Mastech Digital(MHH) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION 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 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) 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) 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) 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) 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) 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) 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 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] - 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][26][27] - 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] 2. Revenue from Contracts with Customers 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][35] 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][41] 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 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][46] 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][48] 4. Leases 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] - 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] 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 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] - 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] 6. Employee Benefit Plan 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] - 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] - No matching contributions were provided for all other employees for the three months ended March 31, 2019 and 2018[55] 7. Stock-Based Compensation 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] - 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] - Stock-based compensation expense was $236,000 in Q1 2019, an increase from $105,000 in Q1 2018[57] - 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][59][60] 8. Credit Facility 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] - Borrowings bear interest at variable rates (PNC's prime rate or LIBOR plus a margin). The company pledged substantially all assets as collateral[65][66] - As of March 31, 2019, the company was in compliance with all provisions under the facility[66] 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 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][120] - 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] 10. Derivative Instruments and Hedging Activities 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] - Notional amounts for the swap contracts were $12.0 million at March 31, 2019, and $12.6 million at December 31, 2018[73] 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][76] 11. Fair Value Measurements 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][78] 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] 12. Shareholders' Equity 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] 13. Earnings Per Share 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] - For both Q1 2019 and Q1 2018, 180,000 anti-dilutive stock options were excluded from the computation of diluted earnings per share[82] 14. Business Segments and Geographic Information 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][84][86] 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 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] - 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][91][92][93] - 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][95][96] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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] - The company operates in two reporting segments: Data and Analytics Services (Mastech InfoTrellis) and IT Staffing Services, serving various industry verticals[104][105] Economic Trends and Outlook 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] - Supply-side pressures for skilled IT professionals are expected to persist in both business segments, particularly in IT staffing[106][109] - 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] - Strategic relationships with systems integrators and managed service providers (MSPs) may pressure IT staffing gross margins in the future[108] Results of Operations for the Three Months Ended March 31, 2019 as Compared to the Three Months Ended March 31, 2018 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 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] 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] - 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][112] - 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] Gross Margins 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] - Gross profit as a percentage of revenue improved by 30 basis points to 24.0% in Q1 2019 (23.7% in Q1 2018)[114] 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][116] Selling, General and Administrative ("S,G&A") Expenses 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] - 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] - Operations expense increased by $0.3 million in IT Staffing Services, related to higher offshore recruiter staff/compensation and facility costs[121] - 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] - Amortization of acquired intangible assets remained consistent at $0.7 million in both periods[121] Other Income / (Expense) Components 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 $(15,000)[119] - The higher interest expense compared to Q1 2018 ($(473,000)) was largely due to a higher effective interest rate[119] Income Tax Expense 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] - 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] Liquidity and Capital Resources 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 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] - 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] - 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] Cash flows provided by (used in) operating activities 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] - 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] - Working capital increases in both periods were primarily in support of revenue growth (higher accounts receivable) and Q1 payments of annual variable compensation[124] Cash flows (used in) investing activities 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] - Capital expenditures totaled $(404,000) in Q1 2019 and $(130,000) in Q1 2018, largely related to system upgrade expenditures[125] Cash flows provided by (used in) financing activities 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] - 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] Off-Balance Sheet Arrangements 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] 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] - The company attempts to minimize any effects of inflation by controlling operating costs and adjusting billing rates[128] 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] - 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] Recently Issued Accounting Standards 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] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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] - The company elected not to engage in currency hedging activities from 2016 to date, despite previous use of foreign currency forward contracts[131] - Interest rate risk on variable-rate debt is managed through interest-rate swap contracts, converting variable rates to a fixed rate[73] ITEM 4. CONTROLS AND PROCEDURES 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 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] - Based on the evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[133] - Certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2[134] Changes in Internal Control over Financial Reporting 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] PART II. OTHER INFORMATION 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 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] - 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] ITEM 1A. RISK FACTORS 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] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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] - As of March 31, 2019, the company does not have a publicly announced share repurchase program in place[139] ITEM 6. EXHIBITS 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] - 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] - 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] - XBRL Instance Document and Taxonomy Extension Documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[142] 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] - Signatories include Vivek Gupta, Chief Executive Officer, and John J. Cronin, Jr., Chief Financial Officer (Principal Financial Officer)[146]