MASTECH DIGITAL, INC. You should read the following discussion in conjunction with our audited
consolidated financial statements and accompanying notes for the year ended
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Table of Contents 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, 2020 . 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 endedDecember 31, 2020 , 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, 2020 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 six months endedJune 30, 2021 . 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. 21
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Table of Contents 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. We are encouraged by the global roll-out of vaccination programs and signs of economic expansion in 2021. While there is still uncertainty in the global markets relating to the pandemic and its impact on economic conditions, we are hopeful that economic conditions will improve throughout the year as the impact of the pandemic subsides in many key markets. 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 endedDecember 31, 2020 ). 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 MSP's 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. 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 EndedJune 30, 2021 as Compared to the Three Months EndedJune 30, 2020 : Revenues: Revenues for the three months endedJune 30, 2020 totaled$53.7 million compared to$47.6 million for the corresponding three month period in 2020. This 13% year-over-year revenue increase reflected a 9.6% increase in our IT staffing services segment and a 32% increase in our data and analytics services segment, of which approximately 4% was organic growth. For the three months endedJune 30, 2021 , the Company had one client that had revenues in excess of 10% of total revenues (CGI = 14.8%) For the three months endedJune 30, 2020 , the Company had the same one client with revenues in excess of 10% of total revenues (CGI = 15.1%). The Company's top ten clients represented approximately 48% and 49% of total revenues for the three months endedJune 30, 2021 and 2020, respectively. 22
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Table of Contents
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) June 30, 2021 June 30, 2020
Data and Analytics Services $ 9.0 $ 6.8
IT Staffing Services 44.7 40.8
Total revenues $ 53.7 $ 47.6
Revenues from our Data and Analytics Services segment totaled $9.0 million in
the second quarter ended June 30, 2021 , compared to $6.8 million in the
corresponding period last year. The increase in revenues reflected $1.9 million
related to our AmberLeaf acquisition and $0.3 million in organic growth. Project
delays have impacted organic growth opportunities; however, we are starting to
see positive signs in this area. New bookings were strong for the second
consecutive quarter with an aggregate value of approximately $15 million .
Revenues from our IT Staffing Services segment totaled $44.7 million in the
three months ended June 30, 2021 compared to $40.8 million during the
corresponding 2020 period. This 10% increase reflected a higher level of
billable consultants, partially offset by a lower average bill rate in the
second quarter of 2021 when compared to the corresponding 2020 period. Billable
consultant headcount at June 30, 2021 totaled
1,251-consultants
compared to
1,035-consultants
one-year
earlier. The increase in billable consultants of
216-consultants
over the last
12-month
period (a 21% increase) reflects strong activity levels, particularly in the
first half of 2021. Our average bill rate decreased during the second quarter of
2021 to $74.65 per hour compared to $76.91 per hour in the corresponding 2020
quarter. The decline in average bill rate was due to lower rates on new
assignments during the first half of 2021 and was reflective of the types of
skill-sets that we deployed. Permanent placement / fee revenues were
approximately $0.2 million during the 2021 quarter, which were
in-line
with the corresponding 2020 quarter.
Gross Margins:
Gross profits in the second quarter of 2021 totaled $14.3 million and exceeded
the second quarter of 2020 gross profits by approximately $1.7 million . Gross
profit as a percentage of revenue was 26.7% for the three month period ended
June 30, 2021 compared to 26.6% during the same period of 2020. This slight
improvement in gross margins reflected higher margins in our IT Staffing
Services segment.
Below is a tabular presentation of gross margin by reporting segment for the
three months ended June 30, 2021 and 2020, respectively:
Three Months Ended Three Months Ended
Gross Margin June 30, 2021 June 30, 2020
Data and Analytics Services 46.7 % 52.2 %
IT Staffing Services 22.7 22.4
Total gross margin 26.7 % 26.6 %
Gross margins from our Data and Analytics Services segment were 46.7% of
revenues during the second quarter of 2021, which represented a decline of
550-basis
points from a year ago. The margin decline reflects a lower margin profile in
our acquired AmberLeaf business. Our core D&A business continued to have gross
margins in the 50% range in the second quarter of 2021.
Gross margins from our IT Staffing Services segment were 22.7% in the second
quarter of 2021 compared to 22.4% during the corresponding quarter of 2020. This
30-basis
point expansion was due to better gross margins on new assignments secured
during the last several quarters.
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Selling, General and Administrative ("S,G&A") Expenses:
Below is a tabular presentation of operating expenses by sales, operations,
amortization of acquired intangible assets, the revaluation of contingent
consideration and general and administrative categories for the three months
ended
Three Months Ended Three Months Ended
S,G&A Expenses (Amounts in millions) June 30, 2021 June 30, 2020
Data and Analytics Services Segment
Sales and Marketing $ 1.4 $ 1.2
Operations 0.8 0.4
Amortization of Acquired Intangible Assets 0.6 0.5
Revaluation of Contingent Consideration (2.0 ) -
General & Administrative 1.3 0.7
Subtotal Data and Analytics Services $ 2.1 $ 2.8
Three Months Ended Three Months Ended
S,G&A Expenses (Amounts in millions) June 30, 2021 June 30, 2020
IT Staffing Services Segment
Sales and Marketing $ 1.9 $ 1.7
Operations 2.2 2.0
Amortization of Acquired Intangible Assets 0.2 0.2
General & Administrative 2.6 2.3
Subtotal IT Staffing Services $ 6.9 $ 6.2
Total S,G&A Expenses $ 9.0 $ 9.0
S,G&A expenses for the three months ended
• Sales expense increased by $0.4 million in the 2021 period compared to
the corresponding 2020 period. Approximately $0.2 million reflected
AmberLeaf sales expense and $0.2 million was due to austerity measures
implemented in the 2020 period, which have been unwound in 2021.
• Operations expense increased $0.6 million in the 2021 period compared to
the corresponding 2020 period. Approximately $0.4 million reflected
investments made to the delivery organization of our Data and Analytics
Services segment, including the impact of the AmberLeaf acquisition.
Operations expense in our IT Staffing Services segment increased by
$0.2 million and related to increases in staff and related variable
expenses - both reflecting higher activity levels in 2021.
• Amortization of acquired intangible assets was $0.1 million higher in the
2021 period due to the AmberLeaf acquisition.
• 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 the
corresponding 2020 period.
• General and administrative expense increased by $0.9 million in the 2021
period compared to the corresponding 2020 period. General and
administrative expense in our Data and Analytics Services segment
increased by $0.6 million due to executive leadership staff increases and
higher stock-based compensation expense. In our IT Staffing Services
segment, higher stock-based compensation expense and additional
administrative staff (from the austerity-impacted levels of 2020) were
responsible for a $0.3 million increase from 2020.
Other Income / (Expense) Components:
Other Income / (Expense) for the three months ended
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Table of Contents Income Tax Expense: Income tax expense for the three months endedJune 30, 2021 totaled$1.4 million , representing an effective tax rate on pre-tax income of 27.7% compared to$488,000 for the three months endedJune 30, 2020 , which represented a 14.1% effective tax rate on pre-tax income. The lower effective tax rate in the 2020 period largely reflected excess tax benefits related to the exercise of stock options and the vesting of restricted share units. Results of Operations for the Six Months EndedJune 30, 2021 as Compared to the Six Months EndedJune 30, 2020 : Revenues: Revenues for the six months endedJune 30, 2021 totaled$103.4 million compared to$98.0 million for the corresponding six month period in 2020. This 5.5% year-over-year revenue increase reflected a 2.2% increase in our IT staffing services segment and a 25% increase in our data and analytics services segment, which represented flat organic growth when excluding the AmberLeaf acquisition. For the six months endedJune 30, 2021 , the Company had one client that had revenues in excess of 10% of total revenues (CGI = 14.9%). For the six months endedJune 30, 2020 , the Company had the same one client that had revenues in excess of 10% of total revenues (CGI = 13.9%). The Company's top ten clients represented approximately 48% and 47% of total revenues for the six months endedJune 30, 2021 and 2020, respectively. Below is a tabular presentation of revenues by reportable segment for the six months endedJune 30, 2021 and 2020, respectively: Six Months Ended Six Months Ended Revenues (Amounts in millions) June 30, 2021 June 30, 2020 Data and Analytics Services $ 17.7 $ 14.1 IT Staffing Services 85.7 83.9 Total revenues $ 103.4 $ 98.0 Revenues from our Data and Analytics Services segment totaled$17.7 million during the six months endedJune 30, 2021 , compared to$14.1 million in the corresponding six-month period last year. Excluding revenues from the AmberLeaf acquisition, organic revenues were flat compared to the six months of 2020. Project delays continued to impact 2021 revenues during the first half of the year. New bookings were approximately$30 million and 32% above new bookings for the six-month period of 2020. Revenues from our IT Staffing Services segment totaled$85.7 million in the six months endedJune 30, 2021 compared to$83.9 million during the corresponding 2020 period. This 2% increase reflected an increased level of billable consultants, partially offset by a lower average bill rate in the first half of 2021, when compared to the corresponding 2020 period. Billable consultants increased by 188-consultants during the first six months of 2021 versus a decline of 132-consultants during the six months endedJune 30, 2020 . Permanent placement / fee revenues were approximately$0.4 million during the six months of 2021, which were in-line with the corresponding 2020 period. Gross Margins: Gross profits in the six months endedJune 30, 2021 totaled$27.1 million compared to$25.4 million in the corresponding period last year. Gross profit as a percentage of revenue was 26.2% for the six month period endedJune 30, 2021 compared to 25.9% during the same period of 2020. This 30-basis point improvement largely reflected a favorable mix of revenues between our two operating segments. Below is a tabular presentation of gross margin by reporting segment for the six months endedJune 30, 2021 and 2020, respectively: Six Months Ended Six Months Ended Gross Margin June 30, 2021 June 30, 2020 Data and Analytics Services 46.2 % 49.5 % IT Staffing Services 22.1 21.9 Total gross margin 26.2 % 25.9 % 25
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Table of Contents Gross margins from our Data and Analytics Services segment were 46.2% of revenues during the six month period endedJune 30, 2021 compared to 49.5% in the corresponding period of 2020. This gross margin decline reflects a lower margin profile in our acquired AmberLeaf business. Gross margins from our IT Staffing Services segment were 22.1% in the six months endedJune 30, 2021 compared to 21.9% during the corresponding period of 2020. This 20-basis point expansion was due to better gross margins on new assignments secured during the last several quarters. Selling, General and Administrative ("S,G&A") Expenses: Below is a tabular presentation of operating expenses by sales, operations, amortization of acquired intangible assets, the revaluation of contingent consideration and general and administrative categories for the six months endedJune 30, 2021 and 2020, respectively: Six Months Ended Six Months Ended S,G&A Expenses (Amounts in millions) June 30, 2021 June 30, 2020 Data and Analytics Services Segment Sales and Marketing $ 3.2 $ 2.5 Operations 1.6 0.9 Amortization of Acquired Intangible Assets 1.2 1.0 Revaluation of Contingent Consideration (2.0 ) - General & Administrative 2.3 1.5 Subtotal Data and Analytics Services $ 6.3 $ 5.9 Six Months Ended Six Months Ended S,G&A Expenses (Amounts in millions) June 30, 2021 June 30, 2020 IT Staffing Services Segment Sales and Marketing $ 3.7 $ 3.7 Operations 4.2 4.4 Amortization of Acquired Intangible Assets 0.4 0.4 General & Administrative 5.3 4.9 Subtotal IT Staffing Services $ 13.6 $ 13.4 Total S,G&A Expenses $ 19.9 $ 19.3
S,G,&A expenses for the six months ended
• Sales expense increased by $0.7 million in the 2021 period compared to
the corresponding 2020 period. The entire $0.7 million increase
reflected investments in the sales organization of our Data and
Analytics Services segment, of which $0.5 million pertained to the
AmberLeaf acquisition. Sales expense in our IT Staffing Services
segment was flat on a year-over-year basis.
• Operations expense increased by $0.5 million in the 2021 period
compared to the corresponding 2020 period. Approximately $0.7 million
reflected investments made to the delivery organization of our Data
and Analytics Services segment, including the AmberLeaf acquisition.
Operations expense in our IT Staffing Services segment declined by
$0.2 million and largely related to reductions in staff although we
started to
re-hire
in the second quarter to due increased demand.
• Amortization of acquired intangible assets was $0.2 million higher in
the 2021 period due to the AmberLeaf acquisition.
• 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 the corresponding 2020 period.
• General and administrative expense increased by $1.2 million in the
2021 period compared to the corresponding 2020 period. General and
administrative expense in our Data and Analytics Services segment
increased by $0.8 million due to executive leadership staff increases
and higher stock-based compensation expense. In our IT Staffing
Services segment, higher stock-based compensation expense and
additional administrative staff (from the austerity-impacted levels of
2020) were responsible for a $0.4 million increase from 2020.
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Table of Contents Other Income / (Expense) Components: Other Income / (Expense) for the six months endedJune 30, 2021 consisted of interest expense of ($354,000 ) and foreign exchange losses of ($22,000 ). For the six months endedJune 30, 2020 , Other Income / (Expense) consisted of interest expense of ($477,000 ) and foreign exchange gains of$94,000 . The lower level of interest expense was reflective of debt repayments in 2021 and 2020. Income Tax Expense: Income tax expense for the six months endedJune 30, 2021 totaled$1.9 million , representing an effective tax rate on pre-tax income of 27.5% compared to$0.9 million for the six months endedJune 30, 2020 , which represented a 15.2% effective tax rate on pre-tax income. The lower effective tax rate in the 2020 period largely reflected excess tax benefits related to the exercise of stock options and the vesting of restricted share units. Liquidity and Capital Resources: Financial Conditions and Liquidity: AtJune 30, 2021 , we had bank debt, net of cash balances on hand, of$10.0 million and approximately$26.1 million of borrowing capacity under our existing credit facility. 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. AtJune 30, 2021 , our accounts receivable "days sales outstanding" ("DSOs") measurement was 63-days, which improved by 2-days from our DSO measurement atMarch 31, 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, exclusive of any acquisition activity. Cash flows provided by (used in) operating activities: Cash provided by operating activities for the six months endedJune 30, 2021 totaled$0.2 million compared to cash provided by operating activities of$11.6 million during the six months endedJune 30, 2020 . Elements of cash flow during the 2021 period were net income of$4.9 million , non-cash charges of$1.9 million and an increase in operating working capital levels of ($6.6 million ). Elements of cash flow during the corresponding 2020 period were net income of$4.8 million , non-cash charges of$2.6 million and a decrease in operating working capital levels of$4.2 million . The operating working capital increase in the 2021 period reflected investment to support revenue growth. The operating working capital decrease in the 2020 period reflected an improvement in DSOs and higher payroll related accruals. Cash flows (used in) investing activities: Cash (used in) investing activities for the six months endedJune 30, 2021 was ($525,000 ) compared to ($135,000 ) for the six months endedJune 30, 2020 . In 2021 capital expenditures and payments of office lease deposits accounted for investing activities. In 2020 capital expenditures accounted for all investing activities. Cash flows provided by (used in) financing activities: Cash (used in) financing activities for the six months endedJune 30, 2021 totaled ($1.9 million ) and consisted of term loan debt repayments of ($2.2 million ) partially offset by$0.3 million related to proceeds from the issuance of common shares and the exercise of stock options. Cash (used in) financing activities for the six months endedJune 30, 2020 totaled ($9.4 million ) and largely consisted of net debt payments on our term loan and revolving credit line of ($10.8 million ) partially offset by$1.4 million of proceeds from the issuance of common stock. Off-Balance Sheet Arrangements: We do not have any off-balance sheet arrangements. 27
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Table of Contents 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. 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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