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TMCNet:  MASTECH HOLDINGS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[March 21, 2014]

MASTECH HOLDINGS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) Overview We are a domestic provider of IT staffing services to mostly large and medium-sized organizations. From July 1986 until our September 30, 2008 spin-off, we conducted our business as subsidiaries of iGATE. We do not sell, lease or otherwise market any computer software or hardware, and 100% of our revenues are derived from the sale of information technology staffing services.


Our IT staffing business combines technical expertise with business process experience to deliver a broad range of services within business intelligence / data warehousing; web services; enterprise resource planning & customer resource management; and e-Business solutions. We provide our services across various industry verticals including: automotive; consumer products; education; financial services; government; healthcare; manufacturing; retail; telecommunications; transportation and utilities.

We have one operating segment. We do, however, track and evaluate our revenues and gross profits by three distinct sales channels: wholesale IT; retail IT; and permanent placements / fees. Our wholesale IT channel consist of system integrators and other IT staffing firms with a need to supplement their abilities to attract highly-qualified temporary technical computer personnel.

Our retail IT channel focuses on clients that are end-users of IT staffing services. Within the retail channel are end-user clients that have retained a third party to provide vendor management services, commonly known in the industry as Managed Service Providers ("MSP"). Permanent placement / fee revenues are incidental revenues derived as by-product opportunities of conducting our core contract staffing business.

Economic Trends and Outlook Generally, our business outlook is highly correlated to general U.S. economic conditions. During periods of increasing employment and economic expansion, demand for our services tends to increase. Conversely, during periods of contracting employment and / or a slowing domestic economy, demand for our services tends to decline. As the economy slowed during the last half of 2007 and recessionary conditions emerged in 2008 and during much of 2009, we experienced less demand for our staffing services. During the second half of 2009, we began to see signs of market stabilization and a modest pick-up in activity levels within certain sales channels and technologies. During 2010, market conditions continued to strengthen over the course of the year and activity levels within most of our sales channels progressively improved. In 2011 and 2012, activity levels continued to trend up in most technologies and sales channels. During 2013, we continued to see a steady flow of solid activity in our contract staffing business. Permanent placement activity levels trended down in 2013 compared to 2012 and 2011. As we enter 2014, we see the strengthening of the domestic job market as a positive for us and our industry.

In addition to tracking general U.S. economic conditions, a large portion of our revenues are generated from a limited number of clients (see Item 1A, the Risk Factor entitled "Our revenues are highly concentrated and the loss of a significant client would adversely affect our business and revenues").

Accordingly, our trends and outlook are additionally impacted by the prospects and well-being of these specific clients. By way of illustration, during the second half of 2006, while general U.S. economic conditions were positive, we experienced a decline in billable headcount and negative sequential quarterly revenue growth due to client-specific conditions at two of our larger clients.

This "account concentration" factor may result in our results of operations deviating from the prevailing U.S. economic trends from time to time.

In recent years, a larger portion of our revenues has come from our wholesale IT sales channel, which consists largely of strategic relationships with systems integrators and other staffing organizations. This channel tends to carry lower gross margins, but provides higher volume opportunities. This trend in our business mix has impacted overall gross margins during the past several years and, if this trend continues, will likely impact future gross margins as well.

Within our retail IT sales channel, many large users of IT staffing services are employing Managed Service Providers ("MSP") to manage their contractor spending in an effort to drive down overall costs. This trend 20 -------------------------------------------------------------------------------- Table of Contents towards utilizing the MSP model has resulted in lower gross margins in the retail IT channel over the past several years and it is likely that our gross margins will be pressured in future periods should this trend continue.

Recent Developments In August 2013, the Company sold its healthcare staffing business to Accountable Healthcare Staffing, Inc., as more fully described in Note 2 "Discontinued Operations" to the Consolidated Financial Statements, included herein. This action reflects the Company's desire to focus exclusively on its IT staffing business. The Consolidated Statements of Operations and Cash Flows for all periods presented have been recast to reflect the healthcare staffing business as discontinued operations.

On October 30, 2013, the Company announced that its Board of Directors approved a five-for-four (25-percent) stock split and declared a special cash dividend of $0.50 per post-split share of common stock. Shareholders of record received one new share of common stock for every four shares that they owned. The distribution of the new shares was made on November 29, 2013. The cash dividend was paid on December 20, 2013 to shareholders of record at the close of December 9, 2013. The earnings per share calculations for all periods presented have been recast to reflect the impact of the stock split on outstanding shares.

Results of Continuing Operations Below is a tabular presentation of revenues and gross profit margins by sales channel for the periods discussed: Revenues & Gross Margin by Sales Channel (Amounts in millions) Years Ended December 31, Revenues 2013 2012 2011 Wholesale IT Channel $ 82.8 $ 64.0 $ 57.7 Retail IT Channel 23.9 26.5 22.3 Permanent Placements / Fees* 0.2 0.3 0.5 Total Revenues $ 106.9 $ 90.8 $ 80.5 Gross Margin Wholesale IT Channel 18.1 % 18.3 % 18.8 % Retail IT Channel 20.7 % 19.5 % 20.4 % Permanent Placements / Fees* 100.0 % 100.0 % 100.0 % Total Gross Margin % 18.8 % 18.9 % 19.7 % * Permanent Placement / Fees are generated from clients within both of our existing sales channels.

In order to minimize the impact of the industry trends mentioned above on our operating margins, the Company will need to continue to lower its operating cost structure as a percentage of revenues through innovation and greater efficiencies. Investments in our global recruitment centers, aimed at improving operational effectiveness, and costs rationalization efforts throughout our entire organization, are examples of past actions that have resulted in lower operating costs as a percentage to total revenues.

21 -------------------------------------------------------------------------------- Table of Contents Below is a tabular presentation of operating expenses by sales, operations and general and administrative categories for the periods discussed: Selling, General & Administrative ("S,G&A") Expense Details (Amounts in millions) Years Ended December 31, 2013 2012 2011 Sales and Marketing $ 4.4 $ 4.0 $ 4.8 Operations (HR & Recruiting) 5.3 5.0 4.3 General & Administrative 5.1 4.8 4.6 Total S,G&A Expenses $ 14.8 $ 13.8 $ 13.7 2013 Compared to 2012 Revenues Revenues for the year ended December 31, 2013 totaled $106.9 million, compared to $90.8 million for the year ended December 31, 2012. This 18% increase was due to higher demand for the Company's staffing services during 2013. Billable IT consultant headcount at December 31, 2013 totaled 742-consultants compared to 632-consultants one-year earlier. Additionally, our average bill rate in 2013 increased to $74.25 from $73.58 in 2012.

Revenues from our wholesale IT channel increased 29% in 2013 compared to 2012.

Higher revenue levels from staffing clients (up 23%) were driven by strong demand for our IT staffing services. Revenue from our integrator clients were up 35% over 2012 levels, as we participated in more larger-scale project assignments with several of our strategic partners. Retail IT channel revenues declined by 10% in 2013 compared to a year earlier. This decline reflected lower revenues from direct end-user clients. Revenues from MSP clients were largely flat in 2013, after a significant run-up in revenues during 2012. The 2013 decision to wind down business activities with a low-margin MSP client impacted revenues in this channel during the year. Permanent placement / fee revenues declined in 2013 by approximately $0.1 million from 2012. With the closure of several branch offices in late 2011, permanent placement opportunities have been less prevalent over the last two years.

In 2013, we had one client that represented more than 10% of total revenues (Accenture = 11.4%). In 2012, we had three clients that represented more than 10% of revenues (IBM = 13.3%, TEK Systems = $12.0%; and Kaiser Permanente = 11.8%). Our top ten clients represented 57% of total revenues in 2013 compared to 60% of total revenues in 2012.

Gross Margin Gross profit increased to $20.1 million in 2013 compared to $17.2 million in 2012. This improvement in gross profit was due to strong revenue growth during the 2013 period. Gross profit as a percentage of revenue was 18.8% in 2013 compared to 18.9% in 2012. The 10 basis point decline in gross margin reflected lower levels of permanent placement / fee revenues, as higher margins in our retail channel essentially offset slightly lower gross margins from our wholesale channel.

Wholesale IT channel gross margins decreased by 20 basis points in 2013 compared to 2012. This slight decline was largely due to consultant compensation increases on existing assignments that out-paced bill rate increases during 2013. With assignment durations increasing over the last several years, this issue continues to have a greater impact on our overall gross margin performance. In our retail IT channel, gross margins increased by 120 basis points from 2012 levels. This increase reflected higher margins on new assignments and the wind-down of business with a low-margin MSP client.

22 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative ("S,G&A") Expenses S,G&A expenses in 2013 totaled $14.8 million and represented 13.9% of revenues, compared to $13.8 million or 15.2% of revenues in 2012.

Below is a variance analysis by expense category related to S,G&A expense in 2013 compared to 2012: • Sales expense increased by $0.4 million and reflected staff increases of $0.2 million and higher travel and variable compensation expenses of $0.2 million.

• Recruiting expenses increased by $0.3 million due to increases in our recruiting staff of $0.1 million; higher activity-base expenses of $0.1 million (H1-B processing fees, job board access fees and background check expenses); and higher variable compensation expenses of $0.1 million.

• General and administrative expenses increased by $0.3 million. Higher equity-based compensation expense of $0.3 million and higher bonus expense of $0.1 million in 2013 were partially offset by lower severance expense of $0.1 million.

Other Income / (Expense) Components In 2013, other income / (expense) consisted of net interest expense of $93,000 and foreign exchange gains of $16,000. In 2012, other income / (expense) consisted of $68,000 of net interest expense and foreign exchange gains of $36,000. Higher net interest expense in 2013 was due to higher average borrowings during 2013 compared to 2012. Net foreign exchange gains in 2013 and 2012 reflected exchange rate variations between the Indian rupee and the U.S.

dollar.

Income Tax Expense Income tax expense for 2013 was $2.0 million and represented an effective tax rate on pre-tax income of 37.4% compared to $1.3 million for 2012, which represented an effective tax rate on pre-tax income of 38.4%. The lower effective tax rate in 2013 was largely due to a higher aggregate state income tax rate in 2012.

2012 Compared to 2011 Revenues Revenues for the year ended December 31, 2012 totaled $90.8 million, compared to $80.5 million for the year ended December 31, 2011. This 13% increase was due to higher demand for the Company's IT staffing services during 2012. Billable IT consultant headcount at December 31, 2012 totaled 632-consultants compared to 555-consultants one-year earlier. The impact of a higher level of billable consultants in 2012 was partially offset by a lower average bill rate ($73.58 in 2012 versus $74.02 in 2011).

Revenues from our wholesale IT channel increased 11% in 2012 compared to 2011.

Higher revenue levels from staffing clients (up 28%) were driven by strong demand for our IT services. Revenue from our integrator clients were largely flat in 2012, compared to 2011, as lower levels of ERP assignments in 2012 impacted our overall growth rate with these clients. Retail IT channel revenues increased by 19% in 2012 compared to a year earlier. Essentially all of this growth came from higher demand at many of our MSP clients. Revenues from direct end-user clients were impacted by the late 2011 closure of several under-performing branch operations. Permanent placement / fee revenues declined in 2012 by approximately $0.2 million from 2011. This decline was largely due to several branch closures in late 2011, which were areas of high permanent placement opportunities.

In 2012, we had three clients that represented more than 10% of total revenues (IBM = 13.3%; TEK Systems = 12.0%; and Kaiser Permanente = 11.8%). In 2011, we had three clients that represented more than 10% of revenues (IBM = 16.5%; TEK Systems = 12.0%; and Kaiser Permanente = 10.7%). Our top ten clients represented 60% of total revenues in 2012 compared to 63% of total revenues in 2011.

23 -------------------------------------------------------------------------------- Table of Contents Gross Margin Gross profit increased to $17.2 million in 2012 compared to $15.9 million in 2011. This improvement in gross profit was due to our revenue growth in 2012.

Gross profit as a percentage of revenue was 18.9% in 2012 compared to 19.7% in 2011. The 80 basis point decline in gross margin reflected lower levels of permanent placement / fee revenues and various levels of margin compression in each of our sales channels.

Wholesale IT channel gross margins decreased by 50 basis points in 2012 compared to 2011. This performance reflected a lower level of ERP assignments at integrator clients and lower margins at our staffing clients. In our retail IT channel, gross margins declined by 90 basis points from 2011 levels. This decline largely reflected a shift of revenues toward MSP clients and away from direct end-user clients. This shift in revenues was largely due to the closure of several under-performing branch operations in late 2011.

Selling, General and Administrative ("S,G&A") Expenses S,G&A expenses in 2012 totaled $13.8 million and represented 15.2% of revenues, compared to $13.7 million or 17.0% of revenues in 2011. Excluding severance expenses in 2012 and 2011 of $120,000 and $277,000, respectively, S,G&A expenses would have represented 15.1% of revenues in 2012 compared to 16.6% in 2011.

Below is a variance analysis by expense category related to S,G&A expense in 2012 compared to 2011: • Sales expense decreased by $0.8 million and reflected savings associated with the realignment of our sales leadership structure and the late 2011 closure of several branch operations.

• Recruiting expenses increased by $0.7 million due to staff increases of $0.3 million; higher commission and bonus expense of $0.1 million; and higher activity-base expenses of $0.4 million (H1-B processing fees, job board access fees and background check expenses); partially off-set by lower facility costs of $0.1 million, which reflected our new office lease arrangement in New Delhi, India.

• General and administrative expenses increased by $0.2 million. The increase reflected higher compensation and benefit expense of $0.2 million and higher expenditures on outside consulting services of approximately of $0.1 million. Additionally, we had lower severance expense of approximately $0.2 million and higher bad debt expense of $0.1 million in the 2012 period. It should be noted that the higher bad debt expense variance related to a $0.1 million reversal (credit) of bad debt expense in 2011.

Other Income / (Expense) Components In 2012, other income / (expense) consisted of net interest expense of $68,000 and foreign exchange gains of $36,000. In 2011, other income / (expense) consisted of $38,000 of net interest expense, foreign exchange losses of $26,000 and a $5,000 loss related to the closure of a joint venture. Higher net interest expense in 2012 was due to higher unused credit line fees on our expanded credit facility and higher amortization of loan origination costs incurred in August 2011. Net foreign exchange gains and losses in 2012 and 2011 reflected exchange rate variations between the Indian rupee and the U.S. dollar.

Income Tax Expense Income tax expense for 2012 was $1.3 million and represented an effective tax rate on pre-tax income of 38.4% compared to $795,000 for 2011, which represented an effective tax rate on pre-tax income of 37.0%. The higher effective tax rate in 2012 was largely due to a higher aggregate state income tax rate.

Results of Discontinued Operations Net Income from discontinued operations in 2013 totaled $536,000 and included a net gain of $442,000 related to the sale of the healthcare staffing business. In 2012, net income from discontinued operations totaled $81,000 compared to a loss of ($242,000) in 2011.

24 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Financial Condition and Liquidity At December 31, 2013, we had cash balances on hand of $412,000, net of outstanding borrowings and approximately $15.4 million of borrowing capacity under our existing credit facility. This financial position reflects returning $2.1 million of capital to our shareholders during 2013 in the form of a year-end cash dividend. The cash dividend was declared by our Board of Directors as a one-time dividend reflective of the Company's 2013 financial results and the divestiture of our healthcare segment. At this time, we do not anticipate adopting a recurring dividend program and future dividends will be based on the Board's assessment of a variety of factors, both internal and external to our business.

Historically, we have funded our business needs with cash generated from operating activities. In the staffing services industry, investment in operating working capital levels (defined as current assets minus cash and cash equivalents and current liabilities, excluding short-term borrowings) is a significant use of cash. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash preservation. Our accounts receivable "days sales outstanding" ("DSO's") measurement was 48 days at December 31, 2013 and 47 days at December 31, 2012.

We believe that effectively managing our DSO's has been an important factor in maximizing our cash flows in recent years.

Cash provided by operating activities, our cash and cash equivalents balances on hand at December 31, 2013 and current availability under our credit facility are expected to be adequate to fund our business needs over the next 12 months.

Below is a tabular presentation of cash flow activities for the periods discussed: Years Ended December 31, Cash Flows Activities 2013 2012 2011 (Amounts in millions) Operating activities - from continuing operations $ 1.9 $ 0.9 $ 0.9 Investing activities - from continuing operations (0.1 ) (0.2 ) (0.3 ) Financing activities - from continuing operations (4.3 ) (5.9 ) (0.7 ) Discontinued Operations activities 2.3 0.1 (0.5 ) Operating Activities Cash provided by operating activities for the years ended December 31, 2013, 2012 and 2011 totaled $1.9 million, $0.9 million and $0.9 million, respectively.

Factors contributing to cash flows during the 2013 period included net income of $3.3 million and non-cash charges of $0.6 million, offset by an increase in operating working capital of $2.0 million. In 2012, cash flows from operating activities included net income of $2.1 million and non-cash charges of $0.5 million, offset by an increase in operating working capital of $1.7 million. In 2011, cash flows from operating activities included net income of $1.4 million, non-cash charges of $0.2 million and an offsetting increase in operating working capital of $0.7 million. The increases in operating working capital during 2013, 2012 and 2011 were in support of higher activity levels and revenue expansion.

We would expect operating working capital levels to increase should revenue growth continue in 2014. Similar to previous years, such an increase would have a negative impact on cash generated from operating activities. We believe that DSO's are likely to remain in the 48 to 52-day range during 2014.

Investing Activities Cash used in investing activities for the years ended December 31, 2013, 2012 and 2011 totaled approximately $0.1 million, $0.2 million and $0.3 million, respectively. In 2013 and 2012 capital expenditures largely accounted for all uses of cash in investing activities. In 2011, capital expenditures and long-term facility lease deposits of $0.1 million (offshore facility leases) accounted for our uses of cash in investing activities.

25 -------------------------------------------------------------------------------- Table of Contents We believe that investments in capital expenditures and facility lease deposits should approximate $0.3 million in 2014.

Financing Activities In 2013, cash used in financing activities totaled $4.3 million and included $2.1 million of dividend payments and $2.6 million of debt repayments, partially offset by stock option activities. In 2012, cash used in financing activities totaled $5.9 million and included $6.7 million of dividend payments on common stock, $2.5 million of purchases under the Company's share repurchase program, partially offset by $2.6 million of borrowings under our revolving loan facility and $0.7 million of proceeds related to stock option exercises. In 2011, cash used in financing activities totaled $0.7 million and principally related to share repurchases and deferred financing costs incurred in connection with our amended credit facility with PNC Bank.

Discontinued Operations Activities In 2013, discontinued operations generated cash of $2.3 million related to proceeds from the sale of the business and the wind-down of retained operating working capital levels. In 2012 and 2011, discontinued operations generated cash of $0.1 million and utilized cash of $0.5 million, respectively.

Contractual Obligations and Off-Balance Sheet Arrangements We have financial commitments related to existing operating leases, primarily for office space that we occupy, and borrowings under our existing credit facility. Our commitments are as follows: Payments due by period (Amounts in thousands) Less than 1 - 3 3 - 5 More than Contractual obligations 1 year years years 5 years Total Operating Leases $ 501 $ 326 $ 8 $ - $ 835 Borrowings under credit facility $ 12 $ - $ - $ - $ 12 We do not have any off-balance sheet arrangements.

Inflation We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seek to ensure that billing rates reflect increases in costs due to inflation.

Seasonality Our operations are generally not affected by seasonal fluctuations. However, our consultants' billable hours are affected by national holidays and vacation patterns. Accordingly, we typically have lower utilization rates and higher benefit costs during the fourth quarter. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impacts our revenue and gross profit performance during the subsequent quarter.

Critical Accounting Policies and Estimates Certain accounting policies are particularly important to the portrayal of our financial position, results of operations and cash flows and require the application of significant judgment by management, and as a result, are subject to an inherent degree of uncertainty. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of certain estimates. These estimates are 26 -------------------------------------------------------------------------------- Table of Contents based on our historical experience, terms of existing contracts, observances of industry trends and other available information from outside sources, as appropriate. The following explains our most critical accounting policies. See the Notes to the Consolidated Financial Statements, contained in Item 8, of this annual report on Form 10-K for a complete description of our significant accounting policies.

Revenue Recognition The Company recognizes revenue on time-and-material contracts as services are performed and expenses are incurred. Time-and-material contracts typically bill at an agreed upon hourly rate, plus out-of-pocket expense reimbursement.

Out-of-pocket expense reimbursement amounts vary by assignment, but on average represent approximately 2% to 3% of total revenues. Revenue is earned when the Company's 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 Company's fee is contingent upon the hired resource's continued employment with the client, revenue recognition is deferred until such employment conditions are satisfied.

Accounts Receivable and Allowance for Uncollectible Accounts The Company extends credit to clients based upon management's assessment of their creditworthiness. A substantial portion of the Company's revenue, and the resulting accounts receivable, are from Fortune 1000 companies, major systems integrators and other staffing organizations.

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.

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.

Stock-Based Compensation Effective October 1, 2008, the Company adopted a Stock Incentive Plan (the "Plan") that provides up to 1,000,000 shares (800,000 pre-split shares) of the Company's 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 Company's common stock at the grant date and generally vest over a four 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.

The assumptions associated with this option pricing model and other information related to our Stock Incentive Plan are more fully described in Note 8 "Stock-Based Compensation" to the Consolidated Financial Statements, included in Item 8 herein.

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 27 -------------------------------------------------------------------------------- Table of Contents 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 Company's 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 Company's assets and liabilities. We measure 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 management's 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 reports 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, 2013, the Company provided a liability of $111,000 for uncertain tax positions, including interest and penalties, related to various state income tax matters applicable to the periods subsequent to our spin-off from iGATE.

Derivative Instruments and Hedging Activities The Company is exposed to foreign currency risks as a result of its Indian-based global recruitment centers. During 2012, the Company's expenditures in Indian rupees, in support of these operations, increased significantly. Accordingly, to mitigate and manage the risk of changes in foreign currency exchange rates, the Company entered into foreign currency forward contracts in June 2012 and continued its hedging strategy into 2013 and 2014. These forward contracts have been designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815 "Derivatives and Hedging". The Company does not enter into derivative contracts for speculative purposes.

All derivatives are recognized on the balance sheet at fair value. The effective portion of the changes in the fair value on these instruments are recorded in other comprehensive income (loss) and are reclassified into the Consolidated Statement of Operations on the same line item and in the same period in which the underlying hedge transaction affects earnings. Changes in the fair value of these instruments deemed ineffective are recognized in the Consolidated Statement of Operations as foreign exchange gains / (losses). Forward points (premiums / discounts) are excluded from the assessment of hedge effectiveness and are recognized in the Consolidated Statement of Operations as foreign exchange gains / (losses).

With respect to derivatives designed as hedges, the Company formally documents all relationships between the 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, these change in the fair value of the derivative is recorded in the Consolidated Statement of Operations as foreign exchange gains / (loss).

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 Flows for all periods presented have been recast to reflect the presentation of discontinued operations. The carrying value of assets and liabilities of discontinued operations that have been retained by the Company are disclosed in Note 2 "Discontinued Operations" to the Consolidated Financial Statements, included in Item 8 herein.

28 -------------------------------------------------------------------------------- Table of Contents Recently Issued Accounting Standards The Company is of the opinion that any pending accounting pronouncement, either in the adoption phase or not yet required to be adopted, will not have a significant impact on the Company's financial position or results of operations.

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