Mastech Digital, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Mastech provides data and analytics, digital transformation, and IT staffing services through its Data and Analytics Services and IT Staffing Services segments. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $50.4 | $45.2 |
| Gross profit / margin | $12.7 / 25.2% | $10.8 / 24.0% |
| Operating income | $2.5 | $1.9 |
| Net income | $1.9 | $1.0 |
| Diluted EPS | $0.16 | $0.09 |
| Operating cash flow | $2.8 | $1.1 |
- Revenue increased 12% year over year. Data and Analytics Services revenue rose 28% to $7.4 million; IT Staffing Services rose 9% to $43.1 million.
- Gross margin expanded 120 basis points. Segment margins were 47.1% for Data and Analytics Services (up 160 basis points) and 21.5% for IT Staffing (up 70 basis points).
- SG&A increased to $10.2 million from $9.0 million, or 20.3% of revenue versus 19.8%. The filing cites increased investment and compensation, including higher stock-based compensation.
- Interest expense was $0.3 million versus $0.5 million. The effective tax rate was 16.9%, compared with 26.7%, primarily reflecting tax benefits from stock option exercises and restricted-share vesting.
- Operating cash flow improved to $2.8 million; investing activities used $0.1 million, and financing activities used $2.8 million, principally for debt repayments. Cash declined by $0.4 million to $2.6 million.
Balance sheet, debt, and liquidity
- At March 31, 2020, total assets were $89.8 million, total liabilities $41.0 million, and shareholders’ equity $48.8 million. Cash was $2.6 million; accounts receivable was $21.1 million and unbilled receivables $12.5 million.
- Credit-facility borrowings were $7.3 million on the revolver and $14.8 million on the term loan. Available revolver capacity was approximately $15.2 million. Management reported bank debt net of cash of $19.6 million and said available cash, operating cash flow, and facility capacity should cover business needs and debt service over the next 12 months.
- The company paid $1.1 million on the term loan and made $2.2 million of net revolver repayments during the quarter. A required additional $4.0 million term-loan payment was made in April 2020, after quarter-end.
- The company was in compliance with credit-facility covenants at March 31. Debt is secured by substantially all company assets. Accounts-receivable days sales outstanding were 60 days, described as toward the high end of the acceptable range.
Changes, outlook, and risks
- Management reported that COVID-19 adversely affected the business in March and expected a greater impact in Q2 2020, fiscal 2020, and beyond. The extent and duration were uncertain; some Data and Analytics pipeline opportunities had been deferred to the second half of 2020 or later. The filing provides no numerical revenue or earnings guidance.
- IT Staffing growth reflected more billable consultants on average and a higher average bill rate ($76.68 per hour versus $74.56). However, billable consultant headcount at quarter-end was 1,100, down from 1,116 a year earlier.
- Revenue concentration remained notable: the largest client, CGI, accounted for 12.7% of revenue versus 11.9% a year earlier; the top ten clients contributed approximately 46% in both periods. Management also identified economic conditions, client-specific performance, staffing demand, and competition for skilled IT professionals as factors affecting results.
- Other comprehensive loss was $0.3 million, including foreign-currency translation losses and interest-rate swap losses. The swap was a liability of $0.1 million at quarter-end. The company disclosed foreign-currency exposure and no current currency hedging activity.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. It reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting; disclosure controls were deemed effective.
Important facts for investors to verify
- How COVID-19 affected Q2 results, deferred project opportunities, billable consultant levels, and client demand after March 31.
- Whether the April $4.0 million term-loan payment, covenant requirements, and available borrowing capacity leave adequate liquidity as conditions evolve.
- Whether receivables and the 60-day DSO level convert to cash as expected, particularly given client and revenue concentration.
- The dilution and shareholder-approval implications of 800,000 stock-option grants, which were contingent on approval to increase the plan’s share authorization.