Mastech Digital(MHH) - 2022 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements Mastech Digital reported increased revenues but decreased net income for the nine months ended September 30, 2022 Condensed Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Unaudited, in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $63.15 | $59.53 | $185.02 | $162.96 | | Gross Profit | $16.29 | $16.62 | $48.97 | $43.74 | | Income from Operations | $3.36 | $4.98 | $10.21 | $12.16 | | Net Income | $2.41 | $3.41 | $7.17 | $8.34 | | Diluted EPS | $0.20 | $0.28 | $0.59 | $0.69 | Condensed Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited, in millions) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $3.48 | $6.62 | | Total current assets | $57.76 | $53.91 | | Goodwill, net of impairment | $32.51 | $32.51 | | Total assets | $114.78 | $113.70 | | Current portion of long-term debt | $2.20 | $4.40 | | Total current liabilities | $26.74 | $26.84 | | Long-term debt, less current portion, net | $0.00 | $8.33 | | Total liabilities | $30.31 | $39.27 | | Total shareholders' equity | $84.47 | $74.43 | Condensed Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Unaudited, in millions) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash flows provided by operating activities | $7.74 | $1.91 | | Net cash flows used in investing activities | ($0.80) | ($1.04) | | Net cash flows used in financing activities | ($9.39) | ($3.01) | | Net change in cash and cash equivalents | ($3.14) | ($2.23) | Notes to Condensed Consolidated Financial Statements - The company operates as a provider of Digital Transformation IT Services through two reportable segments: Data and Analytics Services and IT Staffing Services[25][33] Revenue by Segment (in millions) | Segment | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Data and Analytics Services | $31.48 | $28.27 | | IT Staffing Services | $153.54 | $134.70 | | Total Revenues | $185.02 | $162.96 | - For the nine months ended September 30, 2022, one client (CGI) accounted for 21.3% of total revenue, with the top ten clients representing approximately 53% of total revenues[42][43] - As of September 30, 2022, the company had no outstanding borrowings under its $40 million Revolver and had $36.4 million of unused borrowing capacity, with an outstanding term loan of $2.2 million[64][71] - Subsequent to the quarter end, on November 1, 2022, Ganeshan Venkateshwaran resigned as the CEO of the Data and Analytics Services segment and will receive a severance payment of $0.7 million[94] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2022 revenue growth, gross margin decline, and the impact of a cyber-security breach Cyber-security Breach During Third Quarter 2022 - The company experienced a cyber-security breach in Q3 2022 involving a single employee email account, resulting in a $0.45 million pre-tax loss reserve for related costs and potential losses[100] Economic Trends and Outlook - The company's business is highly correlated to North American economic conditions, with management mindful of inflationary pressures and recessionary concerns impacting customer investment in long-term projects[107] - The company faces ongoing supply-side challenges for skilled IT professionals in advanced technologies, expected to continue into 2023[110] Results of Operations for the Three Months Ended September 30, 2022 vs 2021 Q3 Revenue by Segment (in millions) | Segment | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Data and Analytics Services | $10.1 | $10.5 | | IT Staffing Services | $53.1 | $49.0 | | Total Revenues | $63.2 | $59.5 | - Total gross margin decreased by 210 basis points to 25.8% in Q3 2022 from 27.9% in Q3 2021, primarily due to the Data and Analytics Services segment's margin falling to 39.6% from 51.6% because of lower utilization and a $0.3 million project cost overrun[115][118] - SG&A expenses increased to $12.9 million (20.4% of revenue) from $11.6 million (19.5% of revenue) in the prior-year quarter, partly due to the $0.45 million cyber-security breach reserve and $0.12 million in severance expenses[120][121] Results of Operations for the Nine Months Ended September 30, 2022 vs 2021 Nine Months Revenue by Segment (in millions) | Segment | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Data and Analytics Services | $31.5 | $28.3 | | IT Staffing Services | $153.5 | $134.7 | | Total Revenues | $185.0 | $163.0 | - Total gross margin for the nine-month period was 26.5%, a slight decrease from 26.8% in the prior year, reflecting lower margins in the Data and Analytics segment (42.8% vs 48.2%) offset by improved margins in the IT Staffing segment (23.1% vs 22.4%)[128][130] Liquidity and Capital Resources Liquidity Position as of Sep 30, 2022 | Metric | Amount (in millions) | | :--- | :--- | | Cash Balance | $3.5 | | Total Bank Debt | $2.2 | | Revolver Borrowing Capacity | $36.4 | - During Q3 2022, the company prepaid $7.6 million of its outstanding term loan using excess cash balances[137] - Cash provided by operating activities for the nine months ended Sep 30, 2022, was $7.7 million, a significant improvement from $1.9 million in the same period of 2021, primarily due to better working capital management[140] Quantitative and Qualitative Disclosures About Market Risk The company's market risks primarily involve interest rate fluctuations and foreign currency exposures, both deemed immaterial - As of September 30, 2022, the company had $2.2 million in outstanding variable-rate debt, where a hypothetical 10% increase in interest rates would increase annual interest expense by approximately $0.013 million[149] - The company is exposed to foreign currency risk from its Indian and European subsidiaries, but management states a hypothetical 10% change in foreign currency rates would not materially impact the consolidated financial statements[150] Controls and Procedures The CEO and CFO concluded disclosure controls were effective with no material changes to internal controls - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report[152] - There were no material changes in the Company's internal control over financial reporting during the quarter ended September 30, 2022[154] PART II OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, which management believes will not materially impact financial results - Management believes that the disposition of ongoing legal proceedings, which arise in the ordinary course of business, should not have a material adverse effect on the company's financial condition or results[156] Risk Factors No material changes occurred to the risk factors previously disclosed in the Annual Report on Form 10-K - No material changes have occurred from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[157] Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable for the current reporting period - Not applicable[158] Exhibits The report includes various exhibits, notably CEO and CFO certifications and XBRL data files - Exhibits filed with this report include certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as XBRL instance and taxonomy documents[159]