Mastech Holdings, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Mastech Holdings, Inc. The company provides IT and specialized healthcare staffing services.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2011 period.
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $25.629 | $23.489 | $75.395 | $65.505 |
| Gross profit / margin | $4.885 / 19.1% | $4.649 / 19.8% | $14.174 / 18.8% | $12.931 / 19.7% |
| Operating income / margin | $0.940 / 3.7% | $0.728 / 3.1% | $2.307 / 3.1% | $1.415 / 2.2% |
| Net income | $0.601 | $0.441 | $1.411 | $0.860 |
| Diluted EPS | $0.18 | $0.12 | $0.42 | $0.23 |
- Revenue grew 9% in Q3 and 15% for the first nine months. Management attributed growth mainly to increased demand and more billable consultants; IT billable headcount was 633 at quarter-end, up from 542 a year earlier.
- For Q3, wholesale IT revenue was $16.2 million, retail IT $6.5 million, specialized healthcare $2.8 million, and permanent placement/fees $0.1 million. Year-to-date amounts were $47.1 million, $20.0 million, $8.1 million, and $0.2 million, respectively.
- Gross margin declined despite higher gross profit. Management cited supply-side pricing pressure, shifts toward lower-margin channels, reduced ERP assignments, and weaker permanent-placement revenue. SG&A was $3.945 million in Q3 and $11.867 million year to date; as a share of revenue it declined to 15.4% and 15.7%, respectively.
- Income tax expense was $0.374 million in Q3 and $0.875 million year to date; effective tax rates were 38.4% and 38.3%.
Cash flow, liquidity, and balance sheet
- For the first nine months, operating cash flow was $0.037 million, versus cash used of $0.158 million in 2011. The filing attributes the limited cash generation to a $1.7 million working-capital increase, primarily supporting revenue growth. Capital expenditures were $0.126 million; financing cash outflow was $2.413 million, largely due to share repurchases.
- Cash was $3.253 million at September 30, 2012, down from $5.755 million at December 31, 2011. Current assets were $18.989 million and current liabilities $7.698 million. Receivables were $9.301 million and unbilled receivables $5.090 million.
- The company reported access to a PNC credit facility with $19 million maximum availability and a $15 million borrowing base at quarter-end. The filing does not provide a clear quarter-end outstanding borrowing balance. Management expected cash, operating cash generation, and facility access to fund needs over the next 12 months.
- Total liabilities were $7.698 million; shareholders’ equity was $12.251 million. No separate long-term debt balance is presented. DSO was 51 days, one day above the year-earlier level.
Material developments, outlook, and risks
- Wholesale IT and retail IT revenue grew, as did specialized healthcare revenue; permanent-placement revenue fell. IBM, TEK Systems, and Kaiser Permanente each represented more than 10% of nine-month revenue. The top ten clients generated 55% of year-to-date revenue, down from 58% in 2011.
- Management said activity had continued to trend upward through the first nine months of 2012, but flagged uncertainty in the global economy heading into Q4 2012 and 2013. No specific revenue or earnings guidance was provided. Management cautioned that wholesale and MSP mix may pressure gross margins; Q4 may also have lower utilization and higher benefit costs due to holidays and vacations.
- The company entered rupee forward contracts in June 2012 to hedge Indian recruitment-center expenditures. Contracts totaling $1.401 million had a reported fair value of $0.100 million and an unrealized gain of $0.075 million; management expected that gain to be reclassified into earnings within 12 months.
- The company repurchased 429,886 shares in a March 2012 tender offer at $5.79 per share, including transaction costs, and 6,140 shares in Q3 at an average $5.05. After quarter-end, the board extended the repurchase program through December 22, 2014 and added 250,000 authorized shares.
- Unrecognized tax benefits were $0.118 million; the company said approximately $0.025 million might be reduced over the next 12 months as statutes of limitation expire. Management stated ordinary-course lawsuits and administrative proceedings were not expected to materially harm financial position, results, or cash flows. No material risk-factor changes were reported.
Important facts for investors to verify
- Credit-facility borrowings, remaining borrowing capacity under the borrowing base, and applicable terms.
- Whether revenue growth can continue without further gross-margin deterioration from client mix, MSP pricing, and consultant compensation costs.
- Working-capital and unbilled-receivable trends, and conversion of reported earnings into operating cash flow.
- Client concentration and exposure to the largest accounts, alongside the pace of billable-headcount growth.
- Execution and cash impact of the expanded share-repurchase authorization, and the performance of the rupee hedges.