Mastech Holdings, Inc. (identified in request as Mastech Digital, Inc.) — Q1 2013 Form 10-Q
Business context and reporting period
The filing is for the three months ended March 31, 2013, compared with Q1 2012. Mastech provides IT and specialized healthcare staffing services and reports one combined segment. Financial statement amounts below are in U.S. dollars; unless noted, amounts are in thousands.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $27,005 | $24,454 |
| Gross profit / margin | $4,883 / 18.1% | $4,460 / 18.2% |
| Operating income / margin | $937 / 3.5% | $596 / 2.4% |
| Net income / diluted EPS | $575 / $0.17 | $352 / $0.10 |
| Operating cash flow | $(57) | $(486) |
| Cash at period end | $630 | $2,748 |
| Short-term borrowings | $2,666 | $2,610 at Dec. 31, 2012 |
Revenue grew about 10% year over year; net income increased about 63%. SG&A was $3,946, or 14.6% of revenue, versus $3,864, or 15.8%. Income tax expense was $349, with a 37.8% effective rate, compared with $221 and 38.6%. The company reported $9 of other comprehensive income from cash-flow hedges.
At March 31, total current assets were $17,100 and current liabilities were $10,568 (current ratio about 1.6); working capital was approximately $6.5 million. Accounts receivable was $9,761 and unbilled receivables were $5,932. Management reported $2.0 million of debt net of cash and approximately $13.2 million of available borrowing capacity under its credit facility. The cash-flow statement shows $2.666 million of short-term borrowings; the filing does not explain the difference between gross borrowings and management’s net-debt figure in this discussion.
Material changes and management commentary
- Wholesale IT revenue rose 16% to $17.8 million; retail IT declined about 5% to $6.2 million; specialized healthcare increased 15% to $3.0 million. Permanent placement revenue was insignificant.
- Billable IT consultants numbered 658 at quarter-end, versus 558 a year earlier; management said billable IT headcount grew about 4% during Q1, among its strongest first-quarter performances in the past decade.
- Gross margin slipped 0.1 percentage point. Healthcare margin fell 1.2 points to 16.6%, reflecting higher bench and project-startup costs; retail IT margin improved 0.4 point to 19.7%, and wholesale IT remained 17.6%.
- Operating cash use improved to $57 from $486, but growth in receivables and unbilled receivables continued to consume working capital. DSO was 52 days versus 51 days a year earlier.
Outlook, risks, contingencies, and unusual items
Management said activity levels remained solid in Q1 and expected operating cash flow, cash on hand, and credit availability to fund business needs for the balance of 2013. No quantitative earnings or revenue guidance was provided. Management described demand as correlated with U.S. economic conditions; it also cautioned that wholesale IT mix and the use of managed service providers may pressure margins.
Revenue concentration remains relevant: IBM was 10.7% of Q1 revenue, and the top ten clients represented about 52%, down from 57% in Q1 2012. Foreign-exchange risk related to Indian operations is hedged with forward contracts; outstanding contracts totaled $1.507 million and had a reported fair value of $47. Litigation and administrative proceedings arise in the ordinary course; management did not expect them to materially adversely affect the company. The filing reported no material change in previously disclosed risk factors.
No severance costs were incurred in Q1 2013; Q1 2012 included approximately $120 of severance related to an executive leadership change. Q1 2013 stock-based compensation was $95, versus $38 a year earlier. No share repurchases occurred in the quarter. Management reported effective disclosure controls and no subsequent events.
Important facts for investors to verify
- Whether receivables and unbilled receivables convert to cash as expected, given negative operating cash flow and the increase in unbilled receivables to $5.9 million.
- The reconciliation of $2.666 million in balance-sheet short-term borrowings to management’s stated $2.0 million of debt net of cash, and the terms and availability of the credit facility.
- Whether IT staffing growth is sustained and whether healthcare startup costs, MSP pricing, or channel mix further affect gross margins.
- Exposure to major clients and the status and accounting effects of currency hedges as contracts mature through December 2013.