|
MASTECH HOLDINGS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in conjunction with our audited
consolidated financial statements and accompanying notes included in our Annual
Report on Form 10-K for year ended December 31, 2011, filed with the Securities
and Exchange Commission ("SEC") on March 23, 2012.
This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, including
statements about future events, future performance, plans, strategies,
expectations, prospects, competitive environment and regulations.
Forward-looking statements include all statements that are not historical facts
and can be identified by the use of forward-looking terminology such as the
words, "may", "will", "expect", "anticipate", "believe", "estimate", "plan",
"intend" or the negative of these terms or similar expressions in this quarterly
report on Form 10-Q. We have based these forward-looking statements on our
current views with respect to future events and financial performance. Our
actual financial performance could differ materially from those projected in the
forward-looking statements due to the inherent uncertainty of estimates,
forecasts and projections and our financial performance may be better or worse
than anticipated. Given these uncertainties, you should not put undue reliance
on any forward-looking statements. All of the forward-looking statements are
qualified in their entirety by reference to the factors discussed under "Risk
Factors", "Forward-Looking Statements" and elsewhere in our 2011 Annual Report
on Form 10-K. Forward-looking statements represent our estimates and assumptions
only as of the date that they were made. We do not undertake any duty to update
forward-looking statements and the estimates and assumptions associated with
them, after the date of this quarterly report on Form 10-Q, except to the extent
required by applicable securities laws.
Website Access to SEC Reports:
The Company's website is www.mastech.com. The Company's 2011 Annual Report on
Form 10-K, current reports on Form 8-K and all other reports filed with the SEC,
are available free of charge on the Investor Relations page. The website is
updated as soon as reasonably practical after such reports are filed
electronically with the SEC.
Overview:
We are a domestic provider of IT and specialized healthcare staffing services.
From July 1986 through September 2008, we conducted our business as subsidiaries
of iGATE Corporation. We do not sell, lease or otherwise market computer
software or hardware, and 100% of our revenue is derived from the sale of
staffing services.
Our IT staffing business combines technical expertise with business process
experience to deliver a broad range of services within business intelligence /
data warehousing; web services; enterprise resource planning & customer resource
management; and eBusiness solutions. We provide our services across various
industry verticals including: automotive; consumer products; education;
financial services; government; healthcare; manufacturing; retail; technology;
telecommunications; transportation; and utilities. Our healthcare staffing unit
provides specialized healthcare professionals to hospitals and other healthcare
facilities.
The Company aggregates its IT and healthcare operating segments based on the
nature of services and, accordingly, has one reportable segment. Thus, no
segment related disclosures are presented. However, the Company tracks and
evaluates its revenues and gross profits by four distinct sales channels:
wholesale IT; retail IT; specialized healthcare and permanent placements / fees.
Our wholesale IT channel consists of system integrators and other IT staffing
firms with a need to supplement their abilities to attract highly-qualified
temporary technical computer personnel. Our retail IT channel focuses on clients
that are end-users of IT staffing services. Within the retail channel are
end-user clients that have retained a third party to provide vendor management
services, commonly known in the industry as Managed Service Providers ("MSP").
The specialized healthcare channel clients consist of hospitals and other
healthcare facilities that utilize our staffing professionals. Permanent
placement / fee revenues are incidental revenues derived as by-product
opportunities of conducting our core contract staffing business.
Critical Accounting Policies:
Derivative Instruments and Hedging Activities
The Company is exposed to foreign currency risks as a result of its Indian-based
global recruitment centers. During 2012, the Company's expenditures in Indian
rupees, in support of these operations, have increased significantly.
Accordingly, to mitigate and manage the risk of changes in foreign currency
exchange rates, the Company entered into foreign currency forward contracts in
June 2012. These forward contracts have been designated as cash flow hedging
instruments and qualified as effective hedges at inception under ASC Topic 815,
"Derivatives and Hedging". The Company does not enter into derivative contracts
for speculative purposes.
All derivatives are recognized on the balance sheet at fair value. The effective
portion of the changes in fair value on these instruments are recorded in other
comprehensive income (loss) and are reclassified into the Consolidated Statement
of Operations on the same line item and in the same period in which the
underlying hedge transaction affects earnings. Changes in the fair value of
14
--------------------------------------------------------------------------------
Table of Contents
these instruments deemed ineffective are recognized in the Consolidated
Statement of Operations as foreign exchange gains (losses). Forward points
(premiums/discounts) are excluded from the assessment of hedge effectiveness and
are recognized in the Consolidated Statement of Operations as foreign exchange
gains/(losses).
With respect to derivatives designated as hedges, the Company formally documents
all relationships between the hedging instruments and hedged items, as well as
its risk management objective and strategy for undertaking such transactions.
The Company evaluates hedge effectiveness at the time a contract is entered into
and on an ongoing basis. If a contract is deemed ineffective, the change in the
fair value of the derivative is recorded in the Consolidated Statement of
Operations as foreign exchange gain (loss).
Other Critical Accounting Policies
The Company's other significant accounting policies are described in Note 1.
"Significant Accounting Policies" of the notes to our audited Consolidated
Financial Statements, included in our 2011 Annual Report on Form 10-K.
Recent Developments:
On October 23, 2012, the Board of Directors approved the extension of the
Company's existing share repurchase program through December 22, 2014 and
increased the number of shares subject to the program by 250,000 shares. This
program was set to expire on December 22, 2012.
Economic Trends and Outlook:
Generally, our business outlook is highly correlated to general U.S. economic
conditions. During periods of increasing employment and economic expansion,
demand for our services tends to increase. Conversely, during periods of
contracting employment and / or a slowing domestic economy, demand for our
services tends to decline. As the economy slowed during the last half of 2007
and recessionary conditions emerged in 2008 and during much of 2009, we
experienced less demand for our staffing services. During the second half of
2009, we began to see signs of market stabilization and a modest pick-up in
activity levels within certain sales channels and technologies. In 2010, market
conditions continued to strengthen over the course of the year and activity
levels within most of our sales channels progressively improved. In 2011 and
during the first nine months of 2012, activity levels have continued to trend up
in most technologies and sales channels. Notwithstanding this recent trend, we
continue to have concerns about U.S. economic conditions due to lingering
uncertainties that exist in the global economy as we look towards the fourth
quarter of 2012 and into 2013.
In addition to tracking general U.S. economic conditions, a large portion of our
revenues are generated from a limited number of clients. Accordingly, our trends
and outlook are impacted by the prospects and well-being of these specific
clients. This "account concentration" factor may cause our results of operations
to deviate from the prevailing U.S. economic trends from time to time.
In recent years, a larger portion of our revenues have come from our wholesale
IT sales channel, which consists largely of strategic relationships with systems
integrators and other staffing organizations. This channel tends to carry lower
gross margins, but provides higher volume opportunities. Should this trend in
our business mix continue, it is likely that our overall gross margins will
decline. Within our retail sales channel, many larger users of IT staffing
services are employing MSP's to manage their contractor spending in an effort to
drive down overall costs. The impact of this shift towards the MSP model has
been lower gross margins. Should this trend towards utilizing the MSP model
continue, it is likely that our gross margins will decline in the future.
Results of Operations for the Three Months Ended September 30, 2012 as Compared
to the Three Months Ended September 30, 2011:
Revenues:
Revenues for the three months ended September 30, 2012 totaled $25.6 million,
compared to $23.5 million for the corresponding three month period in 2011. This
9% year-over-year revenue increase largely reflects a higher demand for our
services and the corresponding increase in IT billable consultants during the
2012 period, as well as the expansion of our healthcare business. Billable IT
headcount at September 30, 2012 totaled 633 consultants compared to 542
consultants, a year earlier. For the three-month period ended September 30, 2012
our billable IT headcount increased by 46-consultants or an increase of
approximately 8%.
15
--------------------------------------------------------------------------------
Table of Contents
Below is a tabular presentation of revenues by sales channel for the three
months ended September 30, 2012 and 2011:
Three months Three months
ended ended
Revenues (Amounts in millions) September 30, 2012 September 30, 2011
Wholesale IT Channel $ 16.2 $ 15.0
Retail IT Channel 6.5 5.9
Specialized Healthcare 2.8 2.4
Permanent Placements / Fees 0.1 0.2
Total revenues $ 25.6 $ 23.5
Revenues from our wholesale IT channel increased approximately 8% during the
three month period ended September 30, 2012 compared to the corresponding 2011
period. Higher revenue levels from staffing clients (up 28%) were driven by
stronger demand for IT services. Partially offsetting this increase were lower
integrator client revenues (down 6%) as lower levels of new ERP assignments have
impacted this channel's performance in 2012. Retail IT channel revenues were up
approximately 10% during the three months ended September 30, 2012 compared to
the period a year earlier due to higher demand at many of our MSP clients.
Specialized healthcare revenues increased by 17% for the three month 2012 period
compared to the corresponding 2011 period. This improvement largely reflects the
expansion of our therapy service offerings during the current year. Permanent
placement / fee revenues were approximately $0.1 million down from revenues
generated a year earlier.
During the three months ended September 30, 2012, we had three clients that
represented more than 10% of total revenues (TEK Systems = 10.9%; IBM = 10.2%;
and Kaiser Permanente = 10.3%). During the three months ended September 30,
2011, we had two clients that represented more than 10% of total revenue (IBM =
14.1% and TEK Systems = 10.3%). During the 2012 period, our top ten clients
represented approximately 54% of total revenues compared to 54% of total
revenues in the corresponding 2011 period.
Gross Margin:
Gross profits in the third quarter of 2012 totaled $4.9 million, or
approximately $0.2 million higher than the third quarter of 2011. Gross profit
as a percentage of revenue was 19.1% in the three-month period ending
September 30, 2012, which was in-line with the results for the second quarter
2012. However, these margins were below the 19.8% achieved during the
corresponding three month period ending September 30, 2011. The gross margin
decline from a year earlier reflected supply-side pricing pressures within
certain technologies, a revenue shift towards our lower margin sales channels
and lower ERP and permanent placement revenues.
Below is a tabular presentation of gross margin by sales channel for the three
months ended September 30, 2012 and 2011:
Three months Three months
ended ended
Gross Margin September 30, 2012 September 30, 2011
Wholesale IT Channel 18.7 % 18.9 %
Retail IT Channel 19.4 19.8
Specialized Healthcare 17.7 20.1
Permanent Placements / Fees 100.0 100.0
Total gross margin 19.1 % 19.8 %
Wholesale IT channel gross margins declined by 20 basis points for the three
months ended September 30, 2012 compared to the corresponding 2011 period. This
decline largely reflected lower margins at our staffing clients as consultant
compensation increases on existing assignments exceeded our ability to secure
bill rate increases. Additionally, a lower level of ERP assignments at our
integrator clients also impacted margins. Retail IT gross margins were down 40
basis points during the three months ended September 30, 2012 compared to 2011,
due to supply-side pricing pressures and an unfavorable mix of business between
direct end-user and MSP clients. Specialized healthcare gross margins declined
by 240 basis points in the 2012 period compared to a year earlier. This decline
reflects pricing pressures from MSP clients and an unfavorable mix of business
related to the Company's healthcare service offerings during the 2012 quarter.
Selling, General and Administrative ("SG&A") Expenses:
SG&A expenses for the three months ended September 30, 2012 totaled $3.9 million
or 15.4% of revenues, compared to $3.9 million or 16.7% of revenues for the
three months ended September 30, 2011. Our level of SG&A spend in the current
quarter was $0.1 million less than in the previous quarter ended June 30, 2012,
as selling expenses declined. This decline should be viewed as temporary given
our plans to expand the sales organization over the next several quarters.
Fluctuations within SG&A expense components during the 2012 period compared to a
year earlier included the following:
• Sales expense was lower by $0.2 million in the 2012 period compared to
2011 due to lower sales leadership expenses.
16
--------------------------------------------------------------------------------
Table of Contents
• Recruiting expense was up in the 2012 period by $0.2 million due to an
increase in recruiting staff and higher visa processing/job board fees.
• General and administrative expense in 2012 was in-line with expenses a
year earlier.
Other Income / (Expense) Components:
Other Income / (Expense) for the three months ended September 30, 2012 consisted
of interest expense of $17,000; and foreign exchange gains of $52,000. For the
three months ended September 30, 2011, Other Income / (Expense) consisted of
interest expense of $9,000, foreign exchange losses of $6,000 and a $3,000 loss
related to the closure of a joint venture. The higher interest expense in the
2012 period largely reflects the amortization of deferred financing costs
related to our August 31, 2011 amended credit facility with PNC Bank. The
foreign exchange gains reflect a $30,000 gain on our foreign currency forward
contracts and gains related to the strengthening of the Indian rupee against the
U. S. Dollar during the three-months ended September 30, 2012.
Income Tax Expense:
Income tax expense for the three months ended September 30, 2012 totaled
$374,000 representing an effective tax rate on pre-tax income of 38.4%, compared
to $269,000 for the three months ended September 30, 2011, which represented a
37.9% effective tax rate on pre-tax income.
Results of Operations for the Nine Months Ended September 30, 2012 as Compared
to the Nine Months Ended September 30, 2011:
Revenues:
Revenues for the nine months ended September 30, 2012 totaled $75.4 million,
compared to $65.5 million for the corresponding nine month period in 2011. This
15% year-over-year revenue increase largely reflects a higher demand for our
services and the corresponding increase in billable consultants during the 2012
period.
Below is a tabular presentation of revenues by sales channel for the nine months
ended September 30, 2012 and 2011:
Nine months Nine months
ended ended
Revenues (Amounts in millions) September 30, 2012 September 30, 2011
Wholesale IT Channel $ 47.1 $ 42.4
Retail IT Channel 20.0 16.4
Specialized Healthcare 8.1 6.3
Permanent Placements / Fees 0.2 0.4
Total revenues $ 75.4 $ 65.5
Revenues from our wholesale IT channel increased approximately 11% during the
nine month period ended September 30, 2012 compared to the corresponding 2011
period. Higher revenue levels from staffing clients (up 30%) were driven by
stronger demand for IT services. During the 2012 period, lower levels of new ERP
assignments have impacted the growth of our integrator business which was flat
when compared to the 2011 period. Retail IT channel revenues were up
approximately 22% during the nine months ended September 30, 2012 compared to
the period a year earlier. This increase came from higher demand at many of our
MSP clients. Specialized healthcare revenues increased by 29% for the nine month
2012 period compared to the corresponding 2011 period. This improvement
reflected an expansion of our service offerings and the geographies in which we
market such services. Permanent placement / fee revenues were approximately $0.2
million below those revenues generated a year earlier.
During the nine months ended September 30, 2012, we had three clients that
represented more than 10% of total revenues (IBM = 12.0%; TEK Systems 10.9%, and
Kaiser Permanente = 10.7%) During the nine months ended September 30, 2011, we
had two clients that represented more than 10% of total revenue (IBM = 14.8% and
TEK Systems = 11.0%). During the 2012 period, our top ten clients represented
approximately 55% of total revenues compared to 58% of total revenues in the
corresponding 2011 period.
Gross Margin:
Gross profits in the first nine months of 2012 totaled $14.2 million, or
approximately $1.2 million higher than during the first nine months of 2011.
Gross profit as a percentage of revenue declined to 18.8% in the nine-month
period ending September 30, 2012 from the 19.7% reported in the corresponding
2011 period. This reduction in gross margin reflected supply-side pricing
pressures within certain technologies, a revenue shift towards our lower margin
sales channels, and lower ERP and permanent placements revenues in the 2012
period.
17
--------------------------------------------------------------------------------
Table of Contents
Below is a tabular presentation of gross margin by sales channel for the nine
months ended September 30, 2012 and 2011:
Nine months Nine months
ended ended
Gross Margin September 30, 2012 September 30, 2011
Wholesale IT Channel 18.2 % 18.8 %
Retail IT Channel 19.4 20.5
Specialized Healthcare 18.1 18.7
Permanent Placements / Fees 100.0 100.0
Total gross margin 18.8 % 19.7 %
Wholesale IT channel gross margins declined by 60 basis points for the nine
months ended September 30, 2012 compared to the corresponding 2011 period. This
decline was due to lower levels of ERP assignments and consultant compensation
increases, in excess of bill rate increases, on existing projects in the 2012
period. Retail IT gross margins were down 110 basis points during the nine
months ended September 30, 2012 compared to 2011, due to supply-side pricing
pressures and an unfavorable mix of business between direct end-user and MSP
clients. Specialized healthcare gross margins declined by 60 basis points in the
2012 period compared to a year earlier, largely due to an unfavorable mix of
business (service offerings) and pricing pressures from MSP clients during the
third quarter of 2012.
Selling, General and Administrative ("SG&A") Expenses:
SG&A expenses for the nine months ended September 30, 2012 totaled $11.9 million
or 15.7% of revenues, compared to $11.5 million or 17.6% of revenues for the
nine months ended September 30, 2011. The increase in SG&A expenses largely
reflected investments made to our recruiting organization, particularly during
the first six months of 2012. Fluctuations within SG&A expense components during
the 2012 period compared to a year earlier included the following:
• Sales expense was down $0.3 million in the 2012 period compared to 2011,
largely due to lower sales leadership expenses.
• Recruiting expense was up in the 2012 period by $0.7 million due to an
increase in recruiting staff, higher visa processing / job board fees and
expenditures made in connection with process improvement initiatives.
• General and administrative expense in 2012 was in-line with expenses
incurred a year earlier. Both the 2012 and 2011 periods included
approximately $0.1 million of severance expense related to sales and
recruitment leadership changes.
Other Income / (Expense) Components:
Other Income / (Expense) for the nine months ended September 30, 2012 consisted
of interest expense of $ 50,000; and foreign exchange gains of $29,000. For the
nine months ended September 30, 2011, Other Income / (Expense) consisted of
interest expense of $21,000, foreign exchange losses of $6,000 and a $5,000 loss
related to the closure of a joint venture. The higher interest expense in the
2012 period largely reflects the amortization of deferred financing costs
related to our August 31, 2011 amended credit facility with PNC Bank. The
foreign exchange gains reflect a $30,000 gain related to our currency forward
contracts used to hedge currency fluctuations in the Indian Rupee.
Income Tax Expense:
Income tax expense for the nine months ended September 30, 2012 totaled
$875,000, representing an effective tax rate on pre-tax income of 38.3%,
compared to $523,000 for the nine months ended September 30, 2011, which
represented a 37.8% effective tax rate on pre-tax income.
Liquidity and Capital Resources:
Financial Conditions and Liquidity:
At September 30, 2012, we had $3.3 million of cash and equivalents on hand. In
addition to our cash balances, we have access to a credit facility with PNC
Bank, N.A. with $19 million of maximum availability, under which our borrowing
base was $15.0 million as of September 30, 2012.
Historically, we have funded our business needs with cash generated from
operating activities. Controlling our operating working capital levels by
closely managing our accounts receivable balance is an important element of cash
generation. At September 30, 2012, our accounts receivable "days sales
outstanding" ("DSO's") measurement was 51-days, which was 1-day higher than our
DSO's of a year ago. We expect cash provided by operating activities, cash
balances on hand and access to capital under our existing credit facility to be
adequate to fund our business needs over the next 12-months.
18
--------------------------------------------------------------------------------
Table of Contents
Cash flows provided by (used in) operating activities:
Cash provided by operating activities for the nine months ended September 30,
2012 totaled $37,000 compared to cash used of ($0.2 million) during the nine
months ended September 30, 2011. Elements of cash flows during the 2012 period
were net income of $1.4 million, non-cash charges of $0.3 million and an
offsetting increase in operating working capital levels of ($1.7 million).
During the nine months ended September 30, 2011, elements of cash flows included
net income of $0.9 million, non-cash charges of $0.3 million and an offsetting
increase in operating working capital levels of ($1.4 million). The increases in
operating working capital levels in both periods were in support of our revenue
growth.
Cash flows used in investing activities:
Cash used in investing activities for the nine months ended September 30, 2012
totaled $126,000 compared to $102,000 for the nine months ended a year earlier.
In both 2012 and 2011, capital expenditures accounted for our entire cash needs.
Cash flows used in financing activities:
Cash used in financing activities for the nine months ended September 30, 2012
totaled $2.4 million and largely related to common shares purchased under the
Company's modified "Dutch Auction" tender offer in March 2012. In the 2011
period, cash used in financing activities totaled $0.5 million and related to
common shares purchased under the Company's share repurchase program and
deferred financing costs incurred in connection with our amended credit facility
with PNC Bank.
Contractual Obligations and Off-Balance Sheet Arrangements:
The Company rents certain office space and equipment under non-cancelable leases
which provides for future minimum rental payments. Total lease commitments have
not materially changed from the amounts disclosed in the Company's 2011 Annual
Report on Form 10-K.
Inflation:
We do not believe that inflation had a significant impact on our results of
operations for the periods presented. On an ongoing basis, we attempt to
minimize any effects of inflation on our operating results by controlling
operating costs and, whenever possible, seeking to insure that billing rates are
adjusted periodically to reflect increases in costs due to inflation.
Seasonality:
Our operations are generally not affected by seasonal fluctuations. However, our
consultants' billable hours are affected by national holidays and vacation
policies. Accordingly, we generally have lower utilization rates and higher
benefit costs during the fourth quarter.
Recently Issued Accounting Pronouncements:
The Company is of the opinion that any pending accounting pronouncements, either
in the adoption phase or not yet required to be adopted, will not have a
significant impact on the Company's financial position or results of operations.
[ Back To IBM News 's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
IoT EVOLUTION MAGAZINE
