Mastech Digital, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Mastech provides IT staffing and digital transformation services. Its two segments are IT Staffing Services and Data and Analytics Services, the latter acquired with InfoTrellis in July 2017.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $44.9 | $35.1 | $88.2 | $68.2 |
| Gross profit | $10.9 | $7.1 | $21.2 | $13.3 |
| Gross margin | 24.3% | 20.2% | 24.0% | 19.5% |
| Operating income | $4.5 | $1.0 | $6.9 | $1.4 |
| Net income | $2.8 | $0.7 | $4.2 | $0.9 |
| Diluted EPS | $0.51 | $0.15 | $0.76 | $0.20 |
- Revenue increased 28% in Q2 and 29% in the first half. Growth included InfoTrellis, which contributed $6.1 million of Q2 revenue and $12.7 million for the half; IT Staffing revenue grew 11% in both comparisons.
- IT Staffing gross margin was 21.4% in Q2 and 20.7% for the half, versus 20.2% and 19.5%. Data and Analytics gross margin was 42.2% in Q2 and 43.3% for the half. The consolidated margin increase reflects the higher-margin acquired business as well as improved IT Staffing margins.
- Q2 reported operating results included a $9.1 million credit from reducing the InfoTrellis contingent consideration liability and a $7.7 million goodwill impairment charge. The liability was reduced because management judged that payment conditions were unlikely to be fully met. The impairment reflected lower revenue recovery than initially expected and revised projections that included additional investment needs.
- First-half operating cash flow was negative $0.6 million, compared with positive $0.5 million in 2017. The company attributed the 2018 use primarily to a $5.5 million increase in operating working capital, including higher receivables supporting revenue growth. Investing cash flow was negative $0.6 million; financing cash flow was negative $0.5 million.
- Cash was $0.7 million at June 30, down from $2.5 million at year-end 2017. Total debt was approximately $37.8 million: $10.6 million drawn on the revolver and $27.6 million on the term loan. The company reported approximately $12 million of unused revolver capacity and about $37 million of bank debt net of cash.
- Current assets were $37.3 million and current liabilities $19.2 million. Days sales outstanding rose to 62 days, described as the high end of the company’s range; management expected improvement in Q3. Management believed cash, operating cash generation and available credit would cover business needs and debt service for the next 12 months.
Changes, outlook and risks
- Year-over-year comparisons are affected by the InfoTrellis acquisition: 2017 periods shown did not include the business. On a pro forma basis, first-half 2017 revenue would have been $78.5 million and net income $1.6 million, versus reported 2018 revenue of $88.2 million and net income of $4.2 million.
- Within Data and Analytics, Q2 revenue fell from $6.6 million in Q1 to $6.1 million as several projects ended; management nevertheless cited strong activity and new assignments. A fixed-price project cost overrun reduced Q2 segment margin by 260 basis points.
- IT Staffing billable consultants increased to 1,078 from 968 a year earlier, while the average bill rate declined to $72.85 per hour from $73.77. Management linked the rate decline to new assignment rates and the mix of deployed skill sets.
- Management described economic and market conditions as generally positive, while warning that skilled-worker supply constraints may persist. It also noted that client concentration and managed-service-provider purchasing models may affect results and pressure staffing margins. The filing gives no numerical revenue or earnings guidance.
- The company amended its credit agreement in April 2018, reducing the revolver commitment to $22.5 million (with potential increases subject to conditions), increasing the swing-loan sublimit to $5 million and relaxing the maximum leverage covenant through September 2019. It reported compliance with facility provisions at June 30.
- Top ten clients accounted for about 49% of Q2 revenue and 48% of first-half revenue. CGI represented 13.3% of Q2 and 12.7% of first-half revenue. The company reported no material changes to previously disclosed risk factors; it said ordinary-course litigation was not expected to have a material adverse effect.
- Other items: the Tax Act accounting remained provisional, with no adjustment in the first half; operating lease commitments were approximately $3.3 million. On July 24, the board declared a two-for-one stock split, expected to be distributed August 24, 2018.
Important facts for investors to verify
- Whether InfoTrellis can meet revised revenue and profitability expectations, and whether further goodwill impairment or contingent consideration remeasurement will be required.
- Whether receivables and 62-day DSO improve as management expected, supporting a return to positive operating cash flow.
- How much reported earnings growth reflects recurring segment performance versus the unusual contingent consideration credit and goodwill impairment.
- Debt repayment capacity, borrowing-base availability, interest costs and ongoing compliance with credit covenants.
- Whether staffing headcount growth can offset lower bill rates and persistent skilled-labor supply pressure, and whether client concentration or MSP practices affect margins.