Mastech Digital(US:MHH)2025-08-13 12:30markdown [PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section provides a comprehensive overview of Mastech Digital, Inc.'s financial performance and position, including detailed statements, notes, management's discussion, market risks, and internal controls [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. for the three and six months ended June 30, 2025 and 2024, including statements of operations, comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining accounting policies, revenue recognition, segment reporting, goodwill, leases, commitments, employee benefits, stock-based compensation, credit facilities, income taxes, earnings per share, and recently issued accounting standards [Condensed Consolidated Statements of Operations (Unaudited)](index=3&type=section&id=(a)%20Condensed%20Consolidated%20Statements%20of%20Operations%20(Unaudited)) This statement presents the Company's revenues, gross profit, operating income, net income, and earnings per share for the specified periods | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Revenues | $49,097 | $49,534 | $97,414 | $96,357 | | Gross profit | $13,820 | $13,980 | $26,712 | $26,111 | | Income (loss) from operations | $27 | $1,693 | $(1,826) | $1,287 | | Net income (loss) | $135 | $1,391 | $(1,304) | $1,230 | | Basic EPS | $0.01 | $0.12 | $(0.11) | $0.11 | | Diluted EPS | $0.01 | $0.12 | $(0.11) | $0.10 | - For the three months ended June 30, 2025, **net income decreased significantly** to **$135 thousand** from **$1,391 thousand** in the prior year. For the six months ended June 30, 2025, the company reported a **net loss** of **$(1,304) thousand**, compared to a **net income** of **$1,230 thousand** in the prior year[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 statement details the Company's net income and other comprehensive income components, such as foreign currency translation adjustments, to arrive at total comprehensive income | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) | $135 | $1,391 | $(1,304) | $1,230 | | Foreign currency translation adjustments | $(23) | $1 | $7 | $(27) | | Total comprehensive income (loss) | $112 | $1,392 | $(1,297) | $1,203 | - **Total comprehensive income** for the three months ended June 30, 2025, was **$112 thousand**, a **significant decrease** from **$1,392 thousand** in the prior year. For the six months ended June 30, 2025, the company reported a **total comprehensive loss** of **$(1,297) thousand**, compared to a **comprehensive income** of **$1,203 thousand** in the prior year[12](index=12&type=chunk) [Condensed Consolidated Balance Sheets (Unaudited)](index=5&type=section&id=(c)%20Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) This statement provides a snapshot of the Company's assets, liabilities, and shareholders' equity at specific points in time | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :---------------- | | Total current assets | $65,659 | $66,205 | | Total assets | $110,392 | $111,484 | | Total current liabilities | $19,718 | $20,577 | | Total liabilities | $22,582 | $24,050 | | Total shareholders' equity | $87,810 | $87,434 | - As of June 30, 2025, **total assets decreased** slightly to **$110.4 million** from **$111.5 million** at December 31, 2024. **Total liabilities also decreased** to **$22.6 million** from **$24.1 million**, while **total shareholders' equity increased** to **$87.8 million** from **$87.4 million**[15](index=15&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity (Unaudited)](index=6&type=section&id=(d)%20Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20(Unaudited)) This statement outlines changes in the Company's common stock, additional paid-in capital, retained earnings, and treasury stock over the reporting period | Metric (in thousands) | Balances, December 31, 2024 | Balances, June 30, 2025 | | :-------------------- | :-------------------------- | :---------------------- | | Common Stock | $135 | $135 |\ | Additional Paid-in Capital | $38,277 | $40,064 |\ | Retained Earnings | $55,817 | $54,513 |\ | Treasury Stock | $(4,885) | $(4,999) |\ | Total Shareholders' Equity | $87,434 | $87,810 | - **Shareholders' equity increased** from **$87.4 million** at December 31, 2024, to **$87.8 million** at June 30, 2025, primarily driven by **increases** in additional paid-in capital from stock-based compensation and stock option exercises, partially offset by a **net loss** and treasury stock repurchases[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 statement categorizes cash inflows and outflows from operating, investing, and financing activities for the specified periods | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash flows provided by (used in) operating activities | $301 | $(145) | | Net cash flows (used in) investing activities | $(188) | $(751) | | Net cash flows provided by financing activities | $64 | $378 | | Net change in cash and cash equivalents | $191 | $(560) | | Cash and cash equivalents, end of period | $27,933 | $20,587 | - **Cash provided by operating activities improved significantly** to **$301 thousand** for the six months ended June 30, 2025, compared to **cash used in operating activities** of **$(145) thousand** in the prior year. Investing activities **used less cash**, and financing activities **provided less cash** compared to the prior year[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 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) This note describes Mastech Digital, Inc.'s business operations, reportable segments, and the basis for preparing the financial statements - Mastech Digital, Inc. provides Digital Transformation IT Services to large and medium-sized organizations, with offerings including data management and analytics services, digital learning services, and IT staffing services[25](index=25&type=chunk)[26](index=26&type=chunk) - The company operates in two reportable segments: Data and Analytics Services (expanded through acquisitions like InfoTrellis and AmberLeaf) and IT Staffing Services (covering digital and mainstream technologies, including recent expansion into engineering staffing)[27](index=27&type=chunk)[28](index=28&type=chunk)[33](index=33&type=chunk) [2. Revenue from Contracts with Customers](index=9&type=section&id=2.%20Revenue%20from%20Contracts%20with%20Customers) This note details the Company's revenue recognition policies and disaggregates revenue by contract type and business segment - The Company recognizes revenue over time for time-and-material contracts as services are performed and for fixed-price contracts using a cost-based input method to measure progress[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) Revenue Disaggregation by Contract Type and Segment (in thousands) | Segment / Contract Type | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :---------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | **Data and Analytics Services Segment** | | | | | | Time-and-material Contracts | $7,827 | $6,183 | $13,475 | $12,294 | | Fixed-price Contracts | $762 | $2,693 | $4,074 | $4,649 | | Subtotal | $8,589 | $8,876 | $17,549 | $16,943 | | **IT Staffing Services Segment** | | | | | | Time-and-material Contracts | $40,508 | $40,658 | $79,865 | $79,414 | | Fixed-price Contracts | — | — | — | — | | Subtotal | $40,508 | $40,658 | $79,865 | $79,414 | | **Total Revenues** | $49,097 | $49,534 | $97,414 | $96,357 | - For the three months ended June 30, 2025, three clients (Fidelity, Populus, CGI) each exceeded **10%** of **total revenues**, representing approximately **58%** of **total revenues** from the top ten clients. This indicates a **high client concentration**[42](index=42&type=chunk)[43](index=43&type=chunk) [3. Goodwill and Other Intangible Assets, net](index=10&type=section&id=3.%20Goodwill%20and%20Other%20Intangible%20Assets,%20net) This note provides information on the Company's goodwill and identifiable intangible assets, including their carrying values and amortization - **Goodwill remains unchanged** at **$8.4 million** for IT Staffing Services and **$18.8 million** for Data and Analytics Services as of June 30, 2025, with **no impairment recorded** during the period. However, a continued decline in the Data and Analytics Services segment could lead to future impairment charges[45](index=45&type=chunk)[46](index=46&type=chunk)[48](index=48&type=chunk) Identifiable Intangible Assets (in thousands) | Asset Type | As of June 30, 2025 Net Carrying Value | As of December 31, 2024 Net Carrying Value | | :-------------------- | :----------------------------------- | :---------------------------------------- | | IT Staffing Services: | | | | Client relationships | $1,305 | $1,638 | | Data and Analytics Services: | | | | Client relationships | $7,410 | $8,228 | | Covenant-not-to-compete | $22 | $66 | | Trade name | $25 | $74 | | Technology | $247 | $302 | | **Total Intangible Assets** | **$9,009** | **$10,308** | - **Total net intangible assets decreased** from **$10.3 million** at December 31, 2024, to **$9.0 million** at June 30, 2025, due to ongoing amortization. Amortization expense for the six months ended June 30, 2025, was **$1.3 million**[48](index=48&type=chunk)[49](index=49&type=chunk) [4. Leases](index=12&type=section&id=4.%20Leases) This note describes the Company's lease arrangements, including right-of-use assets, lease liabilities, and related expenses - The Company leases office facilities and equipment under noncancelable operating leases, with an average initial lease term of **3.9 years** and a weighted average remaining term of **2.7 years**. All leases are classified as operating leases[51](index=51&type=chunk) Lease Assets and Liabilities (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Long-term operating lease right-of-use assets | $3,192 | $3,832 | | Short-term operating lease liability | $1,313 | $1,265 | | Long-term operating lease liability | $1,825 | $2,486 | | Total Liabilities | $3,138 | $3,751 | - **Rental expense** for the six months ended June 30, 2025, was **$0.8 million**, **up from** **$0.7 million** in the prior year. Cash paid for lease liabilities **remained consistent** at **$0.7 million** for both periods[53](index=53&type=chunk)[54](index=54&type=chunk) [5. Commitments and Contingencies](index=13&type=section&id=5.%20Commitments%20and%20Contingencies) This note discloses the Company's involvement in legal proceedings and other commitments, assessing their potential financial impact - The Company is involved in various lawsuits and administrative proceedings in the ordinary course of business. Management believes, after consulting legal counsel, 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[55](index=55&type=chunk) [6. Employee Benefit Plan](index=13&type=section&id=6.%20Employee%20Benefit%20Plan) This note outlines the Company's employee retirement savings plan and any contributions made - The Company offers an Employee Retirement Savings Plan (401(k)) to substantially all U.S. based salaried and W-2 hourly employees. **No matching contributions** were provided by the Company for the three and six months ended June 30, 2025, and 2024[56](index=56&type=chunk) [7. Stock-Based Compensation](index=13&type=section&id=7.%20Stock-Based%20Compensation) This note details the Company's stock incentive plans, stock-based compensation expense, and employee stock purchase plan - The Company has a Stock Incentive Plan (amended May 2025) with **6,200,000 shares** allocated for issuance and a terminated 2024 Inducement Stock Incentive Plan. As of June 30, 2025, **1,054,000 shares** were available for grants under the main Plan[57](index=57&type=chunk)[58](index=58&type=chunk)[60](index=60&type=chunk) Stock-Based Compensation Expense (in thousands) | Period | 2025 (3 Months) | 2024 (3 Months) | 2025 (6 Months) | 2024 (6 Months) | | :-------------------- | :-------------- | :-------------- | :-------------- | :-------------- | | Stock-based compensation expense | $714 | $461 | $1,600 | $1,000 | - The Employee Stock Purchase Plan allows eligible employees to purchase common stock at a **15%** discount. As of June 30, 2025, **420,576 shares** were available for purchase under this plan[63](index=63&type=chunk)[64](index=64&type=chunk)[65](index=65&type=chunk) [8. Credit Facility](index=14&type=section&id=8.%20Credit%20Facility) This note describes the Company's credit agreement, including revolving credit and term loan facilities, and compliance with covenants - The Company has a Credit Agreement with PNC Bank, providing a total aggregate commitment of **$53.1 million**, consisting of a **$40 million** revolving credit facility (Revolver) expiring in December 2026 and a **$13.1 million** term loan facility (Term Loan), which was fully repaid by January 2023[66](index=66&type=chunk)[68](index=68&type=chunk) - As of June 30, 2025, the Company had **no outstanding borrowings** under the Revolver and approximately **$22.2 million** of **unused borrowing capacity**. The Company was **in compliance** with all financial covenants[71](index=71&type=chunk)[73](index=73&type=chunk) [9. Income Taxes](index=15&type=section&id=9.%20Income%20Taxes) This note provides information on the Company's income before taxes, provision for income taxes, and effective tax rates by geographic segment Income (Loss) Before Income Taxes (in thousands) | Geographic Segment | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Domestic | $(418) | $615 | $(3,004) | $299 | | Foreign | $628 | $1,194 | $1,452 | $1,228 | | Total | $210 | $1,809 | $(1,552) | $1,527 | Total Provision (Benefit) for Income Taxes (in thousands) | Period | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Total provision (benefit) for income taxes | $75 | $418 | $(248) | $297 | - The **effective tax rate** for the three months ended June 30, 2025, was **35.7%** (tax expense of **$75 thousand** on pre-tax income of **$210 thousand**), compared to **23.1%** in the prior year. For the six months ended June 30, 2025, the **effective tax rate** was **(16.0)%** (tax benefit of **$(248) thousand** on pre-tax loss of **$(1,552) thousand**), compared to **19.4%** in the prior year[76](index=76&type=chunk) [10. Shareholders' Equity](index=16&type=section&id=10.%20Shareholders'%20Equity) This note details changes in shareholders' equity, including share repurchase programs and common stock transactions - The Board of Directors **authorized a share repurchase program** of up to **500,000 shares**, extended through February 8, 2026. During the three and six months ended June 30, 2025, the Company **repurchased** **16,511 shares** at an **average price of $6.90 per share**, with **407,000 shares remaining available**[77](index=77&type=chunk)[78](index=78&type=chunk) [11. Earnings (Loss) Per Share](index=16&type=section&id=11.%20Earnings%20(Loss)%20Per%20Share) This note explains the calculation of basic and diluted earnings per share, including the treatment of anti-dilutive securities - **Basic earnings (loss) per share** is calculated based on **net income (loss)** and **weighted average common shares outstanding**. **Diluted EPS** includes the potential dilution from stock options using the treasury stock method[80](index=80&type=chunk) - For the three months ended June 30, 2025, **2,357,000 anti-dilutive stock options** were excluded from diluted EPS computation. For the six months ended June 30, 2025, all stock options and restricted shares were **anti-dilutive**[81](index=81&type=chunk) [12. Business Segments and Geographic Information](index=17&type=section&id=12.%20Business%20Segments%20and%20Geographic%20Information) This note provides financial information for the Company's two reportable segments, Data and Analytics Services and IT Staffing Services, and geographic revenues - 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, mainstream technologies, and engineering services)[82](index=82&type=chunk)[83](index=83&type=chunk)[84](index=84&type=chunk) Segment Revenues (in thousands) | Segment | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------ | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Data and Analytics Services | $8,589 | $8,876 | $17,549 | $16,943 | | IT Staffing Services | $40,508 | $40,658 | $79,865 | $79,414 | | Total revenues | $49,097 | $49,534 | $97,414 | $96,357 | Segment Gross Margin % | Segment | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------ | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Data and Analytics Services | 45.2% | 49.2% | 44.6% | 47.9% | | IT Staffing Services | 24.5% | 23.6% | 23.6% | 22.7% | | Total gross margin % | 28.1% | 28.2% | 27.4% | 27.1% | [13. Recently Issued Accounting Standards](index=19&type=section&id=13.%20Recently%20Issued%20Accounting%20Standards) This note discusses recently issued accounting pronouncements and their expected impact on the Company's financial statements - ASU 2023-09 (Income Taxes) is effective for annual periods beginning after December 15, 2024, requiring enhanced income tax disclosures. ASU 2024-03 (Income Statement Expenses) is effective for annual periods beginning after December 15, 2026, requiring more detailed disclosures about business expenses[88](index=88&type=chunk)[89](index=89&type=chunk) - The Company does not expect either ASU 2023-09 or ASU 2024-03 to have a **material impact** on its financial statements[88](index=88&type=chunk)[89](index=89&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=20&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, highlighting key financial performance drivers, economic trends, and strategic initiatives. It covers revenue, gross margins, SG&A expenses, and income taxes for the three and six months ended June 30, 2025, compared to 2024, along with discussions on liquidity, capital resources, and market risks [Website Access to SEC Reports](index=21&type=section&id=Website%20Access%20to%20SEC%20Reports) This section informs stakeholders about where to access the Company's SEC filings online - The Company's SEC filings, including the Annual Report on Form 10-K and current reports on Form 8-K, are available free of charge on the Investors page of its website, www.mastechdigital.com[94](index=94&type=chunk) [Critical Accounting Policies](index=21&type=section&id=Critical%20Accounting%20Policies) This section confirms no material changes to the Company's critical accounting policies as disclosed in its annual report - There were **no material changes** to the Company's critical accounting policies during the six months ended June 30, 2025, as detailed in the Annual Report on Form 10-K for the year ended December 31, 2024[95](index=95&type=chunk) [2024 Primentor, Inc. Consulting Agreement](index=21&type=section&id=2024%20Primentor,%20Inc.%20Consulting%20Agreement) This section details a consulting agreement for strategic advisory services and associated expenses - The Company entered into a three-year consulting agreement with Primentor, Inc. on January 12, 2024, for strategic advisory and management consulting services. Consulting expenses incurred in 2024 were approximately **$1.1 million**, with expected payments of **$270 thousand** in 2025 and **$120 thousand** in 2026[96](index=96&type=chunk) [Transition of the Company's finance and accounting functions to India](index=21&type=section&id=Transition%20of%20the%20Company's%20finance%20and%20accounting%20functions%20to%20India) This section describes a cost-cutting initiative to offshore finance and accounting functions, including estimated costs and savings - The Company is implementing a cost-cutting initiative to transition its finance and accounting functions to India. As of June 30, 2025, **$200 thousand** in additional costs have been incurred, with total transition expenses estimated to be **$500 thousand** to **$750 thousand**[97](index=97&type=chunk) - Approximately **$1.3 million** in severance expense is expected related to this initiative, with **$500 thousand** already incurred by June 30, 2025. Post-transition cost savings are projected to be around **$1.2 million** per annum[98](index=98&type=chunk) [Overview](index=21&type=section&id=Overview) This section provides a general description of the Company's business, services, and operating segments - Mastech Digital provides Digital Transformation IT Services, including data management and analytics, digital learning, and IT Staffing Services, operating through two segments: Data and Analytics Services (Mastech InfoTrellis) and IT Staffing Services[99](index=99&type=chunk)[100](index=100&type=chunk) - Both segments serve various industry verticals such as financial services, government, healthcare, manufacturing, retail, technology, telecommunications, and transportation[101](index=101&type=chunk) [Data and Analytics](index=22&type=section&id=Data%20and%20Analytics) This section provides an update on new bookings and business trends within the Data and Analytics Services segment - **New bookings** in the Data and Analytics Services segment for Q2 2025 totaled approximately **$5.8 million**, a **decrease** from **$9.2 million** in Q2 2024, indicating a **decline in new business volume**[107](index=107&type=chunk) [Economic Trends and Outlook](index=22&type=section&id=Economic%20Trends%20and%20Outlook) This section discusses the broader economic factors influencing the Company's business and future prospects - The business outlook is highly correlated with North American economic conditions, with demand for services **increasing** during economic expansion and **declining** during contractions[103](index=103&type=chunk) - **Uncertainty and caution persist** in the marketplace in the second half of 2025, influenced by lingering questions about immigration, trade policies, and tariffs, leading to extended client decision-making cycles and conservative spending[103](index=103&type=chunk) - A significant portion of revenues comes from a limited number of clients, making the Company's results **susceptible to the prospects and well-being of these specific clients**[104](index=104&type=chunk) [Results of Operations for the Three Months Ended June 30, 2025 as Compared to the Three Months Ended June 30, 2024](index=22&type=section&id=Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20June%2030,%202025%20as%20Compared%20to%20the%20Three%20Months%20Ended%20June%2030,%202024) This section analyzes the Company's financial performance for the three months ended June 30, 2025, compared to the same period in 2024, covering key operational metrics [Revenues](index=22&type=section&id=Revenues_Q2) This section analyzes the Company's revenue performance for the quarter, disaggregated by business segment and highlighting key drivers Revenues by Segment (in millions) | Segment | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | YoY Change | | :------------------------ | :------------------------------- | :------------------------------- | :--------- | | Data and Analytics Services | $8.6 | $8.9 | -3.4% | | IT Staffing Services | $40.5 | $40.6 | -0.2% | | Total revenues | $49.1 | $49.5 | -0.8% | - **Total revenues decreased** by **1%** year-over-year to **$49.1 million**, driven by **modest declines** in both IT Staffing Services and Data and Analytics Services segments. The IT Staffing segment saw **essentially flat revenue** despite **lower consultant count**, offset by **higher bill rates** (**$85.32/hour** in Q2 2025 vs. **$81.94/hour** in Q2 2024)[106](index=106&type=chunk)[107](index=107&type=chunk) - **Client concentration increased**, with the top three clients (Fidelity, Populus, CGI) accounting for **38.4%** of **total revenues** in Q2 2025, compared to **25.6%** from the top two clients (CGI, Allegis) in Q2 2024[106](index=106&type=chunk) [Gross Margins](index=23&type=section&id=Gross%20Margins_Q2) This section examines the Company's gross profit and gross margin percentages for the quarter, broken down by segment Gross Margin by Segment | Segment | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change (bps) | | :------------------------ | :------------------------------- | :------------------------------- | :----------- | | Data and Analytics Services | 45.2% | 49.2% | -400 | | IT Staffing Services | 24.5% | 23.6% | +90 | | Total gross margin | 28.1% | 28.2% | -10 | - **Overall gross profit decreased** by **$0.2 million** to **$13.8 million**, with the **gross margin percentage slightly down** by **10 basis points** to **28.1%**. This was due to a **400-basis point reduction** in Data and Analytics Services margins (**lower utilization**) offset by a **90-basis point increase** in IT Staffing Services margins (**higher quality placements**)[108](index=108&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) [Selling, General and Administrative ("SG&A") Expenses](index=24&type=section&id=Selling,%20General%20and%20Administrative%20(%22SG%26A%22)%20Expenses_Q2) This section details the Company's selling, general, and administrative expenses for the quarter, explaining significant changes and their impact SG&A Expenses (in millions) | Expense Category | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | YoY Change | | :------------------------ | :------------------------------- | :------------------------------- | :--------- | | Data and Analytics Services Subtotal | $4.0 | $3.6 | +$0.4 | | IT Staffing Services Subtotal | $8.2 | $8.0 | +$0.2 | | Amortization of Acquired Intangible Assets | $0.7 | $0.7 | $0.0 | | Severance Expense | $0.2 | — | +$0.2 | | Finance and Accounting Transition Expense | $0.7 | — | +$0.7 | | Total SG&A Expenses | $13.8 | $12.3 | +$1.5 | - **Total SG&A expenses increased** by **$1.5 million** to **$13.8 million** (**28.1%** of revenues) in Q2 2025, **up from** **$12.3 million** (**24.8%** of revenues) in Q2 2024. This **increase was primarily due to** **$0.2 million** in **severance expense** (IT Staffing Sales Management) and **$0.7 million** in **finance and accounting transition expense**[111](index=111&type=chunk)[113](index=113&type=chunk) - General and administrative expenses **increased** by **$0.8 million**, driven by **bad debt expense**, executive leadership hires, and **higher stock-based compensation** in both segments[113](index=113&type=chunk) [Other Income / (Expense) Components](index=24&type=section&id=Other%20Income%20/%20(Expense)%20Components_Q2) This section reviews other non-operating income and expense items, such as interest income and foreign exchange gains/losses, for the quarter - Other income (expense) for Q2 2025 included **$190 thousand** in **interest income** and **$(7) thousand** in **foreign exchange losses**, resulting in a **net positive contribution**. This compares to **$130 thousand** **interest income** and **$(14) thousand** **foreign exchange losses** in Q2 2024, with **higher interest income** reflecting **higher cash balances**[112](index=112&type=chunk) [Income Tax Expense (Benefit)](index=25&type=section&id=Income%20Tax%20Expense%20(Benefit)_Q2) This section discusses the Company's income tax expense or benefit and effective tax rate for the quarter - **Income tax expense** for Q2 2025 was **$75 thousand**, resulting in an **effective tax rate** of **35.7%**. This is **higher than** the **$418 thousand** expense and **23.1% effective tax rate** in Q2 2024, which **benefited from a partial reversal** of a tax valuation allowance[114](index=114&type=chunk) [Results of Operations for the Six Months Ended June 30, 2025 as Compared to the Six Months Ended June 30, 2024](index=25&type=section&id=Results%20of%20Operations%20for%20the%20Six%20Months%20Ended%20June%2030,%202025%20as%20Compared%20to%20the%20Six%20Months%20Ended%20June%2030,%202024) This section analyzes the Company's financial performance for the six months ended June 30, 2025, compared to the same period in 2024, covering key operational metrics [Revenues](index=25&type=section&id=Revenues_YTD) This section analyzes the Company's year-to-date revenue performance, disaggregated by business segment and highlighting key drivers Revenues by Segment (in millions) | Segment | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | YoY Change | | :------------------------ | :----------------------------- | :----------------------------- | :--------- | | Data and Analytics Services | $17.5 | $17.0 | +2.9% | | IT Staffing Services | $79.9 | $79.4 | +0.6% | | Total revenues | $97.4 | $96.4 | +1.0% | - **Total revenues increased** by **1%** year-over-year to **$97.4 million**, with Data and Analytics Services **growing by 4%** and IT Staffing Services by **1%**. The IT Staffing **increase was driven by higher average bill rates** despite a **lower number of billable consultants** (**980** in 2025 vs. **1,035** in 2024)[115](index=115&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk) - **Client concentration remained high**, with the top three clients (Fidelity, Populus, CGI) representing **37.6%** of **total revenues** for the six months ended June 30, 2025, compared to **26.2%** from the top two clients (CGI, Allegis) in the prior year[115](index=115&type=chunk) [Gross Margins](index=25&type=section&id=Gross%20Margins_YTD) This section examines the Company's year-to-date gross profit and gross margin percentages, broken down by segment Gross Margin by Segment | Segment | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | Change (bps) | | :------------------------ | :----------------------------- | :----------------------------- | :----------- | | Data and Analytics Services | 44.6% | 47.9% | -330 | | IT Staffing Services | 23.6% | 22.7% | +90 | | Total gross margin | 27.4% | 27.1% | +30 | - **Overall gross profit increased** to **$26.7 million**, with the **gross margin percentage improving** by **30 basis points** to **27.4%**. This was due to a **90-basis point increase** in IT Staffing Services margins (**higher margins and bill rates on new assignments**) **partially offset by** a **330-basis point decrease** in Data and Analytics Services margins (**lower utilization rates**)[118](index=118&type=chunk)[119](index=119&type=chunk)[121](index=121&type=chunk) [Selling, General and Administrative ("SG&A") Expenses](index=26&type=section&id=Selling,%20General%20and%20Administrative%20(%22SG%26A%22)%20Expenses_YTD) This section details the Company's year-to-date selling, general, and administrative expenses, explaining significant changes and their impact SG&A Expenses (in millions) | Expense Category | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | YoY Change | | :------------------------ | :----------------------------- | :----------------------------- | :--------- | | Data and Analytics Services Subtotal | $8.1 | $7.8 | +$0.3 | | IT Staffing Services Subtotal | $16.8 | $15.6 | +$1.2 | | Amortization of Acquired Intangible Assets | $1.3 | $1.4 | -$0.1 | | Severance Expense | $1.6 | — | +$1.6 | | Finance and Accounting Transition Expense | $0.7 | — | +$0.7 | | Total SG&A Expenses | $28.5 | $24.8 | +$3.7 | - **Total SG&A expenses increased** by **$3.7 million** to **$28.5 million** (**29.3%** of revenues) for the six months ended June 30, 2025, **up from** **$24.8 million** (**25.8%** of revenues) in the prior year. This was **largely due to** **$1.6 million** in **severance expense** (CFO and IT Staffing Sales Management) and **$0.7 million** in **finance and accounting transition expense**[122](index=122&type=chunk)[123](index=123&type=chunk) - General and administrative expenses **increased** by **$1.9 million**, primarily due to executive compensation (including **stock-based compensation**) and **higher recruiting fees** in both segments, along with **bad debt expense** in Data and Analytics Services[123](index=123&type=chunk) [Other Income / (Expense) Components](index=27&type=section&id=Other%20Income%20/%20(Expense)%20Components_YTD) This section reviews other non-operating income and expense items, such as interest income and foreign exchange gains/losses, for the year-to-date period - Other income (expense) for the six months ended June 30, 2025, included **$305 thousand** in **net interest income** and **$(31) thousand** in **foreign exchange losses**. This compares to **$284 thousand** **interest income** and **$(44) thousand** **foreign exchange losses** in the prior year, with **higher interest income** reflecting **higher cash balances**[124](index=124&type=chunk) [Income Tax Expense](index=27&type=section&id=Income%20Tax%20Expense_YTD) This section discusses the Company's year-to-date income tax expense or benefit and effective tax rate - **Income tax benefit** for the six months ended June 30, 2025, was **$(248) thousand**, resulting in an **effective tax rate** of **(16.0%)** on **pre-tax loss**. This compares to an expense of **$297 thousand** and an **effective tax rate** of **19.4%** in the prior year, reflecting a **favorable adjustment** to the tax valuation allowance due to Singapore tax benefits[125](index=125&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the Company's ability to meet its short-term and long-term financial obligations, including cash balances, credit facilities, and cash flow activities [Financial Conditions and Liquidity](index=27&type=section&id=Financial%20Conditions%20and%20Liquidity) This section provides an overview of the Company's financial position, cash reserves, and available credit, assessing its overall liquidity - As of June 30, 2025, the Company had **no bank debt**, **$27.9 million** in **cash balances**, and approximately **$22.2 million** of **unused borrowing capacity** under its credit facility[126](index=126&type=chunk) - The Company believes that current cash, operating cash flows, and credit facility availability will be **sufficient to fund business needs** and the **share repurchase program** for the next twelve months, **excluding acquisition activities**[128](index=128&type=chunk) - Accounts receivable 'days sales outstanding' (DSOs) **remained steady** at **53 days** as of June 30, 2025, consistent with the prior year[127](index=127&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 primary business operations - **Cash provided by operating activities** was **$0.3 million** for the six months ended June 30, 2025, a **significant improvement** from **cash used in operating activities** of **$(0.1) million** in the prior year. This was driven by a **net loss** of **$(1.3) million**, **$1.3 million** in non-cash charges, and a **$0.3 million decrease in operating working capital**[129](index=129&type=chunk) [Cash flows (used in) investing activities](index=27&type=section&id=Cash%20flows%20(used%20in)%20investing%20activities) This section details cash flows related to the acquisition and disposal of long-term assets and investments - **Cash used in investing activities decreased** to **$(188) thousand** for the six months ended June 30, 2025, from **$(751) thousand** in the prior year, primarily due to **lower capital expenditures**[130](index=130&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 outlines cash flows from debt, equity, and dividend transactions - **Cash provided by financing activities** was **$64 thousand** for the six months ended June 30, 2025, **down from** **$378 thousand** in the prior year. This included **proceeds from stock option exercises** (**$108 thousand**) and **common share issuance** (**$70 thousand**), **partially offset by treasury stock purchases** (**$(114) thousand**)[131](index=131&type=chunk) [Off-Balance Sheet Arrangements](index=28&type=section&id=Of%20-Balance%20Sheet%20Arrangements) This section discloses any material off-balance sheet arrangements that could impact the Company's financial position - The Company has **no off-balance sheet arrangements** other than **$324 thousand** in **outstanding letters of credit** issued under its Credit Agreement[132](index=132&type=chunk) [Inflation](index=28&type=section&id=Inflation) This section discusses the impact of inflationary conditions on the Company's operations and strategies to mitigate these effects - Inflation has **not had a significant impact** on operations for the periods presented, but **economic uncertainty** due to inflationary conditions may **adversely affect demand** for services. The Company aims to mitigate effects by **controlling costs** and **adjusting billing rates**[133](index=133&type=chunk) [Seasonality](index=28&type=section&id=Seasonality) This section describes the seasonal patterns affecting the Company's business performance and financial results - The Company experiences **seasonality**, with **lower utilization rates** and **higher benefit costs** typically in the fourth quarter due to national holidays and vacation policies. Assignment completions also tend to be higher near year-end, impacting subsequent quarter performance[135](index=135&type=chunk) [Recently Issued Accounting Standards](index=28&type=section&id=Recently%20Issued%20Accounting%20Standards) This section provides an update on new accounting pronouncements and their expected impact on the Company's financial reporting - Recent accounting pronouncements are described in Note 13 to the accompanying financial statements, with **no material impact expected** on the Company's financial statements[136](index=136&type=chunk)[88](index=88&type=chunk)[89](index=89&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) This section discusses the Company's exposure to market risks, primarily related to changes in interest rates and currency fluctuations, and assesses their potential impact on the financial statements [Interest Rates](index=28&type=section&id=Interest%20Rates) This section assesses the Company's exposure to interest rate fluctuations and their potential impact on financial performance - As of June 30, 2025, the Company had **no outstanding borrowings** under its Credit Agreements, thus **limiting its direct exposure** to interest rate fluctuations on debt[138](index=138&type=chunk) [Currency Fluctuations](index=28&type=section&id=Currency%20Fluctuations) This section discusses the Company's exposure to foreign currency exchange rate changes and their effects on consolidated financial statements - The Company's **reporting currency is the U.S. dollar**. While its Indian and European subsidiaries use **local functional currencies**, **foreign currency translation adjustments** are recorded in accumulated other comprehensive income (loss)[139](index=139&type=chunk) - Gains and losses from foreign currency transactions have **not been material** for the periods presented. A **hypothetical 10% change** in foreign currency rates would **not have a material impact** on the consolidated financial statements[139](index=139&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=29&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section details the Company's disclosure controls and procedures, confirming their effectiveness as of June 30, 2025, and noting no material changes in internal control over financial reporting during the quarter - The Company's **disclosure controls and procedures** were evaluated and **deemed effective** by the CEO and CFO as of June 30, 2025, ensuring **timely and accurate reporting** of information[140](index=140&type=chunk)[141](index=141&type=chunk) - **No material changes** in the Company's **internal control over financial reporting** occurred during the quarter ended June 30, 2025[143](index=143&type=chunk) [PART II. OTHER INFORMATION](index=29&type=section&id=PART%20II%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity security sales, other information, and exhibits, providing additional context to the Company's operations and governance [ITEM 1. LEGAL PROCEEDINGS](index=29&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section addresses the Company's involvement in legal and administrative proceedings, stating that management believes these matters will not materially impact the Company's financial position, results of operations, or cash flows - The Company is involved in various lawsuits and administrative proceedings in the ordinary course of business. Management believes these will **not have a material adverse effect** on financial position, results of operations, or cash flows[145](index=145&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, 2024 - There have been **no material changes** to the risk factors as previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2024[146](index=146&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) This section provides a summary of the Company's common stock repurchases during the quarter ended June 30, 2025, under its publicly announced share repurchase program Common Stock Repurchases (Quarter Ended June 30, 2025) | Period | Total Number of Shares Purchased | Average Price per Share | | :-------------------------- | :------------------------------- | :---------------------- | | April 1, 2025 — April 30, 2025 | — | $— | | May 1, 2025 — May 31, 2025 | 6,201 | $7.33 | | June 1, 2025 — June 30, 2025 | 10,310 | $6.64 | | Total | 16,511 | $6.90 | - The Company **repurchased** **16,511 shares** of common stock at an **average price of $6.90 per share** during the quarter ended June 30, 2025, under its extended **share repurchase program**, which has **406,568 shares remaining available**[147](index=147&type=chunk) [ITEM 5. OTHER INFORMATION](index=30&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This section discloses information regarding Rule 10b5-1 trading plans, noting no adoption, modification, or termination by directors or officers, and the Company's own 10b5-1 Repurchase Plan - **No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements** during the quarter ended June 30, 2025[148](index=148&type=chunk) - The Company **entered into a Rule 10b5-1 and Rule 10b-18 Repurchase Plan** on June 9, 2025, **authorizing the purchase of up to 406,568 shares** of common stock under its **share repurchase program**, expiring February 8, 2026. **No shares were purchased under this specific plan** during the quarter[149](index=149&type=chunk) [ITEM 6. EXHIBITS](index=31&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed with the Form 10-Q, including executive employment agreements, amendments to the stock incentive plan, separation agreements, certifications, and XBRL-related documents - **Exhibits include executive employment agreements**, amendments to the **Stock Incentive Plan**, a confidential **separation agreement**, Section 302 and 906 **certifications**, and various **XBRL documents**[150](index=150&type=chunk) [SIGNATURES](index=32&type=section&id=SIGNATURES) This section contains the required signatures for the Form 10-Q, certifying its submission on behalf of Mastech Digital, Inc. by its Chief Executive Officer and Chief Financial Officer - The report was **duly signed** on August 13, 2025, by Nirav Patel, Chief Executive Officer, and Kannan Sugantharaman, Chief Financial Officer, on behalf of Mastech Digital, Inc.[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk)