Mastech Holdings, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The filing identifies the registrant as Mastech Holdings, Inc.; it describes an IT and specialized healthcare staffing business with one reportable segment.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $28.935 million | $25.312 million | $55.940 million | $49.766 million |
| Gross profit / margin | $5.456 million / 18.9% | $4.829 million / 19.1% | $10.339 million / 18.5% | $9.289 million / 18.7% |
| Operating income | $1.266 million | $0.771 million | $2.203 million | $1.367 million |
| Net income | $0.789 million | $0.458 million | $1.364 million | $0.810 million |
| Diluted EPS | $0.23 | $0.14 | $0.40 | $0.24 |
- Q2 revenue rose 14% year over year, primarily on stronger demand and higher billable IT consultant headcount: 716 at quarter-end versus 587 a year earlier. First-half revenue increased 12%.
- Wholesale IT drove growth: revenue increased 28% in Q2 and 22% for the first half. Retail IT revenue fell 13% and 9%, respectively; healthcare revenue grew 8% and 10%.
- SG&A was $4.190 million in Q2 and $8.136 million for the first half. As a share of revenue, it declined to 14.5% from 16.0% in Q2 and to 14.5% from 15.9% for the first half.
- Healthcare gross margin weakened, contributing to lower consolidated margins year over year. Retail IT margins improved; wholesale IT margins were flat.
Cash, debt and liquidity
- At June 30, cash was $0.616 million; short-term borrowings were $3.479 million. Management reported $2.9 million of debt net of cash and approximately $14 million of available borrowing capacity.
- First-half operating cash flow was negative $0.839 million, versus negative $1.562 million a year earlier. Higher receivables and unbilled receivables used $2.932 million of cash; management attributed the working-capital increase to revenue growth.
- Investing cash outflow was $0.071 million, mainly capital expenditures. Financing provided $0.867 million, largely from net short-term borrowings. Cash declined $0.043 million during the half.
- Total assets were $19.439 million and shareholders’ equity was $8.378 million at June 30, 2013. Accounts receivable DSO was 52 days, in line with the prior quarter.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management said first-half activity levels remained solid and expected cash from operations, cash on hand and credit-facility access to be adequate for business needs through the remainder of 2013.
- Management noted that demand is sensitive to U.S. economic conditions and major-client prospects. Wholesale IT generally has lower gross margins; greater use of managed service providers can pressure retail IT margins. The business also has seasonal utilization and benefit-cost patterns, particularly in the fourth quarter.
- On July 26, 2013, the company agreed to sell substantially all assets of its healthcare staffing segment for $1.15 million, comprising approximately $1.0 million cash at closing and assumption of certain liabilities. The sale excluded cash, receivables and other current assets totaling approximately $1.5 million, net of retained current liabilities. Closing was subject to customary conditions and expected in Q3 2013.
- Foreign-currency forward contracts hedged rupee-related expenditures; their June 30 fair value was a $56,000 liability and pretax losses of $82,000 were expected to be reclassified into earnings within 12 months. Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the healthcare asset sale closed on expected terms and how proceeds, assumed liabilities, and excluded working-capital assets were ultimately treated.
- Whether revenue growth converted into operating cash flow, given the first-half cash use and increased receivables.
- Whether healthcare margin pressure and lower retail IT revenue continued, and whether the wholesale-heavy mix affected consolidated margins.
- Client concentration: the top ten clients generated about 51% of first-half revenue; Accenture represented 10.1% of Q2 revenue.
- Corporate identity: this filing names Mastech Holdings, Inc., although the request metadata identifies Mastech Digital, Inc.