Mastech Holdings, Inc. — Q2 2012 Form 10-Q
Business and period: The issuer named in the filing is Mastech Holdings, Inc. (the filing metadata identifies Mastech Digital, Inc.). The company provides IT and specialized healthcare staffing services. This unaudited report covers the quarter and six months ended June 30, 2012; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Revenue | $25.312 | $22.115 | $49.766 | $42.016 |
| Gross profit | $4.829 | $4.438 | $9.289 | $8.282 |
| Gross margin | 19.1% | 20.1% | 18.7% | 19.7% |
| Operating income | $0.771 | $0.621 | $1.367 | $0.687 |
| Net income | $0.458 | $0.382 | $0.810 | $0.419 |
| Diluted EPS | $0.14 | $0.10 | $0.24 | $0.11 |
| Cash flow from operations | — | — | $(1.532) | $(0.834) |
Q2 revenue rose about 14% year over year and net income about 20%; first-half revenue rose about 18% and net income about 93%. SG&A was $4.058 million in Q2 and $7.922 million in H1, respectively 16.0% and 15.9% of revenue, versus 17.3% and 18.1% a year earlier. Interest expense and foreign-exchange losses increased year over year. Effective tax rates were 37.9% for Q2 and 38.2% for H1.
Balance sheet, liquidity and capital
- At June 30, cash was $1.687 million, down from $5.755 million at December 31, 2011. Accounts receivable was $12.116 million and unbilled receivables $1.938 million.
- Total assets were $17.847 million; current liabilities and total liabilities were both $6.339 million. The balance sheet presents no debt balance. The company reported access to a PNC credit facility with $19 million maximum availability and a $15.3 million borrowing base at quarter-end.
- H1 operating cash use of $1.532 million reflected working-capital investment, principally receivables, alongside net income of $0.810 million. Investing cash use was $0.108 million.
- Financing cash use was $2.428 million, largely the $2.491 million share repurchase. In March, the company repurchased 429,886 shares at $5.79 per share, including transaction costs; no shares were repurchased in Q2. The program had 177,228 shares remaining and was scheduled to expire December 23, 2012.
Business trends and material changes
- Quarterly revenue growth reflected stronger demand, increased IT consultant headcount (587 at June 30 versus 530 a year earlier), and healthcare expansion. Retail IT revenue rose about 27%, specialized healthcare 24%, and wholesale IT 8% in Q2.
- Despite higher revenue and gross profit, gross margin fell 100 basis points year over year in Q2 and 100 basis points for H1. Management cited supply-side pricing pressure, consultant compensation rising faster than bill rates, lower ERP assignments, and mix shifting toward lower-margin channels. Healthcare margins improved.
- Top ten clients contributed 56% of revenue in both Q2 and H1, down from 61% and 60%, respectively, in the comparable 2011 periods. IBM, TEK Systems and Kaiser Permanente each exceeded 10% of H1 2012 revenue.
- Recruiting investment raised recruiting expense by approximately $0.3 million in Q2 and $0.4 million in H1 year over year. H1 2012 also included $0.120 million of severance costs tied to an executive leadership change.
Outlook, risks and contingencies
Management gave no quantified revenue or earnings guidance. It said activity had generally improved through the first half of 2012 but expressed growing concern about U.S. economic conditions and global uncertainty heading into the second half. It expected operating cash, existing cash and credit-facility access to meet business needs for the balance of 2012. Management warned that wholesale IT and managed-service-provider mix can pressure gross margins and that client concentration can make results diverge from broader economic trends.
The company entered Indian-rupee forward contracts in June to hedge expected recruitment-center expenditures. The contracts totaled $1.881 million, had a $0.005 million fair value, and produced a reported $0.004 million unrealized gain; they mature in monthly installments through June 2013. Management said ordinary-course lawsuits and administrative proceedings were not expected to have a material adverse effect. Risk factors were unchanged from the 2011 Form 10-K, and the filing reported no subsequent events.
Key facts for investors to verify
- Whether receivables and unbilled-receivable growth converts to cash; H1 operating cash flow was negative despite higher earnings.
- Whether margin pressure from pricing, ERP assignments and channel mix persists or reverses.
- Current credit-facility borrowings, availability and any applicable covenants; the filing states the borrowing base but does not clearly state facility usage or covenant headroom.
- Exposure to major customers and the effects of economic conditions on staffing demand.
- Execution and remaining capacity of the share-repurchase program, and the impact of repurchases on cash and shares outstanding.