Mastech Digital, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, with comparisons to 2020 and 2019. Mastech provides data and analytics, digital transformation, digital learning and IT staffing services through two segments: Data and Analytics Services and IT Staffing Services. Its revenue is primarily generated in North America.
Financial performance
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Revenue | $222.0 million | $194.1 million | Up 14%; 2019 revenue was $193.6 million |
| Gross profit / margin | $59.4 million / 26.8% | $51.5 million / 26.6% | Margin up 0.2 percentage points |
| Operating income | $17.6 million | $13.4 million | Up about 31% |
| Net income | $12.2 million | $9.9 million | Up about 24% |
| Diluted EPS | $1.02 | $0.83 | Up from $0.99 in 2019 |
| Operating cash flow | $5.2 million | $21.2 million | Lower mainly due to working-capital investment |
| Capital expenditures | $1.9 million | $0.3 million | Primarily systems and Chennai facility upgrades |
Segments and operating drivers
- Data and Analytics Services: Revenue was $38.3 million, up 27% (approximately 11% organic). Gross margin declined to 48.4% from 50.5%, partly reflecting AmberLeaf’s lower-margin mix. Bookings were approximately $55 million.
- IT Staffing Services: Revenue was $183.7 million, up 12%. Year-end consultants-on-billing increased to 1,261 from 1,063. Average bill rate decreased to $75.66 per hour from $76.60; segment gross margin edged up to 22.3% from 22.1%.
- Total SG&A was $41.8 million, or 18.8% of revenue, versus $38.1 million, or 19.6%, in 2020. Operating costs increased with activity and investment, including sales, delivery and recruiting resources.
Balance sheet, debt and liquidity
- At year-end, cash was $6.6 million; current assets were $53.9 million and current liabilities were $26.8 million.
- Gross borrowings were $13.1 million, all under the term loan; there were no revolver borrowings. The company reported $32.4 million of available borrowing capacity and $6.5 million of bank debt net of cash.
- Total liabilities were $39.3 million and shareholders’ equity was $74.4 million. The company was in compliance with its credit facility covenants.
- The term loan requires $4.4 million of principal payments in each of 2022 and 2023, with $4.3 million due in 2024. The revolving facility expires in December 2026.
- Year-end days sales outstanding was 61 days, compared with 60 days in 2020. Management expects operating working capital to rise if revenue grows.
Material changes, outlook and notable items
- Revenue recovery followed the pandemic-related disruption to activity in 2020. In 2021, staffing growth and higher Data and Analytics activity lifted revenue, although some clients continued to delay new project starts.
- Management expressed hope that COVID-19 concerns and economic uncertainty would ease in 2022, but gave no specific revenue or earnings guidance. It expected skilled-technology labor supply challenges to persist and noted that staffing margins may face pressure from managed service providers and systems-integrator relationships.
- Operating cash flow fell to $5.2 million from $21.2 million, as higher receivables and other working-capital needs absorbed cash. The company also repaid $2.3 million of deferred payroll taxes in 2021; the remaining $2.3 million was due by December 31, 2022.
- A $2.9 million reduction in AmberLeaf contingent consideration was recorded as a credit to SG&A after management determined payment conditions were unlikely to be met. No contingent consideration liability remained at year-end. This noncash credit benefited reported operating results.
- AmberLeaf contributed a full year of results in 2021, compared with only the period from its October 2020 acquisition through year-end in 2020. The filing reports approximately 11% organic growth in Data and Analytics.
- Customer concentration is significant: the largest client, CGI, accounted for 15% of revenue in both 2021 and 2020 and 19.5% of year-end 2021 receivables. The top ten clients generated 48% of 2021 revenue.
- Key risks include economic and pandemic uncertainty, client and industry concentration, attracting and retaining skilled personnel, H-1B immigration changes, competition and margin pressure, reliance on Indian operations, cybersecurity, and acquisition execution. Approximately 26% of the workforce used company-sponsored H-1B permits.
- Ordinary-course lawsuits were not expected by management to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and identified goodwill valuation as a critical audit matter. Management reported that two previously identified material weaknesses were remediated and that internal control over financial reporting was effective; the auditor did not attest to that assessment.
Most important facts for investors to verify
- Whether revenue growth and the Data and Analytics pipeline convert into sustained organic growth and profitability, particularly given the segment’s lower 2021 gross margin.
- Whether working-capital demands, DSO and the remaining $2.3 million payroll-tax repayment constrain cash generation in 2022.
- Debt amortization, covenant headroom and the terms and availability of the credit facility, especially if operating performance weakens or interest rates rise.
- Client concentration and renewal or termination exposure, including CGI’s revenue and receivables contribution and the short-notice termination provisions on some long-term engagements.
- Whether the AmberLeaf contingent-consideration reversal and goodwill valuation assumptions remain supportable; goodwill was $32.5 million and the auditor highlighted its valuation as a critical audit matter.
- Execution of internal-control remediation and continued effectiveness of controls, as the auditor did not provide an internal-control attestation.