Mastech Digital, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 7, 2021. Mastech provides data and analytics, digital transformation, and IT staffing services. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $49.8 | $50.4 | Down 1.3% |
| Gross profit / gross margin | $12.8 / 25.7% | $12.7 / 25.2% | Profit up $0.1; margin up 0.5 percentage point |
| Operating income | $1.9 | $2.5 | Down $0.6 |
| Net income | $1.2 | $1.9 | Down 36%; diluted EPS $0.10 vs. $0.16 |
| Cash from operations | $0.8 | $2.8 | Down $2.0 |
| Cash and cash equivalents | $7.2 at March 31 | $7.7 at December 31, 2020 | Down $0.4 |
| Debt | $16.4 term loan; no revolver borrowings | $17.5 term loan at December 31, 2020 | $1.1 repaid in the quarter |
Gross margin improvement reflected a greater contribution from higher-margin Data and Analytics Services. SG&A rose to $10.9 million from $10.2 million, or 21.9% of revenue versus 20.2%, contributing to lower operating income. The effective tax rate was 27.1%, versus 16.9%.
Segments and material comparisons
- Data and Analytics Services: Revenue was $8.8 million, up 19% from $7.4 million; segment operating income fell to $0.4 million from $0.9 million. Segment gross margin declined to 45.7% from 47.1%, partly reflecting lower-margin AmberLeaf work.
- IT Staffing Services: Revenue was $41.0 million, down 5% from $43.1 million; segment operating income was $2.3 million versus $2.2 million. Gross margin was 21.4% versus 21.5%. The billable consultant base increased by 99 during the quarter to 1,162; average bill rate declined to $75.12 per hour from $76.68.
- The October 2020 AmberLeaf acquisition contributed $1.9 million in Q1 revenue and an approximately $0.1 million net loss. Because the acquisition was not included in reported Q1 2020 results, reported year-over-year comparisons are not fully like-for-like. The filing provides unaudited 2020 pro forma revenue of $53.6 million and net income of $2.3 million, but cautions that this is not necessarily indicative of results as if combined.
Cash, debt, and liquidity
Operating cash flow of $0.8 million included a $2.0 million increase in operating working capital, principally attributed to a major client payment received late relative to quarter-end; accounts receivable and unbilled receivables used $4.1 million of cash. Investing activities used $0.2 million and financing activities used $1.0 million, primarily for term-loan repayments. Cash declined by $0.4 million to $7.2 million. Net bank debt after cash was $9.2 million. The company reported approximately $25 million of available revolver capacity, $65 days sales outstanding (at the high end of its acceptable range), and compliance with its credit-facility covenants. Management believes cash, operating cash generation, and available credit are adequate for the next 12 months, absent acquisition-related activity.
Outlook, risks, and notable items
- No specific revenue, earnings, or cash-flow guidance was provided. Management cited improving activity and early signs of economic expansion as vaccination programs roll out, but emphasized continued uncertainty around the pace and extent of the post-pandemic recovery. Data and Analytics bookings were $15.8 million, and pipeline opportunities had strengthened; pandemic-related project delays continued to push out some start dates.
- Management noted that IT staffing demand is economically sensitive, skilled-worker supply constraints can pressure costs and margins, and systems-integrator, staffing-firm, and managed-service-provider relationships may pressure staffing margins.
- Revenue concentration remains material: CGI represented 15% of Q1 revenue (12.7% in Q1 2020), and the top ten clients represented approximately 47% of revenue. The late major-client payment also increased working capital and DSOs.
- Disclosure controls and procedures were deemed ineffective because previously identified material weaknesses remained in complex-transaction management review and IT general controls. Remediation was ongoing; AmberLeaf was excluded from the control assessment under the SEC acquisition transition guidance and is expected to be included in the year-end 2021 assessment.
- The company was in the initial stages of an IRS audit of its 2018 tax return and had been notified of a Canadian audit covering 2018 and 2019. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- The interest-rate swap matured April 1, 2021. An April 1, 2021 Chennai office lease runs for three years, with aggregate payments of approximately $1.4 million and renewal options.
Important facts for investors to verify
- Whether the late client payment was collected and whether receivables, unbilled receivables, and DSOs normalized after quarter-end.
- Whether Data and Analytics bookings convert to revenue, project start delays ease, and AmberLeaf contributes profitably.
- Whether IT staffing consultant growth and utilization offset lower bill rates and pandemic-related demand effects.
- Progress in remediating the material weaknesses and the scope and outcomes of the IRS and Canadian tax audits.
- Debt repayment, covenant headroom, and liquidity under the amended credit facility, particularly if operating cash flow remains affected by working capital.