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MHH > SEC Filings for MHH > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for MASTECH HOLDINGS, INC.


6-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our audited consolidated financial statements and accompanying notes for year ended December 31, 2012, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on March 22, 2013.

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 2012 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 2012 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. 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 it's 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:

Please refer to Note 1 "Summary of Significant Accounting Policies" of the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2012 for a more detailed discussion of our significant accounting policies and critical accounting estimates.

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


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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 2012, activity levels continued to trend up in most technologies and sales channels. During the first quarter of 2013, activity levels remained solid.

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. This trend in our business mix has impacted overall gross margins during the past several years, and if this trend continues, will likely impact future gross margins as well. 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. This trend towards utilizing the MSP model has resulted in lower gross margins in the retail IT channel over the last two years and it is likely that our gross margins will be pressured in future periods should this trend continue.

Results of Operations for the Three Months Ended March 31, 2013 as Compared to the Three Months Ended March 31, 2012:

Revenues:

Revenues for the three months ended March 31, 2013 totaled $27.0 million, compared to $24.5 million for the corresponding three month period in 2012. This 10% year-over-year revenue increase, which was achieved with one-less billable day in the 2013 period compared to 2012, reflected higher demand for the Company's services and the corresponding increase in billable consultants on assignment during the 2013 period. Billable IT headcount at March 31, 2013 totaled 658 consultants compared to 558 consultants, one-year earlier. For the three-months ended March 31, 2013, our billable IT headcount increased by approximately 4%, which was one of the strongest first quarter performances in the last decade.

Below is a tabular presentation of revenues by sales channel for the three months ended March 31, 2013 and 2012, respectively:

                                      Three Months Ended       Three Months Ended
    Revenues (Amounts in millions)      March 31, 2013           March 31, 2012
    Wholesale IT Channel             $               17.8     $               15.4
    Retail IT Channel                                 6.2                      6.5
    Specialized Healthcare                            3.0                      2.6
    Permanent Placements / Fees                       0.0                      0.0

    Total revenues                   $               27.0     $               24.5

Revenues from our wholesale IT channel increased approximately 16% in the three month period ended March 31, 2013 compared to the corresponding 2012 period. Higher revenue levels from both staffing clients (up 20%) and integrator clients (up 14%) were driven by stronger demand for IT services. Retail IT channel revenues were down approximately 5% during the three months ended March 31, 2013 compared to the period one-year earlier. The decline reflected a high level of project ends at several of our MSP and end-user clients. Healthcare revenues increased by 15% for the three month period ended March 31, 2013 compared to the corresponding 2012 period. This improvement was largely due to an increase in demand for travel nurses. Permanent placement / fee revenues were insignificant in both the 2013 and 2012 periods.

During the three months ended March 31, 2013, IBM represented 10.7% of total revenues and was our only client to exceed 10% of total revenues. For the three months ended March 31, 2012, three clients represented more than 10% of total revenues. IBM, TEK Systems and Kaiser Permanente represented 14.7%, 10.6% and 10.6% of total revenues, respectively.

The Company's top ten clients represented approximately 52% and 57% of total revenues for the three months ended March 31, 2013 and 2012, respectively.

Gross Margin:

Gross profits in the first quarter of 2013 totaled $4.9 million, or approximately $0.4 million higher than the first quarter of 2012. Gross profit as a percentage of revenue decreased modestly to 18.1% for the three month period ending March 31, 2013 compared to 18.2% for the three month period a year earlier. The gross margin decline was due to lower healthcare margins which reflected higher bench costs and front-end, project initiation costs related to increases in our travel nurse service-offering.


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Below is a tabular presentation of gross margin by sales channel for the three months ended March 31, 2013 and 2012, respectively:

                                   Three Months Ended       Three Months Ended
     Gross Margin                    March 31, 2013           March 31, 2012
     Wholesale IT Channel                         17.6 %                   17.6 %
     Retail IT Channel                            19.7                     19.3
     Specialized Healthcare                       16.6                     17.8
     Permanent Placements / Fees                 100.0                    100.0

     Total gross margin                           18.1 %                   18.2 %

Wholesale IT channel gross margins were flat for the three months ended March 31, 2013 compared to the 2012 period. Retail IT gross margins were up 40 basis points during the three months ended March 31, 2013 compared to the corresponding 2012 period as margins on MSP assignments strengthened somewhat during the first quarter of 2013. Specialized healthcare gross margins declined by 120 basis points and reflected higher bench costs and front-end, project initiation costs related to increases in our travel nurse service-offering.

Selling, General and Administrative ("SG&A") Expenses:

SG&A expenses for the three months ended March 31, 2013 totaled $3.9 million or 14.6% of revenues, compared to $3.8 million or 15.8% of revenues for the three months ended March 31, 2012. Fluctuations within SG&A expense components during the 2013 period compared to a year earlier included the following:

Sales expense was flat in the 2013 period compared to 2012. Lower sales leadership expenses were offset by an increase in sales staff.

Recruiting expense was also flat in the 2013 period compared to 2012. Increase is offshore staff was offset by lower job board and background check fees.

General and administrative expense in 2013 was up approximately $0.1 million from a year earlier. An increase in stock-based compensation expense and higher travel expenses were largely responsible for the variance.

Other Income / (Expense) Components:

Other Income / (Expense) for the three months ended March 31, 2013 consisted of interest expense of $25,000 and foreign exchange gains of $12,000. For the three months ended March 31, 2012, Other Income / (Expense) consisted of interest expense of $16,000 and foreign exchange losses of $7,000. The higher interest expense in the 2013 reflects outstanding borrowings in the 2013 period.

Income Tax Expense:

Income tax expense for the three months ended March 31, 2013 totaled $349,000, representing an effective tax rate on pre-tax income of 37.8%, compared to $221,000 for the three months ended March 31, 2012, which represented a 38.6% effective tax rate on pre-tax income. A slightly lower aggregate state tax rate in the 2013 period was responsible for the lower effective tax rate.

Liquidity and Capital Resources:

Financial Conditions and Liquidity:

At March 31, 2013, we had $2.0 million of outstanding debt, net of cash balances on hand, and approximately $13.2 million of borrowing capacity under our existing credit facility.

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 March 31, 2013, our accounts receivable "days sales outstanding" ("DSO's") measurement was 52-days, compared to 51-days a year earlier. We expect cash provided by operating activities, cash balances on hand and current availability under our existing credit facility to adequately fund our business needs during the balance of 2013.

Cash flows used in operating activities:

Cash used in operating activities for the three months ended March 31, 2013 totaled $0.1 million compared to $0.5 million during the three months ended March 31, 2012. Elements of cash flows in the 2013 period were net income of $0.6 million and an offsetting increase in operating working capital levels of $0.7 million. During the three months March 31, 2012, elements of cash flows were net income of $0.4 million and an offsetting increase in operating working capital levels of $0.9 million. The operating working capital increases in both 2013 and 2012 reflected higher accounts receivable balances in support of our revenue growth.


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Cash flows used in investing activities:

Cash used in investing activities for the three months ended March 31, 2013 totaled $31,000 compared to $34,000 for the three months ended a year earlier. In both 2013 and 2012, capital expenditures accounted for most of our cash needs.

Cash flows provided by (used in) financing activities:

Cash provided by financing activities for the three months ended March 31, 2013 totaled $0.1 million and largely consisted of proceeds from short-term borrowings. Cash (used in) financing activities for the three months ended March 31, 2012 totaled ($2.5) million and related to common stock purchased under the Company's modified "Dutch Auction" tender offer.

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 2012 Annual Report on Form 10-K. We do not have any off-balance sheet arrangements.

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. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impacts our revenue and gross profit performance during the subsequent quarter.

Recently Issued Accounting Standards:

In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-01, Balance Sheet (Topic 210): Clarifying the scope and disclosures about Offsetting Assets and Liabilities. The main objective in developing this Update is to address implementation issues about the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities. Stakeholders have told the Board that because the scope in Update 2011-11 is unclear, diversity in practice may result. Recent feedback from stakeholders is that standard commercial provisions of many contracts would equate to a master netting arrangement. Stakeholders questioned whether it was the Board's intent to require disclosures for such a broad scope, which would significantly increase the cost of compliance. The objective of this Update is to clarify the scope of the offsetting disclosures and address any unintended consequences.

The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.

The amendments clarify the intended scope of the disclosures required by
Section 210-20-50. The Board concluded that the clarified scope will reduce significantly the operability concerns expressed by preparers while still providing decision-useful information about certain transactions involving master netting arrangements. The amendments provide a user of financial statements with comparable information as it relates to certain reconciling differences between financial statements prepared in accordance with U.S. GAAP and those financial statements prepared in accordance with International Financial Reporting Standards (IFRS).

An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of Update 2011-11.

The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No, 2013-02, Comprehensive Income (Topic 220, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income.


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The amendments of this update do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.

The amendments in this Update apply to all entities that issue financial statements that are presented in conformity with U.S. GAAP and that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods presented, including interim periods.

For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted.

The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

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