Mastech Holdings, Inc. (MHH) — 2014 Form 10-K
Business and period. The filing is for the fiscal year ended December 31, 2014, with quarterly information for Q4. The registrant is Mastech Holdings, Inc. (the metadata identifies the company as Mastech Digital). It provides U.S. IT staffing services; all revenue is from staffing. The healthcare staffing business, sold in August 2013, is reported as discontinued operations.
Key financial results
| Metric | FY 2014 | FY 2013 | Q4 2014 | Q4 2013 |
|---|---|---|---|---|
| Revenue | $113.5 million | $106.9 million | $28.5 million | $28.5 million |
| Gross profit | $20.8 million | $20.1 million | $5.2 million | $5.4 million |
| Gross margin | 18.3% | 18.8% | Not separately stated | Not separately stated |
| Income from continuing operations | $3.4 million | $3.3 million | $0.8 million | $1.0 million |
| Diluted EPS from continuing operations | $0.77 | $0.75 | $0.18 | $0.18 |
| Operating cash flow from continuing operations | $3.3 million | $1.9 million | Not provided | Not provided |
- Annual revenue rose about 6%; continuing-operations net income increased about 5%. Consolidated net income fell to $3.4 million from $3.8 million in 2013, which included a $0.4 million after-tax gain on the healthcare business sale.
- SG&A was $15.2 million, or 13.4% of revenue, versus $14.8 million, or 13.9%, in 2013. Operating income was $5.5 million versus $5.3 million.
- Wholesale revenue increased 6% to $87.6 million and represented 77% of total revenue; its gross margin declined to 17.0% from 18.1%. Retail revenue rose 7% to $25.5 million and its gross margin improved to 21.5% from 20.7%.
- Cash and cash equivalents were $2.6 million at year-end, compared with $0.4 million a year earlier. Total liabilities were $7.2 million; there were no borrowings outstanding. The PNC facility provides up to $20 million, with $16.9 million of unused availability at year-end, subject to borrowing-base limits and covenants.
- Operating working capital was $9.1 million, versus $8.4 million. Days sales outstanding were 49, compared with 48 at year-end 2013. Capital expenditures and deposits used $0.7 million in 2014. The company repurchased approximately $0.8 million of shares; it paid no recurring dividend.
Changes, outlook, and risks
- Revenue growth reflected a higher average billable consultant base, though year-end consultants declined to 731 from 742 and the average bill rate eased to $74.00 from $74.25. Management cited tight supply of skilled IT professionals as a constraint on assignment wins.
- Gross margin contracted by 50 basis points, principally because consultant compensation increases outpaced bill-rate increases, especially in wholesale. Management noted that wholesale mix and managed-service-provider arrangements can pressure margins.
- Management viewed a strengthening job market and growing U.S. economy as favorable entering 2015, but expected staffing-supply pressures to remain challenging. No specific revenue or earnings guidance was provided. The company expected 2015 capital expenditures and facility deposits of about $0.4 million and DSO of 48–52 days; it expected working-capital needs to rise if revenue grew.
- A technology center established in Q4 2014 was intended to assess high-demand skills and emerging technologies; management expected new practice areas to generate revenue during 2015.
- Key risks include client concentration (top ten clients were 59% of revenue; Accenture alone was 11.7%), contracts generally terminable without penalty, competition and pricing pressure, recruitment and retention, H-1B immigration rules, MSP-related margin pressure, and Indian rupee and operating risks. About 49% of the U.S. workforce worked under company-sponsored H-1B permits.
- Operating lease commitments totaled $3.4 million. The company disclosed ordinary-course lawsuits and administrative matters, but management did not expect them to materially affect financial position, results, or cash flows. It reported compliance with credit-facility covenants. The independent auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The auditor did not attest to internal controls.
Investor verification priorities
- Confirm whether revenue growth can continue while year-end consultant headcount and average bill rates soften, and track new assignment wins and utilization.
- Monitor gross-margin trends by channel, particularly wholesale compensation and bill-rate recovery and MSP economics.
- Assess client concentration and exposure to project termination, especially Accenture and the top ten accounts.
- Review cash conversion, receivables and working-capital requirements against growth, as well as borrowing-base availability and facility covenants.
- Track H-1B workforce exposure, recruiting capacity, and whether the new technology practices produce revenue as anticipated in 2015.