Mistras Group, Inc. — Form 10-Q Summary
Business and period: Mistras provides technology-enabled asset protection, inspection, testing and engineering services, as well as related products and systems, to asset-intensive industries. This filing covers the three months ended August 31, 2014 (the first quarter of fiscal 2015), compared with the three months ended August 31, 2013. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $166.6 | $135.8 | +22.6% |
| Gross profit / margin | $42.0 / 25% | $39.3 / 29% | Margin down 4 percentage points |
| Operating income / margin | $3.7 / 2% | $9.6 / 7% | Down 62% |
| Net income attributable to Mistras | $1.7 | $5.6 | Down 70% |
| Diluted EPS | $0.06 | $0.19 | Down $0.13 |
| Operating cash flow | $14.5 | $11.5 | Up $3.0 |
Revenue growth comprised 8.6% organic growth, 12.7% acquisition growth and a 1.3% foreign-exchange benefit. Services revenue rose 27% (about 10% organic and 17% from acquisitions); International revenue rose about 6%, largely reflecting currency effects; Products and Systems revenue was roughly flat. Oil and gas remained the largest vertical at 48% of revenue, with revenue up about 24%. The top ten customers represented 32% of revenue, versus 35% a year earlier.
Gross profit increased only 7% despite revenue growth, compressing the gross margin to 25%. Management attributed Services margin pressure to investment in Canadian oil sands capacity, wage increases exceeding price increases, and a lower mix of advanced services. International margin was affected by lower product sales; Products and Systems margin improved on favorable sales mix. Operating expenses increased 29%; excluding acquisition-related items, they increased 24%. Income from operations before acquisition-related items was $2.7 million, versus $7.5 million, and its margin fell to 2% from 6%.
Cash, debt and liquidity
- Cash and cash equivalents were $12.5 million at August 31, 2014, compared with $10.0 million at May 31, 2014.
- Operating activities provided $14.5 million; investing activities used $40.6 million, including $36.8 million for acquisitions net of cash acquired and $3.8 million for capital expenditures. Operating cash flow less capital expenditures was approximately $10.7 million.
- Financing activities provided $30.5 million, including $35.6 million of net revolver borrowings. Foreign-exchange changes reduced cash by $1.9 million.
- Total debt was $136.1 million, versus $76.6 million at May 31, 2014. This included $96.7 million under the senior credit facility and $34.2 million in notes payable. Capital lease obligations were additional liabilities.
- The credit facility had $23.4 million of available borrowing capacity; $4.9 million of letters of credit was outstanding. The company reported compliance with its debt covenants and stated that cash, operating collections, borrowings and capital leases should fund operations for the foreseeable future.
Material changes, outlook and risks
- Three acquisitions were completed during the quarter, including a Louisiana offshore-platform maintenance and inspection provider, a Quebec asset-protection business and a U.K. inspection business. Preliminary acquisition consideration totaled approximately $58.0 million, including about $34.0 million cash, $22.6 million of seller notes and other liabilities, and contingent consideration. Acquired businesses contributed about $7.5 million of revenue and $0.7 million of operating income after closing. Acquisition accounting and valuations remained preliminary.
- Goodwill increased to $170.9 million from $130.5 million at May 31, principally reflecting acquisitions. Debt also rose substantially to finance acquisition activity.
- Acquisition-related fair-value adjustments provided a net $1.0 million operating-income benefit in the quarter, compared with a $2.1 million benefit in the prior-year quarter. These noncash or acquisition-related items affect period comparisons; Adjusted EBITDA was $13.1 million versus $16.0 million.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It described continued opportunity across target markets and stated that funding sources were expected to be adequate for the foreseeable future. These statements are subject to forward-looking risks, including economic conditions and currency volatility.
- Potential acquisition-related contingent consideration ranged from zero to approximately $28.5 million, payable if acquired businesses achieve specified performance metrics over the next three years.
- Legal matters include a pipeline owner’s claim alleging deficiencies in radiographic inspection work; the company said it could not estimate the likely outcome or potential liability and had recorded no reserve. An insurer also alleged liability related to a chemical-plant explosion and sought recovery of some or all of $46 million in damages paid; the company disputed responsibility and recorded no reserve. A governmental investigation concerning a 2011 environmental incident was also disclosed; management did not expect a material effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It said there had been no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether revenue growth converts into improved operating margins, particularly in Services and International.
- Acquisition integration, returns, final purchase-price allocations, and the impact of acquisition-related costs and contingent payments.
- Debt levels, remaining revolver capacity and ongoing compliance with leverage and interest-coverage covenants.
- Resolution and potential financial exposure from the pipeline inspection claim and chemical-plant explosion allegation, for which no reserves were recorded.
- Cash conversion and working-capital trends, and the effect of foreign-exchange movements.