Mastech Digital, Inc. — Q2 2022 Form 10-Q
Business context and period: Mastech provides digital transformation, data and analytics consulting, and IT staffing services through its Data and Analytics Services and IT Staffing Services segments. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $62.1 | $53.7 | $121.9 | $103.4 |
| Gross profit | $16.7 | $14.3 | $32.7 | $27.1 |
| Gross margin | 27.0% | 26.7% | 26.8% | 26.2% |
| Operating income | $3.5 | $5.3 | $6.9 | $7.2 |
| Net income | $2.4 | $3.7 | $4.8 | $4.9 |
| Diluted EPS | $0.20 | $0.31 | $0.39 | $0.41 |
| Operating cash flow | Not separately stated | Not separately stated | $1.9 | $0.2 |
- Revenue: Q2 increased 16% year over year, with organic growth of 26% in Data and Analytics and 14% in IT Staffing. Six-month revenue increased 18%.
- Segment trends: Q2 Data and Analytics revenue was $11.3 million versus $9.0 million; IT Staffing revenue was $50.9 million versus $44.7 million. IT Staffing billable consultants increased to 1,344 from 1,251, and the average bill rate rose to $80.15 per hour from $74.65.
- Margins and earnings: Total gross margin expanded, mainly reflecting stronger IT Staffing margins and segment revenue mix. Data and Analytics margins fell to 43.6% in Q2 from 46.7%, as added staffing and training reduced utilization. IT Staffing margins increased to 23.3% from 22.7%. Operating income and net income declined despite revenue growth; the 2021 comparison benefited from a $2.0 million contingent-consideration revaluation credit related to AmberLeaf.
- Cash flow: First-half operating cash flow was $1.9 million, including a $7.8 million cash use from accounts receivable and unbilled receivables. Investing activities used $0.7 million, primarily for capital expenditures; financing activities used $0.7 million, including $2.2 million of term-loan repayments.
Balance sheet, debt, and liquidity
- At June 30, 2022, cash and cash equivalents were $6.7 million; total current assets were $61.0 million and current liabilities were $27.3 million. Total assets were $119.1 million and shareholders’ equity was $81.5 million.
- Term-loan borrowings were $10.9 million, with no revolver borrowings. The company reported approximately $36.8 million of available revolver capacity and $4.2 million of bank debt net of cash.
- The credit facility matures in December 2026 for the revolver and October 2024 for the term loan. The company was in compliance with its covenants at quarter-end. Management said it may use excess cash to repay part of the term loan during the remainder of 2022.
- Days sales outstanding were 67 days, three days above the prior quarter and described as at the high end of the company’s target range. Management expected DSO to decline over subsequent quarters and considered available cash, operating cash flow, and credit capacity adequate for the next 12 months, excluding acquisitions.
Changes, outlook, and risks
- SG&A rose to $13.2 million in Q2 from $9.0 million and to $25.8 million for the first half from $19.9 million. In addition to the absence of the prior-year $2.0 million credit, increased staffing, compensation, travel, and facility costs contributed to the rise.
- The effective tax rate increased to 32.6% in Q2 from 27.7%, and to 30.5% for the first half from 27.5%. The company attributed the increase mainly to valuation allowances for foreign net operating losses and tax expense associated with forfeited vested stock options.
- No specific revenue or earnings guidance was provided. Management said outlook is closely tied to North American economic conditions, and cited inflation, possible recessionary conditions, COVID-19 variants, and continued shortages of skilled technology workers as uncertainties. It also noted that client demand and spending affect results, and that supply-side pressures may weigh on staffing margins.
- Customer concentration increased: CGI generated 22.3% of Q2 revenue and 20.1% of first-half revenue, versus 14.8% and 14.9% a year earlier. The top ten clients represented approximately 52% of revenue, up from 48% in both comparison periods.
- The company must repay $2.3 million of deferred employer Social Security taxes by December 31, 2022. Its Canadian subsidiary is under tax audit for 2018 and 2019. Management said ordinary-course litigation is not expected to materially affect financial position, results, or cash flows. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control.
Important facts for investors to verify
- Whether Data and Analytics utilization improves as management anticipated, following the increase in billable staff and lower Q2 margins.
- Whether DSO and receivables conversion improve, given the 67-day DSO and first-half working-capital cash use.
- How revenue and margins respond to client concentration, staffing-market supply constraints, and the economic risks identified by management.
- The timing and funding of the $2.3 million payroll-tax repayment and any further term-loan prepayments; also monitor variable-rate debt and covenant compliance.
- The outcome of the Canadian tax audit and the recoverability of foreign tax assets subject to valuation allowances.