Mastech Holdings, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015, with fourth-quarter results included. The filing is by Mastech Holdings, Inc.; the request metadata names Mastech Digital, Inc. The company provides U.S.-focused IT staffing services and reports one operating segment.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $123.5 million | $113.5 million | +9% |
| Gross profit / gross margin | $23.8 million / 19.3% | $20.8 million / 18.3% | Margin +1.0 percentage point |
| Operating income | $4.7 million | $5.5 million | Down |
| Net income from continuing operations | $2.8 million | $3.4 million | Down 20% |
| Diluted EPS from continuing operations | $0.62 | $0.77 | Down |
| Operating cash flow | $3.0 million | $3.3 million | Down |
| Cash and cash equivalents at year-end | $0.8 million | $2.6 million | Down |
| Bank debt at year-end | $12.5 million | None reported | Acquisition financing |
Fourth-quarter 2015 revenue was $32.5 million, gross profit $6.7 million, and net income $1.3 million; fourth-quarter 2014 figures were $28.5 million, $5.2 million, and $0.8 million, respectively. Full-year S,G&A rose to $19.1 million from $15.2 million, including acquisition transaction costs, severance, acquired-intangible amortization, and investment in Salesforce.com and business development.
Business changes and comparison with prior year
- The June 15, 2015 acquisition of Hudson IT for approximately $17.0 million expanded the retail channel and added branch operations. Hudson IT contributed $15.9 million of revenue and approximately $0.8 million of net income from acquisition through year-end.
- Reported revenue increased, but management said organic revenue declined approximately 5%. Average hourly bill rate rose about 1%, to $74.68. Year-end billable consultants numbered 846, versus 731 a year earlier; excluding Hudson IT, the 2015 figure would have been 640.
- Wholesale revenue fell 6% to $82.5 million; retail revenue rose 59% to $40.5 million, largely reflecting Hudson IT. Wholesale represented 67% of revenue, compared with 77% in 2014.
- Top-ten-client concentration improved to 51% of revenue from 59%; no 2015 client exceeded 10% of revenue. Organic assignment activity remained pressured by tight supply of skilled IT professionals and fewer new projects from some integrator clients.
Liquidity, debt, outlook, and risks
- Operating working capital was $9.9 million. Year-end DSO increased to 53 days from 49, which management attributed largely to integrating Hudson IT client assignments. Management expected DSO to return to 50–52 days during 2016.
- Acquisition funding included a $9.0 million term loan and revolving borrowings. At year-end, term debt was $8.1 million and revolver debt $4.4 million; approximately $11 million of revolver capacity remained. The company reported compliance with facility covenants and said available cash, operating cash flow, and borrowing capacity should fund needs for the next 12 months.
- Management viewed job-market growth and a modestly expanding U.S. economy as supportive entering 2016, while warning that IT talent-supply constraints would continue. No specific numeric revenue or earnings guidance was provided.
- Key exposures include competition and pricing pressure, client contracts generally terminable without penalty, client and industry concentration, recruiting and retention, H-1B visa rules (about 49% of the U.S. workforce was on company-sponsored H-1B permits), MSP-related margin pressure, and execution and integration risks from Hudson IT. The company also cited currency, cybersecurity, litigation, healthcare-benefit, and operating risks.
- Subsequent events: CEO D. Kevin Horner resigned effective February 29, 2016; Vivek Gupta became CEO on March 1. The CIO ceased serving on March 11. The company did not hedge Indian rupee exposure for 2016.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether Hudson IT’s contribution and integration support sustainable growth, given the reported organic revenue decline.
- Whether staffing volumes, consultant availability, bill rates, and gross margins improve or remain constrained by talent supply and MSP pricing.
- Whether DSO returns to the expected historical range and working-capital needs remain manageable alongside low cash balances and acquisition debt.
- Debt repayment, borrowing-base availability, and continued compliance with PNC credit-facility covenants.
- Client concentration, H-1B workforce exposure, CEO transition, and any material developments in disclosed legal or other contingencies.