Mastech Holdings, Inc. — Q2 2014 Form 10-Q
Filing identity: The supplied filing is for Mastech Holdings, Inc. (the company named in the filing), for the quarter ended June 30, 2014. The filing reports an IT staffing business; financial amounts below are in millions unless noted. Q2 refers to the three months ended June 30; H1 refers to the six months ended June 30.
Business context and reporting period
Mastech provides IT staffing services through wholesale IT, retail IT, and permanent placement/fee channels. It reports one operating segment. The healthcare staffing business was sold in August 2013 and is presented as discontinued operations; comparisons for 2013 are recast accordingly.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Revenue | $27.656 | $26.135 | $56.340 | $50.135 |
| Gross profit / margin | $5.106 / 18.5% | $4.973 / 19.0% | $10.331 / 18.3% | $9.344 / 18.6% |
| Operating income | $1.419 | $1.218 | $2.813 | $2.101 |
| Net income | $0.893 | $0.789 | $1.762 | $1.364 |
| Diluted EPS | $0.20 | $0.18 | $0.40 | $0.32 |
- Q2 revenue rose 6% year over year; H1 revenue rose 12%. Growth was driven principally by wholesale IT, up approximately 9% in Q2 and 18% in H1. Retail IT declined about 2% and 4%, respectively.
- Gross margin contracted 50 basis points in Q2 and 30 basis points in H1. Wholesale-channel margin pressure reflected lower margins on some new assignments and consultant compensation increases outpacing bill-rate increases; retail-channel margins improved.
- SG&A was $3.687 million in Q2 and $7.518 million in H1, respectively 13.3% of revenue in both periods, versus 14.4% in the comparable 2013 periods. Income tax rates were 37.7% for Q2 and 37.8% for H1.
- H1 operating cash flow was $0.888 million, versus cash used of $0.839 million in H1 2013. Investing cash use was $0.156 million and financing cash provided was $0.093 million. Cash increased to $1.249 million from $0.424 million at year-end 2013.
- At June 30, cash was $1.249 million and the company reported no outstanding debt and approximately $16.0 million of borrowing capacity under its then-existing credit facility. Current assets were $17.648 million and current liabilities $6.825 million.
Material changes and management commentary
- Billable consultants numbered 734 at June 30, compared with 716 a year earlier. Average Q2 bill rate was slightly lower year over year; H1 average bill rate was essentially flat. Headcount declined approximately 4% sequentially in Q2, partly because an early project termination reduced the consultant base by about 30.
- Management said activity levels during H1 2014 had stabilized at levels consistent with the second half of 2013. It noted that the business outlook is tied to U.S. economic conditions and the prospects of a limited number of clients.
- Wholesale IT has become a larger share of revenue and generally carries lower gross margins. Management also cited MSP cost-management practices as a potential source of retail-channel margin pressure.
- Client concentration increased: the top ten clients represented approximately 58% of Q2 revenue and 60% of H1 revenue, versus 56% and 57% a year earlier. Accenture and CGI each exceeded 10% of Q2 revenue.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management stated that cash, operating cash flows, and available credit were expected to fund business needs for the next 12 months.
- After quarter-end, on July 11, the company entered a three-year PNC facility providing up to $20 million, subject to borrowing-base terms and other reductions; it includes up to $1 million for letters of credit and up to $5 million for permitted acquisitions. An additional $10 million commitment increase is subject to bank approval.
- A new Pittsburgh headquarters lease signed April 2 replaces the existing lease in August 2014. It covers ten years, with aggregate lease payments of approximately $2 million, and may be terminated with a penalty at the end of year seven.
- Foreign-exchange exposure from Indian operations is hedged with rupee forward contracts. At June 30, contracts totaled $0.861 million and had a net unrealized gain of $0.061 million; they mature in monthly installments through December 2014.
- Management said ordinary-course litigation was not expected to materially adversely affect financial position, results, or cash flows. The company reported no material changes to previously disclosed risk factors and no material changes to critical accounting policies. It stated that it had no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the filing issuer: this document identifies Mastech Holdings, Inc., not Mastech Digital, Inc.
- Review the July 2014 PNC loan agreement for borrowing-base availability, covenants, mandatory prepayments, and terms applicable to acquisition borrowing.
- Track wholesale-channel mix and gross margins, as well as whether consultant pay increases can be matched by bill-rate increases.
- Assess client concentration and the revenue and staffing effects of the early project termination.
- Distinguish continuing operations from the disposed healthcare business when comparing historical periods; assess cash conversion and receivables/DSO alongside reported earnings.