Mastech Holdings, Inc. - Q1 2011 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Mastech Holdings, Inc. for the period ended March 31, 2011. Mastech is a provider of IT and specialized healthcare staffing services. The company operates through four sales channels: wholesale IT, retail IT, specialized healthcare, and permanent placements/fees. It reports as a single segment.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenues | $19.9 million | $15.7 million |
| Gross Profit | $3.8 million | $3.1 million |
| Gross Margin | 19.3% | 19.6% |
| Net Income | $37,000 | $63,000 |
| Diluted EPS | $0.01 | $0.02 |
| Cash and Equivalents | $4.8 million | $6.3 million |
| Operating Cash Flow | ($1.5 million) used | $0.3 million provided |
| Debt/Credit Facility | $0 outstanding; $10M revolving facility available | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 27% year-over-year, driven by a 21% increase in billable IT headcount (472 consultants vs. 389) and expansion in the healthcare business.
- Channel Mix: Wholesale IT revenue grew significantly (up 42% to $12.9M), while Retail IT remained flat ($5.0M). Healthcare revenue rose 31% to $1.9M.
- Profitability: Despite revenue growth, Net Income declined 41% to $37,000. Gross margin compressed by 30 basis points to 19.3% due to lower margins in the wholesale channel and higher bench costs.
- Expenses: Selling, General, and Administrative (SG&A) expenses increased 28% to $3.8 million, reflecting investments in sales/recruiting staff and $100,000 in severance costs related to recruitment leadership changes.
- Cash Flow: Operating cash flow turned negative ($1.5M used) compared to positive in the prior year, primarily due to a $1.3M increase in accounts receivable supporting revenue growth and a rise in Days Sales Outstanding (DSO) from 48 to 52 days.
Outlook, Risks, and Unusual Items
- Outlook: Management notes activity levels in Q1 2011 were consistent with Q4 2010. The outlook remains correlated to U.S. economic conditions. Management expects cash from operations and current balances to be adequate for 2011 needs, excluding acquisitions.
- Client Concentration: Revenue concentration increased. The top ten clients represented 60% of total revenue in Q1 2011 (vs. 53% in Q1 2010). Three clients exceeded 10% of revenue: IBM (16.1%), TEK Systems (11.4%), and Kaiser Permanente (10.3%).
- Margin Pressure: Management warns that a continued shift toward the wholesale channel and Managed Service Providers (MSPs) in the retail channel may lead to further declines in gross margins.
- Share Repurchase: The company repurchased 3,433 shares at an average price of $4.90 under a program authorized for up to 750,000 shares.
- Related Party: The company paid $210,000 to iGATE Global Solutions (affiliate of former parent) for offshore contractor services.
Investor Verification Checklist
- Verify the sustainability of the 27% revenue growth given the 30-basis point decline in gross margin.
- Monitor the Days Sales Outstanding (DSO) metric, which increased to 52 days, indicating potential collection delays from major clients.
- Assess the impact of client concentration, with the top 10 clients now accounting for 60% of revenue.
- Review the trend of SG&A expenses, which rose significantly due to staffing investments and severance, and their impact on operating leverage.
- Confirm the status of the $10 million revolving credit facility, which expires in October 2011, and plans for renewal.