Mastech Holdings, Inc. — Q1 2012 Form 10-Q
Business and period: The filing is for the three months ended March 31, 2012; the registrant is identified in the filing as Mastech Holdings, Inc. It provides IT and specialized healthcare staffing services and reports one operating segment. All financial amounts below are in thousands of dollars except per-share data.
Financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $24,454 | $19,901 | Up 23% |
| Gross profit / margin | $4,460 / 18.2% | $3,844 / 19.3% | Profit up; margin down 1.1 percentage points |
| Operating income / margin | $596 / 2.4% | $66 / 0.3% | Improved |
| Net income | $352 | $37 | Up $315 |
| Diluted EPS | $0.10 | $0.01 | Up $0.09 |
| Cash from operations | $(449) | $(1,452) | Cash use narrowed |
| Capital expenditures | $(71) | $(22) | Cash use increased |
SG&A was $3,864, or 15.8% of revenue, versus $3,778, or 19.0%, a year earlier. The effective tax rate was 38.6%, compared with 37.3%.
Balance sheet and liquidity
- Cash and cash equivalents were $2,748 at March 31, down from $5,755 at December 31, 2011. Current assets were $17,077 and current liabilities $7,130; the current ratio was approximately 2.4.
- Total liabilities were $7,130, all classified as current; the balance sheet reports no separate debt balance. The PNC credit facility had $19 million maximum availability and a $14.1 million borrowing base. The filing does not clearly state the amount drawn.
- Operating cash use reflected a $0.9 million increase in operating working capital, including growth-related receivables. DSO was 51 days, versus 52 days one year earlier.
- Financing cash use was $2,487, principally the $2.5 million cash-funded repurchase of 429,886 shares at $5.79 per share. Ending cash decreased $3,007 from year-end.
Material changes and management commentary
- Revenue growth reflected stronger demand and more billable IT consultants: 558 at quarter-end versus 472 a year earlier. Wholesale IT revenue rose about 19%, retail IT 30%, and healthcare 37%; permanent placement/fee revenue declined about $0.1 million.
- Gross margin fell as revenue mix shifted toward lower-margin channels, supply-side pricing pressures increased, and permanent placement fees were lower. Retail IT margin fell 2.2 percentage points; wholesale IT fell 0.6 points, while healthcare improved 0.8 points.
- Management said activity levels had continued to trend upward in most technologies and sales channels through Q1, and expressed encouragement about U.S. job-market improvement while noting uncertainty in the global economy. It expected operating cash flow, cash on hand, and credit-facility access to fund business needs for the rest of 2012. No quantified earnings or revenue guidance was provided.
- Management cautioned that results are sensitive to U.S. economic conditions and major-client prospects. It noted that wholesale IT and managed-service-provider mix can pressure gross margins. IBM, TEK Systems, and Kaiser Permanente represented 14.7%, 10.6%, and 10.6% of revenue, respectively; the top ten clients represented about 57%.
Risks, contingencies and unusual items
- The company incurred approximately $120 of severance costs related to an executive leadership change, payable over the six months ending September 30, 2012; Q1 2011 included approximately $100 of severance costs.
- Ordinary-course lawsuits and administrative proceedings were disclosed; management, after consulting counsel, did not expect their disposition to materially adversely affect financial position, results, or cash flows. Lease commitments were said not to have materially changed from the 2011 Form 10-K.
- The company said there were no material changes to previously disclosed risk factors. Foreign-exchange exposure was described as not material; no currency hedges were in place. Seasonality is generally limited, although holidays and vacations affect billable hours and fourth-quarter utilization.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether subsequent operating cash generation and receivables collection offset the Q1 working-capital use and the large cash-funded repurchase.
- Actual borrowings, remaining availability, and terms under the PNC credit facility; the filing gives the borrowing base but not a clear drawn balance.
- Whether revenue growth can continue while restoring gross margin amid lower-margin channel mix, pricing pressure, and project completions.
- Exposure to major clients and the impact of changes in IBM, TEK Systems, Kaiser Permanente, and other top-client demand.
- Execution and cash implications of the repurchase: 429,886 shares were bought, leaving 177,228 shares under the announced plan.