Mastech Digital(MHH) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Mastech Digital, Inc.'s unaudited condensed consolidated financial statements, including statements of operations, balance sheets, and cash flows, for the periods ending September 30, 2021 and 2020 Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $59,531 | $47,383 | $162,964 | $145,391 | | Gross Profit | $16,620 | $13,090 | $43,739 | $38,465 | | Income from Operations | $4,975 | $4,217 | $12,155 | $10,307 | | Net Income | $3,406 | $2,998 | $8,338 | $7,836 | | Diluted EPS | $0.28 | $0.25 | $0.69 | $0.66 | Consolidated Balance Sheet Highlights (Unaudited) | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $54,993 | $41,157 | | Total Assets | $115,082 | $102,046 | | Total Current Liabilities | $27,846 | $21,971 | | Long-term Debt, net | $9,636 | $12,875 | | Total Liabilities | $44,911 | $42,513 | | Total Shareholders' Equity | $70,171 | $59,533 | Consolidated Statements of Cash Flows Highlights (Unaudited) | Metric | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash from operating activities | $1,909 | $16,938 | | Net cash from investing activities | $(1,042) | $(247) | | Net cash from financing activities | $(3,014) | $(15,460) | | Net change in cash | $(2,230) | $1,033 | | Cash at end of period | $5,447 | $4,014 | Notes to Condensed Consolidated Financial Statements - The company operates two reportable segments: Data and Analytics Services and IT Staffing Services[33] Revenue by Segment and Contract Type (Q3 2021 vs Q3 2020) | Segment | Contract Type | Q3 2021 Revenue (in thousands) | Q3 2020 Revenue (in thousands) | | :--- | :--- | :--- | :--- | | Data and Analytics | Time-and-material | $6,021 | $4,140 | | | Fixed-price | $4,502 | $3,036 | | Subtotal | | $10,523 | $7,176 | | IT Staffing | Time-and-material | $49,008 | $40,207 | | Subtotal | | $49,008 | $40,207 | | Total Revenues | | $59,531 | $47,383 | - On October 1, 2020, the company acquired AmberLeaf Partners, Inc. for approximately $9.7 million in cash at closing, with up to $4.5 million in contingent deferred cash payments[44] - During Q2 2021, the company revalued the contingent consideration liability related to the AmberLeaf acquisition, resulting in a $2.0 million reduction to the liability as payment conditions were deemed unlikely to be fully met[48][92] Segment Performance (Q3 2021 vs Q3 2020) | Metric | Data and Analytics | IT Staffing | | :--- | :--- | :--- | | Revenues (Q3 2021) | $10,523 (in thousands) | $49,008 (in thousands) | | Revenues (Q3 2020) | $7,176 (in thousands) | $40,207 (in thousands) | | Gross Margin % (Q3 2021) | 51.6% | 22.8% | | Gross Margin % (Q3 2020) | 55.9% | 22.6% | | Segment Operating Income (Q3 2021) | $1,851 (in thousands) | $3,916 (in thousands) | | Segment Operating Income (Q3 2020) | $1,579 (in thousands) | $3,294 (in thousands) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 26% year-over-year revenue increase in Q3 2021, driven by growth in IT Staffing and Data and Analytics segments, covering revenue trends, gross margin, operating expenses, and liquidity Overview - Mastech Digital is a provider of Digital Transformation IT Services, operating through two segments: Data and Analytics Services (branded as Mastech InfoTrellis) and IT Staffing Services[110][111] - The company's business outlook is highly correlated to general North American economic conditions, showing signs of economic expansion in 2021 despite 2020 COVID-19 impacts[114] Results of Operations Q3 2021 vs Q3 2020 Revenue by Segment (in millions) | Segment | Q3 2021 Revenue | Q3 2020 Revenue | % Change | | :--- | :--- | :--- | :--- | | Data and Analytics Services | $10.5 | $7.2 | +47% | | IT Staffing Services | $49.0 | $40.2 | +22% | | Total | $59.5 | $47.4 | +26% | - The 47% revenue growth in Data and Analytics for Q3 2021 included 19% organic growth, with the remainder from the AmberLeaf acquisition[119][120] - IT Staffing revenue growth was driven by a 27% year-over-year increase in billable consultant headcount, from 1,037 to 1,317, reflecting strong activity in 2021[121] - Overall gross margin improved slightly to 27.9% in Q3 2021 from 27.6% in Q3 2020, mainly due to better margins in the IT Staffing segment[122] - Selling, General & Administrative (SG&A) expenses increased to $11.6 million in Q3 2021 from $8.9 million in Q3 2020, partly due to the unwinding of 2020 austerity measures and costs associated with the AmberLeaf acquisition[125] Liquidity and Capital Resources - As of September 30, 2021, the company had net bank debt of $8.8 million and $30 million of available borrowing capacity under its credit facility[140] - Cash from operating activities for the first nine months of 2021 was $1.9 million, a significant decrease from $16.9 million in the same period of 2020, primarily due to an increase in operating working capital to support revenue growth[143] - Accounts receivable 'days sales outstanding' (DSOs) increased by three days to 66 days from June 30, 2021, which is on the high end of management's expectations[141] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from currency exchange rate variations due to global operations, with no currency hedging activities since 2015 - The company's cash flows and earnings are subject to fluctuations from currency exchange rate variations, particularly related to its global operations, with no foreign currency forward contracts used to hedge this risk since 2015[151] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2021, due to material weaknesses in internal controls over complex accounting and IT general controls, with a remediation plan underway - Management concluded that the company's disclosure controls and procedures were not effective as of the end of the period covered by the report[154] - The ineffectiveness is due to previously disclosed material weaknesses in internal controls over financial reporting related to management review of complex accounting matters and IT general controls[156] - The company is implementing a remediation plan, including hiring new personnel, enhancing management review controls, and migrating a subsidiary to its Oracle Cloud ERP system to address the IT control weakness[157][160] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal and administrative proceedings, with management expecting no material adverse effect on financial position, operations, or cash flows - The company is involved in ordinary course lawsuits and administrative proceedings, none of which are expected to have a material adverse effect on its financial condition[162] Risk Factors No material changes have occurred in the risk factors since the company's 2020 Annual Report on Form 10-K - No material changes have occurred in the risk factors since the company's 2020 Annual Report on Form 10-K[163] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any Common Stock during Q3 2021 and has no publicly announced share repurchase program in place - The company did not repurchase any of its shares during the third quarter of 2021 and does not have a publicly announced repurchase program[164] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits filed with this report include CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as XBRL interactive data files[166]