Mastech Digital, Inc. — 2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. Mastech provides data and analytics consulting, IT staffing, and digital transformation services. Its reportable segments are Data and Analytics Services and IT Staffing Services. The filing also presents unaudited quarterly results, including Q4.
Key financial metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $193.6 million | $177.2 million |
| Gross profit / gross margin | $48.0 million / 24.8% | $42.5 million / 24.0% |
| Operating income | $17.0 million | $11.6 million |
| Net income / diluted EPS | $11.1 million / $0.99 | $6.7 million / $0.60 |
| Cash from operating activities | $16.1 million | $(0.5) million |
| Cash and cash equivalents at year-end | $3.0 million | $1.3 million |
| Bank debt at year-end | $25.3 million on the balance sheet; approximately $25.5 million gross borrowings | $38.7 million |
| Operating working capital | $19.4 million | $26.1 million |
- Q4 2019 revenue was $50.4 million, gross profit $12.8 million, and net income $2.3 million; Q4 2018 figures were $44.6 million, $10.7 million, and $0.9 million, respectively. Diluted EPS was $0.20 versus $0.08.
- FY 2019 segment revenue was $26.7 million in Data and Analytics Services and $166.9 million in IT Staffing Services. Segment gross margins were 46.7% and 21.3%, respectively.
- Year-end current assets were $36.9 million and current liabilities $19.1 million. The company reported approximately $13.0 million of unused revolver capacity and said available cash, operating cash flow, and credit capacity were expected to fund needs for the next 12 months, absent acquisitions.
Material changes versus the prior comparable period
- Revenue increased 9% year over year: Data and Analytics grew 12%, while IT Staffing grew about 9%. IT staffing growth reflected 65 additional billable consultants and a higher average hourly bill rate ($74.97 versus $73.01).
- Gross margin rose 0.8 percentage points, with improvement in both segments. Management attributed the Data and Analytics increase to lower bench costs and stronger margins on new work, and the IT Staffing increase to digital technology assignments.
- Operating cash flow improved substantially from 2018, primarily as working capital normalized following cash-conversion issues associated with the 2018 cloud ERP implementation. Days sales outstanding improved to 55 from 69.
- Debt declined by approximately $13.4 million on the balance sheet year over year. Cash flow financing activities included $9.6 million of term-loan repayments and $4.0 million of net revolver repayments.
- Net income rose, but comparisons reflect unusual acquisition-accounting items: 2019 included a $6.1 million credit from revaluing contingent consideration; 2018 included an $11.1 million credit from the same liability revaluation and a $9.7 million goodwill impairment charge. No contingent consideration liability remained at year-end 2019.
Outlook, commentary, risks and unusual items
- Before the COVID-19 impact became clear, management cited solid activity, an expanding U.S. economy, and continued growth opportunities, while expecting skilled-worker supply constraints to persist. It also noted potential IT staffing margin pressure from managed service providers and systems-integrator relationships.
- The filing states that the effects of COVID-19 were uncertain and could not then be ascertained; a severe or prolonged pandemic could materially harm business, results, financial condition, and cash flows. Management expected both segments and geographies to be affected to some degree.
- Key risks include customer concentration (top ten customers generated 45% of 2019 revenue; CGI alone represented 11.3%), customer contracts that are generally terminable without penalty, competition and pricing pressure, and dependence on recruiting and retaining skilled staff. Approximately 41% of the workforce used company-sponsored H-1B permits.
- Other material exposures include $25.5 million of gross bank borrowings, covenant restrictions and interest-rate sensitivity, dependence on Indian operations and rupee exchange rates, cybersecurity and business-continuity risks, and client early termination of certain multi-year Data and Analytics engagements.
- The company was in compliance with its credit facility covenants at year-end. Management said ordinary-course lawsuits were not expected to materially affect financial position, results, or cash flows. The auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- How much of reported earnings and year-over-year improvement is attributable to contingent-consideration revaluation and other nonrecurring items.
- Whether Data and Analytics growth and segment margins can be sustained, and whether IT staffing consultant growth offsets recruiting constraints and MSP-related pricing pressure.
- Current debt, revolver availability, covenant headroom, and the timing and funding of planned debt repayments.
- Customer concentration, receivable collection trends, and the impact of COVID-19 on demand, project timing, and customer payments.
- Whether working capital remains controlled as revenue grows; management noted that growth could increase working-capital needs and reduce operating cash generation.