Mistras Group, Inc. — Form 10-Q Summary
Business and period: Mistras provides asset-protection, inspection, testing, and related technology solutions to infrastructure-intensive industries. This filing covers the three months ended August 31, 2013—fiscal 2014’s first quarter, compared with the three months ended August 31, 2012. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $135.8 | $113.4 |
| Gross profit / margin | $39.3 / 28.9% | $33.7 / 29.7% |
| Operating income / margin | $9.6 / 7.0% | $7.7 / 6.8% |
| Net income attributable to Mistras | $5.6 | $4.3 |
| Diluted EPS | $0.19 | $0.15 |
| Operating cash flow | $11.5 | $21.5 |
| Capital expenditures | $2.5 | $2.7 |
- Revenue grew 19.8%; management estimated organic growth of 4.6%, acquisition-related growth of 15.6%, and a 0.4% foreign-exchange reduction.
- Cash was $6.9 at August 31, 2013. Total debt was $52.9, plus $18.2 of capital lease obligations. The $125.0 million revolver had $33.0 outstanding and $4.5 of letters of credit; reported available borrowing capacity was $87.5.
- Net cash used in financing was $10.1, mainly reflecting $6.6 of revolver repayments, $1.9 of capital-lease repayments, and $0.9 of long-term debt repayments. Cash declined $0.9 during the quarter.
- Working capital was $68.3 (current assets of $137.7 less current liabilities of $69.4). The company reported compliance with credit-facility covenants.
- EBITDA, a non-GAAP measure, was $16.3 versus $13.7; Adjusted EBITDA was $16.0 versus $15.5.
Changes and management commentary
- Services revenue rose to $95.8 from $82.4, and International revenue to $37.8 from $24.4; Products and Systems revenue fell to $6.6 from $9.5. Management attributed the Services increase to oil and gas, aerospace, and industrial work, and International growth primarily to prior-year acquisitions.
- Oil and gas represented about 48% of revenue and grew approximately 21%. Revenue outside oil and gas grew approximately 19%. The top ten customers accounted for 35% of revenue, up from 32%.
- Gross margin declined about 80 basis points, attributed mainly to lower Products and Systems volume and mix and the greater share of lower-margin traditional NDT services in International. Management expected that International service mix trend to continue; improved Services project mix partly offset the pressure.
- Operating income increased 24%, while operating margin remained approximately 7%. SG&A rose $5.2, including $3.7 from businesses acquired in the prior twelve months; higher compensation and staffing accounted for much of the remainder.
- A $2.2 reduction in the estimated fair value of acquisition contingent consideration increased operating income; acquisition-related fees partly offset the gain. This unusual item materially benefited reported results. No acquisitions were completed during the quarter.
- Operating cash flow fell $10.0 year over year, principally because the prior-year period benefited more from working-capital changes, particularly receivable collections. The effective tax rate was approximately 36%, versus 38%.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management said cash, operating cash flow, and borrowing capacity were expected to fund operations for the foreseeable future. Planned cash uses include acquisitions, international expansion, equipment, technology, leases, and debt repayments; typical capital expenditures were estimated at 3%–4% of revenue, excluding acquisitions.
- Management cited a fragile global economy, currency volatility, and uncertainty in credit availability. The company has foreign-currency exposure and does not currently hedge it; foreign-currency translation reduced other comprehensive income by $0.3 this quarter.
- A pipeline project owner alleged that certain radiographic images did not meet required quality standards and claimed damages. The matter was at an early investigation stage; the company could not estimate the likely outcome or potential liability and recorded no reserve.
- A governmental investigation relates to a 2011 environmental incident near a company location; management did not expect a material financial effect. Other pending legal matters were described as immaterial in aggregate.
- Potential acquisition-related contingent consideration ranged from zero to $23.9 over the next five years, subject to performance metrics; its recorded fair value was $13.0 at August 31.
Investor verification priorities
- Assess whether revenue growth can become less dependent on acquisitions, given estimated organic growth of 4.6%.
- Track gross-margin pressure in International and Products and Systems, and the sustainability of the Services segment’s improvement.
- Separate recurring operating performance from the $2.2 contingent-consideration valuation gain and monitor future earn-out payments.
- Follow the pipeline-quality claim, for which potential exposure was not estimable, and the environmental investigation.
- Monitor cash conversion, customer concentration, oil-and-gas exposure, borrowing needs, and compliance with credit-facility covenants.