Mastech Holdings, Inc. — Form 10-Q summary
Reporting period: Three and nine months ended September 30, 2013. The filing identifies the registrant as Mastech Holdings, Inc. The company provided IT staffing services; its healthcare staffing business was sold in August 2013 and is reported as discontinued operations. Unless noted otherwise, financial results below are for continuing operations. Dollar amounts are in millions, except per-share data.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $28.3 | $22.8 | $78.4 | $67.3 |
| Gross profit | $5.3 | $4.4 | $14.7 | $12.7 |
| Gross margin | 18.9% | 19.2% | 18.7% | 18.8% |
| Operating income | $1.7 | $0.9 | $3.8 | $2.1 |
| Income from continuing operations | $1.0 | $0.6 | $2.3 | $1.3 |
| Net income, including discontinued operations | $1.5 | $0.6 | $2.8 | $1.4 |
| Diluted EPS, total | $0.43 | $0.18 | $0.83 | $0.42 |
- Q3 revenue rose 24% year over year, while nine-month revenue rose 17%. Management attributed growth chiefly to stronger IT staffing demand and more billable consultants; IT billable headcount was 734 at quarter-end, up from 633 a year earlier.
- Wholesale IT revenue increased 37% in Q3 and 27% for nine months. Retail IT revenue declined about 8% in both comparisons. Wholesale’s larger share of sales contributed to lower overall gross margin.
- SG&A was $3.7 million in Q3 and $10.9 million for nine months, versus $3.5 million and $10.5 million, respectively. As a share of revenue, it decreased to 12.9% from 15.4% in Q3 and to 13.9% from 15.7% year to date.
- Continuing-operations effective tax rates were 38.0% for Q3 and 37.7% for nine months, versus 37.4% and 37.6% a year earlier.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $1.6 million at September 30, 2013, compared with $0.7 million at December 31, 2012. Current assets were $18.5 million and current liabilities $9.1 million.
- The company reported no outstanding debt at quarter-end and more than $15 million of borrowing capacity under its credit facility; it had $2.6 million of short-term borrowings at year-end 2012, repaid during the nine-month period.
- Nine-month cash from operating activities was $2.6 million overall, comprising $1.6 million from continuing operations and $1.0 million from discontinued operations. Continuing-operations operating cash flow was $0.1 million in the comparable 2012 period.
- Cash used in financing activities was $2.6 million, largely reflecting repayment of short-term borrowings. Investing cash flow was positive $0.9 million overall, including $1.0 million of proceeds from the healthcare business sale; continuing-operations capital expenditures were $0.1 million.
- Accounts receivable days sales outstanding improved to 50 days from 52 days in the prior quarter and 51 days a year earlier. Management said cash, operating cash generation and credit-facility access should cover business needs for the next 12 months.
Material changes, outlook and risks
- The August sale of the healthcare staffing business was for $1.15 million, consisting of $1.0 million cash consideration at closing plus assumption of certain liabilities. The transaction generated a $0.442 million after-tax gain in Q3 and year to date. Its assets, net of liabilities, retained by the company were $0.269 million at September 30 and were expected to be monetized within 12 months.
- Management said activity levels remained solid during the first nine months of 2013 and described the sale as a step toward focusing exclusively on IT staffing. No specific revenue or earnings guidance was provided.
- Management cautioned that results are sensitive to U.S. economic conditions and the prospects of major clients. The top ten clients represented 56% of Q3 revenue and 57% of nine-month revenue; Accenture alone accounted for 12.6% and 11.1%, respectively.
- Wholesale IT typically offers higher volume but lower gross margins. Management cited consultant compensation rising faster than bill rates at integrator clients and noted that managed-service-provider arrangements may pressure retail margins. Q3 wholesale gross margin fell 60 basis points year over year, while retail margin rose 140 basis points.
- Foreign-exchange exposure arises from Indian-based recruiting operations. The company had $2.32 million of rupee forward contracts outstanding, with a reported fair-value liability of $56,000; $71,000 of pretax hedge losses was expected to be reclassified into earnings within 12 months.
- Management noted that fourth-quarter holidays, vacations and assignment completions can affect utilization, benefits, revenue and gross profit. It also stated that ordinary-course legal proceedings were not expected to have a material adverse effect, and that there were no material changes to previously disclosed risk factors.
- Subsequent event: on October 30, the board approved a five-for-four stock split and a special cash dividend of $0.50 per post-split share. The dividend was scheduled for payment December 20, 2013; the filed financial statements do not reflect the split.
Key facts for investors to verify
- Compare continuing-operations growth with the reported increase in total net income: Q3 and nine-month net income include the $0.442 million after-tax sale gain.
- Track whether wholesale-led growth continues and whether wage and bill-rate movements, channel mix and MSP pricing affect gross margins.
- Monitor client concentration, especially Accenture, and the company’s ability to sustain billable headcount growth and improve retail-channel revenue.
- Check operating cash generation and working-capital needs, particularly receivables and unbilled receivables, alongside use of the credit facility.
- Confirm the execution and cash impact of the announced special dividend and stock split, and whether retained healthcare-business assets were monetized.