Mastech Digital, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; year-over-year comparisons are with Q1 2021. Amounts below are in U.S. dollars. Mastech provides digital transformation, data and analytics consulting, and IT staffing through two segments: Data and Analytics Services and IT Staffing Services.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $59.8 million | $49.8 million | +20% |
| Gross profit / margin | $15.9 million / 26.7% | $12.8 million / 25.7% | +24%; margin +100 bps |
| Operating income | $3.3 million | $1.9 million | +77% |
| Net income | $2.3 million | $1.2 million | +95% |
| Diluted EPS | $0.19 | $0.10 | Up $0.09 |
| Operating cash flow | $1.6 million | $0.8 million | Up $0.8 million |
Data and Analytics revenue was $10.2 million, up 15%; IT Staffing revenue was $49.6 million, up 21%. Segment gross margins were 45.2% and 22.9%, respectively. Data and Analytics margin declined 50 bps, attributed to lower utilization early in the quarter; IT Staffing margin improved 150 bps, reflecting permanent-placement fees, utilization and offshore staffing revenue. Consolidated margin improvement also reflected a greater contribution from the higher-margin Data and Analytics segment.
SG&A was $12.6 million, up from $10.9 million, but declined to 21.1% of revenue from 21.9%. Income tax expense was $0.9 million, with a 28.2% effective rate versus 27.1%, largely reflecting a higher valuation allowance on foreign net operating losses.
Cash, liquidity and debt
- Cash and cash equivalents were $7.2 million at March 31, 2022, versus $6.6 million at December 31, 2021. Operating cash flow was $1.6 million; capital expenditures were $0.7 million; term-loan repayments were $1.1 million. Cash increased by $0.6 million during the quarter.
- Term-loan principal was $12.0 million, down from $13.1 million at year-end; there were no revolver borrowings. The company reported approximately $35.5 million of available borrowing capacity and $4.8 million of bank debt net of cash.
- Current assets were $57.2 million and current liabilities $26.8 million. The company said cash, operating cash flow and credit availability should meet business and debt-service needs for the next 12 months, excluding acquisition activity. It was in compliance with credit-facility covenants.
- A $2.3 million deferred employer Social Security tax liability is included in accrued payroll and is due by December 31, 2022. The term loan matures October 1, 2024; the revolver expires December 2026.
Changes, outlook and risks
- Management attributed revenue growth to improved Data and Analytics backlog and higher IT Staffing consultant levels and bill rates. IT Staffing average bill rate increased to $78.99 per hour from $75.12.
- Data and Analytics bookings were $11.8 million, down from $15.8 million; management said the prior-year quarter included several multi-year bookings. Bookings are estimates and are not directly comparable to revenue.
- No specific revenue or earnings guidance is provided. Management was hopeful that COVID-19 concerns would have less effect in 2022, while noting uncertainty from variants, inflation and potential recessionary conditions. Skilled-worker supply constraints may persist; managed-service-provider and systems-integrator relationships may pressure IT Staffing margins.
- Customer concentration is material: CGI represented 17.8% of revenue, versus 15.0% a year earlier. The top ten clients represented approximately 51% in the financial-statement note; MD&A says approximately 52% for Q1 2022, compared with 47% in Q1 2021. The filing’s consultant-count comparison also appears internally inconsistent; verify the underlying figure.
- Other items to monitor include the Canadian subsidiary’s tax audit for 2018 and 2019, the foreign tax valuation allowance, and routine lawsuits and administrative proceedings, which management did not expect to materially affect financial position, results or cash flows. No material changes to previously disclosed risk factors were reported.
- A 10% increase in variable interest rates was estimated to raise annual interest expense by approximately $36,000. The company had no interest-rate hedge outstanding. Management said currency sensitivity was not material.
Investor verification checklist
- Reconcile the stated top-ten-client revenue concentration (approximately 51% versus 52%) and confirm the consultant-count comparison, which is unclear in the filing text.
- Track Data and Analytics bookings and backlog conversion, utilization, and the segment’s margin recovery after the reported utilization softness.
- Assess customer concentration, skilled-labor availability, and the effect of staffing channels and inflation on margins.
- Monitor working-capital needs, receivables and collections, the $2.3 million payroll-tax repayment, debt amortization and covenant compliance.
- Review the outcome of the Canadian tax audit and the recoverability of foreign deferred tax assets.