Mastech Digital, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Mastech provides digital transformation IT services through Data and Analytics Services and IT Staffing Services. The InfoTrellis acquisition, completed in July 2017, added the data and analytics segment, so year-over-year consolidated comparisons include acquired revenue in 2018 but not 2017.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $43.3 million | $33.1 million |
| Gross profit / margin | $10.3 million / 23.7% | $6.2 million / 18.8% |
| Operating income | $2.4 million | $0.4 million |
| Net income | $1.4 million | $0.2 million |
| Diluted EPS | $0.25 | $0.04 |
| Operating cash flow | $(2.0) million | $(3.3) million |
- Revenue grew 31% year over year, reflecting the InfoTrellis acquisition and 11% organic growth in IT staffing. IT staffing revenue was $36.8 million; acquired Data and Analytics revenue was $6.6 million.
- Gross margin increased 4.9 percentage points. Data and Analytics margin was 44.3%; IT Staffing margin was 20.0%, up from 18.8%. Management attributed the improvement to segment mix and better IT Staffing assignment margins.
- SG&A was $7.8 million, or 18.1% of revenue, versus $5.8 million, or 17.5%. Excluding acquired-intangible amortization, SG&A was 16.5% of revenue versus 16.9%.
- Interest expense rose to $0.47 million from $0.10 million, primarily due to acquisition-related borrowing. The effective tax rate was 28.4%, compared with 37.6%, reflecting the lower U.S. federal tax rate under the Tax Act.
Financial position and liquidity
- Cash was $1.3 million at March 31, down from $2.5 million at year-end. Operating cash outflow of $2.0 million reflected working-capital investment, including higher receivables and payments of prior-year variable compensation.
- Debt totaled approximately $39.2 million: $11.0 million outstanding on the revolver and $28.6 million on the term loan. Net of cash, bank debt was approximately $38 million. Revolver availability was about $13.5 million.
- Current assets were $35.7 million and current liabilities were $24.3 million. Accounts receivable days sales outstanding rose to 64 days from 58 days in the prior quarter; management expected improvement in Q2.
- Contingent consideration related to InfoTrellis was $17.1 million, including $6.1 million classified as current. Payments depend on acquired-business EBIT milestones.
- The company reported compliance with its credit-facility covenants at quarter-end and said cash, operating cash flow and available credit should be adequate for business needs and debt service over the next 12 months.
Changes, outlook and risks
- IT Staffing billable consultants increased to 1,013 from 893 a year earlier, while average bill rate declined to $73.34 per hour from $75.40; management said the rate had improved about $1 per hour sequentially from Q4 2017. Data and Analytics revenue grew nearly 30% sequentially for a second consecutive quarter, with new assignments booked.
- Management described market conditions as generally positive entering 2018, citing U.S. job growth and global economic expansion, but expected skilled-worker supply constraints to persist. No specific financial guidance was provided.
- Risks highlighted include dependence on a limited number of clients (one client represented 12.1% of Q1 revenue; the top ten represented about 45%), competition for skilled IT professionals, possible margin pressure from managed service provider arrangements, and sensitivity to economic conditions.
- On April 20, 2018, the company amended its credit agreement: revolving commitment decreased from $27.5 million to $22.5 million, with a conditional increase option; the swing-loan sublimit increased from $3.0 million to $5.0 million; and maximum leverage limits were raised through the quarter ending September 30, 2019. Management said the changes were intended to improve financial flexibility and cash management and reduce unused-line fees.
- The company adopted the new revenue-recognition standard in 2018 with no reported financial-statement impact. Accounting for the Tax Act remained provisional; no Q1 adjustments were made to prior estimates. Routine legal proceedings were not expected to have a material adverse effect. Disclosure controls were considered effective, except for the stated exclusion relating to the InfoTrellis acquisition.
Important facts for investors to verify
- How much of reported growth and margin improvement is attributable to InfoTrellis versus organic performance, particularly as comparable periods include the acquired business.
- Whether receivables, DSO and operating cash flow improve, and whether growth can be funded without materially higher borrowings.
- InfoTrellis EBIT performance against the contingent-consideration thresholds and the timing and funding of any payments.
- Whether bill rates, staffing margins and consultant availability improve or face continued pressure.
- The effect of the amended credit commitment and leverage covenants on borrowing capacity, covenant headroom and debt-service flexibility.