Mastech Digital, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a stand-alone fourth-quarter filing. Mastech provides IT staffing, data and analytics consulting, and digital transformation services through its Data and Analytics Services and IT Staffing Services segments.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $177.2 million | $147.9 million |
| Gross profit / margin | $42.5 million / 24.0% | $31.6 million / 21.4% |
| Operating income | $11.6 million | $4.1 million |
| Income before taxes | $9.4 million | $2.9 million |
| Net income / diluted EPS | $6.7 million / $0.60 | $1.6 million / $0.16 |
| Cash from operating activities | $(0.5) million | $3.3 million |
| Cash and cash equivalents at year-end | $1.3 million | $2.5 million |
- Revenue grew 20%. Data and Analytics Services contributed $23.8 million; IT Staffing Services generated $153.4 million, up 11% organically.
- Gross margin rose to 24.0%, reflecting the higher-margin analytics segment and a 110-basis-point improvement in IT staffing gross margin. Segment gross margins were 44.0% for Data and Analytics and 20.9% for IT Staffing.
- Operating cash flow turned negative as operating working capital increased $9.9 million. Year-end DSO rose to 69 days from 58 days, which management attributed largely to billing and cash-conversion disruption during implementation of a cloud-based ERP system.
- At year-end, gross bank borrowings were approximately $39.1 million, including $25.5 million of term debt and $13.6 million drawn on the revolver. Approximately $9 million of revolver capacity remained; cash was $1.3 million. The balance sheet reported total liabilities of $58.3 million and equity of $34.3 million.
Material changes and unusual items
- Net income included an $11.1 million favorable, noncash reduction in the InfoTrellis contingent consideration liability, partly offset by a $9.7 million goodwill impairment charge related to InfoTrellis. The impairment reflected lower-than-expected revenue recovery, reduced near-term projections, and additional investment assumptions.
- These acquisition-related valuation items materially affect interpretation of reported operating expenses and earnings. The contingent consideration liability was $6.1 million at year-end, versus $17.1 million in 2017.
- Interest expense increased to $2.2 million from $1.1 million, mainly due to acquisition-related borrowing. The effective tax rate declined to 28.9% from 44.8%, primarily reflecting the lower federal tax rate and lower tax-reform transition charges.
- The company completed a two-for-one stock split in August 2018; historical share and per-share data were adjusted. No recurring dividend is paid.
- Fourth-quarter revenue was $44.6 million, gross profit $10.7 million, and net income $0.9 million, compared with $40.5 million, $9.5 million, and $0.9 million, respectively, in fourth-quarter 2017.
Outlook, risks, and contingencies
- Management said it was encouraged by domestic employment and economic conditions entering 2019, which it viewed as supportive of both businesses. It expected skilled-worker supply pressures to persist, particularly in IT staffing; no specific financial guidance was provided.
- Management expected working capital and DSO to move toward more normal levels during the first half of 2019 as ERP-related billing processes normalized. Continued growth could still require additional working capital.
- Key risks include competition and margin pressure from managed service providers and preferred-vendor arrangements; attracting and retaining skilled personnel; immigration and H-1B policy changes; economic sensitivity; and dependence on a concentrated client base. The top ten clients supplied 47% of 2018 revenue; CGI alone supplied 12.8% and represented 17.9% of year-end receivables. About 37% of the workforce used company-sponsored H-1B permits.
- Debt covenants restrict certain financial and operating actions. The company reported compliance at year-end and stated that cash generation and available credit were expected to fund needs for the next 12 months. Most assets secure the credit agreement; outstanding debt maturities include $25.0 million in 2022.
- Ordinary-course lawsuits and administrative proceedings were disclosed; management, after consulting counsel, did not expect their disposition to materially affect financial position, results, or cash flows. The 2015 federal tax return was under IRS audit.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether 2019 collections, DSO, and operating cash flow improved after the ERP implementation, and how much working capital growth absorbed cash.
- InfoTrellis revenue and earnings performance against acquisition assumptions, the remaining contingent consideration, and the basis for the goodwill impairment.
- Debt repayment capacity, covenant headroom, interest-rate exposure, and the availability of the stated revolver capacity.
- Client concentration and CGI receivable exposure, alongside the effect of MSP and preferred-vendor pricing on staffing margins.
- Recruiting capacity and the effect of H-1B policy, employee retention, and wage pressures on service delivery and profitability.