UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-34099
MASTECH DIGITAL, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA | 26-2753540 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1305 Cherrington Parkway, Building 210, Suite 400 Moon Township, Pennsylvania |
15108 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (412) 787-2100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrants Common Stock, par value $.01 per share, outstanding as of April 30, 2018 was 5,461,712.
MASTECH DIGITAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2018
Page | ||||||||
PART 1 |
3 | |||||||
Item 1. |
3 | |||||||
(a) |
3 | |||||||
(b) |
4 | |||||||
(c) |
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2018 and December 31, 2017 |
5 | ||||||
(d) |
6 | |||||||
(e) |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
7 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | ||||||
Item 3. |
25 | |||||||
Item 4. |
25 | |||||||
PART II |
26 | |||||||
Item 1. |
26 | |||||||
Item 1A. |
26 | |||||||
Item 2. |
26 | |||||||
Item 6. |
27 | |||||||
28 |
2
ITEM 1. | FINANCIAL STATEMENTS |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended March 31, |
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2018 | 2017 | |||||||
Revenues |
$ | 43,333 | $ | 33,100 | ||||
Cost of revenues |
33,072 | 26,891 | ||||||
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Gross profit |
10,261 | 6,209 | ||||||
Selling, general and administrative expenses |
7,823 | 5,806 | ||||||
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Income from operations |
2,438 | 403 | ||||||
Interest income (expense), net |
(473 | ) | (102 | ) | ||||
Other income (expense), net |
(39 | ) | 21 | |||||
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Income before income taxes |
1,926 | 322 | ||||||
Income tax expense |
546 | 121 | ||||||
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Net income |
$ | 1,380 | $ | 201 | ||||
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Earnings per share: |
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Basic |
$ | .25 | $ | .04 | ||||
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Diluted |
$ | .25 | $ | .04 | ||||
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Weighted average common shares outstanding: |
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Basic |
5,461 | 4,499 | ||||||
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Diluted |
5,529 | 4,561 | ||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
Three Months Ended March 31, |
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2018 | 2017 | |||||||
Net income |
$ | 1,380 | $ | 201 | ||||
Other comprehensive income: |
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Net unrealized gain on interest-rate swap contracts |
122 | 11 | ||||||
Foreign currency translation adjustments |
(42 | ) | | |||||
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Total pretax net unrealized gain |
80 | 11 | ||||||
Income tax expense |
31 | 5 | ||||||
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Total other comprehensive income, net of taxes |
$ | 49 | $ | 6 | ||||
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Total comprehensive income |
$ | 1,429 | $ | 207 | ||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2018 |
December 31, 2017 |
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ASSETS | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 1,267 | $ | 2,478 | ||||
Accounts receivable, net of allowance for uncollectible accounts of $408 in 2018 and $398 in 2017 |
24,784 | 22,876 | ||||||
Unbilled receivables |
8,777 | 7,786 | ||||||
Prepaid and other current assets |
868 | 1,533 | ||||||
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Total current assets |
35,696 | 34,673 | ||||||
Equipment, enterprise software, and leasehold improvements, at cost: |
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Equipment |
1,411 | 1,395 | ||||||
Enterprise software |
2,100 | 1,986 | ||||||
Leasehold improvements |
365 | 365 | ||||||
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3,876 | 3,746 | |||||||
Less accumulated depreciation and amortization |
(1,902 | ) | (1,847 | ) | ||||
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Net equipment, enterprise software, and leasehold improvements |
1,974 | 1,899 | ||||||
Deferred income taxes |
475 | 468 | ||||||
Non-current deposits |
294 | 255 | ||||||
Goodwill |
35,844 | 35,844 | ||||||
Intangible assets, net |
24,772 | 25,465 | ||||||
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Total assets |
$ | 99,055 | $ | 98,604 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 4,194 | $ | 4,003 | ||||
Current portion of contingent consideration liability |
6,125 | | ||||||
Accounts payable |
4,395 | 5,028 | ||||||
Accrued payroll and related costs |
7,129 | 8,969 | ||||||
Other accrued liabilities |
2,296 | 1,679 | ||||||
Deferred revenue |
191 | 430 | ||||||
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Total current liabilities |
24,330 | 20,109 | ||||||
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Long-term liabilities: |
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Long-term debt, less current portion, net |
34,968 | 34,149 | ||||||
Contingent consideration liability, less current portion |
11,000 | 17,125 | ||||||
Long-term accrued income taxes |
68 | 68 | ||||||
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Total liabilities |
70,366 | 71,451 | ||||||
Commitments and contingent liabilities (Note 5) |
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Shareholders equity: |
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Preferred Stock, no par value; 20,000,000 shares authorized; none outstanding |
| | ||||||
Common Stock, par value $.01; 125,000,000 shares authorized and 6,282,348 shares issued as of March 31, 2018 and 6,281,235 as of December 31, 2017 |
63 | 63 | ||||||
Additional paid-in-capital |
20,411 | 20,304 | ||||||
Retained earnings |
12,303 | 10,923 | ||||||
Accumulated other comprehensive income |
66 | 17 | ||||||
Treasury stock, at cost; 820,636 shares as of March 31, 2018 and as of December 31, 2017 |
(4,154 | ) | (4,154 | ) | ||||
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Total shareholders equity |
28,689 | 27,153 | ||||||
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Total liabilities and shareholders equity |
$ | 99,055 | $ | 98,604 | ||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three Months Ended March 31, |
||||||||
2018 | 2017 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 1,380 | $ | 201 | ||||
Adjustments to reconcile net income to cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
748 | 252 | ||||||
Bad debt expense |
10 | | ||||||
Interest amortization of deferred financing costs |
22 | 9 | ||||||
Stock-based compensation expense |
105 | 107 | ||||||
Deferred income taxes, net |
(7 | ) | 8 | |||||
Loss of disposition of fixed assets |
| 4 | ||||||
Working capital items: |
||||||||
Accounts receivable and unbilled receivables |
(2,909 | ) | (2,275 | ) | ||||
Prepaid and other current assets |
756 | (23 | ) | |||||
Accounts payable |
(633 | ) | 989 | |||||
Accrued payroll and related costs |
(1,840 | ) | (2,365 | ) | ||||
Other accrued liabilities |
617 | (50 | ) | |||||
Deferred revenue |
(239 | ) | (111 | ) | ||||
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Net cash flows (used in) operating activities |
(1,990 | ) | (3,254 | ) | ||||
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INVESTING ACTIVITIES: |
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Payment for non-current deposits |
(39 | ) | (6 | ) | ||||
Capital expenditures |
(130 | ) | (37 | ) | ||||
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Net cash flows (used in) investing activities |
(169 | ) | (43 | ) | ||||
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FINANCING ACTIVITIES: |
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Borrowings on revolving credit facility, net |
1,941 | 3,794 | ||||||
(Repayments) on term loan facility |
(953 | ) | (450 | ) | ||||
Proceeds from the exercise of stock options |
2 | | ||||||
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Net cash flows provided by financing activities |
990 | 3,344 | ||||||
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Effect of exchange rate changes on cash and cash equivalents |
(42 | ) | | |||||
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Net change in cash and cash equivalents |
(1,211 | ) | 47 | |||||
Cash and cash equivalents, beginning of period |
2,478 | 829 | ||||||
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Cash and cash equivalents, end of period |
$ | 1,267 | $ | 876 | ||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018 AND 2017
(Unaudited)
1. | Description of Business and Basis of Presentation: |
Basis of Presentation
References in this Quarterly Report on Form 10-Q to we, our, Mastech Digital, Mastech or the Company refer collectively to Mastech Digital, Inc. and its wholly-owned operating subsidiaries, which are included in these Condensed Consolidated Financial Statements (the Financial Statements).
Description of Business
We are a provider of Digital Transformation IT Services.
Our portfolio of offerings includes data management and analytics services; other digital transformation services such as Salesforce.com, SAP HANA, and Digital Learning services; and IT staffing services that span across digital and mainstream technologies.
Reflective of our recent acquisition of the services division of Canada-based InfoTrelllis, Inc., we have added specialized capabilities in delivering data management and analytics services to our customers globally. This business offers project-based consulting services in the areas of Master Data Management, Enterprise Data Integration, Big Data and Analytics, and Digital Transformation, with such services delivered using on-site and offshore resources.
Our IT staffing business combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies. Our digital technologies include data management, analytics, cloud, mobility, social and artificial intelligence. We work with businesses and institutions with significant IT spending and recurring staffing service needs. We also support smaller organizations with their project focused temporary IT staffing requirements.
Accounting Principles
The accompanying Financial Statements have been prepared by management in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and the accompanying notes. Actual results could differ from these estimates. These Financial Statements should be read in conjunction with the Companys audited consolidated financial statements and accompanying notes for the year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the SEC on March 23, 2018. Additionally, our operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that can be expected for the year ending December 31, 2018 or for any other period.
Principles of Consolidation
The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Critical Accounting Policies
Please refer to Note 1 Summary of Significant Accounting Policies of the Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2017 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the three months ended March 31, 2018.
7
Segment Reporting
The Company has two reportable segments, in accordance with ASC Topic 280 Disclosures About Segments of an Enterprise and Related Information: Data and Analytics Services and IT Staffing Services.
2. | Revenue from Contracts with Customers |
As of January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, using the modified retrospective method. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those services. The implementation of the new standard had no impact on the measurement of recognition of revenue of prior periods and we expect the impact of this new standard to be immaterial to us on an ongoing basis. Additional disclosures have been added in accordance with the ASU.
The Company recognizes revenue on time-and-material contracts as services are performed and expenses are incurred. Time-and-material contracts typically bill at an agreed-upon hourly rate, plus out-of-pocket expense reimbursement. Out-of-pocket expense reimbursement amounts vary by assignment, but on average represent less than 2% of total revenues. Revenue is earned on a per transaction or labor hour basis, as that amount directly corresponds to the value of the Companys performance. Revenue recognition is negatively impacted by holidays and consultant vacation and sick days.
The Company recognizes revenue on fixed price contracts as services are rendered and uses a cost-based input method to measure progress. Determining a measure of progress requires management to make judgments that affect the timing of revenue recognized. Under the cost-based input method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. The company has determined that the cost-based input method provides a faithful depiction of the transfer of goods or services to the customer. Estimated losses are recognized immediately in the period in which current estimates indicate a loss. We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which may be refundable.
We do not sell, lease or otherwise market computer software or hardware, and essentially 100
% of our revenue is derived from the sale of data and analytics, IT staffing and digital transformation services. We expense sales commissions in the same period in which revenues are realized. These costs are recorded within sales and marketing expenses.
Our data and analytics services segment provides specialized capabilities in delivering data management and analytics services to customers globally. This business offers project-based consulting services in the areas of Master Data Management, Enterprise Data Integration, Data and Analytics and Digital Transformation, which can be delivered using onsite and offshore resources.
Our IT staffing business combines technical expertise with business process experience to deliver a broad range of services in digital and mainstream technologies. Our digital technology stack includes data management and analytics, cloud, mobility, social and automation. Our mainstream technologies include business intelligence / data warehousing; web services; enterprise resource planning & customer resource management; and e-Business solutions. We work with businesses and institutions with significant IT-spend and recurring staffing needs. We also support smaller organizations with their project focused temporary IT staffing requirements.
The following table depicts the disaggregation of our revenues by contract type and operating segment:
Three Months Ended March 31, |
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2018 | 2017 | |||||||
(Amounts in millions) | ||||||||
Data and Analytics Services Segment |
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Time-and-material Contracts |
$ | 5.6 | $ | | ||||
Fixed-price Contracts |
1.0 | | ||||||
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Subtotal Data and Analytics Services |
$ | 6.6 | $ | | ||||
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IT Staffing Services Segment |
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Time-and-material Contracts |
$ | 36.7 | $ | 33.0 | ||||
Fixed-price Contracts |
| 0.1 | ||||||
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Subtotal IT Staffing Services |
$ | 36.7 | $ | 33.1 | ||||
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Total Revenues |
$ | 43.3 | $ | 33.1 | ||||
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8
For the three months ended March 31, 2018, the Company had one client (CGI = 12.1%) that exceeded 10% of total revenues. For the three months ended March 31, 2017, the Company had the same one client (CGI = 13.0%) that exceeded 10% of total revenues.
The Companys top ten clients represented approximately 45% and 47% of total revenues for the three months ended March 31, 2018 and 2017, respectively.
The following table presents our revenue from external customers disaggregated by geography, based on the work location of our customers:
Three Months Ended March 31, |
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2018 | 2017 | |||||||
(Amounts in millions) | ||||||||
United States |
$ | 42.0 | $ | 33.1 | ||||
Canada |
1.1 | | ||||||
India and other |
0.2 | | ||||||
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Total |
$ | 43.3 | $ | 33.1 | ||||
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3. | Business Combinations |
On July 7, 2017, Mastech Digital, Inc., through its wholly-owned subsidiaries Mastech InfoTrellis, Inc., Mastech InfoTrellis Digital, Ltd., Mastech Digital Data, Inc. and Mastech Digital Private Limited (collectively, the Company Entities), entered into two Asset Purchase Agreements and a Share Purchase Agreement (collectively, the Purchase Agreements) to acquire substantially all of the assets comprising the consulting services business in the areas of master data management, data integration and big data (the Acquired Business) of InfoTrellis Inc., InfoTrellis, Inc. and 2291496 Ontario Inc., including all outstanding shares of InfoTrellis India Private Limited (collectively, InfoTrellis). The aforementioned transaction was closed on July 13, 2017.
Under the terms of the Purchase Agreements, the Company Entities paid at the closing of the acquisition $35.75 million in cash, less certain working capital adjustments which totaled $861,000. The Purchase Agreements also provided for contingent consideration of $19.25 million in deferred cash payments, with up to $8.25 million payable if the EBIT of the Acquired Business for the 12-month period beginning on August 1, 2017 (the Actual Year 1 EBIT) equals $10.0 million and up to $11.0 million payable if the EBIT of the Acquired Business for the 12-month period beginning on August 1, 2018 (the Actual Year 2 EBIT) equals $10.7 million. The deferred amount payments are subject to adjustments under the terms of the Purchase Agreements based upon, among other items, the amount of the Actual Year 1 EBIT and the amount of the Actual Year 2 EBIT.
To fund the acquisition, the Company entered into a new credit agreement on July 13, 2017 with PNC Bank, National Association, as administrative agent, swing loan lender and issuing lender, PNC Capital Markets LLC, as sole lead arranger and sole book runner, and certain financial institutions party thereto as lenders. The Credit Agreement provides for a total aggregate commitment of $65.0 million, consisting of (i) a revolving credit facility in an aggregate principal amount not to exceed $27.5 million, subject to increases to an aggregate amount not to exceed $37.5 million upon satisfaction of certain conditions; (ii) a $30.5 million term loan facility; and (iii) a $7.0 million delayed draw term loan facility to be used exclusively toward contingent consideration payments. In addition, the Company entered into Securities Purchase Agreements with Ashok Trivedi and Sunil Wadhwani (collectively, the Investors) on July 7, 2017 pursuant to which the Company issued and sold an aggregate 857,144 shares (the Shares) of its common stock, par value $0.01 per share (the Common Stock), to the Investors on July 13, 2017 for $6.0 million in aggregate gross proceeds (the Private Placement Transactions). The Company used the proceeds from the Private Placement Transactions to fund a portion of the cash paid at the closing of the acquisition.
On April 20, 2018, we entered into an amendment to the Credit Agreement. Refer to Note 16 Subsequent Event to our Condensed Consolidated Financial Statements included in Item 1 herein for further details regarding this amendment.
9
The acquisition was accounted for using the acquisition method of accounting. The acquisition method of accounting requires that the assets acquired and liabilities assumed be measured at their fair value as of the closing date.
The following table summarizes the fair value of consideration for the Acquired Business on the July 13, 2017 closing date:
(in thousands) |
Amounts | |||
Cash purchase price at closing |
$ | 35,750 | ||
Working capital adjustments |
(861 | ) | ||
Estimated payout of contingent consideration (1) |
17,125 | |||
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Total Fair Value of Consideration |
$ | 52,014 | ||
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(1) | Based on a valuation conducted by an independent third party, the fair value of contingent consideration at the closing date was determined to be $17.1 million. |
The cash purchase price at closing was paid with funds obtained from the following sources:
(in thousands) |
Amounts | |||
Cash balances on hand |
$ | 341 | ||
Sale of common stock in a private placement transactions |
6,000 | |||
Term loan debt facility |
30,500 | |||
Revolving line of credit |
9,000 | |||
Payoff of previous credit facility |
(10,091 | ) | ||
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Cash paid at Closing |
$ | 35,750 | ||
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The preliminary allocation of the purchase price was based on estimates of the fair value of assets acquired and liabilities assumed as of July 13, 2017, as set forth below. The excess purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce. Goodwill is expected to be largely deductible for tax purposes. The fair value of net assets acquired is as follows:
(in thousands) |
Amounts | |||
Current Assets |
$ | 6,909 | ||
Fixed Assets and Other |
215 | |||
Identifiable intangible assets: |
||||
Client relationships |
16,671 | |||
Covenant not-to-compete |
761 | |||
Trade name |
1,221 | |||
Technology |
1,209 | |||
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Total identifiable intangible assets |
19,862 | |||
Goodwill |
27,417 | |||
Current liabilities |
(2,389 | ) | ||
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Net Assets Acquired |
$ | 52,014 | ||
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The fair value of identifiable intangible assets has been estimated using the income approach through a discounted cash flow analysis. Specifically, the Company used the income approach through an excess earnings analysis to determine the fair value of client relationships. The value applied to the covenant not-to-compete was based on an income approach using a with or without analysis of this covenant in place. The trade name and technology were valued using the income approachrelief from royalty method. All identifiable intangibles are considered level 3 inputs under the fair value measurement and disclosure guidance.
The Company incurred $2.0 million of transaction costs related to the acquisition in 2017. No transaction costs were incurred for the three months ended March 31, 2018 and 2017.
10
Included in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2018 are revenues of $6.6 million and net income of $0.9 million applicable to the InfoTrellis operations acquired on July 13, 2017.
The following reflects the Companys unaudited pro forma results had the results of InfoTrellis been included for all periods presented:
Three Months Ended March 31, |
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2018 | 2017 | |||||||
(Amounts in thousands) | ||||||||
Revenue |
$ | 43,333 | $ | 38,713 | ||||
Net income |
$ | 1,380 | $ | 854 | ||||
Earnings per share-diluted |
$ | 0.25 | $ | 0.16 |
The information above does not reflect all of the operating efficiencies or inefficiencies that may have resulted from the InfoTrellis acquisition in those periods prior to such acquisition. Therefore, the unaudited pro forma information above is not necessarily indicative of results that would have been achieved had the business been combined during all periods presented.
4. | Goodwill and Other Intangible Assets, net |
Goodwill related to our June 15, 2015 acquisition of Hudson Global Resources Managements U.S. IT staffing business (Hudson IT) totaled $8.4 million. Goodwill related to or July 13, 2017 acquisition of the services division of InfoTrellis totaled $27.4 million.
The Company is amortizing the identifiable intangible assets on a straight-line basis over estimated average lives ranging from 3 to 12 years. Identifiable intangible assets were comprised of the following as of March 31, 2018 and December 31, 2017:
March 31, 2018 | ||||||||||||||||
(Amounts in thousands) |
Amortization Period (In Years) |
Gross Carrying Value |
Accumulative Amortization |
Net Carrying Value |
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IT staffing services: |
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Client relationships |
12 | $ | 7,999 | $ | 1,861 | $ | 6,138 | |||||||||
Covenant-not-to-compete |
5 | 319 | 178 | 141 | ||||||||||||
Trade name |
3 | 249 | 232 | 17 | ||||||||||||
Data and analytics services: |
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Client relationships |
12 | 16,671 | 983 | 15,688 | ||||||||||||
Covenant-not-to-compete |
5 | 761 | 108 | 653 | ||||||||||||
Trade name |
5 | 1,221 | 173 | 1,048 | ||||||||||||
Technology |
7 | 1,209 | 122 | 1,087 | ||||||||||||
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|
|||||||||||
Total Intangible Assets |
$ | 28,429 | $ | 3,657 | $ | 24,772 | ||||||||||
|
|
|
|
|
|
|||||||||||
December 31, 2017 | ||||||||||||||||
(Amounts in thousands) |
Amortization Period (In Years) |
Gross Carrying Value |
Accumulative Amortization |
Net Carrying Value |
||||||||||||
IT staffing services: |
||||||||||||||||
Client relationships |
12 | $ | 7,999 | $ | 1,694 | $ | 6,305 | |||||||||
Covenant-not-to-compete |
5 | 319 | 162 | 157 | ||||||||||||
Trade name |
3 | 249 | 211 | 38 | ||||||||||||
Data and analytics services: |
||||||||||||||||
Client relationships |
12 | 16,671 | 636 | 16,035 | ||||||||||||
Covenant-not-to-compete |
5 | 761 | 70 | 691 | ||||||||||||
Trade name |
5 | 1,221 | 112 | 1,109 | ||||||||||||
Technology |
7 | 1,209 | 79 | 1,130 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total Intangible Assets |
$ | 28,429 | $ | 2,964 | $ | 25,465 | ||||||||||
|
|
|
|
|
|
11
Amortization expense for the three months ended March 31, 2018 and 2017 totaled $693,000 and $203,000, respectively and is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.
The estimated aggregate amortization expense for intangible assets for the years ending December 31, 2018 through 2022 is as follows:
Years Ended December 31, | ||||||||||||||||||||
2018 | 2019 | 2020 | 2021 | 2022 | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
Amortization expense |
$ | 2,727 | $ | 2,689 | $ | 2,654 | $ | 2,625 | $ | 2,443 |
5. | Commitments and Contingencies |
Lease Commitments
The Company rents certain office space and equipment under non-cancelable leases which provide for future minimum rental payments. Total lease commitments have not materially changed from the amounts disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2017.
Contingencies
In the ordinary course of our business, the Company is involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, the Companys management believes, after consultation with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
6. | Employee Benefit Plan |
The Company provides an Employee Retirement Savings Plan (the Retirement Plan) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code), that covers substantially all U.S. based salaried employees. Concurrent with the acquisition of Hudson IT, the Company expanded employee eligibility under the Retirement Plan to include all U.S. based W-2 hourly employees. Employees may contribute a percentage of eligible compensation to the Retirement Plan, subject to certain limits under the Code. For Hudson IT employees enrolled in the Hudson Employee Retirement Savings Plan under the Code at the acquisition date, the Company provides a matching contribution of 50% of the first 6% of the participants contributed pay, subject to vesting based on the combined tenure with Hudson and Mastech Digital. For all other employees, the Company did not provide for any matching contributions for the three months ended March 31, 2018 and 2017. Mastech Digitals total contributions to the Retirement Plan for the three months ended March 31, 2018 and 2017 related to the former Hudson IT employees totaled approximately $21,000 and $30,000, respectively.
7. | Stock-Based Compensation |
In 2008, the Company adopted a Stock Incentive Plan (the Plan) which, as amended, provides that up to 1,400,000 shares of the Companys Common Stock shall be allocated for issuance to directors, officers and key personnel. Grants under the Plan can be made in the form of stock options, stock appreciation rights, performance shares or stock awards. During the three months ended March 31, 2018, the Company granted 12,690 restricted share units and 90,000 stock options at a strike price of $14.92 under the Plan. During the three months ended March 31, 2017, no grants were made under the Plan. As of March 31, 2018 and December 31, 2017, there were 29,000 shares and 132,000, respectively available for future grant under the Plan.
Stock-based compensation expense for the three months ended March 31, 2018 and 2017 was $105,000 and $107,000, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
During the three months ended March 31, 2018 and 2017, the Company issued 1,113 and 0 shares, respectively, related to the exercising of stock options.
12
8. | Credit Facility |
On July 13, 2017, the Company entered into a Credit Agreement (the Credit Agreement) with PNC Bank, as administrative agent, swing loan lender and issuing lender, PNC Capital Markets LLC, as sole lead arranger and sole book-runner, and certain financial institution parties thereto as lenders (the Lenders). The Credit Agreement provides for a total aggregate commitment of $65 million, consisting of (i) a revolving credit facility (the Revolver) in an aggregate principal amount not to exceed $27.5 million (subject to increase by up to an additional $10 million upon satisfaction of certain conditions); (ii) a $30.5 million term loan facility (the Term Loan); and a (iii) $7.0 million delayed draw term loan facility (the Delayed Draw Term Loan), as more fully described in Exhibit 10.1 to the Companys Form 8-K, filed with the SEC on July 19, 2017.
The Revolver expires in five years and includes swing loan and letter of credit sub-limits in the aggregate amount not to exceed $3.0 million for swing loans and $5.0 million for letters of credit. Borrowings under the Revolver may be denominated in U.S. dollars or Canadian dollars. The maximum borrowings in U.S. dollars may not exceed the sum of 85% of eligible U.S. accounts receivable and 60% of eligible U.S. unbilled receivables, less a reserve amount established by the administrative agent. The maximum borrowings in Canadian dollars may not exceed the lesser of (i) $10.0 million; and (ii) the sum of 85% of eligible Canadian receivables, plus 60% of eligible Canadian unbilled receivables, less a reserve amount established by the administrative agent.
Amounts borrowed under the Term Loan are required to be repaid in consecutive quarterly installments commencing on October 1, 2017 through and including July 1, 2022 and on the maturity date of July 13, 2022. The principal amount of each quarterly installment payable on the Term Loan equals the product of $30.5 million, multiplied by (i) 3.125% for quarterly installments due on October 1, 2017 through and including July 1, 2018; (ii) 3.75% for quarterly installments payable on October 1, 2018 through and including July 1, 2021; and (iii) 5.00% for quarterly installments payable on October 1, 2021 through and including the maturity date, with the maturity date payment equal to the outstanding amount of the loan on that date. The Delayed Draw Term Loan may be used through the date of the final contingent consideration payment (referred to as the final Deferred Amount Payment in the Credit Agreement) on no more than two separate occasions in borrowing multiples of $1.0 million up to the lesser of contingent consideration earned or $7.0 million. Amounts borrowed under the Delayed Draw Term Loan will be payable in consecutive quarterly installments commencing on the first payment date after disbursement of such borrowings. The principal amount of each quarterly installment payable of each Delayed Draw Term Loan equals the product of the original balance of such Loan, multiplied by (i) 3.75% for quarterly installments due on October 1, 2018 through and including July 1, 2021; and (ii) 5.00% for quarterly installments payable on October 1, 2021 through and including the maturity date, with the maturity date payment equal to the outstanding amount of the loan on that date.
Borrowings under the revolver and the term loans, at the Companys election, bear interest at either (a) the higher of PNCs prime rate or the federal funds rate plus 0.50%, plus an applicable margin determined based upon the Companys senior leverage ratio or (b) an adjusted London Interbank Offered Rate (LIBOR), plus an applicable margin determined based upon the Companys senior leverage ratio. The applicable margin on the base rate is between 0.50% and 1.25% on revolver borrowings and between 1.75% and 2.50% on term loans. The applicable margin on the adjusted LIBOR is between 1.50% and 2.25% on revolver borrowings and between 2.75% and 3.50% on term loans. A 20 to 30 basis point per annum commitment fee on the unused portion of the revolver facility and the delayed draw term loan is charged and due monthly in arrears. The applicable commitment fee is determined based upon the Companys senior leverage ratio.
The Company pledged substantially all of its assets in support of the Credit Agreement. The credit agreement contains standard financial covenants, including, but not limited to, covenants related to the Companys senior leverage ratio and fixed charge ratio (as defined under the credit agreement) and limitations on liens, indebtedness, guarantees, contingent liabilities, loans and investments, distributions, leases, asset sales, stock repurchases and mergers and acquisitions. As of March 31, 2018, the Company was in compliance with all provisions under the facility.
In connection with securing the commitments under the Credit Agreement, the Company paid a commitment fee and incurred deferred financing costs totaling $435,000, which were capitalized and are being amortized as interest expense over the life of the facility. Debt financing costs of $373,000 and $395,000 (net of amortization) as of March 31, 2018 and December 31, 2017, respectively, are presented as reductions in long-term debt in the Companys Condensed Consolidated Balance Sheets.
As of March 31, 2018 and December 31, 2017, the Companys outstanding borrowings under the Revolver totaled $11.0 million and $9.0 million, respectively; and unused borrowing capacity available was approximately $13.5 million and $13 million, respectively. The Companys outstanding borrowings under the term loan were $28.6 million and $29.5 million at March 31, 2018 and December 31, 2017, respectively. The Company believes the eligible borrowing base on the revolver will not fall below current outstanding borrowings for a period of time exceeding one year and has classified the $11.0 million net outstanding debt balance at March 31, 2018, as long-term.
13
On April 20, 2018, we entered into an amendment to the Credit Agreement. Refer to Note 16 Subsequent Event to our Condensed Consolidated Financial Statements included in Item 1 herein for further details regarding this amendment.
9. | Income Taxes |
The components of income before income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three months ended March 31, 2018 and, 2017:
Three Months Ended March 31, |
||||||||
2018 | 2017 | |||||||
(Amounts in thousands) | ||||||||
Income before income taxes: |
||||||||
Domestic |
$ | 1,297 | $ | 197 | ||||
Foreign |
629 | 125 | ||||||
|
|
|
|
|||||
Income before income taxes |
$ | 1,926 | $ | 322 | ||||
|
|
|
|
The Company has foreign subsidiaries in Canada and India, both of which generate revenues from foreign clients. Additionally, the Company has foreign subsidiaries in Canada and India which provide services to its U.S. operations. Accordingly, the Company allocates a portion of its income to these subsidiaries based on a transfer pricing model and reports such income as foreign in the above table.
The provision for income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three months ended March 31, 2018 and 2017:
Three Months Ended March 31, |
||||||||
2018 | 2017 | |||||||
(Amounts in thousands) | ||||||||
Current provision: |
||||||||
Federal |
$ | 324 | $ | 67 | ||||
State |
90 | 8 | ||||||
Foreign |
171 | 42 | ||||||
|
|
|
|
|||||
Total current provision |
585 | 117 | ||||||
|
|
|
|
|||||
Deferred provision (benefit): |
||||||||
Federal |
(33 | ) | 3 | |||||
State |
(9 | ) | 1 | |||||
Foreign |
3 | | ||||||
|
|
|
|
|||||
Total deferred provision (benefit) |
(39 | ) | 4 | |||||
|
|
|
|
|||||
Total provision for income taxes |
$ | 546 | $ | 121 | ||||
|
|
|
|
The Tax Cut and Jobs Act of 2017 (the Tax Act) enacted on December 22, 2017 introduced significant changes to U.S. income tax law. Effective 2018, the Tax Act reduced the U.S. statutory tax rate from 34% to 21% and created new taxes on certain foreign-sourced earnings and certain intercompany payments.
We have not fully completed our accounting for the income tax effects of the Tax Act. As discussed in the SEC Staff Accounting Bulletin No. 118, the accounting for the Tax Act should be completed within one year from the Tax Act enactment. During the three months ended March 31, 2018, we have made no adjustments to the provisional amounts recorded at December 31, 2017. Any adjustments to the provisional amounts recorded at December 31, 2017 will be reflected upon the completion of our accounting for the Tax Act.
14
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes for the three months ended March 31, 2018 and 2017 were as follows (amounts in thousands):
Three Months Ended March 31, 2018 |
Three Months Ended March 31, 2017 |
|||||||||||||||
Income taxes computed at the federal statutory rate |
$ | 404 | 21.0 | % | $ | 109 | 34.0 | % | ||||||||
State income taxes, net of federal tax benefit |
81 | 4.2 | 9 | 2.8 | ||||||||||||
Excess tax benefits from stock options/restricted shares |
(2 | ) | (0.1 | ) | | | ||||||||||
Difference in income tax rate on foreign earnings/other |
63 | 3.3 | 3 | 0.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 546 | 28.4 | % | $ | 121 | 37.6 | % | |||||||||
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits related to uncertain tax positions, including interest and penalties, are as follows:
(Amounts in thousands) |
Three Months Ended March 31, 2018 |
|||
Balance as of December 31, 2017 |
$ | 95 | ||
Additions related to current period |
| |||
Additions related to prior periods |
| |||
Reductions related to prior periods |
| |||
|
|
|||
Balance as of March 31, 2018 |
$ | 95 | ||
|
|
Although it is difficult to anticipate the final outcome of these uncertain tax positions, the Company believes that the total amount of unrecognized tax benefits could be reduced by approximately $40,000 during the next twelve months due to the expiration of the statutes of limitation.
10. | Derivative Instruments and Hedging Activities |
Interest Rate Risk Management
Concurrent with the Companys July 13, 2017 borrowings under its new credit facility, the Company entered into a 44month interest-rate swap to convert the debts variable interest rate to a fixed rate of interest. Under the swap contracts, the Company pays interest at a fixed rate of 1.99% and receives interest at a variable rate equal to the daily U.S. LIBOR on a notional amount of $15,000,000. These swap contracts have been designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815, Derivatives and Hedging. These contracts are recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Condensed Consolidated Statements of Operations as interest expense in the same period in which the underlying hedge transaction affects earnings. Changes in the fair value of interest-rate swap contracts deemed ineffective are recognized in the Consolidated Statements of Operations as interest expense. Prior to July 13, 2017, the Company had outstanding interest-rate swap contracts related to term loan borrowings under the Companys previous credit agreement. The fair value of the interest-rate swap contracts at March 31, 2018 and December 31, 2017 was an asset of $131,000 and $9,000, respectively, and is reflected in the Condensed Consolidated Balance Sheets as other current assets.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Income are as follows (in thousands):
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships |
Amount of Gain / (Loss) recognized in OCI on Derivatives |
Location of Gain / (Loss) reclassified from Accumulated OCI to Income (Expense) |
Amount of Gain / (Loss) reclassified from Accumulated OCI to Income (Expense) |
Location of Gain / (Loss) reclassified in Income (Expense) on Derivatives |
Amount of Gain / (Loss) recognized in Income (Expense) on Derivatives |
|||||||||||||||
(Effective Portion) |
(Effective Portion) |
(Effective Portion) |
(Ineffective Portion/Amounts excluded from effectiveness testing) |
|||||||||||||||||
For the Three Months Ended March 31, 2018: |
||||||||||||||||||||
Interest-Rate Swap Contract |
$ | 122 | Interest Expense | $ | (14 | ) | Interest Expense | $ | |
15
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships |
Amount of Gain / (Loss) recognized in OCI on Derivatives |
Location of Gain / (Loss) reclassified from Accumulated OCI to Income (Expense) |
Amount of Gain / (Loss) reclassified from Accumulated OCI to Income (Expense) |
Location of Gain / (Loss) reclassified in Income (Expense) on Derivatives |
Amount of Gain / (Loss) recognized in Income (Expense) on Derivatives |
|||||||||||||||
(Effective Portion) |
(Effective Portion) |
(Effective Portion) |
(Ineffective Portion/Amounts excluded from effectiveness testing) |
|||||||||||||||||
For the Three Months Ended March 31, 2017: |
||||||||||||||||||||
Interest-Rate Swap Contract |
$ | 11 | Interest Expense | $ | (6 | ) | Interest Expense | $ | |
Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets (in thousands):
March 31, 2018 | December 31, 2017 | |||||||||||||||
Derivative Instruments |
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||
Interest-Rate Swap Contracts |
Other Current Assets | $ | 131 | Other Current Assets | $ | 9 |
The estimated amount of pretax (losses) as of March 31, 2018 that is expected to be reclassified from other comprehensive income (loss) into earnings within the next 12 months is approximately ($50,000).
11. | Fair Value Measurements |
The Company has adopted the provisions of ASC 820, Fair Value Measurements and Disclosures (ASC 820), related to certain financial and nonfinancial assets and liabilities. ASC 820 establishes the authoritative definition of fair value; sets out a framework for measuring fair value; and expands the required disclosures about fair value measurements. The valuation techniques required by ASC 820 are based on observable and unobservable inputs using the following three-tier hierarchy:
| Level 1 - Inputs are observable quoted prices (unadjusted) in active markets for identical assets and liabilities. |
| Level 2 - Inputs are observable, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are directly or indirectly observable in the marketplace. |
| Level 3 - Inputs are unobservable that are supported by little or no market activity. |
At March 31, 2018 and December 31, 2017, the Company carried the following financial assets (liabilities) at fair value measured on a recurring basis (in thousands):
Fair Value as of March 31, 2018 | ||||||||||||||||
(Amounts in thousands) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Interest-Rate Swap Contracts |
$ | | $ | 131 | $ | | $ | 131 | ||||||||
Contingent consideration liability |
$ | | $ | | $ | (17,125 | ) | $ | (17,125 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Fair Value as of December 31, 2017 | ||||||||||||||||
(Amounts in thousands) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Interest-Rate Swap Contracts |
$ | | $ | 9 | $ | | $ | 9 | ||||||||
Contingent consideration liability |
$ | | $ | | $ | (17,125 | ) | $ | (17,125 | ) | ||||||
|
|
|
|
|
|
|
|
The fair value of interest rate swap contracts are based on quoted prices for similar instruments from a commercial bank, and therefore, the fair value measurement is considered to be within level 2. The fair value of the contingent consideration liability was estimated by utilizing a probability weighted simulation model to determine the fair value of contingent consideration, and therefore, the fair value measurement is considered to be within level 3.
16
12. | Shareholders Equity |
The Company purchases shares to satisfy employee tax obligations related to its Stock Incentive Plan. During the three months ended March 31, 2018 and 2017, no purchases were made to satisfy employee tax obligations related to the vesting of restricted stock.
13. | Earning Per Share |
The computation of basic earnings per share is based on the Companys net income divided by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised. The dilutive effect of stock options was calculated using the treasury stock method.
For the three months ended March 31, 2018, there were 90,000 anti-dilutive stock options excluded from the computation of diluted earnings per share. For the three months ended March 31, 2017, there were 250,000 anti-dilutive stock options excluded from the computation of diluted earnings per share.
17
14. | Business Segments and Geographic Information |
Our reporting segments are: 1) Data and Analytics Services; and 2) IT Staffing Services.
The data and analytics services segment was acquired through the July 13, 2017 acquisition of the services division of Canada-based InfoTrellis, Inc. This segment is a project-based consulting services business with specialized capabilities in data management and analytics. The business is marketed as Mastech InfoTrellis and utilizes a dedicated sales team with deep subject matter expertise. Mastech InfoTrellis has offices in Toronto, Canada and Austin, Texas and a global delivery center in Chennai, India. Project-based delivery reflects a combination of on-site resources and offshore resources out of the Companys delivery center in Chennai. Assignments are secured on both a time and material and fixed price basis.
The IT staffing services segment offers staffing services in digital and mainstream technologies; digital transformation services focused on providing CRM on the cloud through Salesforce.com; driving IT efficiencies through SAP HANA; and using digital methods to enhance organizational learning. These services are marketed using a common sales force and delivered via our global recruitment center. While the vast majority of our assignments are based on time and materials, we do have the capabilities to deliver our digital transformation services on a fixed price basis.
Three Months Ended March 31, |
||||||||
2018 | 2017 | |||||||
(Amounts in thousands) | ||||||||
Revenues: |
||||||||
Data and analytics services |
$ | 6,572 | $ | | ||||
IT staffing services |
36,761 | 33,100 | ||||||
|
|
|
|
|||||
Total revenues |
$ | 43,333 | $ | 33,100 | ||||
|
|
|
|
|||||
Gross Margin %: |
||||||||
Data and analytics services |
44.3 | % | | |||||
IT staffing services |
20.0 | % | 18.8 | % | ||||
|
|
|
|
|||||
Total gross margin % |
23.7 | % | 18.8 | % | ||||
|
|
|
|
|||||
Segment operating income: |
||||||||
Data and analytics services |
$ | 1,775 | $ | | ||||
IT staffing services |
1,356 | 606 | ||||||
|
|
|
|
|||||
Subtotal |
3,131 | 606 | ||||||
Amortization of acquired intangible assets |
(693 | ) | (203 | ) | ||||
Interest expenses and other, net |
(512 | ) | (81 | ) | ||||
|
|
|
|
|||||
Income before income taxes |
$ | 1,926 | $ | 322 | ||||
|
|
|
|
Below is a reconciliation of segment total assets to consolidated total assets:
At March 31, | ||||||||
2018 | 2017 | |||||||
(Amounts in thousands) | ||||||||
Total assets: |
||||||||
Data and analytics services |
$ | 53,174 | $ | | ||||
IT staffing services |
45,881 | 41,575 | ||||||
|
|
|
|
|||||
Total assets |
$ | 99,055 | $ | 41,575 | ||||
|
|
|
|
18
Below is geographic information related to our revenues from external customers:
Three Months Ended March 31, |
||||||||
2018 | 2017 | |||||||
(Amounts in thousands) | ||||||||
United States |
$ | 42,017 | $ | 33,100 | ||||
Canada |
1,085 | | ||||||
India and Other |
231 | | ||||||
|
|
|
|
|||||
Total revenues |
$ | 43,333 | $ | 33,100 | ||||
|
|
|
|
15. | Recently Issued Accounting Standards |
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which provides for a single five-step model to be applied to all revenue contracts with customers. The new guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Entities can use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 to amend ASU 2014-09 for technical corrections and improvements and to clarify the implementation guidance for 1) principal versus agent considerations, 2) identifying performance obligations, 3) the accounting for licenses of intellectual property and 4) narrow scope improvements on assessing collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. The Company adopted the new guidance on January 1, 2018, using the modified retrospective method, with no impact on its 2017 and 2018 financial statements. The cumulative effect of initially applying the new guidance had no impact on the opening balance of retained earnings as of January 1, 2018. The Company does not expect the new guidance to have a material impact on its financial statements in future periods. Additional disclosures have been included in Note 2 in accordance with the requirements of the new guidance.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this ASU on January 1, 2018 with no material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. Current GAAP either is unclear or does not include specific guidance on eight specific cash flow classification issues included in the amendments in this ASU. The ASU addresses these cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this ASU on January 1, 2018 with no material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation Stock Compensation (Topic 718): Scope of Modification Accounting. Entities have defined the term modification in a broad manner resulting in diversity in modification accounting practice. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted this ASU on January 1, 2018 with no material impact on its consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740); Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU provides accounting and disclosure guidance relating to the Tax Cuts and Jobs Act pursuant to the issuance of SEC Staff Accounting Bulletin No. 118. The guidance allows a company to report provisional amounts when reasonable estimates are determinable for certain income tax effects relating to the Act. These provisional amounts may give rise to new current or deferred taxes based on certain provisions within the Act, as well as adjustments to existing current or deferred taxes that existed prior to the Acts enactment date. In the fourth quarter of 2017, the Company incurred an estimated one-time, non-cash
19
charge of $372,000 related to the enactment of the Act. The charge related to the re-measurement of the Companys deferred tax assets arising from a lower U.S. corporate tax rate of $294,000 and a $78,000 charge related to a one-time transition tax applicable to the new dividend exemption system related to foreign earnings. The provisional estimates recorded at December 31, 2017 were not adjusted during the three months ended March 31, 2018. Any adjustments will be reflected upon completion of our accounting for the Tax Act within one year from the Tax Act enactment.
Recent Accounting Pronouncements not yet adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The main difference between the current requirement under GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. We are currently assessing the potential impact of ASU 2016-02 and expect adoption will have a material impact on our consolidated financial condition and results of operations. Contractual obligations on lease arrangements as of March 31, 2018 approximated $2.7 million.
In January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under this ASU, a goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. We do not expect ASU 2017-04 to have a material impact on our financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815); Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entitys risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the ASU. The Company does not expect this ASU to have a material impact on its financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the ASU. The Company does not expect this ASU to have a material impact on its financial statements.
A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any, that the implementation of such proposed standards would have on the Companys consolidated financial statements.
16. | Subsequent Event |
On April 20, 2018, we entered into an amendment to our Credit Agreement dated as of July 13, 2017. This amendment: (i) reduces the aggregate commitment amount of the revolving credit facility from $27.5 million to $22.5 million, which amount is subject to increase to an aggregate commitment amount not exceeding $32.5 million upon satisfaction of certain conditions; (ii) increases the aggregate commitment amount of the swing loan subfacility under the revolving credit facility from $3.0 million to $5.0 million; and (iii) amends the financial covenant in the Credit Agreement related to the Companys leverage ratio (as defined in the Credit Agreement) by increasing the maximum permitted leverage ratio for each of the fiscal quarters ending on or prior to September 30, 2019. Our desired results of entering into this amendment were to increase our financial flexibility; lower our unused line fees and improve the mechanics of how we manage our cash balances.
On April 25, 2018, the Company filed with the Securities and Exchange Commission, a current report on Form 8-K providing additional details of this amendment.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2017, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on March 23, 2018.
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about future events, future performance, plans, strategies, expectations, prospects, competitive environment and regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words, may, will, expect, anticipate, believe, estimate, plan, intend or the negative of these terms or similar expressions in this quarterly report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Risk Factors, Forward-Looking Statements and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2017. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update forward-looking statements and the estimates and assumptions associated with them, after the date of this quarterly report on Form 10-Q, except to the extent required by applicable securities laws.
Website Access to SEC Reports:
The Companys website is www.mastechdigital.com. The Companys Annual Report on Form 10-K for the year ended December 31, 2017, current reports on Form 8-K and all other reports filed with the SEC, are available free of charge on the Investors page. The website is updated as soon as reasonably practical after such reports are filed electronically with the SEC.
Critical Accounting Policies
Please refer to Note 1 Summary of Significant Accounting Policies of the Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2017 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the three months ended March 31, 2018.
Overview:
We are a provider of Digital Transformation IT Services to mostly large and medium sized organizations.
Our portfolio of offerings include data management and analytics services; other digital transformation services such as Salesforce.com, SAP HANA, and Digital Learning services; and IT staffing services.
With the July 13, 2017 acquisition of InfoTrellis, we now operate in two reporting segments Data and Analytics Services and IT Staffing Services. Our data and analytics services are marketed on a global basis under the brand Mastech InfoTrellis and delivered largely on a project basis with on-site and off-shore resources. These capabilities and expertise were acquired through our recent acquisition of InfoTrellis. Our IT staffing business combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies, as well as our other digital transformation services.
Both business segments provide their services across various industry verticals including: financial services; government; healthcare; manufacturing; retail; technology; telecommunications; education; and transportation. Within each reporting segment we evaluate our revenues and gross profits largely by sales channel responsibility. In the past, we have disclosed revenues and gross profits by client type (wholesale clients and retail clients). Managements emphasis on the breakdown of wholesale and retail client types has diminished over the last year as gross margin opportunities within each client type has changed considerably as the Company has focused on digital technologies. Today, our analysis within our two reporting segments is multi-purposed and includes technologies employed, client relationships, and sales channel accountability.
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Economic Trends and Outlook:
Generally, our business outlook is highly correlated to general North American economic conditions. During periods of increasing employment and economic expansion, demand for our services tends to increase. Conversely, during periods of contracting employment and / or a slowing domestic economy, demand for our services tends to decline. As the economy slowed during the second half of 2007 and recessionary conditions emerged in 2008 and during much of 2009, we experienced less demand for our staffing services. During the second half of 2009, we began to see signs of market stabilization and a modest pick-up in activity levels within certain sales channels and technologies and in 2010, market conditions continued to strengthen over the course of the year. In 2011 through 2013, activity levels continued to trend up in most technologies and sales channels. During 2014 and 2015, we continued to see a steady flow of solid activity in our contract staffing business; however, tightness in the supply side (skilled IT professionals) of our business during these years negatively impacted our new assignment successes. Solid activity levels in our contract staffing business continued during 2016 and 2017, however, recruitment challenges remained due to the tightness in the supply of skilled IT professionals. Entering 2018, we are encouraged by job growth in the U.S and an expanding global economy, as well as potential stimulus associated with the Tax Cut and Jobs Act of 2017. We believe that supply side pressures will persist in both of our business segments, but view market conditions as generally positive.
In addition to tracking general U.S. economic conditions, a large portion of our revenues is generated from a limited number of clients. Accordingly, our trends and outlook are impacted by the prospects and well-being of these specific clients. This account concentration factor may cause our results of operations to deviate from the prevailing U.S. economic trends from time to time.
Within the IT staffing business many larger users of these services are employing third-party managed service providers MSP to manage their contractor spending in an effort to drive down overall costs. This trend towards utilizing the MSP model may pressure gross margins in the future.
Results of Operations for the Three Months Ended March 31, 2018 as Compared to the Three Months Ended March 31, 2017:
InfoTrellis Acquisition
As described above, since the July 13, 2017 closing of the InfoTrellis acquisition, we have operated in two reporting segments Data and Analytics Services; and IT Staffing Services. Our results of operations for periods prior to July 13, 2017 do not include any financial data for our Data and Analytics Services segment and are therefore not fully comparable to our results of operations for periods subsequent to the InfoTrellis acquisition.
Revenues:
Revenues for the three months ended March 31, 2018 totaled $43.3 million compared to $33.1 million for the corresponding three month period in 2017. This 31% year-over-year revenue increase reflected the July 13, 2017 acquisition of InfoTrellis data management and analytics services business and 11% growth in our IT staffing segment. For the three months ended March 31, 2018, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 12.1%). For the three months ended March 31, 2017, the Company had the same one client that had revenues in excess of 10% of total revenues (CGI = 13.0%). The Companys top ten clients represented approximately 45% and 47% of total revenues for the three months ended March 31, 2018 and 2017, respectively.
Below is a tabular presentation of revenues by reportable segment for the three months ended March 31, 2018 and 2017, respectively:
Revenues (Amounts in thousands) |
Three Months Ended March 31, 2018 |
Three Months Ended March 31, 2017 |
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Data and Analytics Services |
$ | 6,572 | $ | | ||||
IT Staffing Services |
36,761 | 33,100 | ||||||
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Total revenues |
$ | 43,333 | $ | 33,100 | ||||
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Revenues from our Data and Analytics Services segment totaled $6.6 million in the first quarter ending March 31, 2018, compared to $5.1 million in the previous quarter ending December 31, 2017. This is the second consecutive quarter that sequential revenues grew by nearly 30%. Activity levels during first quarter 2018 continued to be strong and several new assignments were booked during the quarter.
Revenues from IT Staffing Services segment totaled $36.7 million in the three months ended March 31, 2018 compared to $33.1 million during the corresponding 2017 period. This 11% organic increase reflected a higher level of billable consultants in the 2018 quarter, partially offset by a lower average bill rate. Billable consultant headcount at March 31, 2018 totaled 1,013-consultants compared to 893-consultants one-year earlier. Increased demand for our staffing services and improved efficiencies at our global
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recruitment center were largely responsible for this improvement. Our average bill rate decreased during the 2018 quarter to $73.34/ per hour compared to $75.40 / per hour in the 2017 quarter. The decrease in our average bill rate was due to lower rates on new assignments over the last half of 2017 and is reflective of the types of skill-sets that we deployed. However, when compared to fourth quarter 2017, our first quarter 2018 bill rate increased by approximately $1.00/ per hour. Permanent placement / fee revenues were approximately $0.2 million during the quarter, which was ahead of last years performance.
Gross Margins:
Gross profits in the first quarter of 2018 totaled $10.3 million, compared to $6.2 million in the first quarter of 2017. Gross profit as a percentage of revenue was 23.7% for the three month period ending March 31, 2018 compared to 18.8% during the same period of 2017. This 490-basis point improvement reflected the consolidation of the financial results of our Data and Analytics Services segment, which has a gross margin profile that is materially higher than our IT staffing segment and a 120-basis point organic improvement in our IT Staffing Services segments gross margins.
Below is a tabular presentation of gross margin by reporting segment for the three months ended March 31, 2018 and 2017, respectively:
Gross Margin |
Three Months Ended March 31, 2018 |
Three Months Ended March 31, 2017 |
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Data and Analytics Services |
44.3 | % | | % | ||||
IT Staffing Services |
20.0 | 18.8 | ||||||
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Total gross margin |
23.7 | % | 18.8 | % | ||||
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Gross margins from our Data and Analytics Services segment were 44.3% of revenues during the first quarter of 2018. This compares to gross margins of 45.3% in the fourth quarter of 2017. The margin decline from the previous quarter reflected higher bench costs in the first quarter of 2018 as the Company invested in expanding its practice capabilities.
Gross margins from our IT Staffing Services segment were 20.0% in the first quarter of 2018 compared to 18.8% million during the corresponding quarter of 2017. This 120-basis point increase was due to better gross margins on assignment secured during the first quarter of 2018 and higher direct hire revenues / fees, when compared to the corresponding quarter of 2017. The higher margins also reflects our focus on advance technology skill-sets.
Selling, General and Administrative (S,G&A) Expenses:
Below is a tabular presentation of operating expenses by sales, operations, amortization of acquired intangible assets and general and administrative categories for the three months ended March 31, 2018 and 2017, respectively:
S,G&A Expenses (Amounts in millions) | Three Months Ended March 31, 2018 |
Three Months Ended March 31, 2017 |
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Data and Analytics Services Segment |
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Sales and Marketing |
$ | 0.6 | $ | | ||||
Operations |
0.1 | | ||||||
Amortization of Acquired Intangible Assets |
0.5 | | ||||||
General & Administrative |
0.4 | | ||||||
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Subtotal Data and Analytics Services |
$ | 1.6 | $ | | ||||
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IT Staffing Services Segment |
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Sales and Marketing |
$ | 2.1 | $ | 2.1 | ||||
Operations |
2.1 | 2.1 | ||||||
Amortization of Acquired Intangible Assets |
0.2 | 0.2 | ||||||
General & Administrative |
1.8 | 1.4 | ||||||
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Subtotal IT Staffing Services |
$ | 6.2 | $ | 5.8 | ||||
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Total S,G&A Expenses |
$ | 7.8 | $ | 5.8 | ||||
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S,G&A expenses for the three months ended March 31, 2018 totaled $7.8 million or 18.1% of total revenues, compared to $5.8 million or 17.5% of revenues for the three months ended March 31, 2017. Excluding amortization of acquired intangible assets in
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both periods S,G&A as a percentage of total revenues would have been 16.5% and 16.9%, respectively. Fluctuations within S,G&A expense components during the first quarter of 2018, compared to the first quarter of 2017, included the following:
| Sales expense increased by $0.6 million in the 2018 period compared to 2017. The entire increase was related to the acquisition of our Data and Analytics Services segment in July 2017. Sales expense in our IT Staffing Services segment was largely flat on a year-over-year basis. |
| Operations expense increased by $0.1 million in the 2018 period compared to 2017 primarily related to our new Data and Analytics Services segment. |
| Amortization of acquired intangible assets was $0.5 million higher in the 2018 period compared to 2017. This entire increase reflected the amortization related to the acquisition of our Data and Analytics Services segment. |
| General and administrative expense increased by $0.8 million in the 2018 period compared to 2017. Approximately $0.4 million was related to our new Data and Analytics Services segment and $0.4 million was related to our IT Staffing Services segment. The increase in our IT Staffing Services segment in the 2018 period was due to the following: higher management bonus accruals ($0.2 million); higher travel expenses ($0.1 million); and higher tax and accounting fees ($0.1 million). |
Other Income / (Expense) Components:
Other Income / (Expense) for the three months ended March 31, 2018 consisted of interest expense of ($473,000) and foreign exchange losses of ($39,000). For the three months ended March 31, 2017, Other Income / (Expense) consisted of interest expense of ($102,000) and foreign exchange gains of $21,000. The higher level of interest expense was due to increased borrowings to fund the acquisition of our Data and Analytics Services segment.
Income Tax Expense:
Income tax expense (benefit) for the three months ended March 31, 2018 totaled $546,000, representing an effective tax rate on pre-tax income of 28.4%, compared to $121,000 for the three months ended March 31, 2017, which represented a 37.6% effective tax rate on pre-tax income. The lower effective tax rate largely reflects the impact of the Tax Cut and Jobs Act of 2017, which lowered the U.S. federal income tax rate to 21%.
Liquidity and Capital Resources:
Financial Conditions and Liquidity:
At March 31, 2018, we had bank debt, net of cash balances on hand, of $38 million and approximately $13.5 million of borrowing capacity under our existing credit facility.
Historically, we have funded our organic business needs with cash generated from operating activities. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash generation. At March 31, 2018, our accounts receivable days sales outstanding (DSOs) measurement increased to 64-days from 58-days a quarter earlier, which is on the high end of our range and is expected to improve in the second quarter of 2018.
We believe that cash provided by operating activities, cash balances on hand and current availability under our credit facility will be adequate to fund our business needs and debt service obligations over the next twelve months.
Cash flows provided by (used in) operating activities:
Cash (used in) operating activities for the three months ended March 31, 2018 totaled ($2.0 million) compared to cash (used in) operating activities of ($3.3 million) during the three months ended March 31, 2017. Elements of cash flows in the 2018 period were net income of $1.4 million, non-cash charges of $0.8 million, and an increase in operating working capital levels of ($4.2 million). During the three months ended March 31, 2017, elements of cash flows were net income of $0.2 million, non-cash charges of $0.4 million and an increase in operating working capital levels of ($3.9 million). The operating working capital increases in both 2018 and 2017 were in support of revenue growth (higher accounts receivable levels) and first quarter payments of annual variable compensation accrued in the previous year.
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Cash flows (used in) investing activities:
Cash (used in) investing activities for the three months ended March 31, 2018 was ($169,000) compared to ($43,000) for the three months ended March 31, 2017. In 2018, capital expenditures totaled ($130,000) and largely related to system upgrade expenditures. Additionally, we had ($39,000) of real estate lease deposits. In 2017, cash used in investing activities essentially consisted of capital expenditures.
Cash flows provided by (used in) financing activities:
Cash provided by (used in) financing activities for the three months ended March 31, 2018 totaled $1.0 million and consisted of net borrowings under our revolving credit facility of $1.9 million and $(0.9 million) of debt payments on our term loan facility. Cash provided by financing activities for the three months ended March 31, 2017 totaled $3.3 million and consisted of borrowings under our revolving credit facility of $3.8 million and debt payments on our term loan of ($0.5 million).
Off-Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements.
Inflation:
We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seeking to ensure that billing rates are adjusted periodically to reflect increases in costs due to inflation.
Seasonality:
Our operations are generally not affected by seasonal fluctuations. However, our consultants billable hours are affected by national holidays and vacation policies. Accordingly, we generally have lower utilization rates and higher benefit costs during the fourth quarter. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impacts our revenue and gross profit performance during the subsequent quarter.
Recently Issued Accounting Standards:
Recent accounting pronouncements are described in Note 15 to the accompanying financial statements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Cash and cash equivalents are defined as cash and highly liquid investments with maturities of three months or less when purchased. Cash equivalents are stated at cost, which approximates market value.
Our cash flow and earnings are subject to fluctuations due to exchange rate variations. Foreign currency risk exists by nature of our global recruitment centers. During 2012 through 2015, we attempted to limit our exposure to currency exchange fluctuations in the Indian rupee via the purchase of foreign currency forward contracts. The Company elected not to engage in currency hedging activities in 2016 to date given the likelihood of an environment of interest rate expansion in the United States, which management believes should have the impact of mitigating any material appreciation in the Indian rupee against the U.S. dollar.
Concurrent with the Companys July 13, 2017 borrowings of $39.5 million in support of the InfoTrellis acquisition, we entered into a 44-month interest-rate swap to convert the debts variable interest rate to a fixed rate of interest. Under the swap contracts, the Company pays interest at a fixed rate of 1.99% and receives interest at a variable rate equal to the daily U.S. LIBOR rate on a notional amount of $15 million. The swap contacts mature in monthly installments commencing on September 1, 2017. These swap contacts have been designed as cash flow hedging instruments.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act rules 13a-15(b) and 15d-15(b), except in connection with the InfoTrellis acquisition completed on July 13, 2017. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2, respectively, to this quarterly report on Form 10-Q.
Changes in Internal Control over Financial Reporting
There has been no change in the Companys internal control over financial reporting that occurred during the quarter ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting as of December 31, 2017.
ITEM 1. | LEGAL PROCEEDINGS |
In the ordinary course of our business, we are involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, management believes, after consultation with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 1A. | RISK FACTORS |
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 23, 2018.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
NONE
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ITEM 6. | EXHIBITS |
(a) | Exhibits |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 11th day of May, 2018.
MASTECH DIGITAL, INC. | ||||||
May 11, 2018 | /s/ VIVEK GUPTA | |||||
Vivek Gupta Chief Executive Officer | ||||||
/s/ JOHN J. CRONIN, JR. | ||||||
John J. Cronin, Jr. | ||||||
Chief Financial Officer | ||||||
(Principal Financial Officer) |
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Exhibit 10.3
FIRST AMENDMENT TO
CREDIT AGREEMENT
This First Amendment to Credit Agreement is dated as of November , 2017, by and among Mastech Digital, Inc., a Pennsylvania corporation (MDI), in its capacity as Borrowing Agent under the Credit Agreement (as defined below), PNC Bank, National Association (PNC Bank) and the other Lenders party hereto, and PNC Bank, in its capacity as administrative agent for the Lenders (hereinafter referred to in such capacity as the Administrative Agent) (the First Amendment).
W I T N E S S E T H:
WHEREAS, MDI and the other Borrowers party thereto, the Guarantors party thereto, the Lenders party thereto and the Administrative Agent entered into that certain Credit Agreement, dated as of July 13, 2017 (as may be amended, restated, modified or supplemented from time to time, the Credit Agreement); and
WHEREAS, the Borrowers and the Guarantors desire to amend certain provisions of the Credit Agreement and the Lenders and the Administrative Agent shall permit such amendments pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:
1. All capitalized terms used herein which are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement unless the context clearly indicates otherwise.
2. The definition of Required Lenders set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
Required Lenders means
(A) If there exists fewer than three (3) Lenders, all Lenders (other than any Defaulting Lender), and
(B) If there exist three (3) or more Lenders, at least two (2) Lenders (other than any Defaulting Lender) aggregately having more than fifty percent (50%) of the sum of (a) the aggregate amount of the Revolving Credit Commitments of the Lenders (excluding any Defaulting Lender) or, after the termination of the Revolving Credit Commitments, the outstanding Revolving Credit Loans and Ratable Share of Letter of Credit Obligations of the
Lenders (excluding any Defaulting Lender), (b) the aggregate outstanding amount of any Term Loans and (c) the aggregate amount of the Delayed Draw Term Loan Commitments of the Lenders (excluding any Defaulting Lender) or, after the termination of the Delayed Draw Term Loan Commitments, the outstanding Delayed Draw Term Loans of the Lenders (excluding any Defaulting Lender).
3. Section 9.2.3 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
9.2.3 Guaranties. Each of the Loan Parties shall not, and shall not permit any of its Subsidiaries to, at any time, directly or indirectly, become or be liable in respect of any Guaranty, or assume, guarantee, become surety for, endorse or otherwise agree, become or remain directly or contingently liable upon or with respect to any obligation or liability of any other Person, except for (i) Guaranties of Indebtedness of the Loan Parties permitted hereunder, (ii) contingent liabilities arising from the endorsement of negotiable or other instruments for deposit or collection or similar transactions in the ordinary course of business and (iii) the obligations of MDI under that certain Parent Company Guarantee, dated on or around even date herewith, between MDI and Farmers Group, Inc. (the Farmers Guaranty), the form of which has been delivered by MDI to the Administrative Agent, pursuant to which MDI shall Guaranty the obligations of Mastech Canada under the Guaranteed Agreements (as such term is defined in the Farmers Guaranty); provided that there is no material change in the terms thereof without the prior written consent of the Administrative Agent.
4. The provisions of Sections 2 and 3 of this First Amendment shall not become effective until the Administrative Agent has received the following items, each in form and substance acceptable to the Administrative Agent and its counsel:
(a) this First Amendment, duly executed by each of the Loan Parties, the Administrative Agent and the Required Lenders; and
(b) such other documents as may be requested by the Administrative Agent, if any.
5. Each Loan Party hereby reconfirms and reaffirms all representations and warranties, agreements and covenants made by it pursuant to the terms and conditions of the Credit Agreement and the other Loan Documents, except as such representations and warranties, agreements and covenants may have heretofore been amended, modified or waived in writing in accordance with the Credit Agreement.
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6. Each Loan Party acknowledges and agrees that each and every document, instrument or agreement, which at any time has secured the Obligations hereby continues to secure the Obligations, except to the extent such document, instrument or agreement has been modified, terminated or expired in accordance with their respective terms since their original execution and delivery by such Loan Party.
7. Each Loan Party hereby represents and warrants to the Lenders and the Administrative Agent that (i) such Loan Party has the legal power and authority to execute and deliver this First Amendment, (ii) the officers of such Loan Party executing this First Amendment have been duly authorized to execute and deliver the same and bind such Loan Party with respect to the provisions hereof, (iii) the execution and delivery hereof by such Loan Party and the performance and observance by such Loan Party of the provisions hereof and of the Credit Agreement and all documents executed or to be executed herewith or therewith, do not violate or conflict with the organizational agreements of such Loan Party or any Law applicable to such Loan Party or result in a breach of any provision of or constitute a default under any other agreement, instrument or document binding upon or enforceable against such Loan Party, and (iv) this First Amendment, the Credit Agreement and the documents executed or to be executed by such Loan Party in connection herewith or therewith constitute valid and binding obligations of such Loan Party in every respect, enforceable in accordance with their respective terms.
8. Each Loan Party represents and warrants that (i) no Event of Default exists under the Credit Agreement, nor will any occur as a result of the execution and delivery of this First Amendment or the performance or observance of any provision hereof, (ii) the schedules attached to and made a part of the Credit Agreement, are true and correct in all material respects as of the date hereof, except as such schedules may have heretofore been amended or modified in writing in accordance with the Credit Agreement, and (iii) it presently has no known claims or actions of any kind at law or in equity against the Lenders or the Administrative Agent arising out of or in any way relating to the Loan Documents.
9. Each reference to the Credit Agreement that is made in the Credit Agreement or any other document executed or to be executed in connection therewith shall hereafter be construed as a reference to the Credit Agreement as amended hereby.
10. The agreements contained in this First Amendment are limited to the specific agreements made herein. Except as amended hereby, all of the terms and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect. This First Amendment amends the Credit Agreement and is not a novation thereof.
11. This First Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed to be an original, but all such counterparts shall constitute but one and the same instrument. Delivery of an executed counterpart of a signature page of this First Amendment by e-mail or telecopy shall be effective as delivery of a manually executed counterpart of this First Amendment.
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12. This First Amendment shall be deemed to be a contract under the Laws of the State of New York without regard to its conflict of laws principles. Each Loan Party hereby consents to the nonexclusive jurisdiction of the courts of the State of New York sitting in New York County, New York and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, with respect to any suit arising out of or mentioning this First Amendment.
[INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, and intending to be legally bound, the parties hereto have caused this First Amendment to be duly executed by their duly authorized officers the day and year first above written.
WITNESS: | Mastech Digital, Inc., a Pennsylvania corporation, as Borrowing Agent | |||||||
/s/ Jennifer F. Lacey | By: | /s/ John J. Cronin, Jr. | ||||||
Name: | John J. Cronin, Jr. | |||||||
Title: | EVP and CFO |
[Lender Signature Pages Follow]
ADMINISTRATIVE AGENT AND LENDERS:
PNC Bank, National Association, as a Lender and as Administrative Agent |
By: | /s/ Samuel Giacomantonio | |
Name: | Samuel Giacomantonio | |
Title: | Vice President |
First National Bank of Pennsylvania, as a Lender |
By: | /s/ Michael Colella | |
Name: | Michael Colella | |
Title: | Vice President |
Northwest Bank, as a Lender |
By: | /s/ Thomas K. Craft III | |
Name: | Thomas K. Craft III | |
Title: | SVP Credit Admin. |
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer
I, Vivek Gupta, certify that:
1. | I have reviewed this report on Form 10-Q of Mastech Digital, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
MASTECH DIGITAL, INC. | ||||||
Date: May 11, 2018 | /S/ VIVEK GUPTA | |||||
Vivek Gupta Chief Executive Officer |
Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer
I, John J. Cronin, Jr., certify that:
1. | I have reviewed this report on Form 10-Q of Mastech Digital, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
MASTECH DIGITAL, INC. | ||||||
Date: May 11, 2018 | /S/ JOHN J. CRONIN, JR. | |||||
John J. Cronin, Jr. Chief Financial Officer |
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Mastech Digital, Inc. (the Company) on Form 10-Q for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Vivek Gupta, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/S/ VIVEK GUPTA |
Vivek Gupta |
Chief Executive Officer |
Date: May 11, 2018 |
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Mastech Digital, Inc. (the Company) on Form 10-Q for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John J. Cronin, Jr. Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/S/ JOHN J. CRONIN, JR. |
John J. Cronin, Jr. |
Chief Financial Officer |
Date: May 11, 2018 |