Mastech Digital(MHH) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION 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 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) 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] - 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] Condensed Consolidated Statements of Comprehensive Income (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] - 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] Condensed Consolidated Balance Sheets (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] - 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] Condensed Consolidated Statements of Shareholders' Equity (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] Condensed Consolidated Statements of Cash Flows (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] - 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] Notes to Condensed Consolidated Financial Statements (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 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] - 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][27][32] - 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] 2. Revenue from Contracts with Customers 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] - 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][41] 3. Goodwill and Other Intangible Assets, net 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][45] 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] 4. Leases 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] 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] 5. Commitments and Contingencies 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] 6. Employee Benefit Plan 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] 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 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] 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][60] 8. Credit Facility 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] - 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] - The company was in compliance with all financial covenants under the Credit Agreement as of June 30, 2019[66] 9. Income Taxes 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] 10. Derivative Instruments and Hedging Activities 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] 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] 11. Fair Value Measurements 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] 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 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] 13. Earnings Per Share 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] 14. Business Segments and Geographic Information 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] 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 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] - 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][96][97][98] - 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][100][101] 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 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 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] - 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] - Both segments serve various industry verticals, including financial services, government, healthcare, manufacturing, retail, technology, telecommunications, education, and transportation[111] Economic Trends and Outlook 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] - 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] - 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][116] Results of Operations for the Three Months Ended June 30, 2019 as Compared to the Three Months Ended June 30, 2018 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 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] - 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][120] Gross Margins 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] - Data and Analytics Services gross margin improved to 46.1% (from 42.2%) due to lower bench costs and higher billable consultant utilization[122] Selling, General and Administrative ("S,G&A") Expenses 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][125] - 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][129] Other Income / (Expense) Components 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] Income Tax Expense 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] Results of Operations for the Six Months Ended June 30, 2019 as Compared to the Six Months Ended June 30, 2018 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 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] - 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][130] Gross Margins 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] - Data and Analytics Services gross margin improved to 45.8% (from 43.3%) due to lower bench costs and higher billable consultant utilization[132] Selling, General and Administrative ("S,G&A") Expenses 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][136] - 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][143] Other Income / (Expense) Components 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] Income Tax Expense 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] Liquidity and Capital Resources 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] - 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][144] - 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] Off-Balance Sheet Arrangements This section discusses off-balance sheet arrangements - The company does not have any off-balance sheet arrangements[147] 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] 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] Recently Issued Accounting Standards This section discusses recently issued accounting standards - Recent accounting pronouncements are described in Note 15 to the accompanying financial statements[150] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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] - The company has not engaged in currency hedging activities since 2016, despite previous attempts to limit exposure to Indian rupee fluctuations[151] - Interest rate risk is managed through an interest-rate swap, as detailed in Note 10[73] ITEM 4. CONTROLS AND PROCEDURES 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] - There has been no material change in the company's internal control over financial reporting during the quarter ended June 30, 2019[155] PART II. OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, equity security sales, and required exhibits ITEM 1. LEGAL PROCEEDINGS 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] ITEM 1A. RISK FACTORS 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] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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] - As of June 30, 2019, the Company does not have a publicly announced repurchase program in place[159] ITEM 6. EXHIBITS 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] - 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] - XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are included[162] 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][166]