Mastech Digital, Inc. — Q1 2019 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Mastech provides data and analytics, digital transformation, and IT staffing services through its Data and Analytics Services and IT Staffing Services segments. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $45.2 | $43.3 | Up 4% |
| Gross profit / margin | $10.8 / 24.0% | $10.3 / 23.7% | Profit up $0.6; margin up 0.3 percentage points |
| SG&A | $9.0 | $7.8 | Up $1.2; 19.8% of revenue versus 18.1% |
| Operating income / margin | $1.9 / 4.1% | $2.4 / 5.6% | Down $0.6 |
| Net income | $1.0 | $1.4 | Down 30% |
| Diluted EPS | $0.09 | $0.12 | Down $0.03 |
| Operating cash flow | $1.1 | $(2.0) | Improved $3.1 |
Segments and drivers
- IT Staffing: Revenue was $39.4 million, up 7%. Billable consultants increased to 1,116 from 1,013, and average bill rate rose to $74.56 per hour from $73.34. Gross margin improved to 20.8% from 20.0%; segment operating income increased to $1.5 million from $1.4 million.
- Data and Analytics: Revenue was $5.8 million, down 12% year over year, following material project completions in the second half of 2018. Revenue increased approximately $0.4 million sequentially from Q4 2018 as activity and project wins strengthened. Gross margin improved to 45.5% from 44.3%, but segment operating income declined to $1.0 million from $1.8 million.
- Consolidated gross margin improved, but the stronger contribution from lower-margin staffing and lower Data and Analytics revenue weighed on mix. SG&A growth—including sales investment in Data and Analytics, recruiting and facility costs, bonuses, system upgrades, and stock compensation—more than offset gross-profit growth.
Cash, debt, and liquidity
- At March 31, cash was $1.5 million, total assets $98.7 million, current assets $41.9 million, current liabilities $25.4 million, and shareholders’ equity $35.4 million.
- Debt outstanding was approximately $38.6 million before cash, comprising $14.2 million drawn on the revolver and $24.4 million on the term loan. Management reported bank debt net of cash of approximately $37 million. The company had about $8.3 million of unused revolver capacity; reported long-term debt, net of financing costs, was $33.7 million, with $4.6 million classified as current.
- Operating cash flow was $1.1 million, versus cash use of $2.0 million in Q1 2018. Investing cash use was $0.4 million, mainly capital expenditures; financing cash use was $0.5 million, reflecting $1.1 million of term-loan repayments partly offset by $0.6 million of net revolver borrowings. Cash increased $0.3 million to $1.5 million.
- DSOs improved to 66 days from 69 at December 31, 2018, but management said the level remained high relative to historical averages, with ERP-related cash-conversion issues still being resolved. Management expects operating cash flow, cash on hand, and facility availability to cover business needs and debt service for the next 12 months.
Material changes, outlook, and risks
- Revenue growth was led by staffing; Data and Analytics remained below the prior-year quarter. Despite better gross margins, higher operating expenses and interest costs drove lower operating and net income.
- Management was encouraged by U.S. job-market and economic growth entering 2019, which it viewed as supportive of both segments. It also expected skilled-IT-worker supply pressures to persist, particularly in staffing. The filing gives no specific revenue or earnings guidance.
- Management noted that reliance on a limited number of customers can cause results to diverge from broader economic trends. CGI represented 11.9% of revenue, and the top ten clients represented approximately 46%. Greater use of managed service providers and staffing intermediaries may pressure staffing margins; recruiting constraints may limit growth.
- The company adopted lease accounting Topic 842 on January 1, 2019, recording a $5.7 million right-of-use asset and lease liability at adoption; the reported March 31 balances were $5.3 million each. Management said adoption had an immaterial effect on opening retained earnings and did not expect a material effect on future net earnings.
- A $6.1 million contingent-consideration liability was reclassified from long-term to current between December 31 and March 31; the filing’s balance sheet shows no change in its total amount. The company was in compliance with credit-facility provisions. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Data and Analytics project wins translate into sustained sequential growth and improved segment operating income.
- Whether staffing consultant growth and bill rates continue while recruiting supply constraints and customer/channel margin pressures are managed.
- Whether DSOs and ERP-related cash-conversion issues improve, and whether operating cash flow remains sufficient alongside low cash balances and debt service.
- The timing and funding of the $6.1 million contingent-consideration obligation, remaining revolver availability, and compliance with debt covenants.
- Customer concentration and the performance of the largest accounts; also, potential dilution from Q1 option grants, including grants contingent on shareholder approval.