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 ended
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
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
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
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.
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These data and analytics capabilities and expertise were acquired through our
acquisition of InfoTrellis and enhanced and expanded subsequent to the
acquisition. In
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
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 and into 2023.
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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
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 millions) September 30, 2022 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
Revenues from our IT Staffing Services segment totaled
Gross Margins:
Gross profits in the third quarter of 2022 totaled
Below is a tabular presentation of gross margin by reporting segment for the
three months ended
Three Months Ended Three Months Ended
Gross Margin September 30, 2022 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 %
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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
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
Three Months Ended Three Months Ended
S,G&A Expenses (Amounts in millions)
$ 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
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.
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• 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
Income Tax Expense:
Income tax expense for the three months ended
Results of Operations for the Nine Months Ended
Revenues:
Revenues for the nine months ended
Below is a tabular presentation of revenues by reportable segment for the nine
months ended
Nine Months Ended Nine Months Ended
Revenues (Amounts in millions) September 30, 2022 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
Revenues from our IT Staffing Services segment totaled
Gross Margins:
Gross profits in the nine months ended
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Below is a tabular presentation of gross margin by reporting segment for the
nine months ended
Nine Months Ended Nine Months Ended
Gross Margin September 30, 2022 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
Gross margins from our IT Staffing Services segment were 23.1% in the nine
months ended
Selling, General and Administrative ("S,G&A") Expenses:
Below is a tabular presentation of operating expenses by expense category for
the nine months ended
Nine Months Ended Nine Months Ended
S,G&A Expenses (Amounts in millions)
$ 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
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.
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• 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
Income Tax Expense:
Income tax expense for the nine months ended
Liquidity and Capital Resources:
Financial Conditions and Liquidity:
At
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
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
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Cash flows (used in) investing activities:
Cash (used in) investing activities for the nine months ended
Cash flows (used in) financing activities:
Cash (used in) financing activities for the nine months ended
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.
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