Mastech Digital, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the same 2017 periods. Amounts below are in U.S. dollars. Mastech provides IT staffing, data and analytics, and digital transformation services. Comparisons are affected by the July 2017 InfoTrellis acquisition, which was included for only part of the 2017 comparison period.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $44.3M | $39.2M | $132.5M | $107.4M |
| Gross profit / margin | $10.7M / 24.2% | $8.8M / 22.5% | $31.9M / 24.0% | $22.1M / 20.6% |
| Operating income | $2.5M | $0.2M | $9.4M | $1.6M |
| Net income (loss) | $1.6M | ($0.1M) | $5.8M | $0.8M |
| Diluted EPS | $0.14 | ($0.01) | $0.52 | $0.08 |
- Q3 revenue rose 13%; IT Staffing revenue grew 10% to $38.5M, while Data and Analytics revenue was $5.8M. Nine-month revenue rose 23%, including the larger contribution from InfoTrellis.
- Q3 gross margin improved 170 basis points. IT Staffing margin increased to 21.1% from 20.0%; Data and Analytics margin was 44.5%. Nine-month total margin rose 340 basis points, while Data and Analytics’ nine-month margin was 43.7% versus 44.2% in its partial-year 2017 comparison.
- Q3 operating expenses were $8.2M versus $8.6M, but 2017 included $1.7M of acquisition transaction costs. Excluding those costs and acquired-intangible amortization, management reported SG&A at 16.9% of revenue in Q3 2018 versus 16.1% in Q3 2017.
Cash flow, debt and liquidity
- Operating cash flow was negative $3.3M for the first nine months, compared with negative $1.6M in 2017. The company cited an $11.1M increase in operating working capital, including higher receivables and disruption from implementing a cloud-based ERP system.
- Investing cash outflow was $0.8M; financing cash inflow was $4.2M. Cash declined $0.3M to $2.2M from year-end 2017.
- At September 30, total borrowings were approximately $42.7M: $16.0M on the revolver and $26.7M on the term loan. Net bank debt, after cash, was approximately $40M. Revolver availability was about $6.5M under the $22.5M commitment, subject to borrowing-base limits.
- Current assets were $42.0M and current liabilities $17.1M. Accounts receivable was $24.2M and unbilled receivables $14.0M, up from $7.8M at December 2017. Management said available cash, operating cash flow and borrowing capacity should cover business needs and debt service for the next 12 months, and that the company complied with its credit covenants.
Material changes, outlook and risks
- Nine-month results include a $9.1M noncash benefit from lowering the InfoTrellis contingent consideration liability, after management concluded payment conditions were unlikely to be fully met, and a $7.7M goodwill impairment. The impairment reflected weaker-than-expected revenue recovery, reduced near-term projections and anticipated additional investment. These items materially affect reported operating income.
- InfoTrellis revenue was $5.8M in Q3 and $18.4M for the nine months; management described activity as healthy but noted delayed project starts, project completions and a sequential Q3 revenue decline of about $0.3M.
- Management characterized economic conditions as generally positive but expected staffing and analytics recruitment supply constraints to persist. It noted that MSP use by staffing clients may pressure margins. No specific financial guidance was provided.
- Customer concentration remains relevant: CGI represented 13.5% of Q3 revenue and 12.9% of nine-month revenue; the top ten clients accounted for about 48% in both periods. Management also identified temporary ERP-related billing and collections inefficiencies and expected improvement in Q4 2018.
- Other matters: a two-for-one stock split was distributed in August 2018, and all EPS figures were restated for it. The company expects adoption of the new lease standard to materially affect financial condition and results; lease commitments were approximately $5.8M. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether ERP-related receivables and cash-conversion problems improved after Q3, and whether operating cash flow recovered.
- InfoTrellis project starts, revenue trajectory and performance against the assumptions underlying goodwill and contingent-consideration valuations.
- Current revolver availability, borrowing-base headroom, debt levels and compliance with leverage and fixed-charge covenants.
- Whether customer concentration, staffing supply constraints and MSP pricing pressure affect growth or margins.
- The ultimate impact of lease accounting adoption and any remaining Tax Act accounting adjustments.