Mastech Holdings, Inc. (Mastech Digital) — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The filing identifies the registrant as Mastech Holdings, Inc. The company provides IT staffing services; all revenue is from staffing, and it reports one operating segment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $29.305 million | $27.656 million | $56.365 million | $56.340 million |
| Gross profit / margin | $5.515 million / 18.8% | $5.106 million / 18.5% | $10.202 million / 18.1% | $10.331 million / 18.3% |
| Operating income | $619,000 | $1.419 million | $947,000 | $2.813 million |
| Net income | $382,000 | $893,000 | $577,000 | $1.762 million |
| Diluted EPS | $0.09 | $0.20 | $0.13 | $0.40 |
- Q2 revenue rose 6% year over year, including approximately 5% from the June 15 Hudson IT acquisition; organic growth was modest. Six-month revenue was essentially flat, while revenue excluding Hudson IT was down 2% year over year.
- Q2 gross margin improved 30 basis points, supported by higher margins on new assignments and Hudson IT. First-half margin fell 20 basis points, largely due to higher bench costs; wholesale margin was pressured by a lower-margin business mix and higher benefit costs.
- SG&A rose to $4.896 million in Q2 and $9.255 million in the first half, from $3.687 million and $7.518 million, respectively. Q2 included $549,000 of acquisition transaction costs; the first half included $599,000 of transaction costs and $305,000 of severance related to a sales-leadership change. Excluding transaction costs and severance, first-half SG&A was 14.8% of revenue, versus reported 16.4%.
Cash flow, balance sheet and financing
- First-half operating cash flow was $1.230 million, versus $888,000 in 2014. Investing cash outflow was $17.055 million, including $16.987 million for Hudson IT and $104,000 of capital expenditures. Financing provided $13.747 million. Cash declined from $2.568 million at year-end to $490,000.
- At June 30, total assets were $36.637 million, including $18.421 million of current assets; current liabilities were $10.992 million. Bank debt was approximately $13.9 million gross and $13.4 million net of cash. The balance sheet reports $1.8 million current and $12.072 million long-term debt. Revolver borrowings were $4.9 million, term-loan borrowings $9.0 million, and stated unused revolver capacity was $8.3 million.
- The amended PNC facility added a $9 million term loan, reduced revolving capacity from $20 million to $17 million, and extended the revolver to June 2018; the term loan matures in June 2020 and requires monthly principal payments beginning July 2015. The company reported covenant compliance at quarter-end.
- Management said operating cash, cash on hand and available borrowing capacity should fund operations and debt service for the next 12 months.
Acquisition, outlook and risks
- Mastech paid $17 million for Hudson IT, funded with $2.0 million of cash, a $9.0 million term loan and $5.987 million of revolver borrowing. Hudson contributed $1.3 million of revenue and approximately $0.1 million of net income after acquisition. The preliminary allocation included $8.567 million of identifiable intangible assets and $8.427 million of goodwill.
- Management described demand as solid in the first half but said recruitment remains difficult because skilled IT professionals are in short supply. New project assignments from integrator clients have disappointed. The company expects Hudson to increase retail-channel revenue and improve channel balance, while noting that wholesale generally has lower gross margins and managed-service-provider arrangements may pressure margins.
- Management expected acquired consultants’ bill rates to reduce the company’s average bill rate by approximately 6% in the next quarter. It also expected a temporary rise in days sales outstanding and working-capital needs in Q3 as Hudson client contracts were finalized and the seller retained working capital. No specific earnings or revenue guidance was provided.
- Customer concentration remains material: the top ten clients generated approximately 55% of Q2 revenue and 57% of first-half revenue; Accenture was 10.9% and 11.9%, respectively. The company cited general economic conditions, client concentration, staffing supply, and margin pressure as relevant business exposures.
- Ordinary-course lawsuits were not expected by management to materially affect financial position, results or cash flows. The filing reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Hudson IT’s post-acquisition revenue, profitability, integration progress and eventual impact on margins and cash generation.
- Whether organic staffing demand and billable headcount recover, particularly in the wholesale/integrator channel, and whether recruitment constraints persist.
- Actual Q3 bill-rate trends, DSO and working-capital usage compared with management’s expectations.
- Debt amortization, interest costs, borrowing-base availability and covenant headroom following the acquisition financing.
- Whether elevated SG&A, acquisition-related costs and severance subside, and how customer concentration affects future results.