Mastech Digital, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted.
Business context
Mastech provides digital transformation IT services through two segments: Data and Analytics Services and IT Staffing Services. The filing compares results with the corresponding 2018 periods.
Financial performance and liquidity
- Q2 revenue: $48.5 million, up 8% from $44.9 million. IT Staffing revenue grew 8% to $41.8 million; Data and Analytics revenue grew 9% to $6.7 million.
- First-half revenue: $93.7 million, up 6% from $88.2 million. IT Staffing grew 8% to $81.2 million, while Data and Analytics declined 2% to $12.4 million.
- Gross profit and margin: Q2 gross profit was $12.1 million, with a 24.9% margin versus 24.3% a year earlier. First-half gross profit was $22.9 million, with a 24.4% margin versus 24.0%. Management attributed improvement to higher segment margins; Q2 also benefited from a more favorable segment mix.
- Net income and EPS: Q2 net income was $6.0 million ($0.53 diluted EPS), versus $2.8 million ($0.25). First-half net income was $6.9 million ($0.62 diluted EPS), versus $4.2 million ($0.38).
- Cash flow: First-half operating cash flow was $8.8 million, versus cash use of $0.6 million in 2018. Investing activities used $0.5 million, including $0.6 million of capital expenditures; financing activities used $5.7 million, primarily for debt repayments. Cash increased $2.6 million to $3.9 million.
- Debt and liquidity: The company reported $29.4 million of bank debt net of cash and approximately $12.5 million of available revolver capacity. Outstanding borrowings were $10.0 million on the revolver and $23.3 million on the term loan. Current assets were $41.0 million and current liabilities $21.2 million. Management said available cash, operating cash flow, and credit capacity should cover business needs and debt service for the next 12 months. The company was in compliance with credit-facility provisions.
- Other balance-sheet items: Total assets were $96.4 million and shareholders’ equity $41.7 million at June 30. Adoption of lease accounting resulted in $5.1 million of lease liabilities on the balance sheet at quarter-end.
Material changes and unusual items
- Reported earnings include a $6.1 million gain from reducing the InfoTrellis contingent-consideration liability to zero, because management determined payment conditions were unlikely to be fully satisfied. This is a noncash valuation adjustment and materially affects comparisons.
- The prior-year comparison included a $7.7 million goodwill impairment charge in Q2 2018. The 2018 contingent-consideration revaluation also produced a larger gain ($9.1 million) than in 2019. These items make reported operating expense and profit comparisons less indicative of underlying trends.
- Segment operating income declined: Q2 Data and Analytics was $1.3 million versus $1.4 million; IT Staffing was $1.9 million versus $2.2 million. First-half segment operating income was $2.3 million and $3.4 million, respectively, both below 2018.
- Q2 Data and Analytics revenue rose 15% sequentially from Q1, with management citing stronger pipeline activity and project wins. First-half segment revenue remained below 2018, reflecting material project completions in the second half of 2018.
- First-half operating cash flow improvement reflected better receivable collections and higher payroll accruals; management also noted progress resolving cash-conversion issues associated with a cloud ERP implementation.
Outlook, commentary, and risks
- No numerical revenue or earnings guidance is provided. Management said it was encouraged by U.S. job-market growth and economic expansion, which it views as supportive of both segments.
- Management expects skilled-IT-worker supply constraints to persist, particularly in staffing. The business is sensitive to North American economic conditions and to the performance of a limited number of clients.
- Systems-integrator and staffing-company relationships, as well as clients’ use of managed service providers to reduce contractor costs, may pressure IT Staffing margins. Advanced technology demand presents opportunities but also has acute talent-supply constraints.
- Client concentration remains significant: CGI represented 10.9% of Q2 revenue and 11.4% of first-half revenue. The top ten clients contributed approximately 45% of revenue in both 2019 periods.
- Management believes ordinary-course litigation will not materially harm financial position, results, or cash flows. The filing reports no material changes to previously disclosed risk factors. Foreign-exchange movements are a market risk; the company had not engaged in currency hedging since 2016.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the $6.1 million contingent-consideration gain and the prior-year goodwill impairment.
- Whether Data and Analytics’ sequential recovery continues and translates into sustained year-over-year growth.
- Whether staffing demand, bill rates, consultant headcount, and talent availability support growth without margin erosion.
- Whether improved receivable collections and cash conversion persist, and whether the company maintains adequate revolver availability and covenant compliance.
- The sensitivity of results to major clients, especially CGI, and to client concentration and managed-service-provider pricing pressure.