Mastech Digital, Inc 10-Q for FY2022 Q3
Mastech Digital, Inc. (MHH)
About this 10-Q
Mastech Digital, Inc filed this 10-Q on November 14, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $63.15M
- up 6.1% from $59.53M a year earlier
- Net income
- $2.41M
- down 29.4% from net income of $3.41M a year earlier
- Diluted EPS
- $0.20
- down 28.6% from $0.28 a year earlier
Table of Contents
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| |
||
(Address of principal executive offices) |
(Zip Code) |
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| Emerging growth company | ||||||
Table of Contents
MASTECH DIGITAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS
| Page | ||||||||
| PART 1 |
3 | |||||||
| Item 1. |
3 | |||||||
| (a) |
3 | |||||||
| (b) |
4 | |||||||
| (c) |
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2022 and December 31, 2021 |
5 | ||||||
| (d) |
6 | |||||||
| (e) |
7 | |||||||
| (f) |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
8 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 | ||||||
| Item 3. |
26 | |||||||
| Item 4. |
27 | |||||||
| PART II |
27 | |||||||
| Item 1. |
27 | |||||||
| Item 1A. |
27 | |||||||
| Item 2. |
27 | |||||||
| Item 6. |
28 | |||||||
| 29 | ||||||||
2
Table of Contents
ITEM 1. |
FINANCIAL STATEMENTS |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Revenues |
$ | $ | $ | $ | ||||||||||||
| Cost of revenues |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross profit |
||||||||||||||||
| Selling, general and administrative expenses: |
||||||||||||||||
| Operating expenses |
||||||||||||||||
| Revaluation of contingent consideration liability |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total selling, general and administrative expenses |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income from operations |
||||||||||||||||
| Interest income (expense), net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income (expense), net |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income before income taxes |
||||||||||||||||
| Income tax expense |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Earnings per share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Weighted average common shares outstanding: |
||||||||||||||||
| Basic |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Diluted |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): |
||||||||||||||||
| Net unrealized gain on interest-rate swap contracts |
||||||||||||||||
| Foreign currency translation adjustments |
( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total pretax net unrealized gain (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
| Income tax expense |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total other comprehensive gain (loss), net of taxes |
( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total comprehensive income |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
September 30, 2022 |
December 31, 2021 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | $ | ||||||
| Accounts receivable, net of allowance for uncollectible accounts of $ |
||||||||
| Unbilled receivables |
||||||||
| Prepaid and other current assets |
||||||||
| |
|
|
|
|||||
| Total current assets |
||||||||
| Equipment, enterprise software, and leasehold improvements, at cost: |
||||||||
| Equipment |
||||||||
| Enterprise software |
||||||||
| Leasehold improvements |
||||||||
| |
|
|
|
|||||
| Less – accumulated depreciation and amortization |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net equipment, enterprise software, and leasehold improvements |
||||||||
| Operating lease right-of-use |
||||||||
| Deferred financing costs, net |
— | |||||||
| Non-current deposits |
||||||||
| Goodwill, net of impairment |
||||||||
| Intangible assets, net of amortization |
||||||||
| |
|
|
|
|||||
| Total assets |
$ | $ | ||||||
| |
|
|
|
|||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Current portion of long-term debt |
$ | $ | ||||||
| Accounts payable |
||||||||
| Accrued payroll and related costs |
||||||||
| Current portion of operating lease liability |
||||||||
| Other accrued liabilities |
||||||||
| Deferred revenue |
||||||||
| |
|
|
|
|||||
| Total current liabilities |
||||||||
| |
|
|
|
|||||
| Long-term liabilities: |
||||||||
| Long-term debt, less current portion, net |
||||||||
| Long-term operating lease liability, less current portion |
||||||||
| Long-term accrued income taxes |
||||||||
| Deferred income taxes |
||||||||
| |
|
|
|
|||||
| Total liabilities |
||||||||
| Commitments and contingent liabilities (Note 6) |
||||||||
| Shareholders’ equity: |
||||||||
| Preferred Stock, |
||||||||
| Common Stock, par value $. September 30, 2022 and shares issued as of December 31, 2021 |
||||||||
| Additional paid-in-capital |
||||||||
| Retained earnings |
||||||||
| Accumulated other comprehensive (loss) |
( |
) | ( |
) | ||||
| Treasury stock, at cost; 0 , 2022 and as of December 31, 2021 |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total shareholders’ equity |
||||||||
| |
|
|
|
|||||
| Total liabilities and shareholders’ equity |
$ | $ | ||||||
| |
|
|
|
|||||
Common Stock |
Additional Paid-in Capital |
Accumulated Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders’ Equity |
|||||||||||||||||||
| Balances, December 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
— | — | — | — | ||||||||||||||||||||
| Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
| Stock options exercised |
— | — | — | |||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balances, March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income |
— | — | — | — | ||||||||||||||||||||
| Employee common stock purchases |
— | — | — | — | ||||||||||||||||||||
| Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
| Stock options exercised |
— | — | — | — | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balances, June 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income |
— | — | — | — | ||||||||||||||||||||
| Employee common stock purchases |
— | ( |
) | — | — | — | ( |
) | ||||||||||||||||
| Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
| Stock options exercised |
— | — | — | — | — | — | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balances, September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Common Stock |
Additional Paid-in Capital |
Accumulated Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders’ Equity |
|||||||||||||||||||
| Balances, December 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| Net income |
— | — | — | — | ||||||||||||||||||||
| Other comprehensive gain, net of taxes |
— | — | — | — | ||||||||||||||||||||
| Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
| Stock options exercised |
— | — | — | — | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balances, March 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income |
— | — | — | — | ||||||||||||||||||||
| Employee common stock purchases |
— | — | — | — | ||||||||||||||||||||
| Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
| Stock options exercised |
— | — | — | |||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balances, June 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income |
— | — | — | — | ||||||||||||||||||||
| Other comprehensive gain, net of taxes |
— | — | — | — | ||||||||||||||||||||
| Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balances, September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Bad debt expense |
||||||||
| Interest amortization of deferred financing costs |
||||||||
| Stock-based compensation expense |
||||||||
| Deferred income taxes, net |
||||||||
| Revaluation of contingent consideration liability |
( |
) | ||||||
| Operating lease assets and liabilities, net |
( |
) | ||||||
| Loss on disposition of fixed assets |
||||||||
| Long term accrued income taxes |
( |
) | ||||||
| Working capital items: |
||||||||
| Accounts receivable and unbilled receivables |
( |
) | ( |
) | ||||
| Prepaid and other current assets |
( |
) | ||||||
| Accounts payable |
||||||||
| Accrued payroll and related costs |
||||||||
| Other accrued liabilities |
( |
) | ( |
) | ||||
| Deferred revenue |
( |
) | ||||||
| |
|
|
|
|||||
| Net cash flows provided by (used in) operating activities |
||||||||
| |
|
|
|
|||||
| INVESTING ACTIVITIES: |
||||||||
| Recovery of (payment for) non-current deposits |
( |
) | ||||||
| Capital expenditures |
( |
) | ( |
) | ||||
| Proceeds from the sale of fixed assets |
||||||||
| |
|
|
|
|||||
| Net cash flows provided by (used in) investing activities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| FINANCING ACTIVITIES: |
||||||||
| (Repayments) on term loan facility |
( |
) | ( |
) | ||||
| Proceeds from the issuance of common shares |
||||||||
| Proceeds from the exercise of stock options |
||||||||
| |
|
|
|
|||||
| Net cash flows provided by (used in) financing activities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Effect of exchange rate changes on cash and cash equivalents |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net change in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents, beginning of period |
||||||||
| |
|
|
|
|||||
| Cash and cash equivalents, end of period |
$ | $ | ||||||
| |
|
|
|
|||||
1. |
Description of Business and Basis of Presentation: |
2. |
Revenue from Contracts with Customers |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
| Data and Analytics Services Segment |
||||||||||||||||
| Time-and-material |
$ | $ | $ | $ | ||||||||||||
| Fixed-price Contracts |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Subtotal Data and Analytics Services |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| IT Staffing Services Segment |
||||||||||||||||
| Time-and-material |
$ | $ | $ | $ | ||||||||||||
| Fixed-price Contracts |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Subtotal IT Staffing Services |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Revenues |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
| United States |
$ | $ | $ | $ | ||||||||||||
| Canada |
||||||||||||||||
| India and Other |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenues |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
3. |
Goodwill and Other Intangible Assets, net |
As of September 30, 2022 |
||||||||||||||||
| (Amounts in thousands) |
Amortization Period (In Years) |
Gross Carrying Value |
Accumulative Amortization |
Net Carrying Value |
||||||||||||
| IT Staffing Services: |
||||||||||||||||
| Client relationships |
$ | $ | $ | |||||||||||||
| Covenant-not-to-compete |
||||||||||||||||
| Trade name |
||||||||||||||||
| Data and Analytics Services: |
||||||||||||||||
| Client relationships |
||||||||||||||||
| Covenant-not-to-compete |
||||||||||||||||
| Trade name |
||||||||||||||||
| Technology |
||||||||||||||||
| |
|
|
|
|
|
|||||||||||
| Total Intangible Assets |
$ |
$ |
$ |
|||||||||||||
| |
|
|
|
|
|
|||||||||||
As of December 31, 2021 |
||||||||||||||||
| (Amounts in thousands) |
Amortization Period (In Years) |
Gross Carrying Value |
Accumulative Amortization |
Net Carrying Value |
||||||||||||
| IT Staffing Services: |
||||||||||||||||
| Client relationships |
$ | $ | $ | |||||||||||||
| Covenant-not-to-compete |
||||||||||||||||
| Trade name |
||||||||||||||||
| Data and Analytics Services: |
||||||||||||||||
| Client relationships |
||||||||||||||||
| Covenant-not-to-compete |
||||||||||||||||
| Trade name |
||||||||||||||||
| Technology |
||||||||||||||||
| |
|
|
|
|
|
|||||||||||
| Total Intangible Assets |
$ |
$ |
$ |
|||||||||||||
| |
|
|
|
|
|
|||||||||||
Years Ended December 31, |
||||||||||||||||||||
2022 |
2023 |
2024 |
2025 |
2026 |
||||||||||||||||
(Amounts in thousands) |
||||||||||||||||||||
| Amortization expense |
$ | $ | $ | $ | $ | |||||||||||||||
4. |
Leases |
September 30, 2022 |
December 31, 2021 |
|||||||
(in thousands) |
||||||||
| Assets: |
| |||||||
| Long-term operating lease right-of-use |
$ | $ | ||||||
| |
|
|
|
|||||
| Liabilities: |
| |||||||
| Short-term operating lease liability |
$ | $ | ||||||
| Long-term operating lease liability |
||||||||
| |
|
|
|
|||||
| Total liabilities |
$ | $ | ||||||
| |
|
|
|
|||||
Amount as of September 30, 2022 |
||||
(in thousands) |
||||
| 2022 (For remainder of year) |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| Thereafter |
||||
| |
|
|||
| Total |
||||
| Less: Imputed interest |
( |
) | ||
| |
|
|||
| Present value of operating lease liabilities |
$ | |||
| |
|
|||
5. |
Payroll Tax Liability |
6. |
Commitments and Contingencies |
7. |
Employee Benefit Plan |
8. |
Stock-Based Compensation |
stock option grants at
9. |
Credit Facility |
10. |
Income Taxes |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
| Income before income taxes: |
||||||||||||||||
| Domestic |
$ | $ | $ | $ | ||||||||||||
| Foreign |
( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income before income taxes |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
| Current provision: |
||||||||||||||||
| Federal |
$ | $ | $ | $ | ||||||||||||
| State |
||||||||||||||||
| Foreign |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total current provision |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Deferred provision (benefit): |
||||||||||||||||
| Federal |
||||||||||||||||
| State |
( |
) | ||||||||||||||
| Foreign |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total deferred provision (benefit) |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Change in valuation allowance |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total provision for income taxes |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
|||||||||||||||
| Income taxes computed at the federal statutory rate |
$ | % | $ | % | ||||||||||||
| State income taxes, net of federal tax benefit |
||||||||||||||||
| Excess tax benefit from stock options/restricted shares |
||||||||||||||||
| Difference in income tax rate on foreign earnings |
( |
) | ( |
) | ||||||||||||
| Change in valuation allowance |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| $ | % | $ | % | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
|||||||||||||||
| Income taxes computed at the federal statutory rate |
$ | % | $ | % | ||||||||||||
| State income taxes, net of federal tax benefit |
||||||||||||||||
| Excess tax benefit from stock options/restricted shares |
( |
) | ( |
) | ||||||||||||
| Difference in income tax rate on foreign earnings |
||||||||||||||||
| Change in valuation allowance |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| $ | % | $ | % | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
11. |
Derivative Instruments and Hedging Activities |
| Derivatives in ASC Topic 815 Cash Flow Hedging Relationships |
Amount of Gain recognized in OCI on Derivatives |
Location of Gain reclassified from Accumulated OCI to Income |
Amount of Gain reclassified from Accumulated OCI to Income |
Location of Gain reclassified in Income on Derivatives |
Amount of Gain recognized in Income on Derivatives | |||||
| (Effective Portion) | (Effective Portion) | (Effective Portion) | (Ineffective Portion/Amounts excluded from | |||||||
| For the Three Months Ended September 30, 2021: |
||||||||||
| Interest-Rate Swap Contract |
$ |
Interest Expense | $ |
Interest Expense | $ | |||||
| For the Nine Months Ended September 30, 2021: |
||||||||||
| Interest-Rate Swap Contract |
$ |
Interest Expense | $ |
Interest Expense | $ | |||||
12. |
Fair Value Measurements |
| • | Level 1—Inputs are observable quoted prices (unadjusted) in active markets for identical assets and liabilities. |
| • | Level 2—Inputs are observable, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are directly or indirectly observable in the marketplace. |
• |
Level 3—Inputs are unobservable that are supported by little or no market activity. |
13. |
Shareholders’ Equity |
14. |
Earnings Per Share |
15. |
Business Segments and Geographic Information |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
| Revenues: |
||||||||||||||||
| Data and analytics services |
$ | $ | $ | $ | ||||||||||||
| IT staffing services |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenues |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross Margin %: |
||||||||||||||||
| Data and analytics services |
% | % | % | % | ||||||||||||
| IT staffing services |
% | % | % | % | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total gross margin % |
% | % | % | % | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Segment operating income: |
||||||||||||||||
| Data and analytics services |
$ | $ | $ | $ | ||||||||||||
| IT staffing services |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Subtotal |
||||||||||||||||
| Amortization of acquired intangible assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Revaluation of contingent consideration liability |
— | — | ||||||||||||||
| Reserve for cyber-security bre a ch |
( |
) | — | ( |
) | — | ||||||||||
| Severance expense |
( |
) | — | ( |
) | — | ||||||||||
| Interest expenses and other, net |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income before income taxes |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
September 30, 2022 |
December 31, 2021 |
|||||||
(Amounts in thousands) |
||||||||
| Total assets: |
||||||||
| Data and Analytics Services |
$ | $ | ||||||
| IT Staffing Services |
||||||||
| |
|
|
|
|||||
| Total assets |
$ | $ | ||||||
| |
|
|
|
|||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
| United States |
$ | $ | $ | $ | ||||||||||||
| Canada |
||||||||||||||||
| India and Other |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenues |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
16. |
Recently Issued Accounting Standards |
17. |
Subsequent Event |
Table of Contents
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2021, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2022.
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 ended December 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.
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 ended December 31, 2021, current reports on Form 8-K and all other reports filed with the SEC, 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 the SEC.
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 ended December 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 nine months ended September 30, 2022.
Cyber-security Breach During Third Quarter 2022
During the third quarter 2022, we experienced a cyber-security breach involving a single employee email account and which indirectly impacted two Mastech InfoTrellis clients. Our IT team identified the point of entry, decommissioned the affected laptop and email address, and changed email logins and passcodes for this email account. As a result of this incident, we engaged external advisors to validate our findings and remedial action steps. As part of this engagement, these advisors are assisting us with a forensic analysis to determine whether any personally identifiable information (“PII”) was compromised as a result of this breach. For any such PII data determined to have been compromised, these advisors will be assisting us in determining the appropriate compliance steps required with respect to that PII data. We have accrued a pre-tax loss reserve of $450,000 in the third quarter 2022 related to this event, which reserve includes the cost of engaging these external advisors and an estimate of other potential losses relating to the breach. This expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
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 under the brand Mastech InfoTrellis and are delivered largely on a project basis with on-site and off-shore resources.
19
Table of Contents
These data and analytics capabilities and expertise were acquired through our acquisition of InfoTrellis and enhanced and expanded subsequent to the acquisition. In October 2020, we acquired AmberLeaf Partners, Inc. (“AmberLeaf”), a Chicago-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. 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 expanding U.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. COVID-19 related concerns have been less impactful on our business in 2022. Still the proliferation of COVID-19 variants have caused some uncertainty and could continue to disrupt global markets during the fourth quarter of 2022 and into 2023. In addition, we are mindful of inflationary pressures and overall economic concerns regarding the potential for recessionary conditions in 2022 and beyond. We believe that fears regarding persistent inflation and a potential recession have impacted certain customers and their willingness to invest in long-term projects and it is difficult to predict the impact that these economic pressures might have on our business and results of operations in the future.
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 December 31, 2021). Accordingly, our trends and outlook are additionally impacted by the prospects and well-being of these specific clients. This “account concentration” factor may result in our results of operations deviating from the prevailing economic trends from time to time.
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 and into 2023.
20
Table of Contents
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 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 September 30, 2022 as Compared to the Three Months Ended September 30, 2021:
Revenues:
Revenues for the three months ended September 30, 2022 totaled $63.2 million compared to $59.5 million for the corresponding three month period in 2021. This 6% year-over-year revenue increase reflected an 8% increase in our IT staffing services segment and a 4% decrease in our data and analytics services segment as compared to third quarter 2021. For the three months ended September 30, 2022, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 23.7%). For the three months ended September 30, 2021, the Company had two clients that had revenues in excess of 10% of total revenues (CGI = 14.6% and Accenture = 10.4%). The Company’s top ten clients represented approximately 54% and 49% of total revenues for the three months ended September 30, 2022 and 2021, respectively.
Below is a tabular presentation of revenues by reportable segment for the three months ended September 30, 2022 and 2021, respectively:
| Revenues (Amounts in millions) |
Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
||||||
| Data and Analytics Services |
$ | 10.1 | $ | 10.5 | ||||
| IT Staffing Services |
53.1 | 49.0 | ||||||
|
|
|
|
|
|||||
| Total revenues |
$ | 63.2 | $ | 59.5 | ||||
|
|
|
|
|
|||||
Revenues from our Data and Analytics Services segment totaled $10.1 million in the quarter ended September 30, 2022, compared to $10.5 million in the corresponding quarter last year. This decline comes after a 26% year-over-year improvement during the previous quarter and largely reflected the timing of workable orders in second quarter 2022 versus third quarter 2022. New bookings in the third quarter of 2022 totaled approximately $8 million compared to $9 million in the corresponding quarter of 2021. The reduction in revenue and new bookings may also be attributable to reduced demand arising from customer concerns regarding a potential recession.
Revenues from our IT Staffing Services segment totaled $53.1 million in the three months ended September 30, 2022 compared to $49.0 million during the corresponding 2021 period. This 8% increase largely reflected a higher average bill rate in the third quarter of 2022 when compared to the corresponding 2021 quarter. Our average bill rate increased to $81.60 per hour during the third quarter of 2022 compared to $75.51 per hour in the corresponding 2021 quarter. Billable consultant headcount at September 30, 2022 totaled 1,314-consultants essentially in-line with billable consultant headcount at September 30, 2021. During the third quarter 2022 we had a decline of 30 billable consultants as demand showed some weakness over the previous quarter. As described above, this reduced demand may be due in part to customer concerns regarding a potential recession. Permanent placement revenues were approximately $0.5 million during the current quarter, which were $0.2 million higher than permanent placement revenues of a year ago.
Gross Margins:
Gross profits in the third quarter of 2022 totaled $16.3 million compared to $16.6 million in the third quarter of 2021. Gross profit as a percentage of revenue was 25.8% for the three-month period ended September 30, 2022 compared to 27.9% during the same period of 2021. This 210-basis point decline related to shortfalls in the Data and Analytics Services segment.
Below is a tabular presentation of gross margin by reporting segment for the three months ended September 30, 2022 and 2021, respectively:
| Gross Margin |
Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
||||||
| Data and Analytics Services |
39.6 | % | 51.6 | % | ||||
| IT Staffing Services |
23.2 | 22.8 | ||||||
|
|
|
|
|
|||||
| Total gross margin |
25.8 | % | 27.9 | % | ||||
|
|
|
|
|
|||||
21
Table of Contents
Gross margins from our Data and Analytics Services segment were 39.6% of revenues during the third quarter of 2022 compared to 51.6% of revenues during the third quarter of 2021. The margin decline reflected lower utilization as we were unable to fully deploy the second quarter ramp-up of billable resources. Additionally, we incurred a project cost over-run of $0.3 million on a fixed priced assignment scheduled to complete at year-end.
Gross margins from our IT Staffing Services segment were 23.2% in the third quarter of 2022 compared to 22.8% during the corresponding quarter of 2021. This 40-basis point improvement was largely due to higher permanent placement fees and higher margins from our offshore staffing services offering.
Selling, General and Administrative (“S,G&A”) Expenses:
Below is a tabular presentation of operating expenses by expense category for the three months ended September 30, 2022 and 2021, respectively:
| S,G&A Expenses (Amounts in millions) | Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
||||||
| Data and Analytics Services Segment |
||||||||
| Sales and Marketing |
$ | 1.0 | $ | 1.5 | ||||
| Operations |
0.6 | 0.6 | ||||||
| Amortization of Acquired Intangible Assets |
0.6 | 0.6 | ||||||
| Reserve for Cyber-security Breach |
0.4 | — | ||||||
| Severance |
0.1 | — | ||||||
| General & Administrative |
1.6 | 1.5 | ||||||
|
|
|
|
|
|||||
| Subtotal Data and Analytics Services |
$ | 4.3 | $ | 4.2 | ||||
|
|
|
|
|
|||||
| S,G&A Expenses (Amounts in millions) | ||||||||
| IT Staffing Services Segment |
||||||||
| Sales and Marketing |
$ | 2.4 | $ | 2.0 | ||||
| Operations |
2.7 | 2.4 | ||||||
| Amortization of Acquired Intangible Assets |
0.2 | 0.2 | ||||||
| General & Administrative |
3.3 | 2.8 | ||||||
|
|
|
|
|
|||||
| Subtotal IT Staffing Services |
$ | 8.6 | $ | 7.4 | ||||
|
|
|
|
|
|||||
| Total S,G&A Expenses |
$ | 12.9 | $ | 11.6 | ||||
|
|
|
|
|
|||||
S,G&A expenses for the three months ended September 30, 2022 totaled $12.9 million or 20.4% of total revenues, compared to $11.6 million or 19.5% of total revenues for the three-months ended September 30, 2021. Excluding the amortization of acquired intangible assets in both periods and reserves for severance and a cyber-security breach in the 2022 quarter, S,G&A expense as a percentage of total revenues was 18.4% and 18.2%, respectively.
Fluctuations within S,G&A expense components during the third quarter of 2022, compared to the third quarter of 2021, included the following:
| • | Sales expense decreased by $0.1 million in the 2022 period compared to the corresponding 2021 period. Approximately $0.5 million related to our Data and Analytics Services segment, which reflected lower commissions and bonus accruals. Sales expense in our IT Staffing Services segment increased by $0.4 million due to higher staff and higher variable compensation. |
| • | Operations expense increased $0.3 million in the 2022 period compared to the corresponding 2021 period. Operations expenses were flat in our Data and Analytics Services segment. In our IT Staffing Services segment operations expenses increased by $0.3 million and reflected increases in recruitment staff and higher variable compensation expenses. |
| • | Amortization of acquired intangible assets was $0.8 million in both the 2022 and 2021 periods. |
| • | Reserve for a cyber-security breach totaled $0.4 million in the 2022 period versus zero in 2021. |
| • | Severance expense associated with the closure of operations in Singapore and Ireland, and the rationalization of our cost structure in the UK totaled $0.1 million in the 2022 period versus zero in 2021. |
22
Table of Contents
| • | General and administrative expense increased by $0.6 million in the 2022 period compared to the corresponding 2021 period. General and administrative expense in our Data and Analytics Services segment increased by $0.1 million due to higher executive leadership compensation. In our IT Staffing Services segment, general and administrative expense increased by $0.5 million due to higher compensation expense and increases in travel and facility expenses. |
Other Income / (Expense) Components:
Other Income / (Expense) for the three months ended September 30,2022 consisted of interest expense of ($85,000) and foreign exchange gains of $85,000. For the three months ended September 30, 2021, Other Income / (Expense) consisted of interest expense of ($169,000) and foreign exchange losses of ($66,000). Lower borrowings and a stronger U.S. dollar in the 2022 quarter were responsible for the favorable year-over-year variance.
Income Tax Expense:
Income tax expense for the three months ended September 30, 2022 totaled $1.0 million, representing an effective tax rate on pre-tax income of 28.3% compared to $1.3 million for the three months ended September 30, 20201 which represented a 28.1% effective tax rate on pre-tax income. The higher effective tax rate in the 2022 period largely reflected an increase in our valuation allowance related to foreign net operating losses (“NOL’s) in Singapore, Ireland and the UK.
Results of Operations for the Nine Months Ended September 30, 2022 as Compared to the Nine Months Ended September 30, 2021:
Revenues:
Revenues for the nine months ended September 30, 2022 totaled $185.0 million compared to $163.0 million for the corresponding nine month period in 2021. This 13% year-over-year revenue increase reflected a 14% increase in our IT Staffing Services segment and an 11% increase in our Data and Analytics Services segment. For the nine months ended September 30, 2022, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 21.3%). For the nine months ended September 30, 2021, the Company had the same one client that had revenues in excess of 10% of total revenues (CGI = 14.8%). The Company’s top ten clients represented approximately 53% and 48% of total revenues for the nine months ended September 30, 2022 and 2021, respectively.
Below is a tabular presentation of revenues by reportable segment for the nine months ended September 30, 2022 and 2021, respectively:
| Revenues (Amounts in millions) |
Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
||||||
| Data and Analytics Services |
$ | 31.5 | $ | 28.3 | ||||
| IT Staffing Services |
153.5 | 134.7 | ||||||
|
|
|
|
|
|||||
| Total revenues |
$ | 185.0 | $ | 163.0 | ||||
|
|
|
|
|
|||||
Revenues from our Data and Analytics Services segment totaled $31.5 million during the nine months ended September 30, 2022, compared to $28.3 million in the corresponding nine-month period last year. The 11% year-over-year improvement reflected improved backlog during the first half of 2022.
Revenues from our IT Staffing Services segment totaled $153.5 million in the nine months ended September 30, 2022 compared to $134.7 million during the corresponding 2021 period. This 14% increase reflected a higher level of billable consultants; a higher average bill rate; and higher permanent placement revenues in the 2022 period versus 2021.
Gross Margins:
Gross profits in the nine months ended September 30, 2022 totaled $49.0 million, compared to $43.7 million during the corresponding 2021 period, an increase of $5.3 million. Gross profit as a percentage of revenue was 26.5% for the nine-month period ended September 30, 2022 compared to 26.8% during the same period of 2021. This 30-basis point decline reflected lower gross margins in the Data and Analytics Services segment.
23
Table of Contents
Below is a tabular presentation of gross margin by reporting segment for the nine months ended September 30, 2022 and 2021, respectively:
| Gross Margin |
Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
||||||
| Data and Analytics Services |
42.8 | % | 48.2 | % | ||||
| IT Staffing Services |
23.1 | % | 22.4 | % | ||||
|
|
|
|
|
|||||
| Total gross margin |
26.5 | % | 26.8 | % | ||||
|
|
|
|
|
|||||
Gross margins from our Data and Analytics Services segment were 42.8% of revenues during the nine-month period ended September 30, 2022. This compared to gross margins of 48.2% in the corresponding period of 2021. The margin decline reflects lower utilization during the first nine months of 2022 and a project cost over-run in the third quarter of 2022.
Gross margins from our IT Staffing Services segment were 23.1% in the nine months ended September 30, 2022 compared to 22.4% during the corresponding period of 2021. This 70-basis point expansion was due to higher gross margins on new assignments secured during the last several quarters; higher permanent placement revenues; and increased activity levels from our offshore staffing services offering.
Selling, General and Administrative (“S,G&A”) Expenses:
Below is a tabular presentation of operating expenses by expense category for the nine months ended September 30, 2022 and 2021, respectively:
| S,G&A Expenses (Amounts in millions) | Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
||||||
| Data and Analytics Services Segment |
||||||||
| Sales and Marketing |
$ | 4.7 | $ | 4.7 | ||||
| Operations |
1.9 | 2.2 | ||||||
| Amortization of Acquired Intangible Assets |
1.8 | 1.8 | ||||||
| Revaluation of Contingent Consideration |
— | (2.0 | ) | |||||
| Reserve for Cyber-security Breach |
0.4 | — | ||||||
| Severance |
0.1 | — | ||||||
| General & Administrative |
4.4 | 3.8 | ||||||
|
|
|
|
|
|||||
| Subtotal Data and Analytics Services |
$ | 13.3 | $ | 10.5 | ||||
|
|
|
|
|
|||||
| S,G&A Expenses (Amounts in millions) | ||||||||
| IT Staffing Services Segment |
||||||||
| Sales and Marketing |
$ | 7.3 | $ | 5.7 | ||||
| Operations |
8.4 | 6.6 | ||||||
| Amortization of Acquired Intangible Assets |
0.6 | 0.6 | ||||||
| General & Administrative |
9.2 | 8.2 | ||||||
|
|
|
|
|
|||||
| Subtotal IT Staffing Services |
$ | 25.5 | $ | 21.1 | ||||
|
|
|
|
|
|||||
| Total S,G&A Expenses |
$ | 38.8 | $ | 31.6 | ||||
|
|
|
|
|
|||||
S,G,&A expenses for the nine months ended September 30, 2022 totaled $38.8 million or 21.0% of total revenues, compared to $31.6 million or 19.4% of total revenues for the nine months ended September 30, 2021. Excluding the revaluation of contingent consideration in the 2021 period, reserve for cyber-security breach and severance expense in the 2022 period and the amortization of acquired intangible assets in both periods, S,G,&A expense as a percentage of total revenues was 19.4% and 19.1%, respectively.
Fluctuations within S,G,&A expense components during the first nine months of 2022, compared to the first nine months of 2021, included the following:
| • | Sales expense increased by $1.6 million in the 2022 period compared to the corresponding 2021 period. Sales expense in our Data and Analytics Services segment was flat to 2021, reflecting accrual adjustments to variable compensation expense in the third quarter of 2022. Sales expense in our IT Staffing Services segment was higher by $1.6 million due to staff increases and higher variable compensation expense. |
24
Table of Contents
| • | Operations expense increased by $1.5 million in the 2022 period compared to the corresponding 2021 period. In our Data and Analytics Services segment operations expense decreased by $0.3 million due to lower staff. Operations expense in our IT Staffing Services segment increased by $1.8 million and largely related to increases in recruitment staff and higher other variable expenses to support revenue growth. |
| • | Amortization of acquired intangible assets was $2.4 million in both the 2022 and 2021 periods. |
| • | Revaluation of contingent consideration totaled a credit of $2.0 million in the 2021 period and related to the AmberLeaf acquisition. No contingent consideration existed on the Company’s balance sheet in 2022. |
| • | Reserve for a cyber-security breach totaled $0.4 million in the 2022 period versus zero in 2021. |
| • | Severance expense associated with the closure of operations in Singapore and Ireland, and the rationalization of our cost structure in the UK totaled $0.1 million in the 2022 period versus zero in 2021. |
| • | General and administrative expense increased by $1.6 million in the 2022 period compared to the corresponding 2021 period. General and administrative expense in our Data and Analytics Services segment increased by $0.6 million due to higher executive leadership staff and compensation increases. In our IT Staffing Services segment, general and administrative expense increased by $1.0 million due to higher compensation expense and increases in travel and facility expenses. |
Other Income / (Expense) Components:
Other Income / (Expense) for the nine months ended September 30, 2022 consisted of interest expense of ($326,000) and foreign exchange gains of $334,000. For the nine months ended September 30, 2021, Other Income / (Expense) consisted of interest expense of ($523,000) and foreign exchange losses of ($88,000). Lower borrowings and a stronger U.S. dollar in the 2022 period were responsible for the favorable year-over-year variance.
Income Tax Expense:
Income tax expense for the nine months ended September 30, 2022 totaled $3.0 million, representing an effective tax rate on pre-tax income of 29.8% compared to $3.2 million for the nine months ended September 30, 2021, which represented a 27.8% effective tax rate on pre-tax income. The higher effective tax rate in the 2022 period was largely due to an increase in our tax valuation allowance related to foreign net operating losses (“NOL’s) in Singapore, Ireland and the UK.
Liquidity and Capital Resources:
Financial Conditions and Liquidity:
At September 30, 2022, we had cash balances on hand of $3.5 million and total bank debt of $2.2 million. During the third quarter of 2022 we prepaid $7.6 million of our outstanding term loan with excess cash balances. At quarter-end 2022, we had $36.4 million of borrowing capacity under our existing credit facility, excluding our term loan accordion feature which can provide us with additional term loan capacity of up to another $20 million.
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. At September 30, 2022, our accounts receivable “days sales outstanding” (“DSOs”) measurement decreased by 1 day to 66-days from our June 30, 2022 measurement. This measurement is still on the high-end of our expectations.
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, exclusive of any acquisition activity.
Cash flows provided by (used in) operating activities:
Cash provided by operating activities for the nine months ended September 30, 2022 totaled $7.7 million compared to cash provided by operating activities of $1.9 million during the nine months ended September 30, 2021. Elements of cash flows in the 2022 period were net income of $7.2 million, non-cash charges of $5.5 million, and an increase in operating working capital levels of ($5.0 million). During the nine months ended September 30, 2021, elements of cash flows were net income of $8.3 million, non-cash charges of $4.3 million and an increase in operating working capital levels of ($10.7 million). The operating working capital increase in both the 2022 and 2021 periods were largely in support of revenue growth.
25
Table of Contents
Cash flows (used in) investing activities:
Cash (used in) investing activities for the nine months ended September 30, 2022 was ($0.8 million) compared to ($1.0 million) for the nine months ended September 30, 2021. In 2022, capital expenditures essentially accounted for all investing activities. In 2021, capital expenditures and the payment of office lease deposits accounted for investing activities. Our 2022 capital expenditures largely related to system upgrades and the implementation of our Data and Analytics Services segment to our Oracle Cloud platform.
Cash flows (used in) financing activities:
Cash (used in) financing activities for the nine months ended September 30, 2022 totaled ($9.4 million) and consisted of ($10.9 million) of term loan repayments, partially offset by $1.5 million related to the issuance of common stock applicable to the Company’s employee stock purchase plan and the exercise of stock options. Cash (used in) financing activities for the nine months ended September 30, 2021 totaled ($3.0 million) and consisted of net ($3.3 million) of term loan repayments, partially offset by $0.3 million related to the issuance of common stock applicable to the Company’s employee stock purchase plan and the exercise of stock options. The repayments of term loan in the 2022 period included an early-payment of $7.6 million during the third quarter.
Off-Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements.
Inflation:
We do not believe that inflation had a significant impact on our results of operations for the periods presented except to the extent that it, combined with customer concerns regarding a potential recession, may have impacted demand for certain of our services. 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 an increase in our selling, general and administrative expenses, as well as a higher interest rate environment.
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.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
In addition to the inherent operational risks, the Company is exposed to certain market risks, primarily related to changes in interest rates and currency fluctuations.
Interest Rates
As of September 30, 2022, we had outstanding borrowings of $2.2 million under our Credit Agreement with PNC Bank and certain other financial institution lenders — Refer to Note 9 – “Credit Facility” in the Notes to Condensed Consolidated Financial Statements, included herein. A hypothetical 10% increase in interest rates on our variable debt outstanding at September 30, 2022 would have an increase in our annual interest expense of approximately $13,000. As of September 30, 2022, the Company has no interest-rate hedge vehicles outstanding.
Currency Fluctuations
The reporting currency of the Company and its subsidiaries is the U.S. dollar. The functional currency of the Company’s subsidiary in Canada is the U.S. dollar because the majority of its revenue is denominated in U.S. dollars. The functional currencies of the Company’s Indian and European subsidiaries are the local currency of the location of such subsidiary. The results of operations of the Company’s Indian and European subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company’s Indian and European subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within Shareholders’ Equity. Gains and losses resulting from foreign currency transactions are included as a component of other income (expense), net in the Consolidated Statements of Operations, and have not been material for all periods presented. A hypothetical 10% increase or decrease in overall foreign currency rates would not have had a material impact on our consolidated financial statements.
26
Table of Contents
| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
In the ordinary course of our business, we are involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, management believes, after consultation with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
| ITEM 1A. | RISK FACTORS |
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 14, 2022.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
27
Table of Contents
| ITEM 6. | EXHIBITS |
(a) Exhibits
28
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 14th day of November, 2022.
| MASTECH DIGITAL, INC. | ||||
| November 14, 2022 | /s/ VIVEK GUPTA | |||
| Vivek Gupta Chief Executive Officer | ||||
| /s/ JOHN J. CRONIN, JR. | ||||
| John J. Cronin, Jr. | ||||
| Chief Financial Officer | ||||
| (Principal Financial Officer) | ||||
29
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer
I, Vivek Gupta, certify that:
| 1. | I have reviewed this report on Form 10-Q of Mastech Digital, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| MASTECH DIGITAL, INC. | ||||||
| Date: November 14, 2022 | /S/ VIVEK GUPTA | |||||
| Vivek Gupta | ||||||
| Chief Executive Officer | ||||||
Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer
I, John J. Cronin, Jr., certify that:
| 1. | I have reviewed this report on Form 10-Q of Mastech Digital, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| MASTECH DIGITAL, INC. | ||||||
| Date: November 14, 2022 | /S/ JOHN J. CRONIN, JR. | |||||
| John J. Cronin, Jr. | ||||||
| Chief Financial Officer | ||||||
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Mastech Digital, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vivek Gupta, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /S/ VIVEK GUPTA |
| Vivek Gupta |
| Chief Executive Officer |
| Date: November 14, 2022 |
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Mastech Digital, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John J. Cronin, Jr. Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /S/ JOHN J. CRONIN, JR. |
| John J. Cronin, Jr. |
| Chief Financial Officer |
| Date: November 14, 2022 |