Mastech Digital, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Mastech provides digital transformation services through Data and Analytics Services (D&A) and IT Staffing Services. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $53.7m | $47.6m | $103.4m | $98.0m |
| Gross profit / margin | $14.3m / 26.7% | $12.7m / 26.6% | $27.1m / 26.2% | $25.4m / 25.9% |
| Operating income | $5.3m | $3.6m | $7.2m | $6.1m |
| Net income | $3.7m | $3.0m | $4.9m | $4.8m |
| Diluted EPS | $0.31 | $0.25 | $0.41 | $0.41 |
| Operating cash flow | Not separately presented for the quarter | $0.2m | $11.6m |
Q2 revenue increased 13% year over year; first-half revenue rose 5.5%. First-half net income was nearly flat despite higher revenue and operating income. First-half cash from operations fell sharply as receivables and unbilled receivables, along with prepaid assets, absorbed working capital.
Business and segment trends
- D&A: Q2 revenue was $9.0m versus $6.8m, up 32%; growth included $1.9m from AmberLeaf and $0.3m organic growth. First-half revenue was $17.7m versus $14.1m; organic revenue was flat, with project delays weighing on results. New bookings were about $15m in Q2 and $30m for the half, the latter 32% above the prior-year period. Segment gross margin declined to 46.7% in Q2 and 46.2% for the half, partly reflecting AmberLeaf’s lower-margin profile.
- IT Staffing: Q2 revenue grew 10% to $44.7m; first-half revenue increased 2% to $85.7m. Q2 billable consultants increased 21% year over year to 1,251, while the average bill rate declined to $74.65 from $76.91. Segment gross margin improved to 22.7% in Q2 and 22.1% for the half.
- Company gross margin was broadly stable in Q2 and improved 30 basis points for the first half. The top ten clients contributed about 48% of revenue in both comparative first-half periods; CGI alone represented 14.9% of first-half 2021 revenue.
Liquidity, debt and other balance-sheet items
- At June 30, cash and cash equivalents were $5.3m, versus $7.7m at year-end 2020. Current assets were $47.3m and current liabilities $24.2m.
- Term-loan borrowings were $15.3m; there were no revolver borrowings and approximately $26.1m of revolver capacity available. The company reported $10.0m of bank debt net of cash. It repaid $2.2m of term-loan principal during the first half and was in compliance with credit-facility covenants.
- First-half investing cash use was $0.5m and financing cash use was $1.9m. Total liabilities were $42.7m. Operating lease liabilities totaled $5.9m.
Unusual items, outlook and risks
- A $2.0m Q2 credit from revaluing AmberLeaf contingent consideration increased reported operating income; the liability fell from $2.9m at year-end to $0.9m. This was a non-cash, acquisition-related item, and management judged the payment conditions unlikely to be fully met.
- The first-half effective tax rate was 27.5%, versus 15.2% in 2020, when excess tax benefits from equity awards lowered the rate. The company’s 2018 U.S. tax return was under IRS audit, and Revenue Canada notified the company of planned audits for 2018 and 2019.
- Management cited vaccination progress and improving economic conditions but emphasized continued uncertainty around COVID-19 and the recovery. It expects available operating cash, cash balances and credit capacity to fund business needs and debt service for the next 12 months, excluding acquisitions. No quantitative earnings or revenue guidance was provided.
- Risks include project delays, dependence on a concentrated client base, staffing-market supply constraints and potential pressure on IT staffing margins from systems integrators and managed-service providers. The company also noted foreign-exchange exposure and seasonally lower utilization in Q4.
- Management concluded disclosure controls were not effective because of previously identified material weaknesses in review controls for complex accounting and IT general controls. Remediation was ongoing; AmberLeaf was excluded from the control assessment under the permitted post-acquisition transition period and was expected to be included at year-end 2021. Management cautioned remediation was not yet validated as effective.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether D&A bookings convert into revenue and whether project delays ease; assess organic growth separately from AmberLeaf contributions.
- Whether the Q2 improvement in earnings persists without the $2.0m contingent-consideration credit, and how AmberLeaf performs against its targets.
- Whether working-capital investment moderates and operating cash flow recovers after the first-half $6.6m working-capital use.
- Trends in billable consultant counts, average bill rates, segment margins and customer concentration.
- Progress in remediating material weaknesses, the year-end control assessment including AmberLeaf, and outcomes of the U.S. and Canadian tax audits.