Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-34099 MASTECH DIGITAL, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 26-2753540 (State or other jurisdiction of incorpor ...

Mastech Holdings, Inc. (NYSE:MHH) Q1 2019 Earnings Conference Call May 1, 2019 9:00 AM ET Company Participants Jennifer Ford-Lacey - Manager, Legal Affairs Vivek Gupta - CEO Jack Cronin - CFO Conference Call Participants Operator Ladies and gentlemen, greetings and welcome to the Mastech Digital, Inc. First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this progr ...

Part I [Business](index=3&type=section&id=ITEM%201.%20BUSINESS) Mastech Digital, Inc. provides Digital Transformation IT Services through Data and Analytics Services and IT Staffing Services segments, serving a global customer base primarily in North America. - The company operates through two business segments: Data and Analytics Services and IT Staffing Services[30](index=30&type=chunk) - In 2017, the company acquired the services division of InfoTrellis, Inc., establishing its Data and Analytics Services segment with specialized capabilities in data management, analytics, and project-based consulting[27](index=27&type=chunk)[31](index=31&type=chunk) - The IT staffing segment delivers a broad range of services in both digital (cloud, mobility, social, automation) and mainstream technologies (business intelligence, web services, ERP)[16](index=16&type=chunk) - On July 24, 2018, the Board of Directors declared a **two-for-one stock split** of the company's common stock, which was distributed on August 24, 2018[29](index=29&type=chunk) [Operating Segments](index=5&type=section&id=Operating%20Segments) The Data and Analytics Services segment focuses on project-based consulting, while the IT Staffing Services segment provides contract staffing and digital transformation services, with a significant focus on financial services. Data and Analytics Services - 2018 Revenue by Industry | Industry | Revenue Percentage | | :--- | :--- | | Retail | 25% | | Financial Services | 22% | | Healthcare | 16% | | Manufacturing | 16% | | Government | 10% | | Other | 11% | IT Staffing Services - Billable Consultants by Industry (as of Dec 31, 2018) | Industry | Consultant Percentage | | :--- | :--- | | Financial Services | 44% | | Telecom | 10% | | Healthcare | 8% | | Government | 8% | | Manufacturing | 4% | | Technology | 4% | | Other | 22% | - The IT Staffing segment utilizes a global recruitment model with approximately **200 recruiters** across seven U.S. centers and a large facility in NOIDA, India[51](index=51&type=chunk)[53](index=53&type=chunk) [Competitive Position and Strengths](index=11&type=section&id=Our%20Competitive%20Position) The company operates in highly competitive markets, leveraging an established client base, global delivery model, cost-effective offshore recruiting, and minority-owned business certification as competitive strengths. - Key competitors in the data and analytics segment include IBM Services, Cognizant, Tata Consultancy Services, Deloitte, and Accenture[67](index=67&type=chunk) - The company is certified as a **minority-owned business** by the National Minority Supplier Development Council (NMSDC), which aids in attracting clients with diversity spending initiatives[74](index=74&type=chunk) - A low operating cost structure is maintained through a telesales model in IT Staffing and offshore delivery models in both segments[75](index=75&type=chunk) [Risk Factors](index=13&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company faces significant risks from intense industry competition, challenges in retaining skilled professionals, dependence on U.S. immigration laws, high client concentration, and restrictive debt covenants. - The company's ability to attract and retain qualified IT and data analytics professionals is critical, and failure to do so could materially harm the business[85](index=85&type=chunk) - As of December 31, 2018, approximately **37% of the workforce** was on Mastech Digital-sponsored H1-B temporary work permits, making the company highly sensitive to changes in U.S. immigration laws[86](index=86&type=chunk) - Revenues are highly concentrated, with the top ten clients accounting for approximately **47% of total revenues** for the year ended December 31, 2018[107](index=107&type=chunk) - The company's co-founders, Sunil Wadhwani and Ashok Trivedi, own approximately **62% of the outstanding common stock**, giving them sufficient voting power to control the Board of Directors and major transactions[123](index=123&type=chunk) - At December 31, 2018, the company had **$39.1 million in outstanding borrowings** under its Credit Agreement, which contains restrictive covenants that could limit operating and financial flexibility[109](index=109&type=chunk)[113](index=113&type=chunk) [Properties](index=24&type=section&id=ITEM%202.%20PROPERTIES) The company leases all its office facilities, including its corporate headquarters in Moon Township, Pennsylvania, and operational centers in Canada and India. Principal Leased Properties | Location | Principal Use | Occupying Business Segment | Approx. Sq. Footage | | :--- | :--- | :--- | :--- | | Moon Township, PA | Corporate headquarters | IT Staffing | 11,500 | | Toronto, Canada | Executive, sales, delivery | Data and Analytics | 1,900 | | NOIDA, India | Sales and recruiting office | IT Staffing | 27,000 | | Chennai, India | Sales and delivery center | Data and Analytics | 19,000 | [Legal Proceedings](index=24&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) The company is involved in various lawsuits and administrative proceedings, but management does not expect them to materially affect its financial position or results. - Management, after consulting with legal counsel, does not expect ongoing legal proceedings to have a material adverse effect on the company's financials[141](index=141&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=25&type=section&id=ITEM%205.%20MARKET%20FOR%20THE%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Mastech Digital's common stock trades on the NYSE American under "MHH", underwent a two-for-one stock split in August 2018, and does not currently pay a recurring dividend. - The company's common stock trades on the NYSE American under the symbol "**MHH**"[145](index=145&type=chunk) - A **two-for-one stock split** was declared in July 2018 and became effective in August 2018; all share and per-share data have been recast to reflect this split[29](index=29&type=chunk)[164](index=164&type=chunk) - The company does not pay recurring dividends, though special dividends were paid in 2012 and 2013[146](index=146&type=chunk) - In July 2017, the company sold **1.7 million shares** of common stock to its co-founders for **$6.0 million** in a private placement to partially fund the InfoTrellis acquisition[151](index=151&type=chunk) [Selected Financial Data](index=27&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) This section provides a five-year financial overview, showing consistent revenue growth to $177.2 million in 2018 and a significant increase in net income to $6.7 million, with total assets and liabilities rising due to the InfoTrellis acquisition. Selected Financial Data (2014-2018) | (Amounts in thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenues** | **$177,164** | **$147,882** | **$132,008** | **$123,470** | **$113,523** | | Gross profit | 42,528 | 31,629 | 26,297 | 23,799 | 20,786 | | **Net income** | **$6,691** | **$1,626** | **$2,520** | **$2,753** | **$3,423** | | Diluted EPS | $0.60 | $0.16 | $0.28 | $0.31 | $0.38 | | Total assets | $92,584 | $98,604 | $39,406 | $38,477 | $20,044 | | Total bank debt | $38,704 | $38,152 | $9,877 | $12,538 | $— | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=28&type=section&id=ITEM%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) In 2018, Mastech Digital's revenue grew 20% to $177.2 million, driven by the Data and Analytics segment and IT Staffing's organic growth, with net income rising to $6.7 million despite a goodwill impairment, offset by a contingent consideration credit. [Results of Operations](index=29&type=section&id=Results%20of%20Operations) In 2018, revenues increased by 20% to $177.2 million, and gross margin expanded to 24.0% due to the Data and Analytics business, while operating income was impacted by a goodwill impairment offset by a contingent consideration credit. Revenues & Gross Margin by Segment (2016-2018) | (Revenues in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Revenues** | | | | | Data and Analytics Services | $23.8 | $9.2 | $— | | IT Staffing Services | $153.4 | $138.7 | $132.0 | | **Total Revenues** | **$177.2** | **$147.9** | **$132.0** | | **Gross Margin %** | | | | | Data and Analytics Services | 44.0% | 44.8% | —% | | IT Staffing Services | 20.9% | 19.8% | 19.9% | | **Total Gross Margin %** | **24.0%** | **21.4%** | **19.9%** | - In 2018, S,G&A expenses included a **$9.7 million goodwill impairment charge** and an **$11.1 million credit** from the revaluation of a contingent consideration liability, resulting in a net credit of **$1.4 million** from these items[170](index=170&type=chunk)[177](index=177&type=chunk) - The effective tax rate for 2018 was **28.9%**, a significant decrease from **44.8%** in 2017, primarily due to the lower U.S. federal tax rate and lower U.S. tax reform transition taxes in 2018[176](index=176&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) As of year-end 2018, the company had net bank debt of approximately $37.8 million and negative cash flow from operations, primarily due to a $9.9 million increase in operating working capital and increased Days Sales Outstanding (DSO) from an ERP system implementation. - At December 31, 2018, the company had outstanding bank debt, net of cash, of approximately **$37.8 million** and **$9 million** of available borrowing capacity[186](index=186&type=chunk) - Days Sales Outstanding (DSO) increased from **58 days** at year-end 2017 to **69 days** at year-end 2018, attributed to disruptions from a new Cloud-based ERP platform implementation[187](index=187&type=chunk) Cash Flow Activities Summary (2016-2018) | (Amounts in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Operating activities | $(0.5) | $3.4 | $2.3 | | Investing activities | (1.1) | (36.0) | — | | Financing activities | 0.6 | 34.2 | (2.3) | [Critical Accounting Policies and Estimates](index=35&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's critical accounting policies involve significant judgment, particularly regarding goodwill and intangible asset valuation, and the contingent consideration liability related to the InfoTrellis acquisition. - Goodwill is tested for impairment annually; in 2018, a quantitative test on the InfoTrellis reporting unit resulted in a **$9.7 million impairment charge**[211](index=211&type=chunk) - The contingent consideration liability from the InfoTrellis acquisition is re-measured to fair value periodically; in 2018, it was revalued, resulting in an **$11.1 million reduction** to the liability, recorded as a credit to S,G&A expenses[224](index=224&type=chunk) - The company adopted ASU 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, with no material impact on its financial statements[315](index=315&type=chunk) [Financial Statements and Supplementary Data](index=39&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section includes the company's audited consolidated financial statements for 2016-2018, the independent auditor's report, and detailed notes on accounting policies, acquisitions, goodwill impairment, and debt facilities. [Consolidated Financial Statements](index=41&type=section&id=Consolidated%20Financial%20Statements) The audited financial statements detail the company's financial health, showing total assets of $92.6 million and total liabilities of $58.3 million as of December 31, 2018, with $177.2 million in revenue and $6.7 million in net income for the year. Consolidated Balance Sheet Highlights (as of Dec 31, 2018) | (Amounts in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,294 | $2,478 | | Goodwill, net of impairment | $26,106 | $35,844 | | Total assets | $92,584 | $98,604 | | Long-term debt, less current portion, net | $34,129 | $34,149 | | Contingent consideration liability | $6,069 | $17,125 | | Total liabilities | $58,308 | $71,451 | | Total shareholders' equity | $34,276 | $27,153 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | (Amounts in thousands, except per share data) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Revenues | $177,164 | $147,882 | $132,008 | | Gross profit | $42,528 | $31,629 | $26,297 | | Net income | $6,691 | $1,626 | $2,520 | | Diluted EPS | $0.60 | $0.16 | $0.28 | [Notes to Consolidated Financial Statements](index=48&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide critical context, detailing the InfoTrellis acquisition's $52.0 million consideration, the subsequent $9.7 million goodwill impairment, the $65 million credit facility, and the $11.1 million reduction in contingent consideration liability. - Note 3 (Business Combinations): The InfoTrellis acquisition had a total fair value of consideration of **$52.0 million**, with goodwill of **$27.4 million** and identifiable intangible assets of **$19.9 million**[349](index=349&type=chunk)[350](index=350&type=chunk) - Note 4 (Goodwill and Intangibles): A goodwill impairment charge of **$9.7 million** was recorded in 2018 related to the InfoTrellis acquisition, reducing the goodwill balance to **$26.1 million**[355](index=355&type=chunk)[357](index=357&type=chunk) - Note 6 (Credit Facility): The company entered into a new credit agreement in July 2017 providing for **$65 million** in financing; as of Dec 31, 2018, outstanding debt totaled **$39.1 million**[361](index=361&type=chunk)[369](index=369&type=chunk)[370](index=370&type=chunk) - Note 14 (Fair Value Measurements): The contingent consideration liability, a Level 3 fair value measurement, was reduced by **$11.1 million** in 2018, from a beginning balance of **$17.1 million** to an ending balance of **$6.1 million**[406](index=406&type=chunk)[409](index=409&type=chunk) [Controls and Procedures](index=76&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no independent attestation required as a smaller reporting company. - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[420](index=420&type=chunk) - Based on an evaluation using the COSO-2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[423](index=423&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=78&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) Information regarding directors, executive officers, and corporate governance, including the code of ethics, is incorporated by reference from the company's 2019 proxy statement. - Required information for this item is incorporated by reference from the company's definitive proxy statement for the Annual Meeting of Shareholders scheduled for May 15, 2019[428](index=428&type=chunk) - The company has adopted a Code of Conduct Policy applicable to all employees, which is posted on the company's website[429](index=429&type=chunk) [Executive Compensation](index=78&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Detailed information regarding executive compensation, including compensation discussion and analysis, is incorporated by reference from the company's 2019 proxy statement. - All information required by this item is incorporated by reference from the company's 2019 Proxy Statement[430](index=430&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters](index=78&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20SHAREHOLDER%20MATTERS) Information concerning the security ownership of certain beneficial owners and management is incorporated by reference from the company's 2019 proxy statement. - All information required by this item is incorporated by reference from the company's 2019 Proxy Statement[431](index=431&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=78&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Information regarding related party transactions and director independence is incorporated by reference from the company's 2019 proxy statement. - All information required by this item is incorporated by reference from the company's 2019 Proxy Statement[432](index=432&type=chunk) [Principal Accountant Fees and Services](index=78&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) Information about the fees paid to and services provided by the principal independent registered public accounting firm is incorporated by reference from the company's 2019 proxy statement. - All information required by this item is incorporated by reference from the company's 2019 Proxy Statement[433](index=433&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=79&type=section&id=ITEM%2015.%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including consolidated financial statements, the auditor's report, and an index of all exhibits. - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K[435](index=435&type=chunk)[438](index=438&type=chunk) - Financial Statement Schedule II, detailing Valuation and Qualifying Accounts for 2016-2018, is included[437](index=437&type=chunk)[440](index=440&type=chunk)

Mastech Holdings, Inc. (NYSE:MHH) Q4 2018 Earnings Conference Call February 12, 2019 9:00 AM ET Company Participants Jennifer Ford-Lacey - Manager, Legal Affairs Jack Cronin - CFO Vivek Gupta - CEO Conference Call Participants Louis Moser - Maverick Investors Operator Greetings and welcome to the Mastech Digital call to discuss Fourth Quarter and Full Year 2018 Financial Results, taking place on February 12, 2019. At this time, all participants will be in a listen-only mode. A brief question-and-answer sess ...