Mistras Group, Inc. — Fiscal 2012 Second-Quarter Form 10-Q
Reporting period: Three and six months ended November 30, 2011; fiscal year ends May 31. Figures below are in U.S. dollars; financial statement amounts are unaudited. Mistras provides technology-enabled asset-protection services, products and systems, including nondestructive testing and inspection.
Financial performance
| Metric | Three months ended Nov. 30, 2011 | Year-over-year change | Six months ended Nov. 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $114.2 million | Up 28.6% | $205.7 million | Up 30.8% |
| Gross profit / margin | $35.2 million / 30.8% | Margin down 0.5 percentage points | $62.6 million / 30.5% | Margin down 0.4 percentage points |
| Operating income / margin | $14.1 million / 12.3% | Up 38% | $20.0 million / 9.7% | Up 48% |
| Net income attributable to Mistras | $8.0 million | Compared with $5.7 million | $11.2 million | Compared with $7.3 million |
| Diluted EPS | $0.28 | Compared with $0.21 | $0.39 | Compared with $0.27 |
| Adjusted EBITDA, a non-GAAP measure | $20.6 million | Compared with $15.9 million | $32.5 million | Compared with $24.4 million |
- Quarterly revenue growth comprised estimated organic growth of 19.4%, acquisition growth of 8.8% and foreign-exchange impact of 0.4%. For the six-month period, the respective components were 19.4%, 10.3% and 1.1%.
- Services was the largest segment: revenue was $96.9 million for the quarter and $172.6 million for six months. Products and Systems revenue was $9.1 million and $16.6 million; International revenue was $11.9 million and $21.6 million, respectively.
- Management attributed gross-margin pressure mainly to revenue mix, including growth in lower-margin traditional inspection work, and higher unbilled direct labor associated partly with technician training. Growth in other industries and higher-margin Advanced NDT services partly offset this pressure.
- SG&A rose year over year in dollars, but declined as a share of revenue: approximately 17% versus 18% for the quarter and 19% versus 20% for six months. Operating income increased faster than revenue.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $0.4 million, down from revised prior-year operating cash flow of $9.0 million. Management cited approximately $24.0 million of cash used to fund working capital, primarily higher receivables.
- Investing cash outflow was $18.2 million, including $10.7 million paid for four acquisitions, $3.8 million of capital expenditures and $3.7 million placed in restricted cash for an acquisition that closed after period-end. Financing cash inflow was $12.3 million, primarily from $19.0 million of net revolver borrowings.
- Cash and cash equivalents were $5.3 million at November 30, 2011, down from $10.9 million at May 31; restricted cash was $3.7 million. Accounts receivable rose to $102.8 million from $78.0 million.
- Total current assets were $132.4 million and current liabilities $53.3 million. Long-term debt, including current maturities, was $39.9 million; capital lease obligations totaled $18.6 million. Revolver borrowings were $22.8 million, with $3.9 million of letters of credit outstanding.
- In December 2011, the company replaced its prior facility with a $125 million revolving credit agreement, potentially expandable to $150 million, maturing December 20, 2016. It is secured by substantially all company assets and includes leverage and interest-coverage covenants. The company said it was compliant with the former agreement at November 30 and believed available funding sources were sufficient for the foreseeable future.
Material changes, outlook and risks
- The company completed four acquisitions in the six months and three additional acquisitions in December 2011. Fiscal 2012 acquisitions had an initial cash outlay of $24.1 million, including the December transactions. The four first-half acquisitions added $2.3 million of revenue and recorded a $0.1 million operating loss after closing during the six-month period.
- Acquisition-related contingent-consideration revaluation increased operating income by a net $0.7 million, partly offset by $0.4 million of acquisition costs. Total potential acquisition-related contingent consideration ranged from zero to $10.1 million. The first-half purchase-price allocations were preliminary.
- Management described demand for inspection services and recurring “run and maintain” contracts as drivers of organic growth. Oil and gas remained the largest market, contributing about 57% of quarterly revenue and 56% for six months. BP accounted for 17% of quarterly revenue and 16% for six months; the top ten customers accounted for 44% of quarterly revenue.
- Management identified planned uses of cash including acquisitions, international expansion, equipment, technology, software, leases and working capital. It stated that capital expenditures, excluding acquisitions, historically run at approximately 3%–4% of revenue. No specific revenue or earnings guidance was provided.
- Key exposures include working-capital needs and receivables collection, customer concentration, acquisition integration and contingent payments, variable-rate borrowing, and foreign-currency translation. Foreign-currency translation losses in other comprehensive income were approximately $1.4 million for the six months; the company did not then use foreign-exchange hedges.
- The company reported no material change to previously disclosed risk factors. It said pending legal proceedings were not expected to have a material adverse effect; settlement of two California labor class actions received final court approval in August 2011. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether strong reported growth translates into cash generation: operating cash flow was only $0.4 million as receivables and other working-capital needs absorbed cash.
- Receivables quality, collection timing and customer exposure, particularly BP concentration and the increase in accounts receivable.
- Gross-margin trends and whether mix, training costs and unbilled labor continue to constrain margins.
- Acquisition performance, completion of preliminary purchase-price allocations, integration costs and possible contingent-consideration payments.
- Borrowing levels, covenant headroom and liquidity after the December credit-facility refinancing and acquisitions.
- Comparability of Adjusted EBITDA with GAAP results: it is a company-defined, non-GAAP measure and includes adjustments such as stock compensation and acquisition-related items.