Mastech Digital, Inc.

Previous wording

Generally, our business outlook is highly correlated to general North American economic conditions, particularly with respect to our IT Staffing Services segment. 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 global economy, demand for our services tends to decline. With economic expansion in 2010 through 2019 activity levels improved. However, as economic conditions strengthened, we experienced increased tightness in the supply side (skilled IT professionals) of our businesses. These supply-side challenges pressured resource costs and to some extent gross margins. As we entered 2020, we were encouraged by continued growth in the domestic job markets and expanding U.S. and global economies. However, with the COVID-19 pandemic surfacing in the first quarter of 2020, we realized that economic growth would quickly turn into recessionary conditions, which had a material impact on activity levels in both of our business segments. In 2021, we were encouraged by the global roll-out of vaccination programs and signs of economic improvement, however, the proliferation of COVID-19 variants have caused some uncertainty and disruption in the global markets. In 2022 and 2023, COVID-19-related concerns seemed to subside, however, increased inflation, challenges in the financial sector related to increasing interest rates, and concerns about a possible recession created much uncertainty and impacted demand for our services in the second half of 2022 and the entire year of 2023. Entering 2024, while economic conditions in North American have shown signs of improvement, a level of uncertainty remains with respect to inflation and the potential of escalations of existing conflicts in the Middle East and Ukraine. Currently, it’s difficult to predict how market conditions are going to unfold over the course of 2024 and beyond.

Current wording

Generally, our business outlook is highly correlated to general North American economic conditions, particularly with respect to our IT Staffing Services segment. 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 global economy, demand for our services tends to decline. With economic expansion in 2010 through 2019 activity levels improved. However, as economic conditions strengthened, we experienced increased tightness in the supply side (skilled IT professionals) of our businesses. These supply-side challenges pressured resource costs and to some extent gross margins. As we entered 2020, we were encouraged by continued growth in the domestic job markets and expanding U.S. and global economies. However, with the COVID-19 pandemic surfacing in the first quarter of 2020, we realized that economic growth would quickly turn into recessionary conditions, which had a material impact on activity levels in both of our business segments. In 2021, we were encouraged by the global roll-out of vaccination programs and signs of economic improvement, however, the proliferation of COVID-19 variants caused some uncertainty and disruption in the global markets. In 2022 and 2023, COVID-19-related concerns seemed to subside, however, increased inflation, challenges in the financial sector related to increasing interest rates, and concerns about a possible recession created much uncertainty and impacted demand for our services in the second half of 2022 and the entire year of 2023. In 2024, economic conditions in North America improved over the course of the year as job market growth and inflationary outlooks showed positive signs of improvement. As we enter 2025, a new level of uncertainty and caution has returned to the marketplace, largely related to unknowns with respect to the incoming administration and the impact of the policies it is adopting. Currently, it is difficult to predict how market conditions are going to unfold over the course of 2025 and beyond.

Previous wording

Recent growth in advanced technologies (social, cloud, analytics, mobility, automation) is providing opportunities within our IT Staffing Services segment. However, supply side challenges have proven to be acute with respect to many of these technologies.

Current wording

Recent growth in advanced technologies (social, cloud, data, analytics, mobility, automation) is providing opportunities within our IT Staffing Services segment. However, supply side challenges have proven to be acute with respect to many of these technologies.

Previous wording

Below is a tabular presentation of operating expenses by sales and marketing, operations, general and administrative, amortization of acquired intangible assets, employment-related claim, net of recoveries, goodwill impairment, severance expense, cybersecurity breach, revaluation of contingent consideration and acquisition transaction expense categories for the periods discussed:

Current wording

Below is a tabular presentation of operating expenses by sales and marketing, operations, general and administrative, amortization of acquired intangible assets, employment-related claim, net of recoveries, goodwill impairment, severance expense and a cybersecurity breach for the periods discussed:

Previous wording

In both 2022 and 2021, we had one client that exceeded 10% of total revenues (CGI = 22.2% in 2022 and 15.0% in 2021, respectively). Our top ten clients represented 53% of total revenues in 2022 compared to 48% of total revenues in 2021.

Current wording

In 2024, we had two clients that exceeded 10% of total revenues (CGI = 14.5% and Allegis = 10.7%). In 2023, we had one client that exceeded 10% of total revenues (CGI = 22.5%). Our top ten clients represented 54% of total revenues in 2024 and 53% of total revenues in 2023. Additionally, our largest industry vertical, financial services, represented approximately 49% of total revenues in 2024, compared to approximately 50% in 2023.

Previous wording

Gross profit increased to $63.2 million in 2022, compared to $59.4 million in 2021, an increase of 6% on a year-over-basis. Gross profit as a percentage of revenue totaled 26.1% in 2022, compared to 26.8% in 2021. The decrease in our gross margin percentage was entirely related to our Data and Analytics Services segment as gross margins declined by 690-basis points largely due to poor utilization and lower margins on several longer-term assignments related to compensation increases. Gross margins in our IT Staffing Services segment were 23.0% in 2022, compared to 22.3% in 2021. This 70-basis point improvement was due to better margins on new assignments and higher permanent placement revenues in 2022.

Current wording

Gross profit increased to $55.6 million in 2024, compared to $51.0 million in 2023, an increase of 8.9% on a year-over-basis. Gross profit as a percentage of revenue totaled 27.9% in 2024, compared to 25.4% in 2023.

Previous wording

SG&A expenses in 2022 totaled $51.0 million and represented 21.1% of total revenues, compared to $41.8 million or 18.8% of revenues in 2021. When excluding the amortization of acquired intangible assets, severance expense, cybersecurity breach, revaluation of contingent consideration, and acquisition transaction expenses, the adjusted SG&A expenses related to operations, as a percentage of revenues was 19.2% in 2022 versus 18.6% in 2021. The increase in SG&A as a percentage of revenues, excluding these items mentioned above, was largely due to higher compensation and other variable expense increases in both of our business segments.

Current wording

SG&A expenses in 2024 totaled $51.8 million and represented 26.0% of total revenues, compared to $60.3 million or 30.0% of revenues in 2023. When excluding the amortization of acquired intangible assets and severance expenses in 2024, and the amortization of acquired intangible assets, severance expenses, an employment-related claim, net of recoveries, and goodwill impairment in 2023, the adjusted SG&A expenses related to operations as a percentage of revenues was 23.6% in 2024 versus 23.2% in 2023. The increase in SG&A as a percentage of revenues, excluding these items mentioned above, was largely due to higher sales expense in both business segments, partially offset by lower general and administrative expenses.

Previous wording

In 2022, other income / (expense) consisted of interest expense of ($358,000) and foreign exchange gains of $650,000. In 2021, other income / (expense) consisted of interest expense of ($675,000) and foreign exchange losses of ($49,000). The decline in interest expense was largely due to lower outstanding borrowings. Net foreign exchange gains in 2022 compared to 2021 reflected exchange rate variations between the Indian rupee and the Canadian dollar compared to the U.S. dollar.

Current wording

In 2024, other income / (expense) consisted of net interest income of $606,000 and foreign exchange gains of $27,000. In 2023, other income / (expense) consisted of interest income of $319,000 and foreign exchange losses of ($75,000). The increase in interest income was due to a higher balance of cash on hand in 2024 compared to 2023, partially offset by interest rate reductions in 2024. Net foreign exchange gains (losses) in 2024 compared to 2023 reflected exchange rate variations between the Indian rupee and the Canadian dollar compared to the U.S. dollar.

Previous wording

Income tax expense for 2022 was $3.8 million and represented an effective tax rate onpre-tax income of 30.3%, compared to $4.7 million in 2021, which represented an effective tax rate onpre-tax income of 27.6%. The higher 2022 effective tax rate was due to an increase in our tax valuation allowance related to foreign net operating losses (NOL’s) in Singapore, Ireland and the UK and higher state income taxes.

Current wording

Income tax expense (benefit) for 2024 was $1.0 million and represented an effective tax rate onpre-tax income of 23.1%, compared to ($1.9 million) in 2023, which represented an effective tax rate onpre-tax (loss) of (21.0%). The 2024 effective tax rate compared to 2023 reflected a worthless stock deduction recognized on the dissolution of our Singapore entity in 2024.

Previous wording

Gross margins from our Data and Analytics Services segment were 43.5%, which was 200-basis points better than the 41.5% gross margins that we experienced in 2022. The improvement largely reflected better utilization in the 2023 period.

Current wording

Gross margins from our Data and Analytics Services segment were 43.5%, which was 200-basis points higher than the 41.5% gross margins that we experienced in 2022. The increase largely reflected higher utilization in the 2023 period.

Previous wording

On December 31, 2023, we had a cash balance on hand of $21.1 million, no bank debt outstanding and approximately $22.5 million of borrowing capacity under our existing credit facility. In anticipation of rising interest rates, we elected to prepay term loans in 2022. During 2023, we paid off our final $1.1 million of term loans, in addition to funding $0.3 million of capital expenditures and $0.6 million of common stock repurchases under our 500,000 share repurchase program announced by our Board of Directors in the first quarter of 2023.

Current wording

On December 31, 2024, we had cash balances on hand of $27.7 million, no bank debt outstanding and approximately $22.6 million of borrowing capacity under our existing credit facility.

Previous wording

Historically, we have funded our business needs with cash generation from operating activities. In the data and analytics services and IT staffing services industries, investment in operating working capital levels (defined as current assets excluding cash and cash equivalents minus current liabilities, excluding short-term borrowings) is a significant use of cash. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash preservation. Our accounts receivable “days sales outstanding” measurement (“DSO”) atyear-end 2023 improved to 53-days compared to 59-days atyear-end 2022. The improvement in the DSO measurement in 2023 was largely due to a lower DSO measurement in our solution-based data and analytics services business.

Current wording

Historically, we have funded our business needs with cash generation from operating activities. In the data and analytics services and IT staffing services industries, investment in operating working capital levels (defined as current assets excluding cash and cash equivalents minus current liabilities, excluding short-term borrowings) is a significant use of cash. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash preservation. Our accounts receivable “days sales outstanding” measurement (“DSO”) atyear-end 2024 improved to 52-days compared to 53-days atyear-end 2023.

Previous wording

Cash provided by operating activities, our cash and cash equivalent balances on hand at December 31, 2023 and current availability under our existing credit facility are expected to be adequate to fund our business needs over the next 12 months, absent any major acquisition-related activities.

Current wording

Cash provided by operating activities, our cash and cash equivalent balances on hand at December 31, 2024 and current availability under our existing credit facility are expected to be adequate to fund our business needs over the next 12 months, including our share repurchase program, which was extended by our Board of Directors through February 8, 2026, but excluding any major acquisition-related activities.

Previous wording

Cash provided by (used in) operating activities for the years ended December 31, 2023, 2022 and 2021 totaled $16.0 million, $12.6 million and $5.2 million, respectively. In 2023, cash flows from operating activities included a net (loss) of ($7.1 million), non-cash charges of $10.6 million and decreases in operating working capital of $12.5 million. In 2022, cash flows from operating activities included net income of $8.7 million, non-cash charges of $6.8 million and increases in operating working capital or ($2.9 million). In 2021, cash flows from operating activities included net income of $12.2 million, non-cash charges of $4.7 million and increases in operating working capital of ($11.7 million). The 2023 reduction in operating working capital was due to lower accounts receivable, reflecting significant revenue declines during the year. The 2022 increase in operating capital largely reflected a $2.3 million repayment of the COVID-19 payroll tax deferment program. The 2021 increase in operating working capital reflected higher accounts receivable due to higher revenue levels and a $2.3 million repayment of the COVID-19 payroll tax deferment program.

Current wording

Cash provided by (used in) operating activities for the years ended December 31, 2024, 2023 and 2022 totaled $7.2 million, $16.0 million and $12.6 million, respectively. In 2024, cash flows from operating activities included net income of $3.4 million, non-cash charges of $6.1 million and an increase in operating working capital of ($2.3 million). In 2023, cash flows from operating activities included a net (loss) of ($7.1 million), non-cash charges of $10.6 million and decreases in operating working capital of $12.5 million. In 2022, cash flows from operating activities included net income of $8.7 million, non-cash charges of $6.8 million and increases in operating working capital of ($2.9 million). The 2024 increase in operating working capital reflected higher activities levels as accounts receivable and prepaid expenses increased. The 2023 reduction in operating working capital was due to lower accounts receivable, reflecting significant revenue declines during the year. The 2022 increase in operating capital largely reflected a $2.3 million repayment of the COVID-19 payroll tax deferment program.

Previous wording

We would expect operating working capital levels to increase should revenue grow in 2024. Accordingly, an increase in operating working capital would result in a reduction in cash generated from operating activities. We believe DSOs are currently at the lower range of our expectations and will likely increase marginally should our data and analytics services revenues grow disproportionately to our total revenues.

Current wording

We would expect operating working capital levels to increase should revenue grow in 2025. Accordingly, an increase in operating working capital would result in a reduction in cash generated from operating activities. We believe that DSOs are currently at the lower range of our expectations and will likely increase marginally should our data and analytics services revenues grow disproportionately to our total revenues, as solution businesses generally experience a higher DSO measurement than IT staffing organizations.

Previous wording

Cash (used in) investing activities for the years ended December 31, 2023, 2022 and 2021 totaled ($0.2 million), ($0.8 million) and ($2.1 million), respectively. In 2023, cash (used in) investing activities consisted of ($0.3 million) of capital expenditures and a $0.1 million recovery ofnon-current office lease deposits. In 2022, cash (used in) investing activities consisted of ($0.8) of capital expenditures. In 2021, cash (used in) investing activities consisted of ($1.9 million) of capital expenditures and ($0.2 million) of additionalnon-current office lease deposits. In 2023, capital expenditures were largely limited to computer equipment. In 2022, capital expenditures related primarily to system upgrade expenditures. In 2021, capital expenditures related primarily to system upgrades and improvements to our data and analytics delivery center in Chennai, India.

Current wording

Cash (used in) investing activities for the years ended December 31, 2024, 2023 and 2022 totaled ($0.9 million), ($0.2 million) and ($0.8 million), respectively. In 2024, cash (used in) investing activities consisted entirely of capital expenditures – largely computer equipment and cyber-security related expenditures. In 2023, cash (used in) investing activities consisted of ($0.3 million) of capital expenditures and a $0.1 million recovery ofnon-current office lease deposits. In 2022, cash (used in) investing activities consisted of ($0.8 million) of capital expenditures, primarily related to system upgrade expenditures.

Previous wording

In 2023, cash (used in) financing activities totaled ($1.6 million) and included ($1.1 million) of debt repayments, ($0.6 million) of common stock repurchases, partially offset by proceeds from our issuance of common shares under our employee stock purchase plan. In 2022, cash (used in) financing activities totaled ($10.4 million) and included debt repayments of ($12.0 million) partially offset by proceeds from the exercise of stock options and the issuance of common stock related to the Company’s employee stock purchase plan of $1.6 million. In 2021, cash (used in) financing activities totaled ($4.1 million) and included debt repayments of ($4.4 million) and the payment of deferred financing costs of ($0.2 million) related to our credit facility amendment, partially offset by proceeds from the exercise of stock options and the issuance of common stock related to the Company’s employee stock purchase plan of $0.5 million.

Current wording

In 2024, cash provided by financing activities totaled $0.7 million and included $0.2 million of proceeds from the issuance of common shares under our employee stock purchase plan and $0.5 million of proceeds from the exercise of stock options, partially offset by the repurchase of common stock under the Company’s share repurchase program. In 2023, cash (used in) financing activities totaled ($1.6 million) and included ($1.1 million) of debt repayments, ($0.6 million) of common stock repurchases, partially offset by proceeds from our issuance of common shares under our employee stock purchase plan. In 2022, cash (used in) financing activities totaled ($10.4 million) and included debt repayments of ($12.0 million) partially offset by proceeds from the exercise of stock options and the issuance of common stock related to the Company’s employee stock purchase plan of $1.6 million.

Previous wording

On January 12, 2024, the Company entered into a consulting agreement with Primentor, Inc. to provide strategic advisory and management consulting services, as well as any other business and organizational strategy services as the Board of Directors of the Company may reasonably request from time to time. During 2024, the Company will incur consulting expenses of approximately $1.0 million related to these services, which will impact our income from operations and cash flows. See Note 18 “Subsequent Event” to the Notes to the Consolidated Financial Statements, included in Item 8 herein.

Current wording

On January 12, 2024, the Company entered into a consulting agreement with Primentor, Inc. to provide strategic advisory and management consulting services, as well as any other business and organizational strategy services as the Board of Directors of the Company may reasonably request from time to time. During 2024, the Company incurred consulting expenses of approximately $1.1 million related to these services. In 2025 and 2026, the Company expects to pay Primentor approximately $0.4 million and $0.2 million, respectively.

Previous wording

Our operations are generally not affected by seasonal fluctuations. However, our consultants’ billable hours are affected by national holidays and vacation patterns. Accordingly, we typically 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.

Current wording

Our consultants’ billable hours are affected by national holidays and vacation patterns. Accordingly, we typically 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.

Previous wording

Accounts receivable are reviewed periodically to determine the probability of loss. The Company records an allowance for credit losses when it is probable that the related receivable balance will not be collected based on historical collection experience, client-specific collection issues, and other matters the Company identifies in its collection monitoring.

Current wording

Accounts receivables are reviewed periodically to determine the probability of loss. The Company records an allowance for credit losses when it is probable that the related receivable balance will not be collected based on historical collection experience, client-specific collection issues, and other matters the Company identifies in its collection monitoring.

Previous wording

The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations (“ASC 805”). This guidance requires consideration given (including contingent consideration), assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that:(1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition-related transaction costs will generally be expensed as incurred; (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will effect income tax expense.

Current wording

The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations (“ASC 805”). This guidance requires consideration given (including contingent consideration), assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that:(1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition-related transaction costs will generally be expensed as incurred; (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

Previous wording

Management determines the Company’s income tax provision using the asset and liability method. Under this method, deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle the temporary differences. The effect of a change in tax rates on deferred taxes is recognized in the period that the change is enacted. The Company evaluates its deferred tax assets and records a valuation allowance when, in management’s opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2023 and 2022, the Company provided a valuation allowance of $628,000 and $559,000, respectively, related to the uncertainty of the realization of foreign net operating losses (“NOL”).

Current wording

Management determines the Company’s income tax provision using the asset and liability method. Under this method, deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle the temporary differences. The effect of a change in tax rates on deferred taxes is recognized in the period that the change is enacted. The Company evaluates its deferred tax assets and records a valuation allowance when, in management’s opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2024 and 2023, the Company provided a valuation allowance of $452,000 and $628,000, respectively, related to the uncertainty of the realization of foreign net operating losses (“NOL”).

Previous wording

The reporting currency of the Company and its subsidiaries is the U.S. dollar. The functional currency of the Company’s subsidiary in Canada is the U.S. dollar because the majority of its revenue is denominated in U.S. dollars. The functional currency of the Company’s Indian and European subsidiaries is their local currency. The results of operations of the Company’s Indian and European subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company’s Indian and European subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within Shareholders’ Equity. Gains and losses resulting from foreign currency transactions are included as a component of other income (expense), net in the Consolidated Statements of Operations. Foreign exchange (losses) of ($0.1 million) in 2023 and $0.6 million foreign exchange gains in 2022 were primary due to exchange rate variations between the Indian rupee and the U.S. dollar. Foreign exchange losses were not material in 2021.

Current wording

The reporting currency of the Company and its subsidiaries is the U.S. dollar. The functional currency of the Company’s subsidiary in Canada is the U.S. dollar because the majority of its revenue is denominated in U.S. dollars. The functional currency of the Company’s Indian and European subsidiaries is their local currency. The results of operations of the Company’s Indian and European subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company’s Indian and European subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within Shareholders’ Equity. Gains and losses resulting from foreign currency transactions are included as a component of other income (expense), net in the Consolidated Statements of Operations. Foreign exchange gains / (losses) in 2024 totaled $27,000; in 2023 we incurred losses of ($75,000) and we incurred $650,000 foreign exchange gains in 2022.