Mistras Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Mistras provides asset-protection services, products and systems, including inspection and non-destructive testing, across energy, aerospace, industrial and infrastructure markets. Its reportable segments are Services, International, and Products and Systems. COVID-19 disruption, lower oil prices and reduced aerospace activity weighed on customer demand and project activity.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $147.9 | $192.2 | $431.8 | $569.6 |
| Gross profit | $47.4 | $57.8 | $129.2 | $166.7 |
| Gross margin | 32.0% | 30.1% | 29.9% | 29.3% |
| Operating income (loss) | $5.7 | $10.8 | $(105.9) | $21.8 |
| Net income (loss) attributable to Mistras | $1.5 | $3.1 | $(99.6) | $5.2 |
| Diluted EPS | $0.05 | $0.11 | $(3.43) | $0.18 |
- Q3 revenue fell 23.0%; nine-month revenue fell 24.2%. Management attributed the declines chiefly to COVID-related project disruption and customer spending cuts, with organic declines across all segments.
- Q3 gross margin improved 1.9 percentage points, which management attributed mainly to improved employee utilization and sales mix. Nine-month margin rose 0.6 percentage points; performance varied by segment.
- Nine-month operating loss included $106.1 million of impairment charges: $77.1 million related to goodwill, $28.8 million to intangible assets and approximately $0.2 million to a right-of-use asset. Excluding specified special items, nine-month operating income before special items was $1.2 million, versus $26.9 million a year earlier; this is a non-GAAP measure.
- Oil and gas accounted for approximately 55% of Q3 revenue and 56% for the first nine months, underscoring exposure to that market.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $41.8 million, compared with $40.5 million in 2019. Investing cash outflow was $10.6 million, including $10.7 million of property and equipment purchases; financing cash outflow was $25.1 million.
- Cash at September 30 was $22.1 million, up from $15.0 million at year-end 2019. Total debt was $236.5 million, including $226.4 million borrowed under the credit agreement; finance lease obligations totaled $14.9 million.
- The company reported $35.3 million of available borrowing capacity and $4.3 million of letters of credit outstanding. It stated it was compliant with its amended credit agreement at quarter-end and believed available funding was sufficient for foreseeable needs, while noting uncertainty.
- A May 2020 credit amendment reduced the revolving facility from $300 million to $175 million and revised financial covenants, including temporary covenant relief and stepped-up leverage requirements. The amendment also restricts acquisitions and distributions and includes other borrowing limitations.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management said the pandemic and market volatility made the outlook difficult to predict and expected adverse effects to continue for at least the next several quarters.
- Temporary executive, employee and director pay reductions and suspension of the U.S. and Canadian voluntary retirement-plan match were largely ended in Q4 2020; certain other cost reductions remained.
- Management projected further CARES Act-related tax benefits during 2020 and a cash refund in 2021. These are estimates, not reported cash receipts.
- A Texas pipeline customer dispute includes a customer claim of approximately $7.6 million. Mistras had reserved $1.4 million of receivables due from the customer; it said any successful workmanship claim might be covered by insurance, subject to a deductible, but it could not estimate potential liability and recorded no accrual for the counterclaim.
- Estimated multi-employer pension withdrawal liability remaining was approximately $2.5 million. Potential acquisition-related contingent consideration ranged from zero to approximately $4.3 million.
- Disclosure controls were deemed ineffective at September 30 due to previously reported material weaknesses in financial reporting processes and income-tax accounting. Remediation was ongoing and management had not concluded the weaknesses were remediated.
Important facts for investors to verify
- Progress in revenue and operating performance as customer activity recovers, particularly in oil and gas and aerospace.
- Cash generation, borrowing availability and compliance with the amended credit covenants, including future leverage and EBITDA requirements.
- Assumptions behind the substantial goodwill and intangible-asset impairments and whether further impairment indicators emerge.
- Realization and timing of CARES Act tax benefits and the anticipated 2021 refund.
- Developments in the pipeline litigation, pension withdrawal liability and remediation of internal-control weaknesses.