Mastech Holdings, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative figures are for Q1 2013. The filing identifies the registrant as Mastech Holdings, Inc. The business is a single-segment provider of IT staffing services.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $28.684 | $24.000 |
| Gross profit / margin | $5.225 / 18.2% | $4.371 / 18.2% |
| SG&A | $3.831 | $3.488 |
| Operating income | $1.394 | $0.883 |
| Continuing-operations net income | $0.869 | $0.544 |
| Net income, including discontinued operations | $0.869 | $0.575 |
| Diluted EPS | $0.20 | $0.13 total; $0.01 was discontinued operations |
| Cash from operating activities | $(1.561) | $(0.057) |
| Capital expenditures | $0.015 | $0.026 |
Changes and operating drivers
- Revenue rose 20% year over year, driven by higher demand, more billable consultants, and an approximately 1% increase in average bill rate to $73.78 per hour. Billable IT headcount was 762, up from 658 a year earlier.
- Wholesale IT revenue grew about 28% to $22.9 million; retail IT revenue declined about 5% to $5.8 million. Wholesale IT gross margin eased to 17.2% from 17.6%, while retail IT margin improved to 21.8% from 19.7%. Overall gross margin remained 18.2%.
- Operating income increased to $1.394 million from $0.883 million. SG&A declined as a share of revenue to 13.4% from 14.5%. Net income growth also reflects that the prior-year period included $31,000 from discontinued operations; the healthcare staffing business was sold in 2013.
- Operating cash flow was negative mainly because of a $2.6 million increase in operating working capital, including higher receivables associated with growth and higher days sales outstanding. DSO reached 56 days versus 52 days a year earlier.
Liquidity, debt, and other financial items
- At March 31, cash was $0.508 million, short-term borrowings were $1.632 million, and net debt after cash was approximately $1.1 million. The company reported about $15.0 million of remaining borrowing capacity under its credit facility.
- Current assets were $19.474 million and current liabilities were $9.551 million. The filing says cash, operating cash generation, and available credit were expected to be adequate for 2014 business needs.
- Financing activities provided $1.662 million, principally from short-term borrowings; the company also used $0.272 million for share repurchases/withholding-related share purchases and received $0.305 million in excess tax benefits related to equity awards.
- The effective income tax rate was 38.0%, versus 37.5%. Currency forward contracts hedged rupee-related exposures; their March 31 fair value was a $0.132 million asset, with $0.078 million of pretax gains expected to be reclassified into earnings within 12 months.
Outlook, risks, and unusual items
- No numerical earnings or revenue guidance was provided. Management described activity as solid in Q1 after some softness in early January and said it expected DSO to return to more normal levels in Q2.
- Management noted that demand is tied to U.S. economic conditions and the performance of a concentrated client base. The top ten clients generated approximately 61% of revenue, compared with 58% a year earlier; KPMG and Accenture each exceeded 10% of Q1 2014 revenue.
- Management cautioned that wholesale-channel growth and managed service provider arrangements can pressure margins. Q1 wholesale margin was affected by higher bench costs and consultant compensation rising faster than bill rates.
- On April 2, 2014, the company signed a ten-year Pittsburgh office lease for 11,495 usable square feet, replacing its existing headquarters lease in August 2014. Aggregate lease payments were described as approximately $2 million over the term; the lease may be terminated with a penalty at the end of year seven.
- The company reported ordinary-course lawsuits and administrative proceedings, but management, after consulting counsel, did not expect their disposition to materially adversely affect financial position, results, or cash flows. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Whether DSO and operating cash flow improved after the quarter, given the working-capital use of cash and reliance on borrowing capacity.
- Whether revenue growth remains concentrated in wholesale IT and a limited number of clients, and how that mix affects margins.
- The actual costs and obligations under the new headquarters lease, including its termination penalty and timing.
- How the $1.632 million short-term borrowing balance and reported credit-facility availability evolved after March 31.
- Whether currency hedge gains, tax-position changes, or legal contingencies had material subsequent effects; the filing provides no formal financial forecast.