Mastech Digital, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Mastech provides data and analytics, digital transformation, and IT staffing services. Amounts below are in millions of dollars, except per-share data, percentages, and where noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $47.6 | $48.5 | $98.0 | $93.7 |
| Gross profit / margin | $12.7 / 26.6% | $12.1 / 24.9% | $25.4 / 25.9% | $22.9 / 24.4% |
| Operating income | $3.6 | $8.6 | $6.1 | $10.4 |
| Net income | $3.0 | $6.0 | $4.8 | $6.9 |
| Diluted EPS | $0.25 | $0.53 | $0.41 | $0.62 |
- Q2 revenue declined 2% year over year; six-month revenue rose 5%. Q2 Data and Analytics revenue increased 1.8% to $6.8 million, while IT Staffing revenue declined 2.4% to $40.8 million. For the first half, the segments grew 14% and 3%, respectively.
- Gross margin expanded in both segments. Q2 Data and Analytics margin was 52.2% versus 46.1%; IT Staffing was 22.4% versus 21.5%. The filing attributes the improvement to utilization, assignment mix and rates, and lower pass-through expenses.
- Reported operating income and net income comparisons are affected by a $6.1 million 2019 gain from revaluing InfoTrellis contingent consideration; no such liability remained in 2020. Excluding that 2019 gain, 2020 operating income was higher in both the quarter and first half.
- Q2 interest expense was $0.2 million, down from $0.5 million; first-half interest expense was $0.5 million, down from $1.0 million. Lower debt and interest rates contributed. Effective tax rates were 14.1% for Q2 and 15.2% for the first half, versus 26.2% and 26.3%; the filing cites excess tax benefits from equity awards.
Cash flow, debt, and liquidity
- First-half operating cash flow was $11.6 million, compared with $8.8 million a year earlier. Investing cash outflow was $0.1 million; financing cash outflow was $9.4 million, largely reflecting $10.8 million of net debt repayments.
- Cash at June 30 was $4.7 million, up from $3.0 million at December 31, 2019. Balance-sheet current assets were $37.2 million and current liabilities $20.1 million.
- Debt totaled approximately $14.7 million before cash: $5.0 million outstanding on the revolver and $9.7 million on the term loan. The company reported net bank debt of $10.0 million and approximately $17.3 million of available revolver capacity. It said it expected cash, operating cash flow, and available credit to cover operating needs and debt service for the next 12 months, excluding acquisitions.
- Debt maturities under the facilities are in July 2022; the company reported compliance with all credit-facility provisions. DSO was 59 days, one day better than at March 31.
Management commentary, outlook, and risks
- Management said COVID-19 materially affected Q2, particularly IT Staffing: the segment lost 65 billable consultants during the quarter due to early assignment ends and reduced new-assignment activity. Headcount was 1,035 at quarter-end versus 1,113 a year earlier; the average bill rate rose to $76.91 from $74.76.
- Data and Analytics saw some project starts deferred to the second half. Q2 bookings were approximately $10 million, which management described as holding up relatively well amid the economic conditions.
- The company warned that the pandemic and economic uncertainty could adversely affect results through delayed purchases, reduced upselling, pricing pressure, customer losses, or customers’ inability to pay. It provided no numerical earnings or revenue guidance.
- Customer concentration is material: CGI represented 15.1% of Q2 revenue and 13.9% of first-half revenue; the top ten clients accounted for 49% and 47%, respectively. Management also noted that MSP relationships and staffing intermediaries may pressure IT staffing margins.
- The company expects to become an accelerated filer next year, triggering an auditor attestation requirement for internal controls under Sarbanes-Oxley Section 404. Management expects added compliance costs and cautioned that material weaknesses could be identified. Current disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
- Ordinary-course lawsuits and administrative proceedings were not expected by management to have a material adverse effect. There were no off-balance-sheet arrangements. The company eliminated its 401(k) match for former Hudson IT employees effective January 1, 2020.
Important facts for investors to verify
- Whether deferred Data and Analytics projects convert to revenue and whether bookings support the stated second-half expectations.
- IT Staffing consultant headcount, assignment trends, bill rates, and margin performance as pandemic-related conditions evolve.
- Customer concentration and collection risk, including the ability to sustain DSO and operating cash flow.
- Debt repayment pace, revolver availability and borrowing-base capacity, covenant compliance, and the July 2022 facility maturity.
- Costs and readiness for accelerated-filer and Section 404 auditor-attestation requirements.
- The impact of the 2019 contingent-consideration gain and 2020 stock-based compensation and tax benefits when assessing comparable earnings.