Mastech Digital Delivers Solid Third Quarter Results

PITTSBURGH, Oct. 28, 2020 /PRNewswire/ -- Mastech Digital, Inc. (NYSE American: MHH), a leading provider of Digital Transformation IT Services, announced today its financial results for the third quarter ended September 30, 2020.

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Third Quarter 2020 Highlights:

    --  The Company's Data and Analytics Services segment reported $7.2 million
        of revenues, representing a 6% sequential improvement over the second
        quarter of 2020 and a modest increase over the third quarter of 2019;
    --  The IT Staffing Services segment reported a modest gain in
        Consultants-on-Billing headcount reversing the downward trend of
        declines in the first half of 2020, achieving revenue of $40.2 million.
        The quarterly revenue represents a decline of approximately 5% compared
        to third quarter of 2019 and a 1% decrease from the previous quarter;
    --  Total revenues of $47.4 million, compared to revenues of $49.5 million
        in the third quarter of 2019, reflect the impact of COVID-19 and
        continued uncertain market conditions;
    --  Gross margins grew to a record 27.6%, which was 100 basis points higher
        than the previous record achieved in the second quarter of 2020;
    --  GAAP diluted earnings per share were $0.25 in the third quarter of 2020
        versus $0.17 in the third quarter of 2019; and
    --  Non-GAAP diluted earnings per share were $0.32 in the third quarter of
        2020 versus $0.23 in the third quarter of 2019.

Third Quarter Results:

Mastech Digital revenues for the third quarter of 2020 totaled $47.4 million compared to $49.5 million during the corresponding quarter last year. Gross profits in the third quarter of 2020 were $13.1 million, higher than the $12.3 million in the same quarter of 2019, despite lower revenues in the 2020 period. Gross margins in the 2020 quarter were a record 27.6% or 270-basis points higher than third quarter 2019. GAAP net income for the third quarter of 2020 totaled $3.0 million or $0.25 per diluted share, compared to $1.9 million or $0.17 per diluted share during the same period last year. Non-GAAP net income for the third quarter of 2020 was $3.8 million or $0.32 per diluted share, compared to $2.6 million or $0.23 per diluted share in the third quarter of 2019.

Activity levels at the Company's Data and Analytics Services segment held up well during the quarter despite some project delays, particularly in Europe and parts of Asia. This segment recorded year-over-year and sequential revenue growth and record gross margins. Activity levels for the Company's IT Staffing Services segment picked up modestly, realizing the first increase in Consultants-on-Billing headcount after material declines in the first half of the year. Additionally, gross margins for this segment continued to expand in third quarter 2020 to a record performance of 22.6%.

"I'm pleased with the performance of both business segments in the third quarter considering the backdrop of continuing uncertain economic conditions. Our Data & Analytics business delivered significant sequential growth, which, coupled with the recent acquisition of AmberLeaf Partners, Inc., has positioned the business to scale as global markets begin to open up. Our IT Staffing segment's new remote staffing offering, MAS-REMOTE, gained traction with our customers, driving an increase in the Consultants on-Billing headcount this quarter," stated Vivek Gupta, the Company's President and Chief Executive Officer.

"The Marketing, Customer Support, and Sales Operations/Support capabilities of our acquisition AmberLeaf, broadens Mastech Digital's offerings and will help our clients learn faster from more complete insights. We are all very excited about the opportunities this will open," added Paul Burton, Chief Executive of Mastech InfoTrellis."

Expanding on the Company's financial position, Jack Cronin, Mastech Digital's Chief Financial Officer, stated, "During the third quarter, we reduced bank debt by another $6.1 million, further improving our leverage ratios and increasing our cash availability under our existing credit facility to $22.5 million from $17.3 million a quarter ago. Additionally, despite challenging economic conditions, our accounts receivable balance remains of top credit quality."

About Mastech Digital, Inc.:

Mastech Digital (NYSE American: MHH) is a leading provider of Digital Transformation IT Services. The Company offers Data Management and Analytics Solutions, Digital Learning, and IT Staffing Services with a Digital First approach. A minority-owned enterprise, Mastech Digital is headquartered in Pittsburgh, PA with offices across the U.S., Canada, EMEA, India and ASEAN.

Use of Non-GAAP Measures:

This press release contains non-GAAP financial measures to supplement our financial results presented on a GAAP basis. The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Reconciliations of these non-GAAP measures to their comparable GAAP measures are included in the attached financial tables.

We believe that providing non-GAAP net income and non-GAAP diluted earnings per share offers investors useful supplemental information about the financial performance of our business, enables comparison of financial results between periods where certain items may vary independent of business performance, and allows for greater transparency with respect to key metrics used by management in operating our business. Additionally, management uses these non-GAAP financial measures in evaluating the Company's performance.

Specifically, the non-GAAP financial measures contained herein exclude the following expense items:

Amortization of acquired intangible assets: We amortize intangible assets acquired in connection with our June 2015 acquisition of Hudson IT and our July 2017 acquisition of the services division of InfoTrellis, Inc. We exclude these amortization expenses in our non-GAAP financial measures because we believe it allows investors to make more meaningful comparisons between our operating results and those of other companies within our industry and facilitates a helpful comparison of our results with other periods.

Stock-based compensation expenses: We incur material recurring expense related to non-cash, stock-based compensation. We exclude these expenses in our non-GAAP financial measures because we believe that it provides investors with meaningful supplemental information regarding operational performance. In particular, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under ASC 718, we believe that providing non-GAAP financial measures that exclude these expenses allows investors to make more meaningful comparisons between our operating results and those of other companies within our industry and facilitates comparison of our results with other periods.

Contingent consideration liability revaluation: In connection with the InfoTrellis acquisition, the Company may have been required to pay future consideration that was contingent upon the achievement of specific earnings before interest and tax objectives ("EBIT"). As of the acquisition date, the Company recorded a contingent consideration liability representing the estimated fair value of such contingent consideration that was expected to be paid. In the second quarter of 2019 this contingent consideration liability was reduced by $6.1 million to zero, after a determination was made that the relevant conditions for payment of such liability were unlikely to be satisfied. We believe that providing non-GAAP financial measures that exclude these adjustments to expense are useful for investors to understand the effects of these items on our total operating expenses and facilitate comparison of our results with other periods.

Acquisition-related transaction expenses: We incurred significant expenses in connection with our acquisition of InfoTrellis, Inc. which we would not have otherwise incurred in the periods presented as part of our continuing operations. These transaction expenses consisted of investment banking fees, legal expenses, audit charges related to our acquired companies and various advisor costs. In the 2019 period, we recorded a reduction in acquisition-related transaction expense due to revised estimates of investment banking fees associated with contingent consideration payments. We believe that providing non-GAAP financial measures that exclude these expenses / credits allows investors to make more meaningful comparisons between our operating results and those of other companies within our industry and facilitates a helpful comparison of our results with other periods.

Forward-Looking Statements:

Certain statements contained in this release are forward-looking statements based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "plans," "believes," "scheduled," "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements, which include but are not limited to (i) projections of revenues, earnings, and cash flow, and (ii) statements regarding the expected benefits to the Company from the completion of the AmberLeaf acquisition. These statements are based on information currently available to the Company and it assumes no obligation to update the forward-looking statements as circumstances change. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation, the level of market demand for the Company's services, the highly competitive market for the types of services offered by the Company, the impact of competitive factors on profit margins, market conditions that could cause the Company's customers to reduce their spending for its services, the Company's ability to create, acquire and build new lines of business, to attract and retain qualified personnel, reduce costs and conserve cash, the extent to which the Company's business is adversely affected by the impacts of the COVID-19 pandemic and governmental responses to limit the further spread of COVID-19 and other risks that are described in more detail in the Company's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2019.

For more information, contact:
Donna Kijowski
Manager, Investor Relations
Mastech Digital, Inc.
+91-888.330.5497


                                               
            
              MASTECH DIGITAL, INC.


                                       
            
              CONDENSED CONSOLIDATED BALANCE SHEETS


                                                    
            (Amounts in thousands)


                                                          
            (Unaudited)




                                                                                       September 30, December 31,


                                                                                                2020          2019





                 
            
              ASSETS



     Current assets:



          Cash and cash equivalents                                                          $4,014        $2,981



          Accounts receivable, net                                                           31,258        32,352


           Prepaid and other current assets                                                    2,647         1,597



                 Total current assets                                                         37,919        36,930




      Equipment, enterprise software and
       leasehold improvements, net                                                             2,133         2,476




      Operating lease right-of-use assets                                                      3,642         4,617







     Non-current deposits                                                                       392           405





     Goodwill, net of impairment                                                             26,106        26,106





     Intangible assets, net                                                                  18,052        20,050



                            Total  assets                                                    $88,244       $90,584





                      LIABILITIES AND SHAREHOLDERS' EQUITY



     Current liabilities:


           Current portion of long-term debt                                                  $4,575        $4,575


           Current portion of operating lease
            liability                                                                          1,188         1,396



          Accounts payable                                                                    3,114         4,027


           Accrued payroll and related costs                                                  11,325         7,902



          Other accrued liabilities                                                             739         1,191



                 Total current liabilities                                                    20,941        19,091





     Long-term liabilities:


          Long-term debt, less current portion,
           net                                                                                 3,865        20,682


          Long-term operating lease liability,
           less current portion                                                                2,558         3,321


          Long-term accrued income taxes                                                         185           185


          Long-term payroll tax liability                                                      3,107


          Long-term deferred income taxes                                                        726         1,025




                Total liabilities                                                            31,382        44,304





     Shareholders' equity:


           Common stock, par value $0.01 per share                                               130           127


           Additional paid-in capital                                                         24,901        21,939



          Retained earnings                                                                  36,595        28,759


           Accumulated other comprehensive income
            (loss)                                                                             (577)        (358)



          Treasury stock, at cost                                                           (4,187)      (4,187)



                Total shareholders' equity                                                    56,862        46,280



                            Total liabilities and shareholders'
                             equity                                                          $88,244       $90,584


                                              
              
                MASTECH DIGITAL, INC.


                                 
              
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


                                        
              (Amounts in thousands, except per share data)


                                                         
              (Unaudited)


                                                                                          Three Months ended September 30,             Nine Months ended September 30,

                                                                                                                           ---

                                                                            2020                              2019              2020       2019

                                                                                                                                         ---


     Revenues                                                           $47,383                           $49,543          $145,391   $143,214


      Cost of revenues                                                    34,293                            37,214           106,926    107,996

                                                                                                                                         ---

      Gross profit                                                        13,090                            12,329            38,465     35,218


      Selling, general and administrative expenses:


         Operating expenses                                                8,873                             9,259            28,158     27,768


         Revaluation of
          contingent
          consideration
          liability                                                                                                                  (6,069)



      Total selling,
       general and
       administrative
       expenses                                                            8,873                             9,259            28,158     21,699




      Income from
       operations                                                          4,217                             3,070            10,307     13,519


      Other income/
       (expense), net                                                      (191)                            (380)            (574)   (1,441)

                                                                                                                                         ---

      Income before income
       taxes                                                               4,026                             2,690             9,733     12,078


      Income tax expense                                                   1,028                               741             1,897      3,207

                                                                                                                                         ---

      Net income                                                          $2,998                            $1,949            $7,836     $8,871

                                                                                                                                         ===






     
                Earnings per share:



     Basic                                                                $0.26                             $0.18             $0.70      $0.80



     Diluted                                                              $0.25                             $0.17             $0.66      $0.79




                   Weighted average common shares outstanding:



     Basic                                                               11,381                            11,039            11,260     11,022

                                                                                                                                         ---


     Diluted                                                             12,042                            11,205            11,911     11,198

                                                                                                                                         ---


                                                                        
            
                MASTECH DIGITAL, INC.


                                                         
              
              RECONCILIATION OF GAAP MEASURES TO NON-GAAP MEASURES


                                                                   
            (Amounts in thousands, except per share data)


                                                                                  
              (Unaudited)




                                           Three Months ended September 30,                                          Nine Months ended September 30,



                                                                       2020                                                                      2019    2020       2019





                    GAAP Net Income                                  $2,998                                                                    $1,949  $7,836     $8,871




                    Adjustments:


       Amortization of acquired intangible
        assets                                                          656                                                                       673   1,998      2,017


     
     Stock-based compensation                                         462                                                                       263   1,530        766


       Acquisition transaction expenses                                                                                                        (110)            (110)


       Revaluation of contingent
        consideration liability                                                                                                                               (6,069)


     
     Income tax adjustments                                         (270)                                                                    (225)  (907)       885


                    Non-GAAP Net
                     Income                                          $3,846                                                                    $2,550 $10,457     $6,360







                    GAAP Diluted
                     Earnings Per
                     Share                                            $0.25                                                                     $0.17   $0.66      $0.79



                    Non-GAAP Diluted
                     Earnings Per
                     Share                                            $0.32                                                                     $0.23   $0.88      $0.57







                    Weighted average
                     common shares
                     outstanding:


       GAAP Diluted
        Shares                                                       12,042                                                                    11,205  11,911     11,198


       Non-GAAP Diluted
        Shares                                                       12,042                                                                    11,205  11,911     11,198


                                                                                         
        
             MASTECH DIGITAL, INC.


                                                                                   
           
          SUPPLEMENTAL FINANCIAL INFORMATION


                                                                                            
        (Amounts in thousands)


                                                                                               
           (Unaudited)




                                                          Three Months ended September 30,                                    Nine Months ended September 30,



                                                                                      2020                                                                2019        2020         2019




     
                Revenues:


                              Data and
                               analytics
                               services                                             $7,176                                                              $7,080     $21,308      $19,502


                              IT staffing
                               services                                             40,207                                                              42,463     124,083      123,712


                                           Total revenues                          $47,383                                                             $49,543    $145,391     $143,214






     
                Gross Margin %:


                              Data and
                               analytics
                               services                                              55.9%                                                              45.7%      51.7%       45.8%


                              IT staffing
                               services                                              22.6%                                                              21.4%      22.1%       21.3%


                                     Total gross margin %                           27.6%                                                              24.9%      26.5%       24.6%






     
                Segment Operating Income:


                              Data and
                               analytics
                               services                                             $1,579                                                              $1,530      $3,661       $3,856


                              IT staffing
                               services                                              3,294                                                               2,103       8,644        5,501


                   
              Subtotal                                               4,873                                                               3,633      12,305        9,357




      Amortization of acquired
       intangible assets                                                           (656)                                                              (673)    (1,998)     (2,017)


      Revaluation of contingent
       consideration liability                                                         -                                                                                     6,069


      Acquisition transaction
       expenses                                                                        -                                                                110                     110


      Interest expense and other, net                                              (191)                                                              (380)      (574)     (1,441)


                   Income before income taxes                                     $4,026                                                              $2,690      $9,733      $12,078

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SOURCE Mastech Digital, Inc.