Mastech Digital, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 27, 2023. Mastech Digital provides data and analytics services and IT staffing, primarily in North America.
Financial performance
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Revenue | $242.2 million | $222.0 million | +9% |
| Gross profit / margin | $63.2 million / 26.1% | $59.4 million / 26.8% | Profit +6%; margin down 0.7 percentage points |
| Operating income | $12.2 million | $17.6 million | -31% |
| Net income | $8.7 million | $12.2 million | -29% |
| Diluted EPS | $0.72 | $1.02 | Down $0.30 |
| Cash from operating activities | $12.6 million | $5.2 million | Up $7.4 million |
- Revenue by segment: Data and Analytics Services revenue was $40.6 million (+6%); IT Staffing revenue was $201.6 million (+10%).
- Margins: Data and Analytics gross margin fell to 41.5% from 48.4%, attributed mainly to poor utilization and compensation-related costs on longer-term work. IT Staffing margin rose to 23.0% from 22.3%.
- Expenses and taxes: SG&A was $51.0 million, or 21.1% of revenue, versus $41.8 million, or 18.8%, in 2021. The 2021 total included a $2.9 million credit from revaluing AmberLeaf contingent consideration. The 2022 effective tax rate was 30.3%, versus 27.6%.
- Liquidity and debt: Year-end cash was $7.1 million; debt was $1.1 million, down from $13.1 million. The company reported about $31.8 million of unused revolver capacity and said available resources should meet needs for the next 12 months absent a major acquisition. The remaining term loan was repaid on January 3, 2023.
- Balance sheet: Total assets were $108.9 million and shareholders’ equity was $86.0 million at year-end. Days sales outstanding improved to 59 from 61.
Material changes and operating trends
- Revenue grew, but operating and net income declined as gross margin weakened, SG&A rose, and the prior-year contingent-consideration credit did not recur.
- Data and Analytics bookings were approximately $36 million, down from about $55 million in 2021; management reported weaker new-client activity and lower segment revenue in the second half.
- IT Staffing ended the year with 1,208 consultants on billing, down from 1,261. Average bill rate increased 6.6% to $80.64 per hour. Permanent placement revenue rose 75% to $2.1 million.
- Top ten clients generated 53% of revenue, up from 48%; CGI alone accounted for 22.2%, versus 15.0% in 2021.
Outlook, risks and unusual items
- Outlook: No specific quantitative 2023 guidance is provided. Management described economic conditions entering 2023 as uncertain, citing inflation, rising interest rates and recession concerns. It expected supply constraints in advanced-technology skills to persist and noted that working-capital needs could rise if revenue grows.
- Cybersecurity: A third-quarter 2022 breach involving one employee email account indirectly affected two Mastech InfoTrellis clients. The company accrued a $450,000 pre-tax reserve; its investigation included assessing whether personal information was compromised.
- Employment claim: A former employee asserted employment-related claims. The company disputes them, had not recorded an estimable loss range, and expected approximately $400,000 of professional-services fees in the first quarter of 2023 to defend its position.
- Other key risks: Client and industry concentration; terminable contracts and early termination of Center of Excellence engagements; MSP-related margin pressure; recruitment and retention of skilled staff; H-1B immigration rules (about 27% of workforce); Indian operations, currency and wage costs; cyber and data security; and credit-agreement covenants.
- Capital allocation: In February 2023, the board authorized repurchases of up to 500,000 shares over two years. The company does not pay recurring dividends.
- Audit and controls: UHY LLP issued an unqualified opinion on the financial statements and identified goodwill valuation as a critical audit matter. Management concluded internal control over financial reporting was effective; the auditor did not attest to that assessment.
Investor verification priorities
- Review the sustainability of Data and Analytics bookings, utilization and margins, and confirm whether new-client activity improved after the second-half slowdown.
- Assess the concentration risk: CGI represented 22.2% of revenue and 30.9% of year-end receivables; the top ten clients represented 53% of revenue.
- Track IT Staffing consultant counts, bill rates, and the effect of MSP and preferred-vendor arrangements on gross margins.
- Monitor the cybersecurity investigation, potential client or privacy claims, and the former employee matter, including costs and any revised loss estimates.
- Confirm the term-loan repayment, revolver availability and covenant compliance, and evaluate the proposed share repurchases against liquidity and growth needs.
- Review goodwill valuation assumptions and impairment sensitivity, given $32.5 million of goodwill and its designation as the audit’s critical audit matter.