Mastech Digital, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The company provides Data and Analytics Services and IT Staffing Services.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $47.4 | $49.5 | $145.4 | $143.2 |
| Gross profit / margin | $13.1 / 27.6% | $12.3 / 24.9% | $38.5 / 26.5% | $35.2 / 24.6% |
| Operating income | $4.2 | $3.1 | $10.3 | $13.5 |
| Net income | $3.0 | $1.9 | $7.8 | $8.9 |
| Diluted EPS | $0.25 | $0.17 | $0.66 | $0.79 |
| Operating cash flow | Not separately reported | Not separately reported | $16.9 | $13.1 |
- Q3 segment revenue: Data and Analytics $7.2 million, up 1%; IT Staffing $40.2 million, down 5%. Nine-month segment revenue was $21.3 million, up 9%, and $124.1 million, up slightly, respectively.
- Q3 gross margin improved in both segments: Data and Analytics 55.9% versus 45.7%; IT Staffing 22.6% versus 21.4%. Nine-month margins were 51.7% versus 45.8% and 22.1% versus 21.3%, respectively.
- At September 30, cash was $4.0 million; total assets were $88.2 million; current assets and current liabilities were $37.9 million and $20.9 million. Debt was approximately $8.4 million net of financing costs, with $22.5 million of stated unused revolving capacity. Management reported net bank debt, after cash, of $4.6 million.
- Nine-month investing cash outflow was $0.2 million and financing cash outflow was $15.5 million, principally reflecting $16.9 million of net debt repayments. Cash increased $1.0 million from year-end 2019 to $4.0 million.
Changes versus comparable periods
- Q3 revenue declined 4% year over year, while gross profit rose about $0.8 million and gross margin expanded 270 basis points. Operating income and net income increased.
- Nine-month revenue rose 2% and gross margin expanded 190 basis points, but net income fell about 12%. The comparison was affected by a $6.1 million contingent-consideration revaluation credit recorded in 2019; there was no corresponding credit in 2020. Nine-month operating income consequently declined year over year.
- Q3 IT Staffing billable consultants numbered 1,037, down 13% from a year earlier; the average bill rate increased to $76.33 per hour from $74.60. Data and Analytics benefited from higher-value work, utilization and a more favorable mix, though some projects were delayed.
- Debt declined materially from year-end 2019 following scheduled and additional repayments. Nine-month operating cash flow increased, supported in part by working-capital movements, including higher payroll accruals.
Outlook, risks and notable items
- COVID-19 materially affected Q3, especially IT Staffing: assignment activity remained weak and the billable consultant base had fallen. Data and Analytics also experienced project delays, with some anticipated starts shifted into 2021. Management said future effects were uncertain and expected potential pressure from delayed purchasing, reduced upselling, pricing pressure, customer losses and customers’ ability to pay. No numeric earnings or revenue guidance was provided.
- Management believed operating cash, available credit and cash generation would fund business needs and debt service over the next 12 months, excluding acquisitions. The company was in compliance with credit-facility provisions at September 30.
- On October 1, 2020, after quarter-end, the company acquired AmberLeaf Partners for a stated transaction value of $14 million: $9.5 million cash at closing and up to $4.5 million in contingent deferred payments over two years. A concurrent three-year credit amendment increased the term loan by approximately $10 million and the revolver commitment to $30 million. Management expected near-term gross margins to decline from Q3 levels following the acquisition.
- Customer concentration increased: the largest client, CGI, represented 16.6% of Q3 revenue and 14.8% of nine-month revenue; the top ten clients represented 51% and 48%, respectively. Management also cited potential staffing-margin pressure from managed service providers and strategic channel relationships, and supply constraints for certain technology skills.
- The company expected to become an accelerated filer next year, bringing an auditor attestation requirement for internal controls and added cost; management warned that compliance could reveal material weaknesses. Current disclosure controls were assessed as effective, with no material quarterly change in internal control reported. Routine legal proceedings were not expected by management to have a material adverse effect.
Investor verification points
- Track post-acquisition AmberLeaf performance, contingent payments, integration costs and the effect on margins, debt and liquidity.
- Monitor COVID-related client demand, delayed project starts, consultant headcount, bill rates and recovery in IT Staffing.
- Assess cash conversion and working-capital sustainability, particularly the contribution from payroll accruals and receivable collections.
- Review customer concentration and the largest client’s share of revenue, alongside segment-level margins and revenue mix.
- Confirm progress on accelerated-filer and Section 404 readiness, and monitor credit-facility terms and covenant compliance.