Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

MANAGEMENT'S 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, 2025, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on March 18, 2026.

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, 2025. 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 Company's website is www.mastechdigital.com. The Company's Annual Report on Form 10-K for the year ended December 31, 2025, 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2025 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 nine months ended September 30, 2026.

2024 Primentor, Inc. Consulting Agreement

On January 12, 2024, the Company entered into a consulting services agreement with Primentor, Inc. ("Primentor") under which Primentor provides to the Company strategic advisory and management consulting services, as well as other business and organizational strategy services as requested by the Company's Board of Directors. The initial term of the agreement is three years, commencing on January 12, 2024. The Company may elect to renew the agreement for successive one-year terms, subject to mutual agreement with Primentor regarding the scope of services and related fees.

During 2024 and 2025, the Company incurred consulting expenses of approximately $1.1 million and $0.3 million, respectively. The Company expects to incur approximately $0.2 million in consulting expenses during 2026, plus reimbursement of reasonable and documented out-of-pocket expenses incurred by Primentor in rendering such services.

Transition of the Company's finance and accounting functions to India:

During the first quarter of 2025, the Company's Board of Directors made the decision to implement a long-term cost-cutting initiative to transition the Company's finance and accounting functions to India. During 2025, the Company incurred $1.2 million of severance costs and $0.7 million of costs related to the duplication of resources and travel expenses during the training and knowledge transfer process. The transition was completed as of December 31, 2025.

Overview:

We are a provider of digital transformation IT services to primarily large and medium-sized organizations. Our portfolio combines project-based professional services with flexible staffing solutions to support our clients' evolving digital and technology needs.

Effective January 1, 2026, we realigned our reporting structure and now operate through two reportable segments: Talent and Data & AI. This change reflects how management evaluates performance and allocates resources across our core offerings. Prior-period information has been recast to conform to the current presentation.

Our Data & AI segment is focused on delivering consulting and managed services engagements that help clients design, build, and optimize their data and digital platforms. These offerings are typically delivered on a project or managed services basis and leverage a combination of on-site and offshore delivery capabilities. Our Data & AI capabilities have been developed both organically and through acquisitions, including InfoTrellis in 2017, which expanded our data and analytics expertise, and AmberLeaf in 2020, which strengthened our customer experience and managed services offerings.

Our Talent segment provides staffing solutions that enable clients to access skilled technology professionals across a broad range of digital and mainstream IT disciplines. These engagements include both direct client relationships and intermediated arrangements through managed service providers and systems integrators. This segment allows clients to scale their technology teams efficiently while maintaining flexibility in response to changing business conditions.

Across both segments, we serve a diversified set of industries, including financial services, government, healthcare, manufacturing, retail, technology, telecommunications, and transportation. Our client base includes organizations with ongoing technology investment needs, as well as those undertaking discrete digital transformation initiatives.

Data & AI Segment:

We provide information regarding new bookings within our Data & AI segment, which represents the estimated value of client engagements, including renewals and extensions of existing contracts. We believe this metric provides useful insight into trends in the volume of new business over time. New bookings can vary significantly from period to period due to the timing of contract awards, particularly for larger engagements. The conversion of bookings into revenue is influenced by several factors, including the nature and scope of services, contract duration, and the pace of client spending. Additionally, substantially all of our client contracts are terminable by the client on short notice, with little or no termination penalties. New bookings involve estimates and judgments, and there are no third-party standards governing their calculation. Accordingly, bookings should not be considered a substitute for, or comparable to, revenue measures. We do not update previously reported bookings for subsequent contract modifications, terminations, or reductions.

Economic Trends and Outlook:

Our business outlook is influenced by general economic conditions in North America and globally. Demand for our services, particularly within the Talent segment, is closely tied to employment levels, corporate spending, and overall economic activity. Periods of economic expansion typically lead to increased demand for our services, while periods of economic uncertainty or contraction may result in reduced client spending. In recent periods, economic conditions have been characterized by ongoing uncertainty, including inflationary pressures, interest rate volatility, and evolving trade and immigration policies. These dynamics have contributed to longer client decision-making cycles and more cautious spending patterns.

A significant portion of our revenues is generated from a limited number of clients. As a result, our operating results may be impacted by the financial condition and spending patterns of these clients, which may cause our performance to differ from broader market trends.

Within the Talent segment, a meaningful portion of revenues is generated through relationships with systems integrators and managed service providers ("MSPs"). These arrangements may exert pressure on pricing and margins over time.

Results of Operations for the Three Months Ended September 30, 2026 as Compared to the Three Months Ended September 30, 2025:

Revenues:

Revenues for the three months ended September 30, 2026 totaled $42.0 million, compared to $48.5 million for the corresponding three-month period in 2025. This 13.4% year-over-year revenue decrease reflected a 16.4% revenue decrease in our Talent segment and a 6.8% decline in our Data & AI segment. For the three months ended September 30, 2026, the Company had one client that had revenues in excess of 10% of total revenues (Fidelity 28.5%). For the three months ended September 30, 2025, the Company had three clients that each had revenues in excess of 10% of total revenues (Fidelity = 18.1%, Populus = 12.7% and CGI = 10.4%). The Company's top ten clients represented approximately 62% and 59% of total revenues for the three months ended September 30, 2026 and 2025, respectively.

Below is a tabular presentation of revenues by reportable segment for the three months ended September 30, 2026 and 2025, respectively:

Revenues from our Data & AI segment totaled $14.1 million in the three months ended September 30, 2026, which decreased compared to $15.2 million in the corresponding period last year. The decrease in Data & AI revenues primarily reflects lower time-and-material and staff augmentation engagement volumes compared to the prior-year period, partially offset by increased revenue from fixed-price projects. While bookings have increased during 2026, the associated revenue contribution from recently awarded projects has not yet fully offset the decline in revenue from existing engagements. New bookings in the third quarter of 2026 totaled approximately $10.8 million, compared to bookings of $8.4 million in the third quarter of 2025, reflecting stronger demand for Data & AI services.

Revenues from our Talent segment totaled $27.9 million in the three months ended September 30, 2026, compared to $33.3 million during the corresponding 2025 period. The year-over-year decline in revenue primarily reflects lower billable consultants in 2026. Billable consultants at September 30, 2026 totaled 580-consultants compared to 734-consultants one year earlier. Our average bill rate during the third quarter of 2026 was $92.37 per hour compared to $89.65 per hour in the corresponding 2025 quarter. The increase in average bill rate was due to higher value assignments during the third quarter of 2026 and was reflective of the types of skill sets that we deployed to clients.

Gross Margins:

Gross profit for the third quarter of 2026 totaled $12.0 million, a decrease of $1.4 million compared to the third quarter of 2025. Gross margin was 28.7% in the third quarter of 2026 compared to 27.8% in the corresponding 2025 period. Excluding severance expenses of $0.1 million and $0.3 million in the third quarters of 2026 and 2025, respectively, gross margin increased 70 basis points to 29.0% from 28.3%. This increase was driven by higher gross margins in both the Talent and Data & AI segments.

Below is a tabular presentation of gross margin by reporting segment for the three months ended September 30, 2026 and 2025, respectively:

Gross margins from our Data & AI segment were 40.5% of revenues during the third quarter of 2026, which represented an increase of 50-basis points compared to 40.0% of revenues during the third quarter of 2025. The increase primarily reflected normal fluctuations in project mix and engagement profitability. Including severance expenses of $0.1 million and $0.3 million in the third quarters of 2026 and 2025, respectively, gross margin for the segment increased to 39.7% in 2026 from 38.3% in 2025.

Gross margins from our Talent segment were 23.1% in the third quarter of 2026 compared to 23.0% during the corresponding quarter of 2025. This 10-basis point increase was due to higher quality placements and better pricing on new assignments in 2026.

Selling, General and Administrative ("SG&A") Expenses:

Below is a tabular presentation of operating expenses by expense category for the three months ended September 30, 2026 and 2025, respectively:

SG&A expenses for the three months ended September 30, 2026, totaled $12.0 million or 28.6% of total revenues, compared to $12.6 million or 26.0% of total revenues for the three months ended September 30, 2025. When excluding the amortization of acquired intangible assets in both periods and the severance expense and finance and accounting transition expense in 2025, SG&A expense as a percentage of total revenues was 27.1% and 21.0%, respectively.

Fluctuations within SG&A expense components during the third quarter of 2026, compared to the third quarter of 2025, included the following:

Other Income / (Expense) Components:

Other Income / (Expense) for the three months ended September 30, 2026, consisted of interest income of $266,000 and foreign exchange losses of ($29,000). For the three months ended September 30, 2025, Other Income / (Expense) consisted of interest income of $266,000 and foreign exchange gains of $149,000.

Income Tax Expense:

Income tax expense for the three months ended September 30, 2026, totaled $243,000, representing an effective tax rate on pre-tax income of 97.2%, compared with income tax expense of $294,000 for the three months ended September 30, 2025, which represented an effective tax rate on pre-tax income of 23.8%. The 2026 effective tax rate was significantly higher than the statutory rate, primarily due to non-deductible executive compensation, foreign and other items, and state taxes, applied to near break-even pre-tax income of $250,000.

Results of Operations for the Nine Months Ended September 30, 2026 as Compared to the Nine Months Ended September 30, 2025:

Revenues:

Revenues for the nine months ended September 30, 2026 totaled $124.5 million, compared to $145.9 million for the corresponding nine-month period in 2025. This 14.7% year-over-year revenue decrease reflected a 14.8% revenue decrease in our Talent segment and a 14.3% decline in our Data & AI segment. For the nine months ended September 30, 2026 the Company had one client that had revenues in excess of 10% of total revenues (Fidelity 26.6%). For the nine months ended September 30, 2025, the Company had three clients that each had revenues in excess of 10% of total revenues (Fidelity = 15.4%, Populus = 12.3% and CGI = 11.1%). The Company's top ten clients represented approximately 60% and 58% of total revenues for the nine months ended September 30, 2026 and 2025, respectively.

Below is a tabular presentation of revenues by reportable segment for the nine months ended September 30, 2026 and 2025, respectively:

Revenues from our Data & AI segment totaled $40.2 million for the nine months ended September 30, 2026, which decreased compared to $46.9 million in the corresponding period in 2025. The decrease in Data & AI revenues primarily reflects lower time-and-material and staff augmentation engagement volumes entering 2026, partially offset by higher fixed-price revenue in the third quarter. As newer projects ramp up, the year-over-year revenue decline has moderated in recent quarters. Order bookings for the first nine months of 2026 totaled approximately $38.0 million, compared with $32.7 million for the corresponding period in 2025, reflecting stronger demand for Data & AI services.

Revenues from our Talent segment totaled $84.3 million in the nine months ended September 30, 2026, compared to $99.0 million during the corresponding 2025 period. The year-over-year decline in revenue primarily reflects lower billable consultants in 2026. Billable consultants at September 30, 2026 totaled 580-consultants compared to 734-consultants one year earlier.

Gross Margins:

Gross profits in the nine months ended September 30, 2026 totaled $35.1 million compared to $40.2 million in the corresponding period last year. Gross profit as a percentage of revenue was 28.2% for the nine months ended September 30, 2026, compared to 27.5% during the same period of 2025. Excluding severance expenses of $0.1 million and $0.3 million for the nine months ended September 30, 2026 and 2025, respectively, gross margin increased 60 basis points to 28.3% from 27.7%.

Below is a tabular presentation of gross margin by reporting segment for the nine months ended September 30, 2026 and 2025, respectively:

Gross margins from our Data & AI segment were 39.4% of revenues during the nine months ended September 30, 2026, which represented an increase of 50-basis points compared to 38.9% of revenues during the corresponding period of 2025. The increase primarily reflected normal fluctuations in project mix and engagement profitability. Including severance expenses of $0.1 million and $0.3 million for the nine months ended September 30, 2026 and 2025, respectively, gross margin for the segment increased to 39.2% in 2026 from 38.3% in 2025.

Gross margins from our Talent segment were 22.9% in the nine months ended September 30, 2026, compared to 22.4% during the corresponding period of 2025. This 50-basis point increase was due to higher quality placements and better pricing on new assignments in 2026.

Selling, General and Administrative ("SG&A") Expenses:

Below is a tabular presentation of operating expenses by expense category for the nine months ended September 30, 2026 and 2025, respectively:

SG&A expenses for the nine months ended September 30, 2026, totaled $35.3 million or 28.4% of total revenues, compared to $41.2 million or 28.2% of total revenues for the nine months ended September 30, 2025. When excluding the amortization of acquired intangible assets in both periods and the severance expense and finance and accounting transition expense in 2025, SG&A expense as a percentage of total revenues was 26.9% and 24.1%, respectively.

Fluctuations within SG&A expense components during the first nine months of 2026, compared to the first nine months of 2025, included the following:

Other Income / (Expense) Components:

Other Income / (Expense) for the nine months ended September 30, 2026, consisted of interest income of $814,000 and foreign exchange gains of $352,000. For the nine months ended September 30, 2025, Other Income / (Expense) consisted of interest income of $571,000 and foreign exchange gains of $118,000. The higher level of interest income primarily reflected higher average cash balances during the current nine month period.

Income Tax Expense:

Income tax expense for the nine months ended September 30, 2026, totaled $734,000, representing an effective tax rate on pre-tax income of 81.1%, compared to income tax expense of $46,000 for the nine months ended September 30, 2025, which represented an effective tax rate on a pre-tax loss of (14.5%). The higher effective tax rate in the 2026 period primarily reflected non-deductible executive compensation, unfavorable tax effects associated with stock-based compensation and foreign and other items, and state taxes.

Liquidity and Capital Resources:

Financial Conditions and Liquidity:

As of September 30, 2026, we had no bank debt, cash balances on hand of $37.9 million and approximately $18.3 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. As of September 30, 2026, our accounts receivable "days sales outstanding" ("DSOs") increased to 56-days, compared to 55-days reported at September 30, 2025.

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 support our share repurchase program that we announced in February 2026 over the next twelve months, absent any acquisition-related activities.

Cash flows provided by (used in) operating activities:

Cash provided by operating activities for the nine months ended September 30, 2026, totaled $1.7 million compared to $6.8 million provided by operating activities during the nine months ended September 30, 2025. Operating cash flows for the 2026 period were driven by net income of $0.2 million, non-cash charges of $6.0 million, and a ($4.5) million use of cash from changes in operating working capital. The use of cash from working capital was primarily attributable to a decrease in accrued payroll and related costs, as well as an increase in prepaid and other current assets, and to a lesser extent decreases in accounts payable and other accrued liabilities. These uses of cash were partially offset by a decrease in accounts receivable.

In the prior year period, cash provided by operating activities reflected a net loss of ($0.4) million, non-cash charges of $5.2 million, and a $1.9 million source of cash from changes in operating working capital, primarily attributable to a decrease in accounts receivable and an increase in accrued payroll and related costs, partially offset by a decrease in accounts payable and an increase in prepaid and other current assets.

Cash flows (used in) investing activities:

Cash (used in) investing activities was ($0.4) million in both the nine months ended September 30, 2026 and 2025. Investing activities in both periods consisted primarily of capital expenditures and changes in non-current deposits.

Cash flows provided by (used in) financing activities:

Cash provided by financing activities for the nine months ended September 30, 2026 totaled $0.8 million and consisted primarily of proceeds from the exercise of stock options of $0.8 million, and a small amount from the issuance of common shares related to our Employee Stock Purchase Plan. Cash used in financing activities for the nine months ended September 30, 2025, totaled ($1.0) million and consisted primarily of treasury stock purchases of ($1.6) million, partially offset by proceeds from the exercise of stock options of $0.5 million and the issuance of common shares related to our Employee Stock Purchase Plan.

Off-Balance Sheet Arrangements:

The Company does 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, although economic uncertainty, including the concerns of our clients and other companies with respect to inflationary conditions in North America and elsewhere, has had and may continue to have an adverse impact on the demand for our services. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seek to ensure that billing rates reflect increases in costs due to inflation. However, high levels of inflation may result in higher interest rates which could increase our borrowing costs in the future if we elect to draw on our current or future credit facilities.

In addition, refer to "Item 1A. Risk Factors" in our 2025 Annual Report on Form 10-K for a discussion about risks that inflation directly or indirectly may pose to our business.

Seasonality:

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 13 to the accompanying financial statements.