Mastech Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. The filing identifies the registrant as Mastech Holdings, Inc. (the company name in the request is Mastech Digital, Inc.). The company provides IT staffing services and reports one operating segment.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $31.714 million | $27.060 million |
| Gross profit / margin | $6.113 million / 19.3% | $4.687 million / 17.3% |
| Operating income | $0.135 million | $0.328 million |
| Net income | $0.011 million | $0.195 million |
| Diluted EPS | $0.00 | $0.04 |
| Operating cash flow | $(2.873) million | $0.372 million |
- Revenue rose 17%, primarily due to the June 2015 Hudson IT acquisition; management said organic revenue declined 8%. Billable consultants totaled 854, up 128 year over year, including 206 acquired positions and an organic decline of 78. Average bill rate edged up to $74.80 from $74.45.
- Gross margin improved 200 basis points. Management attributed roughly half to higher margins on new assignments and half to the acquisition-related shift toward retail clients. Retail revenue increased 112% to $12.7 million; wholesale revenue declined 10% to $19.0 million.
- SG&A was $5.978 million, or 18.8% of revenue, versus $4.359 million, or 16.1%. The quarter included $0.780 million of severance charges, compared with $0.305 million a year earlier. Management cited Hudson IT’s higher-cost branch model as an additional factor.
- Interest expense increased to $0.116 million from $0.012 million, reflecting acquisition-related borrowings. Income tax expense was $0.006 million; the reported effective tax rate was 38.0%.
Liquidity, debt and cash flow
- At March 31, cash was $0.830 million and total debt was approximately $15.393 million, implying net debt of about $14.6 million. The balance sheet reported $1.800 million of current debt and $13.593 million of long-term debt.
- Revolving-credit borrowings were $7.7 million; term-loan borrowings were also $7.7 million. The company reported $9.1 million of unused revolving capacity and compliance with credit-facility provisions. Debt is secured by substantially all assets.
- Operating cash use of $2.873 million reflected a $3.0 million increase in operating working capital, including higher receivables. DSO rose to 57 days from 53 at year-end; management attributed roughly five days to extended payment terms agreed with two large, creditworthy clients. Financing provided $2.855 million, principally from net revolving borrowings. Investing cash flow was zero.
- Management said cash, operating cash generation and available credit were expected to be adequate for business needs and debt service over the next 12 months. Working capital was approximately $12.1 million.
Outlook, commentary and risks
- No specific financial guidance was provided. Management reported solid activity in Q1 2016 and an improved assignment win ratio and approximately 1% growth in the billable consultant base during the quarter, but recruitment remained constrained by tight supply of skilled IT professionals.
- Results depend on U.S. economic conditions and client demand. The company also warned that managed-service-provider arrangements may pressure retail margins and that wholesale activity typically carries lower margins.
- Client concentration improved: no client exceeded 10% of Q1 2016 revenue, versus Accenture at 13% in Q1 2015; the top ten clients represented 42% of revenue, down from 59%.
- CEO D. Kevin Horner resigned February 29, 2016; Vivek Gupta became CEO March 1. The company also reported the departure of its technology and information officer in March. Q1 severance related to executive-leadership changes.
- Ordinary-course lawsuits were not expected by management to have a material adverse effect. The filing reported no material change in previously disclosed risk factors and no off-balance-sheet arrangements. The company had no currency hedges outstanding; an interest-rate swap had a $0.061 million liability at quarter-end.
Important facts for investors to verify
- How much of revenue and gross-margin improvement is sustainable organically versus attributable to Hudson IT, given the 8% organic revenue decline and acquired business mix.
- Whether the Q1 working-capital outflow and higher DSO reverse, and whether the amended client payment terms affect cash conversion beyond the quarter.
- Whether the company can restore operating profitability after severance and acquisition-related costs while servicing its debt.
- The acquisition note attributes approximately $6.7 million of Q1 2016 revenue and $0.3 million of net income to Hudson IT, while consolidated net income was $0.011 million; clarify the basis and comparability of the stated Hudson net-income contribution.
- The filing’s registrant name is Mastech Holdings, Inc.; confirm the relationship to the company name supplied in the request.