Mastech Digital, Inc. (NYSE:MHH) Q3 2019 Earnings Conference Call October 29, 2019 9:00 AM ET Company Participants Jennifer Ford Lacey ??? Manager-Legal Affairs Jack Cronin ??? Chief Financial Officer Vivek Gupta ??? Chief Executive Officer Conference Call Participants Operator Greetings, and welcome to the Mastech Digital Incorporated Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, J ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the reported periods [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements for Mastech Digital, Inc., including statements of operations, comprehensive income, balance sheets, shareholders' equity, and cash flows for the periods ended June 30, 2019 and 2018, along with detailed notes explaining the company's business, accounting policies, segment performance, and other financial disclosures [Condensed Consolidated Statements of Operations (Unaudited)](index=3&type=section&id=(a)%20Condensed%20Consolidated%20Statements%20of%20Operations%20(Unaudited)) This section details the company's revenues, gross profit, operating income, net income, and earnings per share for the specified interim periods Consolidated Statements of Operations Summary (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $48,472 | $44,894 | $93,671 | $88,227 | | Gross profit | $12,054 | $10,892 | $22,889 | $21,153 | | Income from operations| $8,579 | $4,457 | $10,449 | $6,895 | | Net income | $5,958 | $2,817 | $6,922 | $4,197 | | Basic EPS | $0.54 | $0.26 | $0.63 | $0.38 | | Diluted EPS | $0.53 | $0.25 | $0.62 | $0.38 | - For the three months ended June 30, 2019, **revenues increased by 8% year-over-year to $48.472 million**, and **net income more than doubled to $5.958 million from $2.817 million in the prior year**. **Diluted EPS rose from $0.25 to $0.53**[10](index=10&type=chunk) - For the six months ended June 30, 2019, **revenues increased by 6% year-over-year to $93.671 million**, and **net income grew by 65% to $6.922 million** from **$4.197 million** in the prior year. **Diluted EPS increased from $0.38 to $0.62**[10](index=10&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Unaudited)](index=4&type=section&id=(b)%20Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) This section presents the company's net income and other comprehensive income components, leading to total comprehensive income for the interim periods Consolidated Statements of Comprehensive Income Summary (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $5,958 | $2,817 | $6,922 | $4,197 | | Total other comprehensive (loss), net of taxes | $(34) | $(84) | $(65) | $(35) |\ | Total comprehensive income | $5,924 | $2,733 | $6,857 | $4,162 | - **Total comprehensive income for the three months ended June 30, 2019, increased by 116.7% to $5.924 million**, compared to **$2.733 million** in the prior year, primarily driven by higher net income[13](index=13&type=chunk) - For the six months ended June 30, 2019, **total comprehensive income increased by 64.8% to $6.857 million**, up from **$4.162 million** in the same period of 2018[13](index=13&type=chunk) [Condensed Consolidated Balance Sheets (Unaudited)](index=5&type=section&id=(c)%20Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) This section provides a snapshot of the company's assets, liabilities, and shareholders' equity at the end of the reporting periods Consolidated Balance Sheet Summary (in thousands) | Metric (in thousands) | June 30, 2019 | December 31, 2018 | | :-------------------- | :------------ | :---------------- | | Cash and cash equivalents | $3,869 | $1,294 | | Total current assets | $41,009 | $40,695 | | Total assets | $96,374 | $92,584 | | Total current liabilities | $21,182 | $17,906 | | Total liabilities | $54,645 | $58,308 | | Total shareholders' equity | $41,729 | $34,276 | - **Cash and cash equivalents significantly increased to $3.869 million** as of June 30, 2019, from **$1.294 million** at December 31, 2018[16](index=16&type=chunk) - **Total assets grew by 4.1% to $96.374 million**, while **total liabilities decreased by 6.3% to $54.645 million**, leading to a **21.7% increase in total shareholders' equity to $41.729 million**[16](index=16&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity (Unaudited)](index=6&type=section&id=(d)%20Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20(Unaudited)) This section outlines changes in the company's common stock, additional paid-in capital, retained earnings, and treasury stock over the reporting period Consolidated Statements of Shareholders' Equity Summary (in thousands) | Metric (in thousands) | Balances, December 31, 2018 | Balances, June 30, 2019 | | :-------------------- | :-------------------------- | :---------------------- | | Common Stock | $126 | $127 | | Additional Paid-in Capital | $20,829 | $21,437 | | Retained Earnings | $17,614 | $24,536 | | Accumulated Other Comprehensive Income (loss) | $(119) | $(184) | | Treasury Stock | $(4,174) | $(4,187) | | Total Shareholders' Equity | $34,276 | $41,729 | - **Shareholders' equity increased by $7.453 million** from December 31, 2018, to June 30, 2019, primarily due to **net income of $6.922 million** and increases in additional paid-in capital from stock-based compensation and employee stock purchases[18](index=18&type=chunk) [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=7&type=section&id=(e)%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) This section details the cash flows from operating, investing, and financing activities, showing the net change in cash and cash equivalents Consolidated Statements of Cash Flows Summary (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash flows provided by (used in) operating activities | $8,753 | $(566) | | Net cash flows (used in) investing activities | $(501) | $(552) | | Net cash flows (used in) financing activities | $(5,722) | $(452) | | Net change in cash and cash equivalents | $2,575 | $(1,731) | | Cash and cash equivalents, end of period | $3,869 | $747 | - **Operating activities generated $8.753 million in cash** for the six months ended June 30, 2019, a significant improvement from a **cash outflow of $(0.566) million** in the prior year, driven by higher net income and improved working capital management[21](index=21&type=chunk) - **Net change in cash and cash equivalents was a positive $2.575 million** for the six months ended June 30, 2019, compared to a **negative $(1.731) million** in the prior year, resulting in an ending cash balance of **$3.869 million**[21](index=21&type=chunk) [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=8&type=section&id=(f)%20Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering business operations, accounting policies, and specific financial items [1. Description of Business and Basis of Presentation](index=8&type=section&id=1.%20Description%20of%20Business%20and%20Basis%20of%20Presentation) Mastech Digital, Inc. provides Digital Transformation IT Services, including data management and analytics, other digital transformation services (Salesforce.com, Digital Learning), and IT staffing for both digital and mainstream technologies. The financial statements are prepared in accordance with U.S. GAAP for interim information and reflect the consolidation of wholly-owned subsidiaries. The company operates in two reportable segments: Data and Analytics Services and IT Staffing Services - **Mastech Digital, Inc. is a provider of Digital Transformation IT Services**, offering data management and analytics, digital transformation services (Salesforce.com, Digital Learning), and IT staffing services[25](index=25&type=chunk) - **The company operates in two reportable segments: Data and Analytics Services** (project-based consulting, acquired via InfoTrellis in 2017) and **IT Staffing Services** (broad range of staffing in digital and mainstream technologies)[26](index=26&type=chunk)[27](index=27&type=chunk)[32](index=32&type=chunk) - **The company adopted ASU No. 2016-02, "Leases (Topic 842)" on January 1, 2019, which resulted in recording a lease right-of-use asset and related lease liability of $5.7 million**[30](index=30&type=chunk) [2. Revenue from Contracts with Customers](index=9&type=section&id=2.%20Revenue%20from%20Contracts%20with%20Customers) The company recognizes revenue primarily from time-and-material and fixed-price contracts for data and analytics, IT staffing, and digital transformation services. Revenue recognition is based on services performed or a cost-based input method for fixed-price contracts. The IT Staffing Services segment is the largest revenue contributor, and a single client, CGI, consistently accounts for over 10% of total revenue Revenue Breakdown by Segment and Contract Type (in thousands) | Segment/Contract Type (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Data and Analytics Services | | | | | | Time-and-material Contracts | $4,777 | $4,808 | $8,763 | $10,413 | | Fixed-price Contracts | $1,877 | $1,275 | $3,659 | $2,242 | | Subtotal Data and Analytics Services | $6,654 | $6,083 | $12,422 | $12,655 | | IT Staffing Services | | | | | | Time-and-material Contracts | $41,818 | $38,811 | $81,249 | $75,572 | | Fixed-price Contracts | — | — | — | — | | Subtotal IT Staffing Services | $41,818 | $38,811 | $81,249 | $75,572 | | Total Revenues | $48,472 | $44,894 | $93,671 | $88,227 | - **IT Staffing Services generated the majority of revenue, with $41.818 million (86.3%)** for the three months ended June 30, 2019, and **$81.249 million (86.7%)** for the six months ended June 30, 2019[39](index=39&type=chunk) - **CGI was a significant client, accounting for 10.9% and 11.4% of total revenue** for the three and six months ended June 30, 2019, respectively. The **top ten clients represented approximately 45% of total revenues** for both periods in 2019[40](index=40&type=chunk)[41](index=41&type=chunk) [3. Goodwill and Other Intangible Assets, net](index=10&type=section&id=3.%20Goodwill%20and%20Other%20Intangible%20Assets,%20net) Goodwill primarily stems from the 2015 acquisition of Hudson Global Resources Management's U.S. IT staffing business and the 2017 acquisition of InfoTrellis's services division. A $9.7 million goodwill impairment related to InfoTrellis was recorded in 2018 due to lower revenue recovery and increased investment needs. Identifiable intangible assets, such as client relationships and technology, are amortized over 3 to 12 years Goodwill by Segment (in thousands) | Segment (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------------- | :------------ | :---------------- | | IT Staffing Services | $8,427 | $8,427 | | Data and Analytics Services | $17,679 | $17,679 | | Total Goodwill | $26,106 | $26,106 | - **A goodwill impairment of $9.7 million** related to the InfoTrellis acquisition was recorded in 2018, reducing the Data and Analytics Services segment goodwill from **$27.4 million to $17.679 million**[43](index=43&type=chunk)[45](index=45&type=chunk) Intangible Assets Net Carrying Value (in thousands) | Intangible Asset (in thousands) | Net Carrying Value (June 30, 2019) | Net Carrying Value (December 31, 2018) | | :------------------------------ | :--------------------------------- | :------------------------------------- | | Client relationships | $19,256 | $20,284 | | Covenant-not-to-compete | $524 | $632 | | Trade name | $743 | $865 | | Technology | $871 | $957 | | Total Intangible Assets | $21,394 | $22,738 | - **Amortization expense for intangible assets was $0.672 million** for the three months and **$1.3 million** for the six months ended June 30, 2019[46](index=46&type=chunk) [4. Leases](index=11&type=section&id=4.%20Leases) The company adopted ASU No. 2016-02, "Leases (Topic 842)" on January 1, 2019, recognizing a lease right-of-use asset and related lease liability of $5.7 million. All leases are classified as operating leases, with an average initial term of five years. Rental expense for the three and six months ended June 30, 2019, was $0.4 million and $0.8 million, respectively - **Adoption of ASU 2016-02 on January 1, 2019, resulted in recording a lease right-of-use asset and related lease liability of $5.7 million**[49](index=49&type=chunk) Lease Metrics (in thousands) | Lease Metric (in thousands) | June 30, 2019 | | :-------------------------- | :------------ | | Long-term operating lease right-of-use assets | $4,980 | | Short-term operating lease liability | $1,339 | | Long-term operating lease liability | $3,736 | | Total Liabilities | $5,075 | - **Rental expense for the three and six months ended June 30, 2019, totaled $0.4 million and $0.8 million**, respectively, an increase from **$0.3 million and $0.6 million** in the prior year periods[52](index=52&type=chunk) [5. Commitments and Contingencies](index=12&type=section&id=5.%20Commitments%20and%20Contingencies) The company is involved in various lawsuits and administrative proceedings in the ordinary course of business. Management, in consultation with legal counsel, believes that the disposition of these matters will not have a material adverse effect on the company's financial position, results of operations, or cash flows - **Management believes that ongoing legal and administrative proceedings will not materially adversely affect the company's financial position, results of operations, or cash flows**[53](index=53&type=chunk) [6. Employee Benefit Plan](index=12&type=section&id=6.%20Employee%20Benefit%20Plan) Mastech Digital provides a 401(k) Employee Retirement Savings Plan covering substantially all U.S. salaried and W-2 hourly employees. For former Hudson IT employees, the company provides a matching contribution of 50% of the first 6% of contributed pay, subject to vesting. No matching contributions were provided for other employees during the reported periods - **The company provides a 401(k) plan for U.S. employees**, with **matching contributions for former Hudson IT employees (50% of the first 6% of contributed pay)**[54](index=54&type=chunk) Retirement Plan Contributions (in thousands) | Contributions (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total contributions to Retirement Plan | $16 | $22 | $35 | $43 | [7. Stock-Based Compensation](index=13&type=section&id=7.%20Stock-Based%20Compensation) The company's Stock Incentive Plan allows for grants of stock options, restricted share units, and stock awards. In May 2019, the plan was amended to increase available shares by 300,000 to 3.9 million. Stock-based compensation expense for the six months ended June 30, 2019, was $503,000. An Employee Stock Purchase Plan was also approved, with 25,793 shares issued in the first offering period - **The Stock Incentive Plan was amended in May 2019, increasing the total shares available for issuance to 3.9 million**[56](index=56&type=chunk) Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock-based compensation expense | $267 | $120 | $503 | $225 | - **The 2019 Employee Stock Purchase Plan was approved, and 25,793 shares were issued at $4.04 per share** during the first offering period ended June 30, 2019[59](index=59&type=chunk)[60](index=60&type=chunk) [8. Credit Facility](index=13&type=section&id=8.%20Credit%20Facility) The company has a $60 million credit facility with PNC Bank, comprising a $22.5 million revolving credit facility, a $30.5 million term loan, and a $7.0 million delayed draw term loan. Borrowings bear interest at variable rates (prime or LIBOR plus applicable margins). As of June 30, 2019, the company was in compliance with all financial covenants, with $10.0 million outstanding on the Revolver and $23.3 million on the Term Loan - **The company's credit facility totals $60 million**, including a **$22.5 million revolving credit facility**, a **$30.5 million term loan**, and a **$7.0 million delayed draw term loan**[61](index=61&type=chunk) - As of June 30, 2019, **outstanding borrowings were $10.0 million on the Revolver** (down from **$13.6 million** at Dec 31, 2018) and **$23.3 million on the Term Loan** (down from **$25.5 million** at Dec 31, 2018)[68](index=68&type=chunk) - **The company was in compliance with all financial covenants** under the Credit Agreement as of June 30, 2019[66](index=66&type=chunk) [9. Income Taxes](index=15&type=section&id=9.%20Income%20Taxes) Income before income taxes for the three and six months ended June 30, 2019, was $8.072 million and $9.388 million, respectively, with a significant portion from foreign operations. The effective tax rate for these periods was 26.2% and 26.3%, respectively, lower than the prior year due to a lower aggregate tax rate on foreign earnings. Unrecognized tax benefits related to uncertain tax positions totaled $228,000 as of June 30, 2019 Income Before Taxes by Geographic Region (in thousands) | Income Before Taxes (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Domestic | $1,219 | $1,820 | $2,166 | $3,117 | | Foreign | $6,853 | $2,030 | $7,222 | $2,659 | | Total | $8,072 | $3,850 | $9,388 | $5,776 | Income Tax Expense and Effective Tax Rate (in thousands) | Income Tax Expense (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total provision for income taxes | $2,114 | $1,033 | $2,466 | $1,579 | | Effective Tax Rate | 26.2% | 26.8% | 26.3% | 27.3% | - **The lower effective tax rate in 2019 periods was largely due to a lower aggregate tax rate on foreign earnings**[72](index=72&type=chunk) [10. Derivative Instruments and Hedging Activities](index=16&type=section&id=10.%20Derivative%20Instruments%20and%20Hedging%20Activities) The company uses an interest-rate swap to convert variable interest rates on its debt to a fixed rate of 1.99% on an initial notional amount of $15.0 million. These swaps are designated as cash flow hedging instruments. As of June 30, 2019, the fair value of the interest-rate swap contracts was a liability of $43,000 - **The company uses an interest-rate swap to hedge variable interest rate debt, fixing the rate at 1.99% on an initial notional amount of $15.0 million**[73](index=73&type=chunk) Derivative Fair Value (in thousands) | Derivative Fair Value (in thousands) | June 30, 2019 | December 31, 2018 | | :----------------------------------- | :------------ | :---------------- | | Interest-Rate Swap Contracts | $(43) | $106 | - **The estimated amount of pretax income expected to be reclassified from other comprehensive income into earnings within the next 12 months is approximately $60,000**[76](index=76&type=chunk) [11. Fair Value Measurements](index=17&type=section&id=11.%20Fair%20Value%20Measurements) The company applies ASC 820 for fair value measurements, categorizing inputs into Level 1, 2, or 3. Interest-rate swap contracts are measured at Level 2, while the contingent consideration liability and goodwill are measured at Level 3. A $6.1 million reduction to the contingent consideration liability was recorded during the three months ended June 30, 2019, as payment conditions were deemed unlikely to be fully satisfied Financial Asset (Liability) Fair Value (in thousands) | Financial Asset (Liability) (in thousands) | Fair Value as of June 30, 2019 | Fair Value as of December 31, 2018 | | :--------------------------------------- | :----------------------------- | :--------------------------------- | | Interest-Rate Swap Contracts | $(43) | $106 | | Contingent consideration liability | $— | $(6,069) | - **The contingent consideration liability was revalued, resulting in a $6.1 million reduction** during the three months ended June 30, 2019, as payment conditions were unlikely to be fully satisfied[81](index=81&type=chunk) Non-recurring Fair Value Measurements (in thousands) | Non-recurring Fair Value (in thousands) | Fair Value as of June 30, 2019 | Fair Value as of December 31, 2018 | | :-------------------------------------- | :----------------------------- | :--------------------------------- | | Goodwill | $26,106 | $26,106 | [12. Shareholders' Equity](index=18&type=section&id=12.%20Shareholders'%20Equity) The company purchases shares to satisfy employee tax obligations related to its Stock Incentive Plan. During the three and six months ended June 30, 2019, 2,574 shares were purchased at a price of $5.05 per share for this purpose - **The company purchased 2,574 shares at $5.05 per share** during the three and six months ended June 30, 2019, to satisfy employee tax obligations related to restricted stock vesting[84](index=84&type=chunk) [13. Earnings Per Share](index=19&type=section&id=13.%20Earnings%20Per%20Share) Basic earnings per share are calculated based on net income and weighted average common shares outstanding, while diluted EPS accounts for potential dilution from stock options using the treasury stock method. For the three and six months ended June 30, 2019, 1.0 million anti-dilutive stock options were excluded from the diluted EPS calculation - **1.0 million anti-dilutive stock options were excluded** from the diluted earnings per share computation for the three and six months ended June 30, 2019[87](index=87&type=chunk) [14. Business Segments and Geographic Information](index=19&type=section&id=14.%20Business%20Segments%20and%20Geographic%20Information) Mastech Digital operates in two segments: Data and Analytics Services (project-based consulting, marketed as Mastech InfoTrellis) and IT Staffing Services (staffing in digital and mainstream technologies, digital transformation services). The IT Staffing segment is the primary revenue driver, while Data and Analytics Services boasts higher gross margins. The majority of revenue is generated from the United States Segment Performance (in thousands) | Segment (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues: | | | | | | Data and analytics services | $6,654 | $6,083 | $12,422 | $12,655 | | IT staffing services | $41,818 | $38,811 | $81,249 | $75,572 | | Total revenues | $48,472 | $44,894 | $93,671 | $88,227 | | Gross Margin %: | | | | | | Data and analytics services | 46.1% | 42.2% | 45.8% | 43.3% | | IT staffing services | 21.5% | 21.4% | 21.2% | 20.7% | | Total gross margin % | 24.9% | 24.3% | 24.4% | 24.0% | | Segment operating income: | | | | | | Data and analytics services | $1,285 | $1,411 | $2,326 | $3,186 | | IT staffing services | $1,897 | $2,227 | $3,398 | $3,583 | - **Data and Analytics Services segment showed a higher gross margin (46.1% for Q2 2019)** compared to **IT Staffing Services (21.5% for Q2 2019)**[91](index=91&type=chunk) Geographic Revenue Breakdown (in thousands) | Geographic Revenue (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $47,208 | $43,536 | $91,318 | $85,553 | | Canada | $802 | $838 | $1,443 | $1,923 | | India and Other | $462 | $520 | $910 | $751 | | Total revenues | $48,472 | $44,894 | $93,671 | $88,227 | [15. Recently Issued Accounting Standards](index=20&type=section&id=15.%20Recently%20Issued%20Accounting%20Standards) The company adopted several new accounting standards on January 1, 2019, including ASU 2016-02 (Leases), ASU 2017-12 (Derivatives and Hedging), ASU 2018-02 (Income Statement—Reporting Comprehensive Income), ASU 2018-07 (Compensation—Stock Compensation), and ASU 2018-09 (Codification Improvements). The adoption of ASU 2016-02 resulted in a $5.7 million lease asset and liability, with an immaterial impact on retained earnings. Other adoptions had no material impact. Future ASUs on goodwill impairment, fair value measurement, and cloud computing arrangements are not expected to have a material impact - **The company adopted ASU No. 2016-02, "Leases (Topic 842)" on January 1, 2019, resulting in a $5.7 million lease asset and liability**, with an immaterial impact on retained earnings[93](index=93&type=chunk) - Other ASUs adopted on January 1, 2019, including those related to derivatives and hedging, comprehensive income, stock compensation, and codification improvements, had no material impact on the consolidated financial statements[94](index=94&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk)[98](index=98&type=chunk) - Upcoming ASUs on goodwill impairment (ASU 2017-04), fair value measurement (ASU 2018-13), and cloud computing arrangements (ASU 2018-15) are not expected to have a material impact[99](index=99&type=chunk)[100](index=100&type=chunk)[101](index=101&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=22&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial performance, condition, and future outlook. It details revenue and gross profit trends for both Data and Analytics Services and IT Staffing Services segments, analyzes changes in operating expenses, and discusses liquidity, capital resources, and economic factors influencing the business [Overview](index=22&type=section&id=Overview) This section discusses overview - **Mastech Digital is a provider of Digital Transformation IT Services** to large and medium-sized organizations, with offerings in data management and analytics, other digital transformation services (Salesforce.com, Digital Learning), and IT staffing[109](index=109&type=chunk) - **The company operates in two reporting segments: Data and Analytics Services** (marketed as Mastech InfoTrellis, project-based consulting) and **IT Staffing Services** (staffing in digital and mainstream technologies, other digital transformation services)[110](index=110&type=chunk) - Both segments serve various industry verticals, including financial services, government, healthcare, manufacturing, retail, technology, telecommunications, education, and transportation[111](index=111&type=chunk) [Economic Trends and Outlook](index=23&type=section&id=Economic%20Trends%20and%20Outlook) This section discusses economic trends and outlook - **The business outlook is highly correlated to general North American economic conditions**; increasing employment and economic expansion tend to increase demand for services[113](index=113&type=chunk) - **Continued growth in domestic job markets and an expanding U.S. economy are positive factors** for both IT staffing and data and analytics services in 2019[113](index=113&type=chunk) - **Supply-side pressures, particularly for skilled IT professionals in advanced technologies (social, cloud, analytics, mobility, automation), are expected to persist** in both business segments[113](index=113&type=chunk)[116](index=116&type=chunk) [Results of Operations for the Three Months Ended June 30, 2019 as Compared to the Three Months Ended June 30, 2018](index=23&type=section&id=Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20June%2030,%202019%20as%20Compared%20to%20the%20Three%20Months%20Ended%20June%2030,%202018) This section discusses results of operations for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 [Revenues](index=23&type=section&id=Revenues_3M) This section discusses revenues Revenues (in millions) | Revenues (in millions) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | | :--------------------- | :------------------------------- | :------------------------------- | | Data and Analytics Services | $6.7 | $6.1 | | IT Staffing Services | $41.8 | $38.8 | | Total revenues | $48.5 | $44.9 | - **total revenues increased by 8% year-over-year to $48.5 million**, with both **IT Staffing Services (8% growth)** and **Data and Analytics Services (9% growth)** contributing[117](index=117&type=chunk) - **IT Staffing Services revenue growth was driven by a higher level of billable consultants (1,113 vs. 1,078)** and a **higher average bill rate ($74.75 vs. $72.85 per hour)**[119](index=119&type=chunk)[120](index=120&type=chunk) [Gross Margins](index=24&type=section&id=Gross%20Margins_3M) This section discusses gross margins Gross Margin % | Gross Margin % | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | | :--------------------- | :------------------------------- | :------------------------------- | | Data and Analytics Services | 46.1% | 42.2% | | IT Staffing Services | 21.5% | 21.4% | | Total gross margin | 24.9% | 24.3% | - **Total gross profit increased by $1.2 million**, and **gross margin as a percentage of revenue improved by 60 basis points to 24.9%**, reflecting higher margins in both segments and a favorable revenue mix towards high-margin data and analytics services[121](index=121&type=chunk) - **Data and Analytics Services gross margin improved to 46.1% (from 42.2%)** due to lower bench costs and higher billable consultant utilization[122](index=122&type=chunk) [Selling, General and Administrative ("S,G&A") Expenses](index=24&type=section&id=Selling,%20General%20and%20Administrative%20(%22S,G%26A%22)%20Expenses_3M) This section discusses selling, general and administrative ("s,g&a") expenses S,G&A Expenses (in millions) | S,G&A Expenses (in millions) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | | :----------------------------- | :------------------------------- | :------------------------------- | | Data and Analytics Services Segment | | | | Sales and Marketing | $0.9 | $0.6 | | Operations | $0.2 | $0.1 | | Amortization of Acquired Intangible Assets | $0.5 | $0.5 | | Revaluation of Contingent Consideration | $(6.1) | $(9.1) | | Goodwill Impairment | — | $7.7 | | General & Administrative | $0.7 | $0.5 | | Subtotal Data and Analytics Services | $(3.8) | $0.3 | | IT Staffing Services Segment | | | | Sales and Marketing | $2.3 | $2.1 | | Operations | $2.6 | $2.2 | | Amortization of Acquired Intangible Assets | $0.2 | $0.2 | | General & Administrative | $2.2 | $1.6 | | Subtotal IT Staffing Services | $7.3 | $6.1 | | Total S,G&A Expenses | $3.5 | $6.4 | - **Total S,G&A expenses decreased to $3.5 million from $6.4 million**, primarily due to a **$6.1 million credit from the revaluation of contingent consideration in 2019**, compared to a $1.4 million net credit (revaluation less goodwill impairment) in 2018[124](index=124&type=chunk)[125](index=125&type=chunk) - Excluding revaluation and amortization, **S,G&A as a percentage of total revenues increased to 18.4% in 2019 from 15.8% in 2018**, driven by higher sales, operations, and general & administrative expenses across both segments[125](index=125&type=chunk)[129](index=129&type=chunk) [Other Income / (Expense) Components](index=25&type=section&id=Other%20Income%20/%20(Expense)%20Components_3M) This section discusses other income / (expense) components - **Other Income / (Expense) for Q2 2019 consisted of interest expense of $(468,000)** and **foreign exchange losses of $(39,000)**, an improvement from Q2 2018's **interest expense of $(615,000)** due to lower outstanding borrowings[126](index=126&type=chunk) [Income Tax Expense](index=25&type=section&id=Income%20Tax%20Expense_3M) This section discusses income tax expense - **Income tax expense for Q2 2019 was $2.1 million**, with an **effective tax rate of 26.2%**, lower than the **26.8% rate in Q2 2018**, primarily due to a lower aggregate tax rate on foreign earnings[127](index=127&type=chunk) [Results of Operations for the Six Months Ended June 30, 2019 as Compared to the Six Months Ended June 30, 2018](index=25&type=section&id=Results%20of%20Operations%20for%20the%20Six%20Months%20Ended%20June%2030,%202019%20as%20Compared%20to%20the%20Six%20Months%20Ended%20June%2030,%202018) This section discusses results of operations for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 [Revenues](index=26&type=section&id=Revenues_6M) This section discusses revenues Revenues (in millions) | Revenues (in millions) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------- | :----------------------------- | :----------------------------- | | Data and Analytics Services | $12.4 | $12.7 | | IT Staffing Services | $81.3 | $75.5 | | Total revenues | $93.7 | $88.2 | - **total revenues increased by 6% year-over-year to $93.7 million**, driven by **8% growth in IT Staffing Services**, partially offset by a **2% decline in Data and Analytics Services**[128](index=128&type=chunk) - **IT Staffing Services revenue growth was due to a higher level of billable consultants and a higher average bill rate**, while **Data and Analytics Services saw a decline due to project ends in late 2018**, though sequential growth strengthened in Q2 2019[129](index=129&type=chunk)[130](index=130&type=chunk) [Gross Margins](index=26&type=section&id=Gross%20Margins_6M) This section discusses gross margins Gross Margin % | Gross Margin % | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------------- | :----------------------------- | :----------------------------- | | Data and Analytics Services | 45.8% | 43.3% | | IT Staffing Services | 21.2% | 20.7% | | Total gross margin | 24.4% | 24.0% | - **Total gross profit increased to $22.9 million**, and **gross margin as a percentage of revenue improved by 40 basis points to 24.4%**, reflecting higher margins in both segments[131](index=131&type=chunk) - **Data and Analytics Services gross margin improved to 45.8% (from 43.3%)** due to lower bench costs and higher billable consultant utilization[132](index=132&type=chunk) [Selling, General and Administrative ("S,G&A") Expenses](index=26&type=section&id=Selling,%20General%20and%20Administrative%20(%22S,G%26A%22)%20Expenses_6M) This section discusses selling, general and administrative ("s,g&a") expenses S,G&A Expenses (in millions) | S,G&A Expenses (in millions) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------- | :----------------------------- | :----------------------------- | | Data and Analytics Services Segment | | | | Sales and Marketing | $1.9 | $1.2 | | Operations | $0.3 | $0.2 | | Amortization of Acquired Intangible Assets | $1.0 | $1.0 | | Revaluation of Contingent Consideration | $(6.1) | $(9.1) | | Goodwill Impairment | — | $7.7 | | General & Administrative | $1.2 | $0.9 | | Subtotal Data and Analytics Services | $(1.7) | $1.9 | | IT Staffing Services Segment | | | | Sales and Marketing | $4.4 | $4.2 | | Operations | $5.0 | $4.3 | | Amortization of Acquired Intangible Assets | $0.4 | $0.4 | | General & Administrative | $4.3 | $3.5 | | Subtotal IT Staffing Services | $14.1 | $12.4 | | Total S,G&A Expenses | $12.4 | $14.3 | - **Total S,G&A expenses decreased to $12.4 million from $14.3 million**, primarily due to a **$6.1 million credit from the revaluation of contingent consideration in 2019**, compared to a $1.4 million net credit (revaluation less goodwill impairment) in 2018[134](index=134&type=chunk)[136](index=136&type=chunk) - Excluding revaluation and amortization, **S,G&A as a percentage of total revenues increased to 18.2% in 2019 from 16.2% in 2018**, driven by higher sales, operations, and general & administrative expenses across both segments[136](index=136&type=chunk)[143](index=143&type=chunk) [Other Income / (Expense) Components](index=27&type=section&id=Other%20Income%20/%20(Expense)%20Components_6M) This section discusses other income / (expense) components - **Other Income / (Expense) for the six months ended June 30, 2019, consisted of interest expense of $(1.0 million)** and **foreign exchange losses of $(54,000)**, an improvement from the prior year's **interest expense of $(1.1 million)** due to lower borrowings[137](index=137&type=chunk) [Income Tax Expense](index=27&type=section&id=Income%20Tax%20Expense_6M) This section discusses income tax expense - **Income tax expense for the six months ended June 30, 2019, was $2.5 million**, with an **effective tax rate of 26.3%**, lower than the **27.3% rate in the prior year**, primarily due to a lower aggregate tax rate on foreign earnings[138](index=138&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses liquidity and capital resources - As of June 30, 2019, the company had **bank debt, net of cash, of $29.4 million** and approximately **$12.5 million of unused borrowing capacity** under its credit facility[139](index=139&type=chunk) - **Cash provided by operating activities for the six months ended June 30, 2019, significantly improved to $8.8 million** from a **cash outflow of $(0.6) million** in the prior year, driven by higher net income and improved accounts receivable collections[142](index=142&type=chunk)[144](index=144&type=chunk) - **Cash used in financing activities for the six months ended June 30, 2019, totaled $(5.7) million**, primarily due to net debt payments on the term loan and revolving credit facility[146](index=146&type=chunk) [Off-Balance Sheet Arrangements](index=28&type=section&id=Off-Balance%20Sheet%20Arrangements) This section discusses off-balance sheet arrangements - The company does not have any off-balance sheet arrangements[147](index=147&type=chunk) [Inflation](index=28&type=section&id=Inflation) This section discusses inflation - **Management believes inflation did not significantly impact results of operations** for the periods presented and aims to minimize its effects by controlling costs and adjusting billing rates[148](index=148&type=chunk) [Seasonality](index=28&type=section&id=Seasonality) This section discusses seasonality - **Operations are generally not affected by seasonal fluctuations**, but **consultant billable hours are impacted by national holidays and vacation policies, leading to lower utilization and higher benefit costs in the fourth quarter**[149](index=149&type=chunk) [Recently Issued Accounting Standards](index=28&type=section&id=Recently%20Issued%20Accounting%20Standards_MD%26A) This section discusses recently issued accounting standards - Recent accounting pronouncements are described in Note 15 to the accompanying financial statements[150](index=150&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=28&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's cash flows and earnings are subject to fluctuations from currency exchange rate variations, particularly due to its global recruitment and delivery centers. While the company previously engaged in currency hedging, it has not done so since 2016. Interest rate risk is managed through an interest-rate swap - **The company's cash flows and earnings are subject to fluctuations due to currency exchange rate variations**, stemming from its global recruitment and delivery centers[151](index=151&type=chunk) - **The company has not engaged in currency hedging activities since 2016**, despite previous attempts to limit exposure to Indian rupee fluctuations[151](index=151&type=chunk) - **Interest rate risk is managed through an interest-rate swap**, as detailed in Note 10[73](index=73&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=28&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2019, concluding they were effective. There have been no material changes in internal control over financial reporting during the quarter - **The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective** as of June 30, 2019[153](index=153&type=chunk) - **There has been no material change in the company's internal control over financial reporting** during the quarter ended June 30, 2019[155](index=155&type=chunk) [PART II. OTHER INFORMATION](index=30&type=section&id=PART%20II%20OTHER%20INFORMATION) This section includes disclosures on legal proceedings, risk factors, equity security sales, and required exhibits [ITEM 1. LEGAL PROCEEDINGS](index=30&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is involved in various lawsuits and administrative proceedings in the ordinary course of business. Management believes, after consulting with legal counsel, that the resolution of these matters will not have a material adverse effect on the company's financial position, results of operations, or cash flows - **Management believes that the disposition of ongoing legal and administrative proceedings will not have a material adverse effect on the company's financial position, results of operations, or cash flows**[157](index=157&type=chunk) [ITEM 1A. RISK FACTORS](index=30&type=section&id=ITEM%201A.%20RISK%20FACTORS) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - **No material changes to risk factors have occurred** since the Annual Report on Form 10-K for the year ended December 31, 2018[158](index=158&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=30&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) During the quarter ended June 30, 2019, the company repurchased 2,574 shares of Common Stock at an average price of $5.05 per share. These repurchases were solely to satisfy employee tax obligations related to the vesting of restricted stock under the company's Stock Incentive Plan, and there was no publicly announced repurchase program in place Share Repurchase Details | Period | Total Number of Shares Purchased | Average Price per Share | | :--------------------------- | :------------------------------- | :---------------------- | | June 1, 2019 — June 30, 2019 | 2,574 | $5.05 | | Total | 2,574 | $5.05 | - **All shares purchased were to satisfy employee tax obligations** related to the vesting of restricted stock under the Company's Stock Incentive Plan[160](index=160&type=chunk) - **As of June 30, 2019, the Company does not have a publicly announced repurchase program in place**[159](index=159&type=chunk) [ITEM 6. EXHIBITS](index=31&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the Form 10-Q, including amendments to the Stock Incentive Plan, certifications by the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL-related documents - Exhibits include the **Third Amendment to Mastech Digital, Inc. Stock Incentive Plan, dated May 15, 2019**[162](index=162&type=chunk) - **Certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and Chief Financial Officer are filed**[162](index=162&type=chunk) - **XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are included**[162](index=162&type=chunk) [SIGNATURES](index=32&type=section&id=SIGNATURES) The report is duly signed on behalf of Mastech Digital, Inc. by Vivek Gupta, Chief Executive Officer, and John J. Cronin, Jr., Chief Financial Officer, on August 9, 2019 - **The report was signed by Vivek Gupta, Chief Executive Officer, and John J. Cronin, Jr., Chief Financial Officer, on August 9, 2019**[164](index=164&type=chunk)[166](index=166&type=chunk)

Mastech Digital, Inc. (NYSE:MHH) Q2 2019 Earnings Conference Call July 31, 2019 9:00 AM ET Company Participants Jennifer Lacey - Head, Legal & Admin John Cronin - CFO & Corporate Secretary Vivek Gupta - President, CEO & Director Conference Call Participants Operator Greetings, and welcome to the Mastech Digital, Inc. Q2 earnings call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Lacey, Manager of Legal Affairs for Mastech D ...

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Mastech Digital, Inc. for the three months ended March 31, 2019 [ITEM 1. FINANCIAL STATEMENTS](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Mastech Digital, Inc. for the three months ended March 31, 2019 and 2018, including statements of operations, comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, and financial performance [Condensed Consolidated Statements of Operations (Unaudited)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Unaudited)) This statement provides a summary of the company's revenues, expenses, and net income for the three months ended March 31, 2019 and 2018 **Condensed Consolidated Statements of Operations (Unaudited):** | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Revenues | $45,199 | $43,333 | +4.3% | | Cost of revenues | $34,364 | $33,072 | +3.9% | | Gross profit | $10,835 | $10,261 | +5.6% | | Selling, general and administrative expense | $8,965 | $7,823 | +14.6% | | Income from operations | $1,870 | $2,438 | -23.2% | | Interest income (expense), net | $(539) | $(473) | +13.9% | | Other income (expense), net | $(15) | $(39) | -61.5% | | Income before income taxes | $1,316 | $1,926 | -31.6% | | Income tax expense | $352 | $546 | -35.6% | | Net income | $964 | $1,380 | -30.1% | | Basic EPS | $0.09 | $0.13 | -30.8% | | Diluted EPS | $0.09 | $0.12 | -25.0% | | Weighted average common shares outstanding (Basic) | 10,998 | 10,922 | +0.7% | | Weighted average common shares outstanding (Diluted) | 11,218 | 11,058 | +1.4% | [Condensed Consolidated Statements of Comprehensive Income (Unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) This statement details the net income and other comprehensive income components, such as unrealized gains/losses on interest-rate swaps and foreign currency adjustments, for the three months ended March 31, 2019 and 2018 **Condensed Consolidated Statements of Comprehensive Income (Unaudited):** | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net income | $964 | $1,380 | -30.1% | | Net unrealized gain (loss) on interest-rate swap contracts | $(54) | $122 | -144.3% | | Foreign currency translation adjustments | $9 | $(42) | +121.4% | | Total pretax net unrealized gain (loss) | $(45) | $80 | -156.3% | | Income tax expense (benefit) | $(14) | $31 | -145.2% | | Total other comprehensive income (loss), net of taxes | $(31) | $49 | -163.3% | | Total comprehensive income | $933 | $1,429 | -34.7% | [Condensed Consolidated Balance Sheets (Unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) This statement presents the company's assets, liabilities, and shareholders' equity as of March 31, 2019, and December 31, 2018, providing a snapshot of its financial position **Condensed Consolidated Balance Sheets (Unaudited):** | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | Change | | :------------------------------------------ | :------------------------------ | :------------------------------- | :------- | | Cash and cash equivalents | $1,548 | $1,294 | +$254 | | Accounts receivable, net | $28,960 | $28,913 | +$47 | | Unbilled receivables | $10,171 | $9,167 | +$1,004 | | Total current assets | $41,850 | $40,695 | +$1,155 | | Net equipment, enterprise software, and leasehold improvements | $2,445 | $2,208 | +$237 | | Operating lease right-of-use assets | $5,328 | $— | +$5,328 | | Goodwill, net of impairment | $26,106 | $26,106 | $0 | | Intangible assets, net | $22,066 | $22,738 | -$672 | | **Total assets** | **$98,718** | **$92,584** | **+$6,134** | | Current portion of long-term debt | $4,575 | $4,575 | $0 | | Current portion of contingent consideration liability | $6,069 | $— | +$6,069 | | Total current liabilities | $25,441 | $17,906 | +$7,535 | | Long-term debt, less current portion, net | $33,667 | $34,129 | -$462 | | Long-term operating lease liability, less current portion | $3,961 | $— | +$3,961 | | **Total liabilities** | **$63,273** | **$58,308** | **+$4,965** | | Total shareholders' equity | $35,445 | $34,276 | +$1,169 | | **Total liabilities and shareholders' equity** | **$98,718** | **$92,584** | **+$6,134** | [Condensed Consolidated Statements of Shareholders' Equity (Unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20(Unaudited)) This statement outlines the changes in each component of shareholders' equity, including net income, other comprehensive income, and stock-based compensation, for the three months ended March 31, 2019 **Condensed Consolidated Statements of Shareholders' Equity (Unaudited):** | Metric | Balances, December 31, 2018 (in thousands) | Net Income (in thousands) | Other Comprehensive (Loss), net of taxes (in thousands) | Stock-based Compensation Expense (in thousands) | Balances, March 31, 2019 (in thousands) | | :-------------------------- | :--------------------------------------- | :------------------------ | :------------------------------------------------------ | :-------------------------------------------- | :-------------------------------------- | | Common Stock | $126 | $— | $— | $— | $126 | | Additional Paid-in Capital | $20,829 | $— | $— | $236 | $21,065 | | Retained Earnings | $17,614 | $964 | $— | $— | $18,578 | | Treasury Stock | $(4,174) | $— | $— | $— | $(4,174) | | Accumulated Other Comprehensive Income (loss) | $(119) | $— | $(31) | $— | $(150) | | **Total Shareholders' Equity** | **$34,276** | **$964** | **$(31)** | **$236** | **$35,445** | [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) This statement categorizes cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2019 and 2018 **Condensed Consolidated Statements of Cash Flows (Unaudited):** | Cash Flow Activity | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net income | $964 | $1,380 | -30.1% | | Depreciation and amortization | $839 | $748 | +12.2% | | Stock-based compensation expense | $236 | $105 | +124.8% | | Accounts receivable and unbilled receivables | $(1,051) | $(2,909) | +63.9% | | Net cash flows provided by (used in) operating activities | $1,128 | $(1,990) | +$3,118 | | Capital expenditures | $(404) | $(130) | +210.8% | | Net cash flows (used in) investing activities | $(395) | $(169) | +133.7% | | Borrowings on revolving credit facility, net | $656 | $1,941 | -66.2% | | (Repayments) on term loan facility | $(1,144) | $(953) | +20.0% | | Net cash flows provided by (used in) financing activities | $(488) | $990 | -149.3% | | Net change in cash and cash equivalents | $254 | $(1,211) | +$1,465 | | Cash and cash equivalents, end of period | $1,548 | $1,267 | +22.2% | [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) These notes provide detailed explanations and additional information supporting the condensed consolidated financial statements, covering accounting policies, business segments, and other financial disclosures [1. Description of Business and Basis of Presentation](index=9&type=section&id=Note%201.%20Description%20of%20Business%20and%20Basis%20of%20Presentation) This note describes Mastech Digital, Inc.'s business as a provider of Digital Transformation IT Services and the basis for preparing its interim financial statements - Mastech Digital, Inc. is a provider of Digital Transformation IT Services. Its offerings include data management and analytics, other digital transformation services (Salesforce.com and Digital Learning), and IT staffing services for both digital and mainstream technologies[25](index=25&type=chunk) - The company operates in two reportable segments: Data and Analytics Services (project-based consulting, acquired InfoTrellis) and IT Staffing Services (staffing in digital and mainstream technologies)[25](index=25&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk) - Financial statements are prepared in accordance with U.S. GAAP for interim financial information, and management makes estimates and assumptions that affect reported amounts[28](index=28&type=chunk) [2. Revenue from Contracts with Customers](index=10&type=section&id=Note%202.%20Revenue%20from%20Contracts%20with%20Customers) This note details the company's revenue recognition policies and disaggregates revenue by segment, contract type, and geography for the periods presented - Revenue is recognized on time-and-material contracts as services are performed and expenses incurred, and on fixed-price contracts using a cost-based input method to measure progress[33](index=33&type=chunk)[35](index=35&type=chunk) **Revenue Disaggregation by Segment and Contract Type (in millions):** | Segment / Contract Type | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :---------------------- | :---------------------------- | :---------------------------- | | **Data and Analytics Services Segment** | | | | Time-and-material Contracts | $4.0 | $5.6 | | Fixed-price Contracts | $1.8 | $1.0 | | Subtotal Data and Analytics Services | $5.8 | $6.6 | | **IT Staffing Services Segment** | | | | Time-and-material Contracts | $39.4 | $36.7 | | Fixed-price Contracts | $— | $— | | Subtotal IT Staffing Services | $39.4 | $36.7 | | **Total Revenues** | **$45.2** | **$43.3** | - Client concentration remains significant: one client (CGI) accounted for **11.9% of total revenues** in Q1 2019 (**12.1% in Q1 2018**), and the top ten clients represented approximately **46% of total revenues** in Q1 2019 (**45% in Q1 2018**)[39](index=39&type=chunk)[41](index=41&type=chunk) **Revenue Disaggregation by Geography (in millions):** | Geography | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :---------- | :---------------------------- | :---------------------------- | | United States | $44.1 | $42.0 | | Canada | $0.6 | $1.1 | | India and other | $0.5 | $0.2 | | **Total** | **$45.2** | **$43.3** | [3. Goodwill and Other Intangible Assets, net](index=11&type=section&id=Note%203.%20Goodwill%20and%20Other%20Intangible%20Assets,%20net) This note provides information on the carrying values of goodwill and other identifiable intangible assets, along with details on impairment and amortization expenses **Goodwill by Operating Segment (in thousands):** | Segment | March 31, 2019 | December 31, 2018 | | :-------------------- | :------------- | :---------------- | | IT Staffing Services | $8,427 | $8,427 | | Data and Analytics Services | $17,679 | $17,679 | | **Total Goodwill** | **$26,106** | **$26,106** | - A goodwill impairment of **$9.7 million** related to the InfoTrellis acquisition was recorded in fiscal year 2018 due to lower revenue recovery and additional investments[43](index=43&type=chunk)[46](index=46&type=chunk) **Identifiable Intangible Assets, Net Carrying Value (in thousands):** | Intangible Asset | March 31, 2019 | December 31, 2018 | | :----------------------- | :------------- | :---------------- | | Client relationships | $19,770 | $20,284 | | Covenant-not-to-compete | $578 | $632 | | Trade name | $804 | $865 | | Technology | $914 | $957 | | **Total Intangible Assets** | **$22,066** | **$22,738** | - Amortization expense for Q1 2019 was **$672,000** (Q1 2018: **$693,000**), with estimated aggregate amortization expense for 2019 at **$2,689,000**[47](index=47&type=chunk)[48](index=48&type=chunk) [4. Leases](index=12&type=section&id=Note%204.%20Leases) This note discusses the adoption of new lease accounting standards, including the recognition of right-of-use assets and lease liabilities, and provides future minimum rental payment schedules - The company adopted ASU No. 2016-02, 'Leases (Topic 842),' on **January 1, 2019**, using the additional transition method[50](index=50&type=chunk) - The adoption resulted in recording a lease right-of-use asset and related lease liability of **$5.7 million** as of January 1, 2019, with an immaterial impact on retained earnings and no expected material impact on future net earnings[50](index=50&type=chunk) **Lease Asset and Liability Classification (March 31, 2019, in thousands):** | Item | Amount | | :-------------------------------- | :----- | | Long-term operating lease right-of-use assets | $5,328 | | Short-term operating lease liability | $1,367 | | Long-term operating lease liability | $3,961 | | **Total Liabilities** | **$5,328** | **Future Minimum Rental Payments (as of March 31, 2019, in thousands):** | Year | Amount | | :--- | :----- | | 2019 | $1,191 | | 2020 | $1,530 | | 2021 | $1,053 | | 2022 | $1,036 | | 2023 | $1,041 | | Thereafter | $208 | | **Total** | **$6,059** | | Less: Imputed interest | $(731) | | **Present value of lease liabilities** | **$5,328** | [5. Commitments and Contingencies](index=14&type=section&id=Note%205.%20Commitments%20and%20Contingencies) This note addresses the company's involvement in various lawsuits and administrative proceedings, and management's assessment of their potential financial impact - The company is involved in various lawsuits and administrative proceedings in the ordinary course of business[54](index=54&type=chunk) - Management believes, after consultation with legal counsel, that the disposition of these matters should not have a material adverse effect on the company's financial position, results of operations, or cash flows[54](index=54&type=chunk) [6. Employee Benefit Plan](index=14&type=section&id=Note%206.%20Employee%20Benefit%20Plan) This note describes the company's 401(k) Retirement Plan, including eligibility and matching contribution policies for different employee groups - The company provides a 401(k) Retirement Plan covering substantially all U.S. based salaried employees and W-2 hourly employees from the Hudson IT acquisition[55](index=55&type=chunk) - For former Hudson IT employees, the company provides a matching contribution of **50% of the first 6% of contributed pay**. Total contributions for these employees were approximately **$19,000** in Q1 2019 and **$21,000** in Q1 2018[55](index=55&type=chunk) - No matching contributions were provided for all other employees for the three months ended March 31, 2019 and 2018[55](index=55&type=chunk) [7. Stock-Based Compensation](index=14&type=section&id=Note%207.%20Stock-Based%20Compensation) This note outlines the company's stock incentive plans, including grants of restricted share units and stock options, and the associated compensation expense - The Stock Incentive Plan allows for grants of stock options, stock appreciation rights, performance shares, or stock awards, with up to **3,600,000 shares** allocated[56](index=56&type=chunk) - In Q1 2019, the company granted **16,365 restricted share units** and **498,000 stock options** at an average strike price of **$6.66**. An additional **55,000 stock options** are contingent on shareholder approval[56](index=56&type=chunk) - Stock-based compensation expense was **$236,000** in Q1 2019, an increase from **$105,000** in Q1 2018[57](index=57&type=chunk) - The 2019 Employee Stock Purchase Plan, subject to shareholder approval, makes **600,000 shares** available for purchase by eligible employees at **85% of the lesser of the fair market value** on the first or last day of the offering period. No shares were issued under this plan as of March 31, 2019[58](index=58&type=chunk)[59](index=59&type=chunk)[60](index=60&type=chunk) [8. Credit Facility](index=14&type=section&id=Note%208.%20Credit%20Facility) This note details the company's credit agreement with PNC Bank, including the revolving credit facility, term loans, interest rates, collateral, and compliance with covenants - The company has a **$60 million** Credit Agreement with PNC Bank, consisting of a **$22.5 million** revolving credit facility (Revolver), a **$30.5 million** term loan, and a **$7.0 million** delayed draw term loan[61](index=61&type=chunk) - Borrowings bear interest at variable rates (PNC's prime rate or LIBOR plus a margin). The company pledged substantially all assets as collateral[65](index=65&type=chunk)[66](index=66&type=chunk) - As of March 31, 2019, the company was in compliance with all provisions under the facility[66](index=66&type=chunk) **Outstanding Borrowings (in millions):** | Facility | March 31, 2019 | December 31, 2018 | | :-------------------------- | :------------- | :---------------- | | Revolving credit facility | $14.2 | $13.6 | | Term loan facility | $24.4 | $25.5 | | **Total Outstanding Borrowings** | **$38.6** | **$39.1** | | Unused borrowing capacity (Revolver) | $8.3 | $9.0 | [9. Income Taxes](index=17&type=section&id=Note%209.%20Income%20Taxes) This note provides a breakdown of income before taxes by geography, the provision for income taxes, and the effective tax rate, along with information on unrecognized tax benefits **Income Before Income Taxes by Geography (in thousands):** | Geography | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :---------- | :---------------------------- | :---------------------------- | | Domestic | $947 | $1,297 | | Foreign | $369 | $629 | | **Total** | **$1,316** | **$1,926** | **Provision for Income Taxes (in thousands):** | Provision Type | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :--------------- | :---------------------------- | :---------------------------- | | Current | $433 | $585 | | Deferred | $(81) | $(39) | | **Total** | **$352** | **$546** | - The effective tax rate was **26.7%** in Q1 2019, down from **28.4%** in Q1 2018, primarily due to a lower U.S. state income tax rate[72](index=72&type=chunk)[120](index=120&type=chunk) - Unrecognized tax benefits related to uncertain tax positions totaled **$254,000** as of March 31, 2019, with a potential reduction of approximately **$30,000** in the next twelve months due to the expiration of statutes of limitation[72](index=72&type=chunk) [10. Derivative Instruments and Hedging Activities](index=18&type=section&id=Note%2010.%20Derivative%20Instruments%20and%20Hedging%20Activities) This note describes the company's use of interest-rate swap contracts to manage interest rate risk, including their notional amounts, fair values, and impact on comprehensive income - The company uses interest-rate swap contracts to convert variable interest rates on its debt to a fixed rate of **1.99%**, designated as cash flow hedging instruments[73](index=73&type=chunk) - Notional amounts for the swap contracts were **$12.0 million** at March 31, 2019, and **$12.6 million** at December 31, 2018[73](index=73&type=chunk) **Fair Value of Interest-Rate Swap Contracts (in thousands):** | Date | Fair Value (Asset) | | :---------------- | :----------------- | | March 31, 2019 | $51 | | December 31, 2018 | $106 | - A net unrealized loss of **$(54) thousand** on interest-rate swap contracts was recognized in Other Comprehensive Income (OCI) for Q1 2019. Approximately **$60,000** of pretax income is expected to be reclassified from OCI into earnings within the next 12 months[75](index=75&type=chunk)[76](index=76&type=chunk) [11. Fair Value Measurements](index=19&type=section&id=Note%2011.%20Fair%20Value%20Measurements) This note explains the company's application of fair value measurement standards, categorizing assets and liabilities into a three-tier hierarchy based on input observability - The company applies ASC 820, 'Fair Value Measurements and Disclosures,' using a three-tier hierarchy (Level 1, 2, 3) based on observability of inputs[77](index=77&type=chunk)[78](index=78&type=chunk) **Fair Value Measurements (as of March 31, 2019, in thousands):** | Item | Level 1 | Level 2 | Level 3 | Total | | :-------------------------- | :------ | :------ | :-------- | :------ | | Interest-Rate Swap Contracts | $— | $51 | $— | $51 | | Contingent consideration liability | $— | $— | $(6,069) | $(6,069) | - Interest-rate swap contracts are measured at **Level 2** (based on quoted prices from commercial banks), and the contingent consideration liability is measured at **Level 3** (estimated using a probability-weighted simulation model)[79](index=79&type=chunk) [12. Shareholders' Equity](index=20&type=section&id=Note%2012.%20Shareholders'%20Equity) This note provides information regarding transactions affecting shareholders' equity, specifically noting no share repurchases for employee tax obligations during the reported periods - The company did not purchase any shares to satisfy employee tax obligations related to its Stock Incentive Plan during the three months ended March 31, 2019, or 2018[80](index=80&type=chunk) [13. Earnings Per Share](index=20&type=section&id=Note%2013.%20Earnings%20Per%20Share) This note explains the computation of basic and diluted earnings per share, including the treatment of potentially dilutive securities - Basic EPS is computed based on net income and weighted average common shares outstanding, while diluted EPS reflects potential dilution from stock options using the treasury stock method[81](index=81&type=chunk) - For both Q1 2019 and Q1 2018, **180,000 anti-dilutive stock options** were excluded from the computation of diluted earnings per share[82](index=82&type=chunk) [14. Business Segments and Geographic Information](index=20&type=section&id=Note%2014.%20Business%20Segments%20and%20Geographic%20Information) This note presents financial information disaggregated by the company's two reportable segments and by geographic region, including revenues, gross margins, and total assets - The company's reportable segments are Data and Analytics Services (project-based consulting, marketed as Mastech InfoTrellis) and IT Staffing Services (staffing in digital and mainstream technologies, digital transformation services)[83](index=83&type=chunk)[84](index=84&type=chunk)[86](index=86&type=chunk) **Segment Revenues (in thousands):** | Segment | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | Change (YoY) | | :------------------------ | :---------------------------- | :---------------------------- | :----------- | | Data and analytics services | $5,768 | $6,572 | -12.3% | | IT staffing services | $39,431 | $36,761 | +7.3% | | **Total revenues** | **$45,199** | **$43,333** | **+4.3%** | **Segment Gross Margin %:** | Segment | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | Change (YoY) | | :------------------------ | :---------------------------- | :---------------------------- | :----------- | | Data and analytics services | 45.5% | 44.3% | +1.2 pp | | IT staffing services | 20.8% | 20.0% | +0.8 pp | | **Total gross margin** | **24.0%** | **23.7%** | **+0.3 pp** | **Total Assets by Segment (in thousands):** | Segment | March 31, 2019 | December 31, 2018 | | :------------------------ | :------------- | :---------------- | | Data and analytics services | $42,800 | $43,182 | | IT staffing services | $55,918 | $49,402 | | **Total assets** | **$98,718** | **$92,584** | **Geographic Revenues (in thousands):** | Geography | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :---------- | :---------------------------- | :---------------------------- | | United States | $44,110 | $42,017 | | Canada | $641 | $1,085 | | India and Other | $448 | $231 | | **Total revenues** | **$45,199** | **$43,333** | [15. Recently Issued Accounting Standards](index=22&type=section&id=Note%2015.%20Recently%20Issued%20Accounting%20Standards) This note discusses the adoption and impact of new accounting standards, including ASU No. 2016-02 on leases, and other ASUs not yet adopted - The company adopted ASU No. 2016-02, 'Leases (Topic 842),' on **January 1, 2019**, resulting in the recognition of a **$5.7 million** lease right-of-use asset and related lease liability, with an immaterial impact on retained earnings and no expected material impact on future net earnings[89](index=89&type=chunk) - Other ASUs adopted on **January 1, 2019**, including ASU 2017-12 (Derivatives and Hedging), ASU 2018-02 (Income Statement—Reporting Comprehensive Income), ASU 2018-07 (Compensation—Stock Compensation), and ASU 2018-09 (Codification Improvements), had no material impact on the consolidated financial statements[90](index=90&type=chunk)[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk) - ASUs not yet adopted, such as ASU 2017-04 (Goodwill Impairment), ASU 2018-13 (Fair Value Measurement), and ASU 2018-15 (Cloud Computing Arrangement Implementation Costs), are not expected to have a material impact on the financial statements[94](index=94&type=chunk)[95](index=95&type=chunk)[96](index=96&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2019, compared to the prior year, covering revenue and gross margin performance by segment, changes in operating expenses, and an analysis of liquidity and capital resources, highlighting key drivers and trends [Overview](index=24&type=section&id=Overview) This overview introduces Mastech Digital's business model, focusing on its Digital Transformation IT Services and two primary reporting segments - Mastech Digital is a provider of Digital Transformation IT Services, offering data management and analytics, digital transformation (Salesforce.com, Digital Learning), and IT staffing services[103](index=103&type=chunk) - The company operates in two reporting segments: Data and Analytics Services (Mastech InfoTrellis) and IT Staffing Services, serving various industry verticals[104](index=104&type=chunk)[105](index=105&type=chunk) [Economic Trends and Outlook](index=24&type=section&id=Economic%20Trends%20and%20Outlook) This section discusses the correlation between the company's business outlook and North American economic conditions, highlighting factors like job market growth, supply-side pressures for IT professionals, and client concentration risks - The business outlook is highly correlated to general North American economic conditions, with continued growth in domestic job markets and an expanding U.S. economy viewed as positive factors for both segments[106](index=106&type=chunk) - Supply-side pressures for skilled IT professionals are expected to persist in both business segments, particularly in IT staffing[106](index=106&type=chunk)[109](index=109&type=chunk) - Client concentration, where a large portion of revenues comes from a limited number of clients, can cause results to deviate from prevailing economic trends[107](index=107&type=chunk) - Strategic relationships with systems integrators and managed service providers (MSPs) may pressure IT staffing gross margins in the future[108](index=108&type=chunk) [Results of Operations for the Three Months Ended March 31, 2019 as Compared to the Three Months Ended March 31, 2018](index=24&type=section&id=Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20March%2031,%202019%20as%20Compared%20to%20the%20Three%20Months%20Ended%20March%2031,%202018) This section analyzes the company's financial performance for the first quarter of 2019 compared to the same period in 2018, focusing on key revenue, gross margin, and expense drivers [Revenues](index=24&type=section&id=Revenues_MD%26A) This section analyzes the total revenue performance and segment-specific revenue trends, including factors like billable consultants and client concentration - Total revenues for Q1 2019 increased by **4%** year-over-year to **$45.2 million**[110](index=110&type=chunk) **Revenues by Reportable Segment (in thousands):** | Segment | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :------------------------ | :---------------------------- | :---------------------------- | | Data and Analytics Services | $5,768 | $6,572 | | IT Staffing Services | $39,431 | $36,761 | | **Total revenues** | **$45,199** | **$43,333** | - IT Staffing Services revenues grew **7% organically** due to a higher level of billable consultants (**1,116 vs. 1,013 YoY**) and a higher average bill rate (**$74.56/hour vs. $73.34/hour YoY**)[113](index=113&type=chunk) - Data and Analytics Services revenues declined by approximately **$0.8 million** year-over-year due to material project ends in H2 2018, but increased sequentially by **$0.4 million** from Q4 2018[110](index=110&type=chunk)[112](index=112&type=chunk) - Client concentration remained high, with one client (CGI) accounting for **11.9% of total revenues** in Q1 2019 (**12.1% in Q1 2018**), and the top ten clients representing approximately **46% of total revenues**[110](index=110&type=chunk) [Gross Margins](index=25&type=section&id=Gross%20Margins_MD%26A) This section examines the company's gross profit and gross margin percentage, detailing improvements across both Data and Analytics Services and IT Staffing Services segments - Gross profits for Q1 2019 totaled **$10.8 million**, exceeding Q1 2018 gross profits by approximately **$0.6 million**[114](index=114&type=chunk) - Gross profit as a percentage of revenue improved by **30 basis points** to **24.0%** in Q1 2019 (**23.7% in Q1 2018**)[114](index=114&type=chunk) **Gross Margin by Reporting Segment:** | Segment | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :------------------------ | :---------------------------- | :---------------------------- | | Data and Analytics Services | 45.5% | 44.3% | | IT Staffing Services | 20.8% | 20.0% | | **Total gross margin** | **24.0%** | **23.7%** | - Data and Analytics Services margin improvement reflected lower bench costs and higher billable consultant utilization. IT Staffing Services margin expansion was due to better gross margins on new assignments, reflecting a focus on advanced technology skill-sets[115](index=115&type=chunk)[116](index=116&type=chunk) [Selling, General and Administrative ("S,G&A") Expenses](index=26&type=section&id=Selling,%20General%20and%20Administrative%20(S,G%26A)%20Expenses) This section analyzes the increase in S,G&A expenses, attributing changes to investments in sales, operations, and general administrative costs across segments - Total S,G&A expenses increased to **$9.0 million** (**19.8% of revenues**) in Q1 2019 from **$7.8 million** (**18.1% of revenues**) in Q1 2018[118](index=118&type=chunk) - Sales expense increased by **$0.5 million**, primarily due to investments in the Data and Analytics Services sales organization (**$0.4 million**) and higher marketing/travel in IT Staffing Services (**$0.1 million**)[121](index=121&type=chunk) - Operations expense increased by **$0.3 million** in IT Staffing Services, related to higher offshore recruiter staff/compensation and facility costs[121](index=121&type=chunk) - General and administrative expense increased by **$0.4 million**, driven by higher stock-based compensation in Data and Analytics Services (**$0.1 million**) and higher bonus accruals, system upgrade costs, and depreciation in IT Staffing Services (**$0.3 million**)[121](index=121&type=chunk) - Amortization of acquired intangible assets remained consistent at **$0.7 million** in both periods[121](index=121&type=chunk) [Other Income / (Expense) Components](index=26&type=section&id=Other%20Income%20/%20(Expense)%20Components) This section details the components of other income and expense, specifically highlighting interest expense and foreign exchange losses for the quarter - Other Income / (Expense) for Q1 2019 included interest expense of **$(539,000)** and foreign exchange losses of **$(15,000)**[119](index=119&type=chunk) - The higher interest expense compared to Q1 2018 (**$(473,000)**) was largely due to a higher effective interest rate[119](index=119&type=chunk) [Income Tax Expense](index=26&type=section&id=Income%20Tax%20Expense_MD%26A) This section reports the income tax expense and effective tax rate for the quarter, noting the primary reason for the year-over-year change - Income tax expense for Q1 2019 was **$352,000**, representing an effective tax rate of **26.7%**[120](index=120&type=chunk) - This was lower than the **$546,000** expense and **28.3% effective tax rate** in Q1 2018, primarily due to a lower U.S. state income tax rate[120](index=120&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet its financial obligations, discussing bank debt, borrowing capacity, accounts receivable, and cash flow trends [Financial Conditions and Liquidity](index=26&type=section&id=Financial%20Conditions%20and%20Liquidity) This section provides an overview of the company's financial position, including bank debt, borrowing capacity, and accounts receivable performance - As of March 31, 2019, the company had bank debt, net of cash balances, of **$37 million** and approximately **$8 million** of borrowing capacity under its existing credit facility[121](index=121&type=chunk) - Accounts receivable 'days sales outstanding' (DSOs) decreased to **66 days** at March 31, 2019, from **69 days** at December 31, 2018, reflecting progress in resolving cash conversion issues related to ERP implementation[122](index=122&type=chunk) - Management believes that cash provided by operating activities, cash balances on hand, and current availability under the credit facility will be adequate to fund business needs and debt service obligations over the next twelve months[123](index=123&type=chunk) [Cash flows provided by (used in) operating activities](index=27&type=section&id=Cash%20flows%20provided%20by%20(used%20in)%20operating%20activities) This section analyzes the cash generated or used by the company's core operations, detailing the components contributing to the change in operating cash flow - Cash provided by operating activities for Q1 2019 totaled **$1.1 million**, a significant improvement from cash used in operating activities of **$(2.0) million** during Q1 2018[124](index=124&type=chunk) - Q1 2019 operating cash flow included net income of **$1.0 million**, non-cash charges of **$1.0 million**, and an increase in operating working capital of **$(0.9) million**[124](index=124&type=chunk) - Working capital increases in both periods were primarily in support of revenue growth (higher accounts receivable) and Q1 payments of annual variable compensation[124](index=124&type=chunk) [Cash flows (used in) investing activities](index=27&type=section&id=Cash%20flows%20(used%20in)%20investing%20activities) This section reports the cash outflows related to the company's investing activities, primarily focusing on capital expenditures for system upgrades - Cash used in investing activities for Q1 2019 was **$(395,000)**, compared to **$(169,000)** for Q1 2018[125](index=125&type=chunk) - Capital expenditures totaled **$(404,000)** in Q1 2019 and **$(130,000)** in Q1 2018, largely related to system upgrade expenditures[125](index=125&type=chunk) [Cash flows provided by (used in) financing activities](index=27&type=section&id=Cash%20flows%20provided%20by%20(used%20in)%20financing%20activities) This section details the cash flows related to the company's financing activities, including borrowings and repayments on its credit facilities - Cash used in financing activities for Q1 2019 totaled **$(0.5) million**, consisting of net borrowings under the revolving credit facility of **$0.6 million** and debt payments on the term loan facility of **$(1.1) million**[126](index=126&type=chunk) - In Q1 2018, cash provided by financing activities totaled **$1.0 million**, consisting of borrowings under the revolving credit facility of **$1.9 million** and term loan payments of **$(0.9) million**[126](index=126&type=chunk) [Off-Balance Sheet Arrangements](index=27&type=section&id=Of%20-Balance%20Sheet%20Arrangements) This section confirms that the company does not have any off-balance sheet arrangements that would materially impact its financial position - The company does not have any off-balance sheet arrangements[127](index=127&type=chunk) [Inflation](index=27&type=section&id=Inflation) This section addresses the impact of inflation on the company's operations and management's strategies to mitigate its effects - Management does not believe that inflation had a significant impact on the results of operations for the periods presented[128](index=128&type=chunk) - The company attempts to minimize any effects of inflation by controlling operating costs and adjusting billing rates[128](index=128&type=chunk) [Seasonality](index=27&type=section&id=Seasonality) This section discusses how seasonal factors, such as national holidays and vacation policies, can influence consultant billable hours and financial results - Operations are generally not affected by seasonal fluctuations, but consultant billable hours are impacted by national holidays and vacation policies[129](index=129&type=chunk) - Lower utilization rates and higher benefit costs generally occur during the fourth quarter. Assignment completions tend to be higher near the end of the calendar year, impacting the subsequent quarter's revenue and gross profit[129](index=129&type=chunk) [Recently Issued Accounting Standards](index=27&type=section&id=Recently%20Issued%20Accounting%20Standards_MD%26A) This section refers to Note 15 of the financial statements for a detailed discussion of recent accounting pronouncements and their impact - This section refers to Note 15 to the accompanying financial statements for a detailed discussion of recent accounting pronouncements[130](index=130&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Mastech Digital is exposed to market risks primarily from foreign currency exchange rate fluctuations due to its global operations and interest rate variations on its variable-rate debt. The company manages interest rate risk through swap contracts but has not engaged in currency hedging since 2016 - The company's cash flows and earnings are subject to fluctuations due to currency exchange rate variations, particularly from its global recruitment and delivery centers[131](index=131&type=chunk) - The company elected not to engage in currency hedging activities from **2016** to date, despite previous use of foreign currency forward contracts[131](index=131&type=chunk) - Interest rate risk on variable-rate debt is managed through interest-rate swap contracts, converting variable rates to a fixed rate[73](index=73&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures and states that there have been no material changes in internal control over financial reporting during the quarter ended March 31, 2019 [Disclosure Controls and Procedures](index=28&type=section&id=Disclosure%20Controls%20and%20Procedures) This section details the evaluation and conclusion regarding the effectiveness of the company's disclosure controls and procedures by management, including the CEO and CFO - As of March 31, 2019, management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the company's disclosure controls and procedures[133](index=133&type=chunk) - Based on the evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[133](index=133&type=chunk) - Certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2[134](index=134&type=chunk) [Changes in Internal Control over Financial Reporting](index=28&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section confirms that no material changes occurred in the company's internal control over financial reporting during the quarter ended March 31, 2019 - There has been no change in the company's internal control over financial reporting during the quarter ended March 31, 2019, that has materially affected, or is reasonably likely to materially affect, such internal control[135](index=135&type=chunk) [PART II. OTHER INFORMATION](index=29&type=section&id=PART%20II%20OTHER%20INFORMATION) This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, and a list of exhibits [ITEM 1. LEGAL PROCEEDINGS](index=29&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the company is involved in routine legal and administrative proceedings, but management does not anticipate a material adverse effect on its financial position, results of operations, or cash flows - The company is involved in a number of lawsuits and administrative proceedings in the ordinary course of its business[137](index=137&type=chunk) - Management believes, after consultation with legal counsel, that the disposition of these proceedings should not have a material adverse effect on the company's financial position, results of operations, or cash flows[137](index=137&type=chunk) [ITEM 1A. RISK FACTORS](index=29&type=section&id=Item%201A.%20Risk%20Factors) This section confirms that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - There have been no material changes from the risk factors as previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018[138](index=138&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=29&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports that Mastech Digital, Inc. did not repurchase any shares of its Common Stock during the first quarter of 2019 and currently does not have a publicly announced share repurchase program in place - The company did not repurchase any shares of its Common Stock during the quarter ended March 31, 2019[139](index=139&type=chunk) - As of March 31, 2019, the company does not have a publicly announced share repurchase program in place[139](index=139&type=chunk) [ITEM 6. EXHIBITS](index=30&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including executive employment agreements, Sarbanes-Oxley Act certifications, and XBRL-related documents - Executive Employment Agreements for Vivek Gupta and John J. Cronin, Jr. (Exhibits 10.1, 10.2)[142](index=142&type=chunk) - Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2)[142](index=142&type=chunk) - Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Executive Officer and Chief Financial Officer (Exhibits 32.1, 32.2)[142](index=142&type=chunk) - XBRL Instance Document and Taxonomy Extension Documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[142](index=142&type=chunk) [SIGNATURES](index=31&type=section&id=SIGNATURES) This section contains the official signatures of the company's Chief Executive Officer and Chief Financial Officer, certifying the filing of the Quarterly Report on Form 10-Q - The report was duly signed on behalf of Mastech Digital, Inc. on **May 14, 2019**[144](index=144&type=chunk) - Signatories include Vivek Gupta, Chief Executive Officer, and John J. Cronin, Jr., Chief Financial Officer (Principal Financial Officer)[146](index=146&type=chunk)

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 ...