Mastech Digital, Inc. — 2020 Form 10-K
Business context and reporting period: Annual report for the fiscal year ended December 31, 2020, filed March 16, 2021. Mastech provides data and analytics, customer experience consulting, digital learning, and IT staffing services through its Data and Analytics Services and IT Staffing Services segments. Results include AmberLeaf Partners from its October 1, 2020 acquisition date.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $194.1 million | $193.6 million |
| Gross profit / gross margin | $51.5 million / 26.6% | $48.0 million / 24.8% |
| Operating income | $13.4 million | $17.0 million |
| Net income | $9.9 million | $11.1 million |
| Diluted EPS | $0.83 | $0.99 |
| Cash from operating activities | $21.2 million | $16.1 million |
- Segments: Data and Analytics revenue grew 13% to $30.2 million (about 6% organic growth); gross margin rose to 50.5% from 46.7%. IT Staffing revenue fell 2% to $163.9 million; gross margin improved to 22.1% from 21.3%.
- Cash and liquidity: Year-end cash was $7.7 million, up from $3.0 million. Operating cash flow benefited from a $7.3 million reduction in operating working capital, including $4.6 million of deferred payroll taxes. Management said available cash, operating cash flow, and credit capacity were expected to cover needs for the next 12 months, absent acquisition-related activity.
- Debt: Year-end term-loan borrowings were $17.5 million, with no revolver borrowings and approximately $22 million of unused borrowing capacity. Net bank debt after cash was about $9.8 million. The company reported compliance with credit-facility covenants at year-end.
- Other balance-sheet items: Total assets were $102.0 million, total liabilities $42.5 million, and shareholders’ equity $59.5 million. A $2.9 million contingent-consideration liability relates to the AmberLeaf acquisition.
- Fourth quarter: Revenue was $48.7 million, gross profit $13.1 million, net income $2.0 million, and diluted EPS $0.17. Fourth-quarter 2019 figures were $50.4 million, $12.8 million, $2.3 million, and $0.20, respectively.
Changes and notable items
- Revenue was nearly flat year over year: Data and Analytics growth was offset by lower IT Staffing activity. COVID-19 caused delayed new projects and early staffing assignment endings, particularly in the first half; IT Staffing ended the year with 1,063 consultants on billing, down 104 during the year.
- Gross margin increased 1.8 percentage points, reflecting expansion in both segments, including improved utilization and higher-value work in Data and Analytics and stronger margins on new staffing assignments.
- Operating income and net income declined despite higher gross profit. 2019 results included a $6.1 million credit from revaluing InfoTrellis contingent consideration; no such credit occurred in 2020. 2020 also included $0.65 million of AmberLeaf acquisition-related expenses and higher segment investment.
- AmberLeaf was acquired for approximately $9.7 million cash at closing, with contingent payments potentially up to $4.5 million based on future targets. It contributed $2.4 million revenue and an approximately $0.4 million net loss in 2020 after acquisition.
- Cash from operations rose, while cash used in investing increased primarily because of the $9.3 million net cash outflow for AmberLeaf. The $4.6 million payroll-tax deferral is due for repayment in $2.3 million installments in 2021 and 2022.
Outlook, risks and controls
- Management expressed hope that economic conditions would improve during 2021 as vaccination programs advanced, while emphasizing continuing uncertainty. The filing gives no specific revenue, earnings, or margin guidance.
- Key risks include ongoing COVID-19 effects, client and industry concentration, competition and margin pressure from managed-service-provider and preferred-vendor arrangements, retaining skilled staff, H-1B immigration policy, reliance on Indian operations, foreign-exchange exposure, and cybersecurity and business-continuity threats. The top ten clients generated 47% of 2020 revenue; CGI alone generated 15%.
- AmberLeaf and other acquisitions carry integration, performance, goodwill, and financing risks. The credit agreement includes financial and operating covenants and is secured by substantially all company assets.
- Material control issue: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end due to weaknesses in review controls for complex accounting matters and IT general controls. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. No related financial-statement misstatements were identified. AmberLeaf was excluded from the control assessment.
- Ordinary-course lawsuits were not expected by management to materially affect financial position, results, or cash flows. The filing reports no off-balance-sheet arrangements and no recurring dividend.
Important facts for investors to verify
- Whether Data and Analytics growth and segment margin gains continue, and whether IT Staffing consultant counts recover.
- How much of 2020 operating cash flow reflects sustainable business performance versus working-capital movements and the temporary payroll-tax deferral.
- Repayment of deferred payroll taxes, scheduled debt amortization, borrowing availability, and continued covenant compliance.
- AmberLeaf’s progress against contingent-payment targets, integration costs, and contribution to earnings and cash flow.
- Remediation and independent testing of the disclosed material weaknesses, including whether controls become effective in subsequent reporting periods.
- Customer concentration and the impact of large-client spending changes, project cancellations, and pricing or margin pressure.