Amounts in thousands)
|
|
2017
|
|
|
1,800
|
|
2018
|
|
|
5,436
|
|
2019
|
|
|
1,800
|
|
2020
|
|
|
900
|
|
2021
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,936
|
|
|
|
|
|
|
6.
|
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, 2016:
|
|
|
|
|
|
|
Total Amount
|
|
|
|
(Amounts in thousands)
|
|
2017
|
|
$
|
843
|
|
2018
|
|
|
877
|
|
2019
|
|
|
878
|
|
2020
|
|
|
502
|
|
2021
|
|
|
187
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,287
|
|
|
|
|
|
|
Rental expense for the years ended December 31, 2016, 2015 and 2014, totaled $1.2 million, $1.0 million
and $596,000, 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
48
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, 2016. Mastechs total contributions to the Retirement Plan related to the qualified Hudson IT employees totaled $105,000 and $48,000 for the years ended December 31, 2016
and 2015, respectively.
8.
|
Stock-Based Compensation
|
Effective October 1, 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, executive management 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. As of December 31, 2016, the Company had 1,055,000 outstanding and/or exercised stock options, 130,000 vested performance shares and
101,000 outstanding and/or released restricted stock units that were issued under the Plan. Thus, as of December 31, 2016, the Company has 114,000 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 price on that date. Grants of stock options and restricted
stock awards generally vest over a four to five-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.
Following is a summary of the Companys stock option activity for the three years ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
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
|
|
Granted
|
|
|
335,000
|
|
|
$
|
7.04
|
|
Exercised
|
|
|
(126,000
|
)
|
|
$
|
0.81
|
|
Cancelled / forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
445,000
|
|
|
$
|
5.61
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, the Companys outstanding in the money stock options using the
year-end share price of $6.81 had an aggregate intrinsic value of $646,000. As of December 31, 2016, the intrinsic value of vested and expected to vest stock options totaled $646,000. The total intrinsic value of options exercised during 2016,
2015 and 2014 totaled $849,000, $183,000 and $131,000, respectively. The measurement date fair value of stock options vested during 2016, 2015 and 2014 totaled $0, $69,000 and $69,000, respectively.
49
The table below summarizes information regarding the Companys outstanding and exercisable
stock options as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices:
|
|
Options
Outstanding
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted Average
Exercise Price
|
|
$0.01 to $2.00
|
|
|
87,000
|
|
|
|
4.8
|
|
|
$
|
0.81
|
|
$2.01 to $4.00
|
|
|
17,000
|
|
|
|
3.0
|
|
|
$
|
2.36
|
|
$4.01 to $6.00
|
|
|
6,000
|
|
|
|
0.7
|
|
|
$
|
4.63
|
|
$6.01 to $8.00
|
|
|
335,000
|
|
|
|
9.3
|
|
|
$
|
7.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445,000
|
|
|
|
8.0
|
|
|
$
|
5.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices:
|
|
Options
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted Average
Exercise Price
|
|
$0.01 to $2.00
|
|
|
87,000
|
|
|
|
4.8
|
|
|
$
|
0.81
|
|
$2.01 to $4.00
|
|
|
17,000
|
|
|
|
3.0
|
|
|
$
|
2.36
|
|
$4.01 to $6.00
|
|
|
6,000
|
|
|
|
0.7
|
|
|
$
|
4.36
|
|
$6.01 to $8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,000
|
|
|
|
4.3
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options of 335,000 units were issued during the year ended December 31, 2016 and vest over a five
year period. No stock options were issued for the years ended December 31, 2015 and 2014.
The Company used the following assumptions
with respect to the Black-Scholes option pricing model for Mastech Digital options issued during 2016. No stock options were issued during 2015 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock option grants:
|
|
|
|
|
|
|
|
|
|
Weighted-average risk-free interest rate
|
|
|
1.34
|
%
|
|
|
|
|
|
|
|
|
Weighted-average dividend yield
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
55.9
|
%
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value
|
|
$
|
3.52
|
|
|
$
|
|
|
|
$
|
|
|
Risk-free interest rate
The risk-free rate for stock options granted during the period was
determined by using a U.S. Treasury rate for the period that coincided with the expected term of the options.
Expected dividend
yield
The Company did not contemplate a recurring dividend program. Accordingly, the dividend yield assumption used was 0.0%.
Expected volatility
Expected volatility was determined based on the historical volatility of Mastech Digitals common
stock.
Expected term
Mastech Digitals expected term is 5.5 years for stock option grants. The Companys expected
term was based on the exercise history of our employees and the vesting term of our stock options.
50
Following is a summary of Mastechs restricted stock activity for the three years ended
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning outstanding balance
|
|
|
67,370
|
|
|
|
72,741
|
|
|
|
39,863
|
|
Awarded
|
|
|
|
|
|
|
18,000
|
|
|
|
45,000
|
|
Released
|
|
|
(22,315
|
)
|
|
|
(23,371
|
)
|
|
|
(12,122
|
)
|
Forfeited
|
|
|
(12,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending outstanding balance
|
|
|
32,555
|
|
|
|
67,370
|
|
|
|
72,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of restricted stock units outstanding at December 31, 2016 was $222,000.
The total intrinsic value of restricted shares released during 2016 totaled $158,000.
Following is a summary of Mastech performance share
activity for the three years ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning outstanding balance
|
|
|
76,419
|
|
|
|
103,273
|
|
|
|
206,554
|
|
Awarded
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
(26,854
|
)
|
|
|
(103,281
|
)
|
Forfeited
|
|
|
(76,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending outstanding balance
|
|
|
0
|
|
|
|
76,419
|
|
|
|
103,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of performance shares vested during 2016 totaled $0. The aggregate intrinsic value
of performance shares outstanding at December 31, 2016 was $0.
Stock-based compensation expense of $408,000, $262,000 and $330,000
was recognized in the Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014, respectively. The Company has recognized related tax benefits associated with its share-based compensation arrangements for the
years ended December 31, 2016, 2015, and 2014 of $152,000, $99,000, and $125,000, respectively. As of December 31, 2016, the total remaining unrecognized compensation expense related to non-vested stock options totaled $1.0 million and the
total remaining unrecognized compensation expense related to restricted stock units amounted to $289,000, which will be amortized over the weighted-average remaining requisite service period of 3.8 years.
The components of income before income as shown in the accompanying
Consolidated Statement of Operations, consisted of the following for the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Amounts in thousands)
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
3,544
|
|
|
$
|
3,995
|
|
|
$
|
5,087
|
|
Foreign
|
|
|
476
|
|
|
|
430
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
4,020
|
|
|
$
|
4,425
|
|
|
$
|
5,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
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 and reports such
income as Foreign in the above table.
No provision for U.S. income taxes has been made for the undistributed earnings of its Indian
subsidiary as of December 31, 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 Consolidated Statement of Operations, consisted of the following for the years
ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Amounts in thousands)
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,189
|
|
|
$
|
1,375
|
|
|
$
|
1,720
|
|
State
|
|
|
101
|
|
|
|
143
|
|
|
|
191
|
|
Foreign
|
|
|
161
|
|
|
|
143
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
1,451
|
|
|
|
1,661
|
|
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
43
|
|
|
|
10
|
|
|
|
51
|
|
State
|
|
|
6
|
|
|
|
1
|
|
|
|
8
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
|
49
|
|
|
|
11
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
1,500
|
|
|
$
|
1,672
|
|
|
$
|
2,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
1,367
|
|
|
|
34.0
|
%
|
|
$
|
1,505
|
|
|
|
34.0
|
%
|
|
$
|
1,873
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
107
|
|
|
|
2.7
|
|
|
|
144
|
|
|
|
3.3
|
|
|
|
199
|
|
|
|
3.6
|
|
Other
|
|
|
26
|
|
|
|
0.6
|
|
|
|
23
|
|
|
|
0.5
|
|
|
|
13
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,500
|
|
|
|
37.3
|
%
|
|
$
|
1,672
|
|
|
|
37.8
|
%
|
|
$
|
2,085
|
|
|
|
37.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
The components of the deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Amounts in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts and employee advances
|
|
$
|
151
|
|
|
$
|
121
|
|
Accrued vacation, bonuses and severance
|
|
|
334
|
|
|
|
289
|
|
Stock-based compensation expense
|
|
|
164
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
649
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
205
|
|
|
|
193
|
|
Depreciation, intangibles and other
|
|
|
190
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
395
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
254
|
|
|
|
309
|
|
Less: current deferred tax asset
|
|
|
280
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
Total long-term deferred tax asset (liability)
|
|
$
|
(26
|
)
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
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, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Unrecognized tax benefits, beginning balance
|
|
$
|
135
|
|
|
$
|
138
|
|
|
$
|
111
|
|
Additions related to current period
|
|
|
20
|
|
|
|
35
|
|
|
|
40
|
|
Additions related to prior periods
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions related to prior periods
|
|
|
(27
|
)
|
|
|
(38
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, ending balance
|
|
$
|
128
|
|
|
$
|
135
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax
expense. As of December 31, 2016, 2015 and 2014, the Company had $15,000, $16,000 and $16,000, respectively, accrued for interest and penalties.
10.
|
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 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, 2016 and 2015 was a liability of $12,000 and $31,000, respectively,
and is reflected in the Consolidated Balance Sheet as other current liabilities.
53
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 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 appreciation in the Indian rupee relative to the U.S. dollar. Thus, at December 31, 2016 and December 31, 2015, there were no outstanding currency hedge positions.
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 (OCI) for the year ended
December 31, 2016 (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)
|
|
|
|
|
|
|
|
Interest-Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$19
|
|
|
Interest Expense
|
|
|
|
$(41)
|
|
|
|
Interest Expense
|
|
|
|
$
|
|
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
|
|
$
|
Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Derivative Instruments
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Currency Forward Contracts
|
|
None
|
|
$
|
0
|
|
|
None
|
|
$
|
0
|
|
Interest-Rate Swap Contracts
|
|
Other Current Liabilities
|
|
$
|
12
|
|
|
Other Current Liabilities
|
|
$
|
31
|
|
The estimated amount of pretax (losses) as of December 31, 2016 that is expected to be reclassified from
other comprehensive income (loss) into earnings, within the next 12 months is approximately ($25,000).
54
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 2016, 2015 and 2014, the Company purchased 0, 12,654 and 32,149 shares, respectively, under the Share Repurchase Program. These share repurchases were completed at an
average share price, inclusive of transaction cost, of $9.49 and $11.75 per share for 2015 and 2014, respectively. The Board of Directors elected not to extend the Share Repurchase Program in December 2016.
In addition to shares purchased under the Share Repurchase Program, the Company purchases shares to satisfy employee tax obligations related
to its Stock Incentive Plan. In 2016, the Company purchased 1,931 shares at an average price of $7.07 to satisfy employee tax obligations related to the vesting of restricted shares. In 2015, the Company purchased 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.
12.
|
Revenue Concentration
|
The Company did not have a client that exceeded 10% of total
revenues in 2016 and 2015. In 2014, Accenture PLC was the Companys only client that exceeded 10% of total revenues, generating 11.7% of total revenues. Additionally, Accenture PLC accounted for 13.4% of the Companys accounts receivable
balance at December 31, 2014.
The Companys top ten clients represented approximately 44%, 51% and 59% of total revenues in
2016, 2015 and 2014, 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, 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.
For the years ended 2016 there were 250,000 anti-dilutive stock options that were excluded from the computation of diluted earnings per
share. In 2015 and 2014, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,393
|
|
|
|
4,338
|
|
|
|
4,320
|
|
Stock options and restricted share units
|
|
|
89
|
|
|
|
103
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,482
|
|
|
|
4,441
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
The following table sets forth the computation of basic EPS utilizing net income and the
Companys weighted-average common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Amounts in thousands, except per share data):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net income
|
|
$
|
2,520
|
|
|
$
|
2,753
|
|
|
$
|
3,423
|
|
Basic weighted-average shares outstanding
|
|
|
4,393
|
|
|
|
4,338
|
|
|
|
4,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
.57
|
|
|
$
|
.63
|
|
|
$
|
.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the computation of diluted EPS utilizing net income 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):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net income
|
|
$
|
2,520
|
|
|
$
|
2,753
|
|
|
$
|
3,423
|
|
Diluted weighted-average shares outstanding
|
|
|
4,482
|
|
|
|
4,441
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
.56
|
|
|
$
|
.62
|
|
|
$
|
.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
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.
|
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, 2016
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest-Rate Swap Contracts
|
|
$
|
0
|
|
|
$
|
(12
|
)
|
|
$
|
0
|
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
15.
|
Quarterly Financial Information (Amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Gross
Profit
|
|
|
Net
Income
|
|
|
Earnings Per
Share
|
|
Year Ended December 31, 2016
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
First quarter
|
|
$
|
31,714
|
|
|
$
|
6,113
|
|
|
$
|
11
|
|
|
$
|
.00
|
|
|
$
|
.00
|
|
Second quarter
|
|
|
33,629
|
|
|
|
6,889
|
|
|
|
945
|
|
|
|
.22
|
|
|
|
.21
|
|
Third quarter
|
|
|
34,263
|
|
|
|
6,897
|
|
|
|
924
|
|
|
|
.21
|
|
|
|
.21
|
|
Fourth quarter
|
|
|
32,402
|
|
|
|
6,398
|
|
|
|
640
|
|
|
|
.14
|
|
|
|
.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
$
|
132,008
|
|
|
$
|
26,297
|
|
|
$
|
2,520
|
|
|
$
|
.57
|
|
|
$
|
.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company incurred severance costs of $780,000, $305,000 and $0 in
2016, 2015 and 2014, respectively. Severance costs during 2016 related to changes in the Companys President and Chief Executive Officer and its Vice President of Technology and Chief Information Officer. Severance costs in 2015 related to a
change in executive sales leadership.
57