Mastech Holdings, Inc. (Mastech Digital) — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 2, 2011. The filing identifies the registrant as Mastech Holdings, Inc. It provides IT and specialized healthcare staffing services and reports one operating segment.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $23.489 million | $18.869 million | $65.505 million | $51.506 million |
| Gross profit / margin | $4.649 million / 19.8% | $3.639 million / 19.3% | $12.931 million / 19.7% | $10.078 million / 19.6% |
| Operating income | $0.728 million | $0.329 million | $1.415 million | $0.631 million |
| Net income | $0.441 million | $0.187 million | $0.860 million | $0.359 million |
| Diluted EPS | $0.12 | $0.05 | $0.23 | $0.10 |
- Revenue grew 24% in Q3 and 27% for the first nine months year over year. Management attributed growth to stronger IT staffing demand and expansion of healthcare services geographically and by offering.
- For Q3, specialized healthcare revenue rose 70% year over year; wholesale IT rose about 19% and retail IT about 23%. For nine months, the respective increases were 52%, 31%, and about 11%.
- Q3 gross margin improved 0.5 percentage points, chiefly from healthcare margin expansion and higher permanent-placement activity. Nine-month margin improved 0.1 points; healthcare and placement gains were partly offset by weaker IT-channel margins.
- SG&A was $3.921 million in Q3 and $11.516 million for nine months, up from $3.310 million and $9.447 million, respectively. The increases reflected investments in sales, recruiting, and healthcare staffing; nine-month recruiting expense also included severance costs.
Cash flow, balance sheet, and liquidity
- Cash and equivalents were $5.614 million at September 30, 2011, versus $6.334 million at December 31, 2010. Total current assets were $19.314 million and current liabilities $7.122 million; total liabilities were $7.122 million.
- Operating cash flow was negative $0.158 million for the first nine months, versus negative $0.132 million in 2010. Increased receivables and unbilled receivables absorbed working capital. Investing cash flow was negative $0.102 million, primarily capital expenditures; financing cash flow was negative $0.460 million, largely share repurchases and credit-facility fees.
- The August 2011 three-year PNC facility provides a $15 million revolver and $4 million delayed-draw term loan. At quarter-end, borrowing availability was $13.8 million and borrowings were zero; the company reported compliance with covenants. The facility is secured by substantially all company assets.
- Accounts-receivable days sales outstanding were 50 days, unchanged from the prior quarter. Management expected cash on hand and operating cash flow to fund needs for the balance of 2011, excluding acquisitions and share repurchases.
Changes, outlook, and key risks
- Management described demand as improving modestly but unevenly during the first nine months of 2011, and cited a challenging U.S. job market as a concern for the remainder of 2011 and entry into 2012. No quantified revenue or earnings guidance was provided.
- Management warned that greater wholesale-channel mix and increased use of managed-service providers can pressure gross margins. Results also depend on a concentrated customer base: IBM represented 14.1% of Q3 revenue and TEK Systems 10.3%; the top ten clients represented 54% of Q3 revenue and 58% for the nine-month period.
- On October 10, 2011, after quarter-end, D. Kevin Horner was appointed CEO and granted 200,000 stock options. The company repurchased 77,070 shares during the first nine months under its 750,000-share program, at an average $4.11 per share.
- The company cited ordinary-course lawsuits and administrative proceedings but did not expect their resolution to materially affect financial position, results, or cash flows. It reported no material changes to previously disclosed risk factors and no material foreign-currency exposure or hedging.
Investor facts to verify
- Whether receivables and unbilled receivables convert to cash as expected, given negative operating cash flow and rising unbilled balances.
- Whether revenue growth persists and healthcare expansion continues to improve margins, while wholesale and MSP mix may weigh on profitability.
- Customer concentration and the outlook for IBM, TEK Systems, and the top ten clients.
- Credit-facility borrowing-base availability, covenant compliance, and terms before any borrowing, acquisition, or additional repurchases.
- Post-quarter CEO transition and option grant, and the pace and remaining authorization of the share-repurchase program.