MASTECH DIGITAL, INC. You should read the following discussion in conjunction with our audited
consolidated financial statements and accompanying notes for the year ended
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about future events, future performance, plans, strategies, expectations, prospects, competitive environment and regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words, "may", "will", "expect", "anticipate", "believe", "estimate", "plan", "intend" or the negative of these terms or similar expressions in this quarterly report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors", "Forward-Looking Statements" and elsewhere in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update forward-looking statements and the estimates and assumptions associated with them, after the date of this quarterly report on Form 10-Q, except to the extent required by applicable securities laws. 17
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Website Access to SEC Reports:
The Company's website is www.mastechdigital.com . The Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , current reports on Form 8-K and all other reports filed with theSEC , are available free of charge on the Investors page. The website is updated as soon as reasonably practical after such reports are filed electronically with theSEC .
Critical Accounting Policies
Please refer to Note 1 "Summary of Significant Accounting Policies" of the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the three months endedMarch 31, 2022 .
Overview:
We are a provider of Digital Transformation IT Services to mostly large and medium-sized organizations.
Our portfolio of offerings includes data management and analytics services; other digital transformation services such as digital learning services; and IT staffing services.
We operate in two reporting segments - Data and Analytics Services and IT Staffing Services. Our data and analytics services are marketed on a global basis under the brand Mastech InfoTrellis and are delivered largely on a project basis with on-site and off-shore resources. These capabilities and expertise were acquired through our acquisition of InfoTrellis and enhanced and expanded subsequent to the acquisition. InOctober 2020 , we acquiredAmberLeaf Partners, Inc. ("AmberLeaf"), aChicago -based customer experience consulting firm. This acquisition enhanced our capabilities in customer experience strategy and managed services offerings for a variety of Cloud-based enterprise applications across sales, marketing and customer services organizations. Our IT staffing business combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies, as well as our other digital transformation services.
Both business segments provide their services across various industry verticals, including: financial services; government; healthcare; manufacturing; retail; technology; telecommunications; and transportation. In our Data and Analytics Services segment, we evaluate our revenues and gross profits largely by service line. In our IT Staffing Services segment, we evaluate our revenues and gross profits largely by sales channel responsibility. This analysis within both our reporting segments is multi-purposed and includes technologies employed, client relationships, and geographic locations.
Data and Analytics:
We provide information regarding our new bookings in our Data and Analytics Services segment, which represents the estimated value of client engagements, including those acquired through acquisitions, as well as renewals, extensions and changes to existing contracts, because we believe doing so provides useful trend information regarding changes in the volume of our new business over time. New bookings can vary significantly quarter to quarter depending in part on the timing of the signing of a small number of large engagements. Among other factors, the types of services and solutions to be delivered, the duration of the engagement and the pace and level of client spending impact the timing of the conversion of new bookings to revenues. In addition, substantially all of our contracts are terminable by the client on short notice with little or no termination penalties. Information regarding our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. New bookings involve estimates and judgments. There are no third-party standards or requirements governing the calculation of bookings. We do not update our new bookings for material subsequent terminations or reductions related to bookings originally provided in prior periods.
Economic Trends and Outlook:
Generally, our business outlook is highly correlated to general North American economic conditions, particularly with respect to our IT Staffing Services segment. During periods of increasing employment and economic expansion, demand for our services tends to increase. Conversely, during periods of contracting employment and / or a slowing global economy, demand for our services tends to decline. As the economy slowed in 2007 and recessionary conditions emerged in 2008 and 2009, we experienced less demand for our IT staffing services. With economic expansion in 2010 through 2019, activity levels improved. However, as the recovery strengthened, we experience increased tightness in the supply-side (skilled IT professionals) of our businesses. These supply-side challenges pressured resource costs and to some extent gross margins. As we entered 2020, we were encouraged by continued growth in the domestic job markets and expandingU.S. and global economies. However, with the COVID-19 pandemic surfacing in the first quarter of 2020, we realized the economic growth would quickly turn into recessionary conditions, which had a material impact on activity levels in both of our business segments. This impact was reduced in 2021 as a result of the global roll-out of vaccination programs and signs of improving economic conditions. As we enter 2022, we are hopeful that COVID-19 related concerns will be less impactful on our business. The proliferation of COVID-19 variants, however, have caused some uncertainty and may continue to disrupt global markets during 2022. In addition, we are mindful of inflationary pressures and overall economic concerns regarding the potential for recessionary conditions. 18
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In addition to tracking general economic conditions in the markets that we
service, a large portion of our revenues is generated from a limited number of
clients (see Item 1A, the Risk Factor entitled "Our revenues are highly
concentrated, and the loss of a significant client would adversely affect our
business and revenues" in our Annual Report on Form
10-K
for the year ended
Within our IT Staffing Services segment, a larger portion of our revenues has come from strategic relationships with systems integrators and other staffing organizations. Additionally, many large end users of IT staffing services are employing managed service providers to manage their contractor spending. Both of these dynamics may pressure our IT staffing gross margins in the future.
Recent growth in advanced technologies (social, cloud, analytics, mobility, automation) is providing opportunities within our IT Staffing Services segment. However, supply side challenges have proven to be acute with respect to many of these technologies. We believe these challenges will remain during 2022.
Within our Data and Analytics Services segment many customers are satisfying their D&A needs using a holistic approach. This often results in the customer using one vendor partner rather than with multiple vendors. We have responded to this trend by establishing a service offering called "Center of Excellence" which bundles a customer's total requirements under a multi-year contract. This concept allows us to better understand the customer's longer-term strategy with respect to D&A and effectively address such needs.
Results of Operations for the Three Months Ended
Revenues:
Revenues for the three months ended
Below is a tabular presentation of revenues by reportable segment for the three
months ended
Three Months Ended Three Months Ended
Revenues (Amounts in thousands) March 31, 2022 March 31, 2021
Data and Analytics Services $ 10,152 $ 8,794
IT Staffing Services 49,603 40,981
Total revenues $ 59,755 $ 49,775
Revenues from our Data and Analytics Services segment totaled
Revenues from our IT Staffing Services segment totaled$49.6 million in the three months endedMarch 31, 2022 compared to$41.0 million during the corresponding 2021 period. This 21% revenue increase reflected a higher level of billing consultants in the 2022 quarter versus 2021. Billing consultants atMarch 31, 2021 totaled 1,295-consultants compared to 1,162-consultants atMarch 31, 2021 . Our average bill rate in the first quarter of 2022 for the segment was$78.99 / per hour compared to$75.12 / per hour in the first quarter of 2021. The increase in average bill rate was due to higher rates on new assignments and is reflective of the types of skill-sets that we deployed. Permanent placement / fee revenues were approximately$0.6 million during the quarter, which was$0.4 million higher than our permanent placement performance of a year ago.
Gross Margins:
Gross profits in the first quarter of 2022 totaled$15.9 million compared to gross profits of$12.8 million in the first quarter of 2021, a 24% year-over-year increase. Gross profit as a percentage of revenue was 26.7% for the three-month period endingMarch 31, 2022 , compared to 25.7% during the same period of 2021. This 100-basis point improvement reflected higher revenue levels in our high-margin Data and Analytics Services segment and improved gross margins in our IT Staffing Services segment due to higher permanent placement fees and revenues from our offshore staffing service offering. 19
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Below is a tabular presentation of gross margin by reporting segment for the
three months ended
Three Months Ended Three Months Ended
Gross Margin March 31, 2022 March 31, 2021
Data and Analytics Services 45.2 % 45.7 %
IT Staffing Services 22.9 21.4
Total gross margin 26.7 % 25.7 %
Gross margins from our Data and Analytics Services segment were 45.2% of revenues during the first quarter of 2022. This compares to gross margins of 45.7% in the first quarter of 2021, representing a 50-basis point decrease due to lower utilization in the first half of the 2022 quarter.
Gross margins from our IT Staffing Services segment were 22.9% in the first quarter of 2022 compared to 21.4% during the corresponding quarter of 2021. This 150-basis point improvement was largely due to higher permanent placement fees, improved utilization and revenues from our higher-margin offshore staffing service offering.
Selling, General and Administrative ("S,G&A") Expenses:
Below is a tabular presentation of operating expenses by sales, operations,
amortization of acquired intangible assets and general and administrative
categories for the three months ended
Three Months Ended Three Months Ended
S,G&A Expenses (Amounts in millions) March 31, 2022 March 31, 2021
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 Data and Analytics 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
S,G&A expenses for the three months ended
Fluctuations within S,G&A expense components during the first quarter of 2022, compared to the first quarter of 2021, included the following:
• Sales expense increased by $0.8 million in the 2022 period compared to
2021. An increase of $0.1 million related to our Data and Analytics
Services segment which reflected additional staff and higher commissions.
Sales expense in our IT Staffing Services segment increased by
$0.7 million due to staff increases, higher commissions and bonuses,
higher travel and other variable expenses.
• Operations expense increased by $0.6 million in the 2022 period compared
to 2021. In our Data and Analytics Services segment operations expense
decrease by increased $0.2 million due to lower staff. In our IT Staffing
Services segment operations expense increased by $0.8 million related to
staff increases and higher variable expense to support revenue growth.
• Amortization of acquired intangible assets was $0.8 million in both the
2022 and 2021 periods.
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• General and administrative expense increased by $0.3 million in the 2022
period compared to 2021. Approximately $0.1 million was related to our
Data and Analytics Services segment and $0.2 million was related to our
IT Staffing Services segment. Executive search fees were largely
responsible for the increases in the Data and Analytics Services segment.
The increase in the IT Staffing Services segment was due to higher rents
and travel expenses.
Other Income / (Expense) Components:
Other Income / (Expense) for the three months ended
Income Tax Expense:
Income tax expense for the three months endedMarch 31, 2022 totaled$915,000 , representing an effective tax rate on pre-tax income of 28.2% compared to$443,000 for the three months endedMarch 31, 2021 , which represented a 27.1% effective tax rate on pre-tax income. The higher effective tax rate in the 2022 period largely reflected an increase in our tax valuation allowance related to foreign net operating losses ("NOLs") inSingapore and theUK .
Liquidity and Capital Resources:
Financial Conditions and Liquidity:
As of
Historically, we have funded our organic business needs with cash generated from operating activities. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash generation. As ofMarch 31, 2022 , our accounts receivable "days sales outstanding" ("DSOs") measurement was 64-days, which was one day lower than at the end of the first quarter 2021.
We believe that cash provided by operating activities, cash balances on hand and current availability under our credit facility will be adequate to fund our business needs and debt service obligations over the next twelve months, absent any acquisition-related activities.
Cash flows provided by (used in) operating activities:
Cash provided by operating activities for the three months endedMarch 31, 2022 totaled$1.6 million compared to$0.8 million during the three months endedMarch 31, 2021 . Elements of cash flows in the 2022 period were net income of$2.3 million , non-cash charges of$2.1 million , and an increase in operating working capital levels of ($2.8 million ). During the three months endedMarch 31, 2021 , elements of cash flow were net income of$1.2 million , non-cash charges of$1.6 million , and an increase in operating working capital levels of ($2.0 million ).
Cash flows (used in) investing activities:
Cash (used in) investing activities for the three months ended
Cash flows provided by (used in) financing activities:
Cash provided by (used in) financing activities for the three months ended
Off-Balance
Sheet Arrangements
We do not have any
off-balance
sheet arrangements.
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Inflation:
We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seeking to ensure that billing rates are adjusted periodically to reflect increases in costs due to inflation. However, high levels of inflation may result in higher interest rates which would increase out cost of borrowings.
Seasonality:
Our operations are generally not affected by seasonal fluctuations. However, our consultants' billable hours are affected by national holidays and vacation policies. Accordingly, we generally have lower utilization rates and higher benefit costs during the fourth quarter. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impacts our revenue and gross profit performance during the subsequent quarter.
Recently Issued Accounting Standards:
Recent accounting pronouncements are described in Note 16 to the accompanying financial statements.
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