Mastech Digital, Inc. — Q1 2017 Form 10-Q
Business and period: Provider of IT staffing and digital transformation services, reporting for the three months ended March 31, 2017, compared with Q1 2016. All figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $33.1 | $31.7 | +4.4% |
| Gross profit / margin | $6.2 / 18.8% | $6.1 / 19.3% | Profit up; margin down 0.5 percentage points |
| Operating income | $0.403 | $0.135 | Improved |
| Net income | $0.201 | $0.011 | Improved |
| Diluted EPS | $0.04 | $0.00 | Improved |
| Operating cash flow | $(3.254) | $(2.873) | Greater cash use |
- Revenue growth reflected more billable consultants (893 versus 854) and a slightly higher average bill rate ($75.40 versus $74.80). Wholesale revenue rose about 9% to $20.8 million; retail revenue fell about 3% to $12.3 million. Placement fees were under $0.1 million in both periods.
- Gross margin pressure reflected higher self-insured benefit costs and weaker retail margins. Retail gross margin fell to 21.4% from 22.5%; wholesale margin was 16.9% in both periods.
- SG&A was $5.806 million, down from $5.978 million. Q1 2016 included $0.780 million of executive-severance costs; 2017 had none. Sales and recruiting expenses increased in 2017, including from staff expansion and higher India recruiting-center compensation.
- Cash from operations was negative, largely due to a $3.9 million working-capital increase, including higher receivables and lower accrued payroll. Investing used $0.043 million; financing provided $3.344 million, mainly net revolving-credit borrowings.
Financial position and liquidity
- At March 31, 2017, cash was $0.876 million, accounts receivable $18.704 million, unbilled receivables $4.673 million, and total assets $41.575 million. Accounts-receivable days sales outstanding remained 58 days.
- Balance-sheet debt was $13.280 million ($1.800 million current and $11.480 million long term); management reported $12.4 million of bank debt net of cash. Revolver borrowings were $7.4 million, with $9.6 million of unused capacity; term-loan borrowings were $5.9 million. The company said it was compliant with facility provisions.
- Management believes cash, operating cash flow and available credit should fund business needs and debt service for the next 12 months, excluding potential acquisitions.
Outlook, risks and other notable items
- No quantified revenue or earnings guidance was provided. Management described activity levels as solid in Q1 2017, while recruitment challenges from a tight supply of skilled IT professionals continued.
- Management noted sensitivity to U.S. economic conditions and key-client prospects. The top ten clients generated 47% of Q1 2017 revenue, versus 42% in Q1 2016; CGI alone accounted for 13%. Wholesale mix can weigh on margins, and MSP cost pressures may further pressure retail margins.
- The company had no currency-hedging program in 2017 and cited foreign-exchange exposure from its Indian recruitment operations. A $5 million-notional interest-rate swap hedged part of its variable-rate term debt.
- Operating lease commitments were approximately $3.2 million. Management expected adoption of the new lease accounting standard to materially affect financial condition and results of operations.
- Ordinary-course lawsuits and administrative proceedings were not expected by management to have a material adverse effect. No material changes to previously reported risk factors were disclosed. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether revenue and consultant growth continue, particularly in wholesale, and whether client concentration increases.
- Whether gross-margin pressure from benefit costs, retail/MSP mix and staffing constraints persists.
- Whether receivables and payroll timing normalize and operating cash flow improves without increased revolver borrowing.
- Available borrowing capacity, debt amortization and covenant compliance under the credit facility.
- The expected financial-statement impact and timing of lease-standard adoption, and any developments in legal or tax contingencies.