Mastech Digital, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Mastech provides digital transformation services through its Data and Analytics Services and IT Staffing Services segments. Results include AmberLeaf, acquired October 1, 2020. The filing describes a recovery in activity during 2021 following COVID-19-related disruption in 2020, while noting continued uncertainty about the pandemic and economic recovery.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $59.5 | $47.4 | $163.0 | $145.4 |
| Gross profit | $16.6 | $13.1 | $43.7 | $38.5 |
| Gross margin | 27.9% | 27.6% | 26.8% | 26.5% |
| Operating income | $5.0 | $4.2 | $12.2 | $10.3 |
| Net income | $3.4 | $3.0 | $8.3 | $7.8 |
| Diluted EPS | $0.28 | $0.25 | $0.69 | $0.66 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $1.9 | $16.9 |
- Q3 revenue rose 26% year over year: IT Staffing revenue increased 22% to $49.0 million, and Data and Analytics revenue increased 47% to $10.5 million. The latter included $1.9 million from AmberLeaf and $1.4 million of organic growth.
- For the first nine months, revenue grew 12.1%; Data and Analytics increased 32.7% (about 6% organic growth, excluding AmberLeaf) and IT Staffing increased 8.6%.
- Q3 segment gross margins were 51.6% for Data and Analytics, down from 55.9%, and 22.8% for IT Staffing, up from 22.6%. AmberLeaf’s lower margin profile contributed to the Data and Analytics decline; improved staffing margins reflected higher direct-hire fees.
- Nine-month net income included a $2.0 million credit from revaluing AmberLeaf contingent consideration. The liability fell from $2.9 million to $0.9 million after management determined payment conditions were unlikely to be fully met.
- Nine-month operating cash flow fell to $1.9 million from $16.9 million. The company cited a $10.7 million increase in operating working capital, including higher receivables to support growth and higher days sales outstanding.
Balance sheet, debt and liquidity
At September 30, 2021, cash was $5.4 million and current assets were $55.0 million versus current liabilities of $27.8 million. The current ratio was approximately 2.0x. Accounts receivable were $32.5 million and unbilled receivables $12.9 million. Total assets were $115.1 million and shareholders’ equity was $70.2 million.
Term-loan borrowings were $14.2 million; there were no revolver borrowings and approximately $30 million of revolver capacity was available. Management reported net bank debt of $8.8 million and said cash, operating cash flow and available credit were expected to cover business needs and debt service over the next 12 months, excluding acquisitions. The company repaid $3.3 million of term debt during the first nine months and reported compliance with credit-facility covenants.
Outlook, risks and notable items
- No numerical earnings or revenue guidance was provided. Management was hopeful that economic conditions would continue improving in Q4 and that 2022 would be healthy for its key markets.
- Management cited skilled-worker supply constraints, which can raise resource costs, and potential gross-margin pressure from staffing intermediaries and managed service providers. Staffing bill rates were lower year over year in Q3, though consultant headcount was up 27% from a year earlier.
- Revenue is concentrated: CGI generated 14.6% of Q3 revenue and 14.8% of nine-month revenue; Accenture represented 10.4% in Q3. The top ten clients generated about 49% of Q3 revenue.
- Many contracts are terminable on short notice with little or no penalty. Results are exposed to economic conditions, client spending, consultant availability, and foreign-exchange movements. The filing says fourth-quarter seasonality can mean lower utilization and higher benefit costs.
- Disclosure controls were deemed ineffective due to previously identified material weaknesses involving management review of complex accounting matters and IT general controls. Remediation was underway but not yet validated over a sustained period. AmberLeaf was excluded from the control assessment pending integration; management planned to include it in the year-end 2021 assessment.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The Canadian subsidiary’s 2018 and 2019 tax years were under audit; the IRS completed its 2018 audit without adjustment.
Most important facts to verify
- Whether receivables collection and working-capital investment improve, given the cash-flow decline and Q3 DSO of 66 days.
- Whether organic Data and Analytics growth and bookings translate into sustained revenue and margins, particularly as AmberLeaf is integrated.
- Whether staffing growth can continue without further bill-rate or gross-margin pressure from talent scarcity and customer/vendor dynamics.
- Progress and independent validation of remediation for the disclosed internal-control material weaknesses, including AmberLeaf’s inclusion in the year-end assessment.
- Client concentration, tax-audit developments, and continued compliance with credit-facility covenants.