Mastech Digital, Inc. (filed as Mastech Holdings, Inc.) — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. The company provides IT and specialized healthcare staffing services.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $22.115 million | $16.920 million | $42.016 million | $32.637 million |
| Gross profit / margin | $4.438 million / 20.1% | $3.364 million / 19.9% | $8.282 million / 19.7% | $6.439 million / 19.7% |
| Operating income / margin | $0.621 million / 2.8% | $0.189 million / 1.1% | $0.687 million / 1.6% | $0.302 million / 0.9% |
| Net income | $0.382 million | $0.109 million | $0.419 million | $0.172 million |
| Diluted EPS | $0.10 | $0.03 | $0.11 | $0.05 |
- Q2 revenue grew 31% year over year, described by management as organic growth; first-half revenue increased 29%. Q2 billable IT headcount was 530, versus 407 a year earlier, and rose by 58 during the quarter.
- In Q2, wholesale IT revenue was $14.4 million, retail IT $5.5 million, healthcare $2.1 million, and permanent-placement fees $0.1 million. First-half revenue by channel was $27.4 million, $10.4 million, $4.0 million, and $0.2 million, respectively.
- Q2 SG&A was $3.817 million (17.3% of revenue), versus $3.175 million (18.8%) a year earlier. First-half SG&A was $7.595 million (18.1%), versus $6.137 million (18.8%).
- Cash and equivalents were $5.333 million at June 30, down from $6.334 million at December 31, 2010. Current assets were $17.819 million and current liabilities $5.804 million. Total liabilities were $5.804 million; the balance sheet reports no long-term liabilities or debt.
- First-half operating cash flow was negative $0.834 million, versus positive $0.012 million in 2010. The company attributed the use of cash mainly to a $1.3 million increase in operating working capital, including higher receivables supporting revenue growth. Investing cash use was $0.072 million; financing cash use was $0.095 million, largely share repurchases.
Material changes and management commentary
- Q2 gross margin edged up to 20.1%, reflecting stronger healthcare margins and higher placement fees, partly offset by weaker contract IT margins. First-half gross margin remained 19.7%: wholesale IT margin declined 70 basis points, while retail IT and healthcare margins improved.
- Healthcare revenue grew 55% in Q2 and 42% in the first half, which management attributed to expanded services and geographic reach. Wholesale IT revenue grew 35% in Q2 and 38% in the first half. First-half retail IT revenue increased 5%, as higher MSP demand was partly offset by lower end-user revenue.
- Management described first-half activity as improving at a modest and uneven pace. It said demand is tied to U.S. economic conditions and warned that wholesale-channel and managed-service-provider mix can pressure margins.
- The company expected cash on hand and operating cash generation to fund 2011 needs, excluding acquisitions and share repurchases. It had a $10 million revolving facility, with a $9.3 million borrowing base at June 30; the facility was due to expire October 15, 2011, and management intended to replace it on or before expiration. The filing does not state a clear outstanding borrowing balance.
- During the first half, the company incurred approximately $0.1 million in severance costs for recruitment-organization realignment, payable over the six months ending September 30, 2011. It repurchased 31,768 shares in the first half at an average $4.10 per share; 28,335 shares were repurchased in Q2 at an average $4.00.
Risks, contingencies, and other items
- Customer concentration increased: the top ten clients accounted for approximately 61% of Q2 revenue and 60% of first-half revenue, versus 56% and 54% in the comparable 2010 periods. IBM and TEK Systems each exceeded 10% of revenue in both periods.
- The company noted that a challenging U.S. job market and high unemployment could weigh on demand. Staffing results may also be affected by customer-specific conditions, pricing, channel mix, and seasonal reductions in billable hours and higher benefit costs in the fourth quarter.
- Management said ordinary-course lawsuits and administrative proceedings were not expected to have a material adverse effect. Lease commitments were reported as not materially changed from the 2010 annual report. No material changes to previously disclosed risk factors were reported.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No subsequent events were reported.
- No specific revenue, earnings, or margin guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to uncertainty.
Important facts for investors to verify
- Whether the revolving credit facility was renewed before its October 15, 2011 expiration, and the facility’s terms and actual utilization.
- Whether receivables and working-capital requirements continue to absorb cash as revenue grows, including the reported 50-day DSO at June 30.
- Whether customer concentration and channel mix—particularly wholesale IT and MSP business—affect revenue stability and gross margins.
- Whether healthcare expansion and the higher billable consultant count translate into sustained profitable growth, given increased sales and recruiting costs.
- The continuing impact of the share repurchase program and the remaining authorization of 718,232 shares at June 30, 2011.