Mastech Digital, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Mastech provides digital transformation, data and analytics consulting, and IT staffing services through its Data and Analytics Services and IT Staffing Services segments. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $63.2 million | $59.5 million | $185.0 million | $163.0 million |
| Gross profit / margin | $16.3 million / 25.8% | $16.6 million / 27.9% | $49.0 million / 26.5% | $43.7 million / 26.8% |
| Operating income | $3.4 million | $5.0 million | $10.2 million | $12.2 million |
| Net income | $2.4 million | $3.4 million | $7.2 million | $8.3 million |
| Diluted EPS | $0.20 | $0.28 | $0.59 | $0.69 |
| Operating cash flow | Not separately reported | Not separately reported | $7.7 million | $1.9 million |
- Q3 revenue increased 6% year over year, led by IT Staffing Services, up 8%; Data and Analytics Services revenue declined 4%. Nine-month revenue rose 13%, with increases in both segments.
- Q3 gross profit fell despite higher revenue, as consolidated margin contracted 210 basis points. Nine-month gross profit increased, while margin slipped 30 basis points.
- Q3 net income declined about 29%; nine-month net income declined about 14%. Q3 SG&A rose to $12.9 million from $11.6 million, including a $450,000 cyber-breach reserve and $120,000 of severance expense.
- Cash and cash equivalents were $3.5 million at September 30, 2022, versus $6.6 million at year-end 2021. Current assets were $57.8 million and current liabilities $26.7 million.
- Debt was $2.2 million, all current, compared with $12.7 million total debt at year-end 2021. The company prepaid $7.6 million of its term loan in August. It had no revolver borrowings and reported $36.4 million of unused borrowing capacity.
- Nine-month investing cash outflow was $0.8 million, mainly capital expenditures; financing cash outflow was $9.4 million, primarily term-loan repayments. Cash declined by $3.1 million over the period, including a $701,000 adverse foreign-exchange effect.
Material changes and management commentary
- Q3 IT Staffing revenue growth reflected a higher average bill rate ($81.60 per hour versus $75.51 a year earlier); billable consultant headcount was essentially flat year over year at 1,314. Management noted a sequential decline of 30 billable consultants as demand weakened.
- Data and Analytics Q3 gross margin fell to 39.6% from 51.6%. Management cited lower utilization after a resource ramp-up and a $0.3 million cost overrun on a fixed-price project. For the nine months, segment margin was 42.8% versus 48.2%, attributed to lower utilization and the Q3 overrun.
- IT Staffing gross margin improved to 23.2% in Q3 from 22.8%, and to 23.1% for the nine months from 22.4%, supported by permanent placements, offshore staffing, and improved assignment margins.
- Data and Analytics new bookings were approximately $8 million in Q3 2022 versus $9 million a year earlier. Management said bookings are volatile and not directly comparable to revenue; it cited potential recession concerns as a possible factor in weaker demand.
- Operating cash flow improved year over year as the working-capital outflow was smaller. Receivables and unbilled receivables used $7.1 million of cash during the nine-month period. Days sales outstanding were 66 days at quarter-end, described as at the high end of expectations.
Outlook, risks, and unusual items
- The filing provides no numerical revenue or earnings guidance. Management said demand is correlated with North American economic conditions and noted inflation, possible recession, and lingering COVID-19 uncertainty as risks; it could not predict the effect of these factors on future results.
- Customer concentration is material: CGI represented 23.7% of Q3 revenue and 21.3% of nine-month revenue. The top ten clients generated approximately 54% and 53%, respectively, versus 49% and 48% in the comparable 2021 periods.
- The company reported a Q3 cybersecurity breach involving one employee email account and indirectly affecting two Data and Analytics clients. Forensic work was ongoing to determine whether personal information was compromised; a $450,000 pre-tax reserve was recorded.
- The company decided to close its Singapore and Ireland operations and rationalize costs in the UK; it recorded $120,000 of related severance in Q3. The foreign-loss valuation allowance increased, and the Canadian subsidiary was under tax audit for 2018 and 2019.
- A $2.3 million deferred employer Social Security tax liability was due by December 31, 2022. Term-loan excess-cash-flow repayments may apply beginning in Q1 2023 if the senior leverage ratio exceeds 1.50x. The company said it was compliant with credit-facility covenants at quarter-end.
- After quarter-end, effective November 1, 2022, the Data and Analytics Services segment CEO resigned. The company disclosed a $700,000 severance payment, with $550,000 payable over 12 months and $150,000 as a lump sum; unvested options ceased vesting.
- Management believes cash, operating cash flow, and available credit are sufficient for business needs and debt service over the next 12 months, excluding acquisitions. It noted Q4 seasonality can reduce consultant utilization and increase benefit costs.
- Ordinary-course legal proceedings were disclosed; management did not expect them to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether Data and Analytics utilization, project economics, bookings, and segment margins recover after Q3 weakness.
- Whether IT staffing demand and billable consultant headcount withstand economic uncertainty, and whether higher bill rates can be sustained.
- Client concentration and the consequences of any reduction in work from CGI or other major clients.
- The final scope, costs, and any customer or regulatory consequences of the cybersecurity incident and PII investigation.
- Completion and financial effects of the Singapore and Ireland closures, UK cost rationalization, and the segment CEO’s departure.
- Collection of receivables, repayment of the $2.3 million payroll-tax liability, and compliance with credit-facility covenants and any excess-cash-flow repayment requirements.