Mistras Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. Mistras provides technology-enabled inspection, testing, engineering and asset-protection services, with Services, International, and Products and Systems segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $182.2m | $179.6m | $561.6m | $513.3m |
| Gross profit | $52.3m | $47.9m | $155.6m | $137.4m |
| Gross margin | 28.7% | 26.7% | 27.7% | 26.8% |
| Operating income (loss) | $3.0m | $(10.4)m | $19.7m | $(2.1)m |
| Net income (loss) attributable to Mistras | $(1.0)m | $(7.0)m | $7.9m | $(3.1)m |
| Diluted EPS | $(0.04) | $(0.25) | $0.27 | $(0.11) |
| Operating cash flow | Not presented by quarter | $24.2m | $35.2m |
Q3 revenue rose about 1% year over year; nine-month revenue increased 9%. Gross margin improved in both periods. The company reported non-GAAP income before special items of $10.1m for Q3 versus $6.9m, and $26.2m for nine months versus $16.6m. These figures exclude specified special items and are not GAAP measures.
At September 30, cash was $17.1m, total debt was $150.2m, and capital lease obligations totaled $13.5m. Revolver borrowings were $140.7m, with $103.9m of available borrowing capacity and $5.4m of letters of credit outstanding. Total current assets were $199.4m and current liabilities $95.2m. The company reported compliance with its credit agreement covenants. Nine-month capital expenditures were $15.8m.
Changes and operating trends
- Services revenue increased 3% in Q3 and 9% year to date; International revenue decreased 4% in Q3 but increased 9% year to date. Products and Systems revenue declined 9% in Q3 and rose 2% year to date. The Products and Systems subsidiary sale affected comparisons.
- Q3 operating results included a $5.9m pension withdrawal charge and a $2.4m gain on sale of a subsidiary. Q3 2017 included $15.8m of impairment charges and $1.2m of litigation expense, contributing to the year-over-year improvement in GAAP operating income.
- Nine-month operating cash flow declined $11.0m, or 31%, chiefly due to working-capital movements and the timing of receivables collections. Accounts receivable rose to $155.6m from $138.1m at year-end; unbilled revenue increased to $28.8m from $14.4m.
- Cash declined $10.5m during the first nine months. Financing cash outflow included $15.9m of net credit-agreement repayments and $4.7m of debt and lease payments. Investing cash outflow was lower than the prior year, partly because there were no acquisitions and the company received $4.8m from the subsidiary sale.
Outlook, risks and unusual items
- Management said market conditions improved through 2018, with oil-and-gas spending recovering and deferred work contributing to spring activity. It expected relatively stable oil-and-gas inspection spending for the remainder of 2018 and described aerospace demand as strong. The filing provides no quantified earnings or revenue guidance.
- The $5.9m pension withdrawal liability was deemed probable after a significant union-work project went to another contractor. The company also accrued approximately $1.6m for potential German severance as temporary-staffing contracts expire and employees are transitioned or terminated under German labor rules.
- Brazilian labor claims generated $1.1m of Q3 and $1.2m of nine-month charges. Management believes sellers owe indemnification for most of the charges but did not recognize a recovery because collection amount and timing were uncertain.
- The Q3 effective tax rate was approximately 190%; the nine-month rate was 44%. Tax Act-related estimates, GILTI and executive-compensation provisions, and discrete tax items contributed. A $0.4m liability was recorded for an ongoing IRS examination; management expected resolution within 12 months.
- An EPA investigation is examining possible groundwater and soil contamination at or near a leased California facility. The company could not determine whether it has liability or estimate any amount and recorded no accrual.
- The company said it had sufficient funding for the foreseeable future and was in covenant compliance. It adopted the new revenue standard in 2018 with no material financial-statement impact; it planned to adopt the lease standard on January 1, 2019.
Important facts for investors to verify
- Whether receivables collections improve and elevated unbilled revenue converts to billed receivables and cash.
- The final amount and payment timing of the multi-employer pension withdrawal liability, German severance and Brazilian labor claims, including any indemnification recovery.
- Future borrowing costs, leverage and covenant headroom given higher interest expense and continued reliance on the revolver.
- Whether management’s expectation of stable oil-and-gas spending and strong aerospace demand is reflected in subsequent segment revenue and margins.
- Final Tax Act accounting, GILTI treatment and resolution of the IRS examination; the filing does not provide a clear estimate of possible EPA exposure.