Mistras Group, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Mistras provides technology-enabled asset protection, inspection, testing and related services for energy, industrial, infrastructure and aerospace customers. This unaudited filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $192.2m | $182.2m | $569.6m | $561.6m |
| Gross profit / margin | $57.8m / 30.1% | $52.3m / 28.7% | $166.7m / 29.3% | $155.6m / 27.7% |
| Income from operations / margin | $10.8m / 5.6% | $3.0m / 1.7% | $21.8m / 3.8% | $19.7m / 3.5% |
| Net income (loss) attributable to Mistras | $3.1m | $(1.0)m | $5.2m | $7.9m |
| Diluted EPS | $0.11 | $(0.04) | $0.18 | $0.27 |
- Cash flow: Nine-month operating cash flow was $40.5m, versus $24.2m. Investing used $21.6m, including $17.3m for property, plant and equipment and $4.8m for an acquisition. Financing used $29.5m. Cash declined $11.2m from year-end to $14.4m.
- Debt and liquidity: Total debt was $267.3m at September 30, down from $290.6m at December 31, 2018. Cash was $14.4m; available borrowing capacity was $131.4m. The company reported compliance with credit-facility covenants. Current assets were $193.0m and current liabilities $111.2m.
- Other metrics: Interest expense rose to $3.0m for Q3 and $10.1m for the nine months, from $1.9m and $5.6m, respectively. The effective tax rates were approximately 61% for Q3 and 55% year to date. Operating lease liabilities totaled $43.2m following adoption of the new lease standard.
Material changes versus comparable periods
- Q3 revenue increased 6%; nine-month revenue increased 1%. Management attributed Q3 growth to acquisition and modest organic growth, partly offset by foreign exchange. Year-to-date acquisition growth was partly offset by organic decline and unfavorable foreign exchange.
- Services revenue rose 8% in Q3 and 5% year to date, aided by the Onstream acquisition. International revenue was up 1% in Q3 but down 6% year to date. Products and Systems revenue declined 3% in Q3 and 24% year to date, reflecting lower volume and the prior-year sale of a subsidiary.
- Gross margin improved in both comparison periods, with management citing favorable mix, operating leverage and labor utilization. Q3 GAAP operating income rose sharply, in part because Q3 2018 included a $5.9m pension withdrawal charge; nine-month GAAP operating income also included a $2.8m net troubled-customer bad-debt provision in 2019.
- Net income attributable to Mistras declined year to date despite improved operating income, with higher interest expense and tax expense among the factors. The 2018 nine-month period also included a $2.4m gain on sale of a subsidiary.
Outlook, commentary and risks
- The filing provides no quantified full-year earnings or revenue guidance. Management said cash, operating cash flow, bank borrowings and lease financing should be sufficient to fund operations for the foreseeable future.
- Management said lower crude-oil prices had reduced customer inspection and maintenance spending and anticipated customers could defer spending from time to time later in 2019 into early 2020. Oil and gas represented approximately 59% of Q3 revenue.
- Debt covenants restrict leverage and certain corporate actions; the permitted leverage ratio tightens to 3.75x at year-end 2019 and 3.50x from March 2020. The company said it was compliant at quarter-end.
- Contingencies include an estimated $3.1m multi-employer pension withdrawal liability at September 30 (including a $0.9m payment made in October), approximately $1.1m of German severance accruals, and an EPA-related investigation at a leased California facility for which the company could not estimate liability and had recorded no accrual. Potential acquisition-related contingent consideration ranged up to approximately $7.9m.
- A renewable-energy customer insolvency led to a 2019 bad-debt charge, partly reversed in Q2; no further reserve change was recorded in Q3. The company also noted that the Onstream acquisition increased operating expenses and interest burden. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Services growth and gross-margin improvements persist, and how much growth is organic versus acquisition-related.
- Whether oil-and-gas customer spending and inspection demand weaken as management described, given the company’s sector concentration.
- Debt levels, borrowing availability, covenant headroom and the effect of higher interest expense.
- Resolution and cash impact of pension, severance, environmental and acquisition-related contingencies.
- Drivers of the elevated effective tax rate and the sustainability of operating cash flow and earnings.