Mastech Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing identifies the registrant as Mastech Holdings, Inc. (the request metadata names Mastech Digital, Inc.). Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
The company provides IT staffing services and reports one operating segment. Revenue is generated through wholesale IT staffing, retail IT staffing, and permanent placements. The healthcare staffing business sold in August 2013 is presented as discontinued operations.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $28.634 | $28.283 | $84.974 | $78.418 |
| Gross profit / margin | $5.227 / 18.3% | $5.335 / 18.9% | $15.558 / 18.3% | $14.679 / 18.7% |
| Operating income | $1.439 | $1.676 | $4.252 | $3.777 |
| Continuing-operations income | $0.879 | $0.999 | $2.641 | $2.308 |
| Net income, including discontinued operations | $0.879 | $1.480 | $2.641 | $2.844 |
| Diluted EPS | $0.20 | $0.34 | $0.59 | $0.66 |
- Q3 revenue rose about 1%; nine-month revenue rose about 8%. Nine-month wholesale IT revenue increased to $67.0 million from $60.0 million, while retail IT revenue declined to $17.8 million from $18.3 million.
- Q3 gross margin declined 60 basis points year over year; nine-month gross margin declined 40 basis points. Management attributed wholesale margin pressure to lower margins on new assignments and consultant pay increases exceeding bill-rate increases. Retail margins improved.
- SG&A was $3.788 million in Q3 (13.2% of revenue), versus $3.659 million (12.9%) a year earlier. For nine months, SG&A was $11.306 million (13.3%), versus $10.902 million (13.9%).
- Q3 net income fell from the prior year partly because Q3 2013 included $0.481 million of income from discontinued operations, including a $0.442 million after-tax sale gain. Nine-month 2013 net income likewise included $0.536 million from discontinued operations.
- For the nine months, operating cash flow was $2.816 million, versus $2.573 million; continuing-operations operating cash flow was $2.785 million, versus $1.594 million. Investing cash flow was negative $0.424 million and financing cash flow was negative $0.268 million. Capital spending increased primarily due to the headquarters move.
- At September 30, cash was $2.548 million, total liabilities were $8.194 million, and shareholders’ equity was $12.191 million. There were no outstanding borrowings; the company reported $17.4 million of unused availability under its credit facility. Current assets were $19.423 million and current liabilities $8.194 million.
Material changes, outlook, and risks
- Management said activity levels in the first nine months of 2014 were stable and broadly consistent with the second half of 2013. It provided no specific numerical earnings or revenue guidance.
- Billable consultants totaled 761 at quarter-end, compared with 734 a year earlier. Management cited higher demand and consultant placements, partly offset by lower average bill rates and an early project termination.
- The company entered a new three-year PNC credit agreement in July 2014, providing up to $20 million subject to borrowing-base limits and other terms. It was in covenant compliance at quarter-end.
- A new ten-year Pittsburgh-area office lease began in August 2014, with aggregate annual lease payments of approximately $2 million over the term; it may be terminated with a penalty after year seven.
- Customer concentration is notable: the top ten clients generated about 60% of revenue in both the quarter and nine-month period. Three clients each exceeded 10% of Q3 revenue.
- Management identified economic conditions, client concentration, wholesale-channel mix, and managed-service-provider pricing as relevant business risks. It also noted seasonal effects that generally reduce utilization and increase benefit costs in Q4.
- The company hedges Indian-rupee exposure with forward contracts. At September 30, the contracts covered 96 million rupees, with a reported net unrealized gain of $11,000; management disclosed sensitivity to currency-rate fluctuations.
- Ordinary-course lawsuits and administrative proceedings were not expected by management to have a material adverse effect. The filing reported no material changes to the risk factors in the 2013 Form 10-K.
- After quarter-end, the board extended the share repurchase program through December 22, 2016; approximately 495,000 shares remained available for repurchase.
Important facts for investors to verify
- Whether wholesale revenue growth can continue without further gross-margin erosion, especially as consultant compensation and client bill rates change.
- How the early project termination and customer concentration affect subsequent-quarter revenue and consultant utilization.
- Credit-facility borrowing-base availability, covenant compliance, and the company’s capacity to fund operations alongside lease and repurchase commitments.
- The cash-flow contribution from continuing operations and the effect of working-capital movements, particularly receivables.
- The distinction between continuing-operations results and prior-year discontinued-operation income when assessing year-over-year earnings.