Mastech Digital(MHH) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and 2021 Condensed Consolidated Statements of Operations (Unaudited) Operations Overview | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Revenues | $59,755 | $49,775 | | Cost of revenues | 43,823 | 36,971 | | Gross profit | 15,932 | 12,804 | | Selling, general and administrative expenses | 12,625 | 10,935 | | Income from operations | 3,307 | 1,869 | | Interest income (expense), net | (114) | (195) | | Other income (expense), net | 54 | (37) | | Income before income taxes | 3,247 | 1,637 | | Income tax expense | 915 | 443 | | Net income | $2,332 | $1,194 | | Basic EPS | $0.20 | $0.10 | | Diluted EPS | $0.19 | $0.10 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) Comprehensive Income | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net income | $2,332 | $1,194 | | Foreign currency translation adjustments | (147) | (19) | | Net unrealized gain on interest-rate swap contracts | — | 35 | | Total comprehensive income | $2,185 | $1,201 | Condensed Consolidated Balance Sheets (Unaudited) Balance Sheet Summary | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | ASSETS | | | | Total current assets | $57,214 | $53,905 | | Net equipment, enterprise software, and leasehold improvements | 3,540 | 3,038 | | Operating lease right-of-use assets | 5,033 | 4,894 | | Goodwill, net of impairment | 32,510 | 32,510 | | Intangible assets, net of amortization | 17,968 | 18,760 | | Total assets | $116,776 | $113,702 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total current liabilities | $26,802 | $26,844 | | Total liabilities | 38,744 | 39,274 | | Total shareholders' equity | 78,032 | 74,428 | | Total liabilities and shareholders' equity | $116,776 | $113,702 | Condensed Consolidated Statements of Shareholders' Equity (Unaudited) Shareholders' Equity Changes (Q1 2022) | Metric | Balances, December 31, 2021 (in thousands) | Balances, March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Common Stock | $131 | $133 | | Additional Paid-in Capital | 28,250 | 29,667 | | Retained Earnings | 50,841 | 53,173 | | Treasury Stock | (4,187) | (4,187) | | Accumulated Other Comprehensive Income (Loss) | (607) | (754) | | Total Shareholders' Equity | $74,428 | $78,032 | | Net income | — | 2,332 | | Other comprehensive (loss), net of taxes | — | (147) | | Stock-based compensation expense | — | 526 | | Stock options exercised | — | 893 | Shareholders' Equity Changes (Q1 2021) | Metric | Balances, December 31, 2020 (in thousands) | Balances, March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Common Stock | $130 | $130 | | Additional Paid-in Capital | 25,509 | 26,231 | | Retained Earnings | 38,620 | 39,814 | | Treasury Stock | (4,187) | (4,187) | | Accumulated Other Comprehensive Income (Loss) | (539) | (532) | | Total Shareholders' Equity | $59,533 | $61,456 | | Net income | — | 1,194 | | Other comprehensive gain, net of taxes | — | 7 | | Stock-based compensation expense | — | 621 | | Stock options exercised | — | 101 | Condensed Consolidated Statements of Cash Flows (Unaudited) Cash Flow Summary | Activity | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net cash flows provided by operating activities | $1,563 | $774 | | Net cash flows (used in) investing activities | (646) | (191) | | Net cash flows (used in) financing activities | (207) | (999) | | Effect of exchange rate changes on cash and cash equivalents | (147) | (19) | | Net change in cash and cash equivalents | 563 | (435) | | Cash and cash equivalents, end of period | $7,185 | $7,242 | Notes to Condensed Consolidated Financial Statements (Unaudited) Details the company's accounting policies, revenue recognition, segment performance, and other key financial disclosures 1. Description of Business and Basis of Presentation - Mastech Digital, Inc. provides Digital Transformation IT Services to large and medium-sized organizations[26] - The company's offerings include data management and analytics services, digital learning services, and IT staffing services[27] - The Data and Analytics Services segment expanded through acquisitions of InfoTrellis (2017) and AmberLeaf Partners (2020), enhancing capabilities in data management, engineering, science, and customer experience consulting[28] - The IT Staffing Services segment delivers a broad range of staffing services in digital (data management, analytics, cloud, AI) and mainstream technologies[29] 2. Revenue from Contracts with Customers - Revenue is primarily derived from data and analytics, IT staffing, and digital transformation services, recognized over time for time-and-material and fixed-price contracts[35][36][38] Revenue by Segment and Contract Type | Segment | Contract Type | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | :--- | | Data and Analytics Services | Time-and-material | $6,181 | $5,854 | | | Fixed-price | 3,971 | 2,940 | | Subtotal D&A Services | | $10,152 | $8,794 | | IT Staffing Services | Time-and-material | $49,399 | $40,981 | | | Fixed-price | 204 | — | | Subtotal IT Staffing Services | | $49,603 | $40,981 | | Total Revenues | | $59,755 | $49,775 | - One client (CGI) accounted for 17.8% of total revenues in Q1 2022 (15.0% in Q1 2021), and the top ten clients represented approximately 51% and 47% of total revenues for the three months ended March 31, 2022 and 2021, respectively[43][44] Revenue by Geography | Geography | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | United States | $58,347 | $47,942 | | Canada | 1,019 | 1,264 | | India and other | 389 | 569 | | Total | $59,755 | $49,775 | 3. Goodwill and Other Intangible Assets, Net - Goodwill primarily stems from the acquisitions of Hudson IT ($8.4M), InfoTrellis ($27.4M, with a $9.7M impairment in 2018), and AmberLeaf ($6.4M)[46] Net Carrying Value of Intangible Assets | Intangible Asset Category | Amortization Period (Years) | Net Carrying Value (March 31, 2022, in thousands) | Net Carrying Value (December 31, 2021, in thousands) | | :--- | :--- | :--- | :--- | | IT Staffing Services: | | | | | Client relationships | 12 | $3,471 | $3,638 | | Covenant-not-to-compete | 5 | — | — | | Trade name | 3 | — | — | | Data and Analytics Services: | | | | | Client relationships | 12 | 12,730 | 13,138 | | Covenant-not-to-compete | 5 | 353 | 413 | | Trade name | 5 | 414 | 500 | | Technology | 7 | 1,000 | 1,071 | | Total Intangible Assets | | $17,968 | $18,760 | - Amortization expense for intangible assets was $792,000 for Q1 2022 and $793,000 for Q1 2021, included in SG&A expenses[48] 4. Leases - The company leases office facilities and equipment under noncancelable operating leases, with an average initial term of four years and a weighted average remaining term of 3.8 years[50] Lease Assets and Liabilities | Lease Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Long-term operating lease right-of-use assets | $5,033 | $4,894 | | Short-term operating lease liability | $1,571 | $1,479 | | Long-term operating lease liability | 3,677 | 3,706 | | Total liabilities | $5,248 | $5,185 | - Rental expense for Q1 2022 and Q1 2021 was $0.4 million each period[54] 5. Payroll Tax Liability - The company deferred $2.3 million in employer's share of social security tax under the CARES Act, due by December 31, 2022, and reflected as part of current liabilities[56] 6. Commitments and Contingencies - Management believes that the disposition of ongoing lawsuits and administrative proceedings will not have a material adverse effect on the company's financial position, results of operations, or cash flows[57] 7. Employee Benefit Plan - The company offers a 401(k) Retirement Plan to U.S. based salaried and W-2 hourly employees, but did not provide matching contributions for the three months ended March 31, 2022 and 2021[58] 8. Stock-Based Compensation - Under the Stock Incentive Plan, 11,304 restricted share units and 400,000 stock options were granted in Q1 2022, compared to 11,955 restricted share units and 270,000 stock options in Q1 2021[59] - Stock-based compensation expense was $526,000 for Q1 2022 and $621,000 for Q1 2021, included in SG&A expenses[60] - The Employee Stock Purchase Plan allows eligible employees to purchase common stock at a 15% discount, with 516,399 shares available as of March 31, 2022[61][62][63] 9. Credit Facility - The company has a $53.1 million credit facility with PNC Bank, comprising a $40 million revolving credit facility (Revolver) and a $13.1 million term loan facility (Term Loan)[64] - The Term Loan requires quarterly installments of $1.1 million through October 1, 2024[66] - As of March 31, 2022, outstanding borrowings under the Revolver were $0 million (unused capacity of $35.5 million), and under the Term Loan were $12.0 million[71] 10. Income Taxes Income Before Taxes by Source | Income Before Taxes | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Domestic | $3,315 | $1,881 | | Foreign | (68) | (244) | | Total | $3,247 | $1,637 | Components of Income Tax Provision | Income Tax Provision | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Current provision | $209 | $461 | | Deferred provision (benefit) | 623 | (50) | | Change in valuation allowance | 83 | 32 | | Total provision for income taxes | $915 | $443 | - The effective tax rate was 28.2% for Q1 2022, up from 27.1% in Q1 2021, primarily due to an increase in the tax valuation allowance related to foreign net operating losses in Singapore and the UK[73][74] 11. Derivative Instruments and Hedging Activities - The company previously used interest-rate swap contracts to convert variable debt to a fixed rate, but these contracts matured on April 1, 2021, and had no value as of March 31, 2022[76] Derivative Impact (Q1 2021) | Derivative Impact (Q1 2021, in thousands) | Amount of Gain recognized in OCI (Effective Portion) | Location of Gain reclassified from Accumulated OCI to Income (Effective Portion) | Amount of Gain reclassified from Accumulated OCI to Income (Effective Portion) | | :--- | :--- | :--- | :--- | | Interest-Rate Swap Contracts | $35 | Interest Expense | $34 | 12. Fair Value Measurements - As of March 31, 2022, and December 31, 2021, the company had no balances related to interest-rate swap contracts or contingent consideration liabilities, as the swap matured and contingent consideration was revalued to zero[78] 13. Shareholders' Equity - No shares were purchased to satisfy employee tax obligations related to the Stock Incentive Plan during the three months ended March 31, 2022 and 2021[79] 14. Earnings Per Share - Basic EPS is calculated based on net income divided by weighted average common shares outstanding, while diluted EPS includes the potential dilution from stock options using the treasury stock method[80] - No anti-dilutive stock options were excluded from diluted EPS computation in Q1 2022, compared to 150,000 in Q1 2021[81] 15. Business Segments and Geographic Information - The company operates in two segments: Data and Analytics Services (Mastech InfoTrellis) and IT Staffing Services[82][83][84] Segment Revenues and Gross Margin | Segment | Revenues (Q1 2022, in thousands) | Revenues (Q1 2021, in thousands) | Gross Margin % (Q1 2022) | Gross Margin % (Q1 2021) | | :--- | :--- | :--- | :--- | :--- | | Data and Analytics Services | $10,152 | $8,794 | 45.2% | 45.7% | | IT Staffing Services | 49,603 | 40,981 | 22.9% | 21.4% | | Total | $59,755 | $49,775 | 26.7% | 25.7% | Segment Operating Income | Segment Operating Income | Q1 2022 (in thousands) | Q1 2021 (in thousands) | | :--- | :--- | :--- | | Data and Analytics Services | $972 | $394 | | IT Staffing Services | 3,127 | 2,268 | | Subtotal | $4,099 | $2,662 | 16. Recently Issued Accounting Standards - The company adopted ASU 2021-10 (Government Assistance) on January 1, 2022, with no material impact[87] - ASU 2021-08 (Business Combinations: Accounting for Contract Assets and Liabilities) is effective after December 15, 2022, and is not expected to have a material impact[88] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provides management's perspective on financial performance, highlighting revenue growth, margin improvements, and liquidity Overview - Mastech Digital provides Digital Transformation IT Services, including data management and analytics, digital learning, and IT staffing services[95] - The company operates in two segments: Data and Analytics Services (Mastech InfoTrellis) and IT Staffing Services, serving various industry verticals[96][97] Economic Trends and Outlook - Business outlook is highly correlated to North American economic conditions; demand for services increases with economic expansion and declines during slowdowns[99] - The company is hopeful that COVID-19 concerns will be less impactful in 2022, but acknowledges uncertainty from variants, inflationary pressures, and potential recessionary conditions[99] - Supply-side challenges for skilled IT professionals, especially in advanced technologies (social, cloud, analytics, mobility, automation), are expected to persist in 2022[99][102] - The Data and Analytics Services segment addresses customer needs through a 'Center of Excellence' offering, bundling total requirements under multi-year contracts[103] Results of Operations for the Three Months Ended March 31, 2022 as Compared to the Three Months Ended March 31, 2021 The company reported strong year-over-year revenue growth, improved gross margins, and operational leverage Revenues Revenue by Segment | Segment | Q1 2022 Revenues (in millions) | Q1 2021 Revenues (in millions) | YoY Growth | | :--- | :--- | :--- | :--- | | Data and Analytics Services | $10.2 | $8.8 | 15% | | IT Staffing Services | $49.6 | $41.0 | 21% | | Total Revenues | $59.8 | $49.8 | 20% | - Data and Analytics Services revenue growth was due to improved backlog, despite Q1 2022 bookings of $11.8 million being lower than Q1 2021's $15.8 million (which included multi-year orders)[105] - IT Staffing Services revenue increase was driven by a higher number of billing consultants (1,295 in Q1 2022 vs. 1,162 in Q1 2021) and an increased average bill rate ($78.99/hour in Q1 2022 vs. $75.12/hour in Q1 2021)[106] Gross Margins Gross Profit and Margin Analysis | Metric | Q1 2022 | Q1 2021 | Change (bps) | | :--- | :--- | :--- | :--- | | Total Gross Profit (in millions) | $15.9 | $12.8 | +24% | | Total Gross Margin % | 26.7% | 25.7% | +100 bps | | Data and Analytics Services Gross Margin % | 45.2% | 45.7% | -50 bps | | IT Staffing Services Gross Margin % | 22.9% | 21.4% | +150 bps | - The overall gross margin improvement was due to higher revenue levels in the high-margin Data and Analytics Services segment and improved gross margins in IT Staffing Services[107] - IT Staffing Services gross margin improvement was largely due to higher permanent placement fees, improved utilization, and revenues from higher-margin offshore staffing services[109] Selling, General and Administrative ("S,G&A") Expenses SG&A Expenses by Segment | S,G&A Category | Q1 2022 (in millions) | Q1 2021 (in millions) | | :--- | :--- | :--- | | Data and Analytics Services Segment | | | | Sales and Marketing | $1.9 | $1.8 | | Operations | 0.6 | 0.8 | | Amortization of Acquired Intangible Assets | 0.6 | 0.6 | | General & Administrative | 1.1 | 1.0 | | Subtotal D&A Services | $4.2 | $4.2 | | IT Staffing Services Segment | | | | Sales and Marketing | $2.5 | $1.8 | | Operations | 2.8 | 2.0 | | Amortization of Acquired Intangible Assets | 0.2 | 0.2 | | General & Administrative | 2.9 | 2.7 | | Subtotal IT Staffing Services | $8.4 | $6.7 | | Total S,G&A Expenses | $12.6 | $10.9 | - Total SG&A expenses increased to $12.6 million (21.1% of revenues) in Q1 2022 from $10.9 million (21.9% of revenues) in Q1 2021, showing a decrease as a percentage of revenue[110] - Increases in sales and operations expenses were primarily due to staff additions, higher commissions/bonuses, and increased variable expenses to support revenue growth[111] Other Income / (Expense) Components - Q1 2022 saw net interest expense of ($114,000) and foreign exchange gains of $54,000, compared to net interest expense of ($195,000) and foreign exchange losses of ($37,000) in Q1 2021[113] - Lower interest expense in Q1 2022 was due to debt repayments[113] Income Tax Expense - Income tax expense for Q1 2022 was $915,000 (28.2% effective tax rate), up from $443,000 (27.1% effective tax rate) in Q1 2021[114] - The higher effective tax rate in Q1 2022 was mainly due to an increase in the tax valuation allowance related to foreign net operating losses in Singapore and the UK[114] Liquidity and Capital Resources The company maintains a strong liquidity position with adequate cash and borrowing capacity to meet its operational needs Financial Conditions and Liquidity - As of March 31, 2022, net bank debt (bank debt less cash) was $4.8 million, with approximately $35.5 million of unused borrowing capacity under the credit facility[115] - Accounts receivable 'days sales outstanding' (DSOs) was 64 days at March 31, 2022, one day lower than Q1 2021[116] - Management believes current cash, operating cash flows, and credit facility availability are adequate for business needs and debt service over the next twelve months, excluding acquisitions[117] Cash flows provided by (used in) operating activities - Cash provided by operating activities increased to $1.6 million in Q1 2022 from $0.8 million in Q1 2021[118] - Q1 2022 operating cash flows included net income of $2.3 million, non-cash charges of $2.1 million, and an increase in operating working capital of ($2.8 million)[118] Cash flows (used in) investing activities - Cash used in investing activities increased to ($646,000) in Q1 2022 from ($191,000) in Q1 2021[119] - The increase in capital expenditures was for the Chennai delivery center in India and the implementation of Oracle Cloud for the Data and Analytics Services segment[119] Cash flows provided by (used in) financing activities - Cash used in financing activities was ($0.2 million) in Q1 2022, consisting of $1.1 million in debt repayments partially offset by $0.9 million from stock option exercises[120] - In Q1 2021, cash used in financing activities was ($1.0 million), with $1.1 million in debt repayments offset by $0.1 million from stock option exercises[120] Off-Balance Sheet Arrangements - The company does not have any off-balance sheet arrangements[121] Inflation - Inflation did not have a significant impact on operations for the periods presented, with efforts to control costs and adjust billing rates to mitigate effects[122] - High inflation levels could lead to higher interest rates, increasing borrowing costs[122] Seasonality - Operations are generally not affected by seasonal fluctuations, but consultant billable hours are impacted by national holidays and vacations, leading to lower utilization in the fourth quarter[123] - Assignment completions tend to be higher near year-end, affecting revenue and gross profit in the subsequent quarter[123] Recently Issued Accounting Standards - Recent accounting pronouncements are detailed in Note 16 to the financial statements[124] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Outlines the company's exposure to market risks, primarily from interest rate changes and currency fluctuations Interest Rates - As of March 31, 2022, the company had $12.0 million in outstanding variable-rate debt under its credit facility[126] - A hypothetical 10% increase in interest rates would increase annual interest expense by approximately $36,000[126] - The company had no interest-rate hedge vehicles outstanding as of March 31, 2022[126] Currency Fluctuations - The reporting currency is the U.S. dollar; functional currencies for Indian and European subsidiaries are local currencies, with translation adjustments recorded in accumulated other comprehensive income (loss)[127] - Gains and losses from foreign currency transactions have not been material, and a hypothetical 10% change in foreign currency rates would not materially impact consolidated financial statements[127] ITEM 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls Disclosure Controls and Procedures - The company maintains disclosure controls and procedures designed to ensure timely and accurate reporting of information required under the Securities Exchange Act of 1934[128] - As of March 31, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[129] - Disclosure controls provide reasonable, not absolute, assurance and are subject to inherent limitations[130] Changes in Internal Control over Financial Reporting - There were no material changes in the company's internal control over financial reporting during the quarter ended March 31, 2022[131] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings States that ongoing legal proceedings are not expected to have a material adverse effect on the company - Management believes ongoing legal proceedings will not materially adversely affect financial position, results of operations, or cash flows[133] ITEM 1A. Risk Factors There have been no material changes to previously disclosed risk factors - No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2021[134] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable for the reporting period - Not applicable for this reporting period[135] ITEM 6. Exhibits Lists the exhibits filed with the Form 10-Q, including Sarbanes-Oxley certifications and XBRL documents - Includes certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and Chief Financial Officer[136] - Contains various XBRL (eXtensible Business Reporting Language) documents for interactive data filing[136] SIGNATURES The report is duly signed by the company's Chief Executive Officer and Chief Financial Officer - The report was signed by Vivek Gupta (Chief Executive Officer) and John J. Cronin, Jr. (Chief Financial Officer) on May 11, 2022[138][139][140]