Mastech Digital, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Mastech provides IT staffing and digital transformation services; results are reported as one operating segment. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $35.1 million | $33.6 million | $68.2 million | $65.3 million |
| Gross profit / margin | $7.1 million / 20.2% | $6.9 million / 20.5% | $13.3 million / 19.5% | $13.0 million / 19.9% |
| Operating income | $1.0 million | $1.7 million | $1.4 million | $1.8 million |
| Net income | $0.7 million | $0.9 million | $0.9 million | $1.0 million |
| Diluted EPS | $0.15 | $0.21 | $0.20 | $0.21 |
| SG&A | $6.1 million | $5.2 million | $11.9 million | $11.2 million |
Revenue grew 4.3% in Q2 and 4.4% in the first half, mainly from increased consultant headcount, partly offset by lower average bill rates. Q2 billable consultants totaled 968 versus 916 a year earlier; average bill rate was $73.77 per hour versus $75.23.
Wholesale revenue rose about 15% in Q2 and 12% in the first half, supported by stronger systems-integrator business. Retail revenue fell 11% in Q2 and 7% in the first half; weakness included managed-service-provider clients. Q2 wholesale gross margin improved to 18.8% from 18.2%, while retail margin declined to 22.4% from 23.3%. For the first half, wholesale margin was 17.9% versus 17.6%, and retail margin was 21.9% versus 22.9%.
Operating income and net income declined despite revenue growth. Higher SG&A reflected expanded sales and recruiting teams and $0.3 million of acquisition-related costs in the 2017 periods. First-half 2016 SG&A included $0.8 million of executive-transition severance charges. Lower 2017 tax expense benefited from a $0.155 million excess tax benefit related to stock awards; effective tax rates were 20.5% for Q2 and 25.1% for the first half, versus 38.0% in each 2016 comparison period.
Cash flow, balance sheet and debt
- First-half operating cash flow was $0.5 million, compared with cash used of $1.2 million in 2016. Working capital absorbed cash, including from higher receivables and unbilled receivables.
- Investing cash outflow was $0.4 million, mostly capital spending for a new cloud-based software package. Financing cash outflow was $0.3 million, including $0.9 million of term-loan repayments, partly offset by $0.6 million of net revolver borrowings.
- Cash at June 30 was $0.6 million. Current assets were $24.7 million and current liabilities $13.3 million. Accounts receivable was $16.6 million and unbilled receivables $5.9 million.
- Debt totaled $9.6 million: $4.2 million drawn on the revolver and $5.4 million on the term loan. The company reported $12.8 million of remaining revolver capacity and was in compliance with its credit-facility provisions. Net bank debt after cash was approximately $9.0 million.
- Days sales outstanding declined to 55 from 58 in the prior quarter. Management said cash, operating cash flow and available credit should cover business needs and debt service for the next 12 months, excluding acquisition activity.
Outlook, material developments and risks
No quantified earnings or revenue guidance is provided. Management described first-half business activity as solid but said recruiting remains challenging because of tight supply of skilled IT professionals. The company noted sensitivity to U.S. economic conditions, client prospects, staffing supply, pricing pressure from managed-service-provider arrangements and its wholesale/retail mix. It also cited client concentration: CGI represented 13.4% of Q2 revenue and 13.3% of first-half revenue; the top ten clients accounted for 49% and 48%, respectively.
After quarter-end, on July 13, 2017, Mastech completed its $55 million acquisition of the services division of InfoTrellis, a data-management and analytics consulting business. Consideration included $35.7 million cash at closing and $19.3 million deferred over two years, contingent on specified EBIT targets. Funding included a new $65 million PNC credit facility and a $6.0 million private placement of shares to the company’s founders and majority shareholders at $7.00 per share. The acquisition and financing were not reflected in the June 30 balance sheet. Management expects the acquisition to expand consulting and project-based digital-transformation services.
Management said ordinary-course legal proceedings are not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported. The company identified the forthcoming lease-accounting standard as expected to have a material impact on its financial condition and results of operations; the estimated lease commitments at June 30 were approximately $3.0 million.
Key facts for investors to verify
- Post-acquisition debt, leverage, interest costs and liquidity under the new $65 million facility, including how much capacity remains after the InfoTrellis transaction.
- InfoTrellis’s contribution to revenue and profitability, integration progress, and whether deferred consideration EBIT targets are achieved.
- Whether wholesale growth can offset continued retail weakness and margin pressure, while sustaining consultant hiring and placement growth.
- Customer concentration and exposure to major clients, particularly CGI and Accenture, and to skilled-worker availability and managed-service-provider pricing.
- The filing’s interest-rate-swap fair-value disclosures are not fully consistent in the supplied text; confirm the reported balance and related exposure in the filed financial statements.