Mastech Holdings, Inc. (Mastech Digital) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing identifies the registrant as Mastech Holdings, Inc. Amounts below are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Business context and results
The company provides IT staffing services, primarily in the United States, through wholesale, retail, and permanent-placement channels. It has one reportable segment. Year-over-year comparisons reflect the June 2015 acquisition of Hudson IT; management says organic revenue declined 7% in both the quarter and first half.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $33.629m | $29.305m | $65.343m | $56.365m |
| Gross profit / margin | $6.889m / 20.5% | $5.515m / 18.8% | $13.002m / 19.9% | $10.202m / 18.1% |
| Operating income | $1.664m | $0.619m | $1.799m | $0.947m |
| Net income | $0.945m | $0.382m | $0.956m | $0.577m |
| Diluted EPS | $0.21 | $0.09 | $0.21 | $0.13 |
Financial position, cash flow, and material changes
- For Q2, revenue rose 15% year over year, while gross margin improved 1.7 percentage points. Management attributed margin improvement to better margins on new assignments and a higher retail-channel mix. Retail revenue rose 70%, largely from Hudson IT; wholesale revenue fell 6%.
- For the first half, revenue increased 16%, gross margin improved 1.8 percentage points, and operating income rose to $1.799m from $0.947m. SG&A was $11.203m, or 17.1% of revenue, versus $9.255m, or 16.4%; first-half 2016 included $0.780m of severance costs related to executive leadership changes.
- Six-month operating cash flow was negative $1.244m, compared with positive $1.230m in 2015. Management attributed the 2016 use principally to a $2.9m increase in operating working capital, including receivables and unbilled receivables. Investing cash outflow was $0.040m; financing cash inflow was $1.171m. Cash declined $0.113m to $0.735m.
- At June 30, cash was $0.735m, current assets $24.505m, and current liabilities $12.832m. Total debt was approximately $13.713m ($1.800m current and $11.913m long-term); management reported net bank debt of $13.0m. Revolver borrowings were $6.5m, with $10.7m of unused capacity. The company was in compliance with its credit-facility covenants.
- Accounts receivable and unbilled receivables totaled $22.755m, up from $19.190m at year-end. DSO increased to 59 days from 57 days in the prior quarter; management said this was at the high end of its expected range.
- Hudson IT contributed $7.6m of Q2 revenue and approximately $0.4m of Q2 net income; first-half contribution was $14.3m revenue and approximately $0.7m net income. For context, pro forma first-half 2015 revenue including Hudson IT was $70.094m, versus $65.343m in first-half 2016.
Outlook, commentary, and risks
- No specific numerical revenue or earnings guidance is provided. Management described activity levels as solid in the first half, reported sequential Q2 revenue growth of 6%, a 62-consultant increase in the billable base during Q2, and an approximately 2% year-over-year increase in average bill rate to $75.23.
- Management cited continued recruitment challenges from limited availability of skilled IT professionals. It also noted dependence on a limited number of clients, potential gross-margin pressure from managed-service-provider arrangements, and sensitivity to U.S. economic conditions. Top ten clients accounted for 44% of Q2 revenue and 43% of first-half revenue.
- The company believes cash, operating cash generation, and available credit should fund business needs and debt service for the next 12 months. However, first-half operating cash flow was negative. The revolving facility is secured by substantially all company assets.
- Currency exposure remains through Indian recruitment operations; the company had no currency hedges outstanding in 2016. A $5m-notional interest-rate swap fixed the rate on part of the term borrowing; its June 30 fair-value liability was $66,000. Management estimated approximately $0.1m of pretax swap losses could be reclassified into earnings over the next 12 months.
- Ordinary-course lawsuits and administrative proceedings were not expected by management to have a material adverse effect. No material risk-factor changes were reported. The company expects adoption of the new lease standard to materially affect its consolidated financial condition and results of operations.
Investor verification points
- Assess how much reported growth depends on Hudson IT and track organic revenue, billable consultant headcount, and assignment wins.
- Monitor receivables, unbilled receivables, DSO, and conversion of earnings into operating cash flow.
- Review debt repayment, borrowing-base availability, covenant compliance, and the effect of interest rates.
- Evaluate whether gross-margin gains can persist alongside higher SG&A and the acquired business’s branch-cost structure.
- Track the effects of executive severance and other unusual costs, and verify the timing and impact of the new lease-accounting standard.