Mistras Group, Inc. — Form 10-Q Summary
Business context and reporting period
Mistras provides technology-enabled asset protection, inspection, testing and engineering services, plus related products and systems. This filing reports the three months ended August 31, 2016—the first quarter of fiscal 2017—compared with the three months ended August 31, 2015. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
- Revenue: $168.4 million, down 6.3% from $179.9 million. Services revenue fell 8%, Products and Systems fell 29%, and International rose 2%.
- Profitability: Gross profit was $50.1 million, down 2.4%; gross margin improved to 29.7% from 28.5%. Operating income declined 14% to $11.2 million, and net income attributable to Mistras fell 4% to $6.6 million. Diluted EPS was $0.22 versus $0.23.
- Adjusted results: Adjusted EBITDA, a non-GAAP measure, was $21.2 million versus $22.3 million. Income from operations before special items was $11.8 million versus $12.1 million; its margin rose to 7.0% from 6.7%.
- Cash flow: Operating cash flow was $17.3 million, up from $16.2 million. Free cash flow, as defined by the company, was $13.3 million versus $11.6 million, after $4.0 million of capital expenditures. Investing used $5.0 million; financing used $17.8 million. Cash declined $6.2 million to $14.9 million.
- Debt and liquidity: Total debt was $70.4 million at August 31, down from $85.0 million at May 31; this excludes capital lease obligations of $18.4 million. The company had $14.9 million cash, $64.8 million drawn on its revolving credit facility, $5.2 million of letters of credit and $105.0 million of available borrowing capacity. It reported compliance with credit agreement covenants.
- Balance sheet: Total assets were $468.3 million and total liabilities were $187.3 million, compared with $482.7 million and $206.4 million, respectively, at May 31, 2016.
Material changes versus the prior comparable period
- Lower Services and Products and Systems revenue drove the consolidated sales decline; International revenue increased modestly. Management cited high-single-digit organic decline and adverse foreign exchange in Services, while Products and Systems was affected by lower sales volume.
- Gross margin improved across all three operating segments. International operating income increased to $4.7 million from $1.8 million, while Services fell to $12.5 million from $15.4 million and Products and Systems fell to $0.1 million from $1.2 million.
- Reported operating income was affected by acquisition-related fair-value adjustments: the current quarter recorded a $0.4 million net expense, compared with a $0.9 million net benefit in the prior-year quarter. This contributed to a larger decline in GAAP operating income than in operating income before special items.
- Interest expense declined to $0.8 million from $1.9 million, primarily due to repayment of seller notes and lower revolving-credit borrowings. The effective tax rate decreased to approximately 36% from 38%.
- The company completed two small Canadian NDT-services acquisitions during the quarter. A further asset protection business was acquired after quarter-end for $7.0 million cash, with up to $2.0 million of contingent consideration.
Outlook, commentary, risks and contingencies
- Management gave no specific financial guidance in the provided filing text. It described market conditions as soft, with lower oil prices prompting customers to curtail spending, while expressing belief that growth opportunities remain across its target markets.
- Oil and gas represented approximately 55% of quarterly revenue. BP accounted for approximately 13% of revenue; one customer accounted for 14% of revenue and 13% of receivables. This concentration increases exposure to customer and energy-market spending decisions.
- The company had a $6.0 million proposed settlement of California wage-and-hour claims, covering approximately 4,900 current and former employees. The settlement remained subject to court approval; a $6.3 million charge, including payroll taxes and related costs, had been recorded in fiscal 2016.
- A pipeline project owner had demanded approximately $6.0 million over alleged radiography image quality defects. No lawsuit had been filed, and the company said it could not estimate the likely outcome or liability; no reserve was recorded.
- An EPA investigation at a leased Cudahy, California facility was ongoing concerning possible hazardous materials in the area. The company could not determine whether it had liability and had recorded no reserve. A separate French contingent-consideration judgment of approximately $0.4 million was being appealed and was fully reserved.
- Potential acquisition-related contingent consideration ranged from zero to approximately $15.4 million, dependent on acquired businesses meeting performance targets. Currency fluctuations also reduced cash by $0.8 million during the quarter; management cited exchange-rate volatility, including the effect of the U.K.’s EU exit.
Important facts for investors to verify
- Whether the California settlement received court approval and the timing and final cost of payment.
- Developments, potential exposure and any reserve changes concerning the pipeline claim and EPA investigation.
- Whether oil-and-gas spending weakness, customer concentration and segment revenue trends persist, particularly for Services and Products and Systems.
- Revolving-credit availability, debt repayment, covenant compliance and the company’s ability to sustain cash generation and free cash flow.
- Purchase accounting and subsequent operating performance for the acquisitions, including potential contingent payments.