Mastech Holdings, Inc. (identified in the request as Mastech Digital, Inc.) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015, compared with the three months ended March 31, 2014. The filing is under the name Mastech Holdings, Inc. The company provides U.S. IT staffing services and reports one operating segment.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $27.06 million | $28.68 million | Down 6% |
| Gross profit / margin | $4.69 million / 17.3% | $5.23 million / 18.2% | Down $0.54 million / 0.9 percentage points |
| SG&A | $4.36 million | $3.83 million | Up $0.53 million |
| Operating income | $0.33 million | $1.39 million | Down 76% |
| Net income | $0.20 million | $0.87 million | Down 78% |
| Diluted EPS | $0.04 | $0.20 | Down $0.16 |
| Operating cash flow | $0.37 million | Use of $1.56 million | Improved |
| Capital expenditures | $0.06 million | $0.02 million | — |
Revenue weakness reflected assignment endings in Q4 2014. Billable consultants were 726 versus 762 a year earlier; average bill rate rose approximately 1% to $74.45 per hour. Wholesale revenue fell about 7%, while retail revenue was flat. Wholesale gross margin declined to 16.1% from 17.6%; retail margin remained 19.9%.
Operating income was pressured by lower revenue and gross margin, plus higher SG&A. Q1 2015 SG&A included $305,000 of severance related to a sales leadership change; excluding that charge, SG&A was 15.0% of revenue versus 13.3% in Q1 2014. The effective tax rate was 37.3%, compared with 38.0%.
Liquidity, balance sheet, and cash flow
- At March 31, 2015, cash was $2.85 million; the company reported no outstanding bank debt and approximately $16.4 million of available borrowing capacity under its credit facility.
- Current assets were $19.36 million and current liabilities $7.40 million. Accounts receivable was $8.89 million and unbilled receivables $6.46 million.
- Operating cash flow was $0.37 million, supported by working-capital movements. Investing activities used $0.03 million. Financing activities used $0.06 million, including $0.20 million of treasury-stock purchases.
- Cash increased from $2.57 million at year-end 2014 to $2.85 million. Days sales outstanding declined to 51 days from 56 days a year earlier.
Outlook, developments, and risks
- Management said activity remained solid after some softness in early January, but recruitment remained challenging because of tight supply of skilled IT professionals. It stated that operating cash flow, cash on hand, and credit availability should be adequate to fund 2015 business needs; no specific earnings or revenue guidance was provided.
- Management cited lower assignment starts at integrator clients, compensation costs rising faster than bill rates on existing assignments, and higher bench and benefit costs. Wholesale and managed-service-provider business may pressure margins. Revenue concentration remains significant: the top ten clients generated approximately 59% of Q1 2015 revenue; Accenture accounted for 13%.
- After quarter-end, on May 11, 2015, the company announced an agreement to acquire Hudson Global’s IT staffing business for $17 million cash, expected to close in Q2 subject to customary conditions. Funding was expected from cash and borrowings under the existing facility.
- The company used rupee forward contracts to hedge certain expenses; outstanding contracts totaled approximately $1.54 million and had a reported unrealized loss of $12,000. Management said ordinary-course litigation was not expected to materially affect the company. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the Hudson acquisition closed as expected, its final funding mix, and its impact on debt, liquidity, and results.
- Whether consultant headcount and new assignment wins recover, especially among integrator clients, and whether bill rates keep pace with compensation costs.
- Whether the gross-margin decline and elevated SG&A, including the new Salesforce.com practice costs, persist.
- Client concentration and the filing’s share-repurchase disclosures: the notes describe repurchases under the program, while the quarterly repurchase table reports no shares purchased under the publicly announced plan.