Mistras Group, Inc. — Q2 2019 Form 10-Q
Period: Three and six months ended June 30, 2019; unaudited. Mistras provides technology-enabled inspection, testing, engineering, and asset-protection services, primarily to oil and gas, industrial, and aerospace customers.
Financial performance and liquidity
- Q2 revenue: $200.6 million, up 5% year over year. Gross profit was $60.1 million, and gross margin improved to 29.9% from 28.7%.
- Q2 earnings: Operating income rose to $15.4 million from $10.3 million; operating margin was 7.7% versus 5.4%. Net income attributable to Mistras was $7.4 million versus $6.0 million; diluted EPS was $0.26 versus $0.20.
- First-half revenue: $377.4 million, down 1%. Gross profit increased to $108.9 million from $103.2 million, with margin at 28.9% versus 27.2%. Operating income fell to $11.0 million from $16.7 million, and net income attributable to Mistras declined to $2.1 million from $8.9 million; diluted EPS was $0.07 versus $0.30.
- Segment trends: Q2 Services revenue increased 9% to $161.2 million; International fell 10% to $37.1 million; Products and Systems fell 21% to $4.3 million. First-half changes were +3%, -9%, and -33%, respectively. Management attributed weakness in International partly to foreign exchange and organic declines, and Products and Systems weakness to lower sales and the prior-year segment divestiture.
- Cash flow: First-half operating cash flow was $21.1 million, up 5%. Investing used $11.0 million, including $12.0 million of capital expenditures; financing used $23.1 million. Cash declined to $12.5 million from $25.5 million at year-end.
- Debt and liquidity: Total debt was $270.4 million, down from $290.6 million at December 31, 2018. The company reported $130.2 million of available revolver capacity, with $261.8 million borrowed and $5.4 million of letters of credit outstanding. It was in compliance with credit-agreement covenants at quarter-end.
- Other balance-sheet items: Total assets were $733.5 million and current liabilities were $115.0 million. Adoption of the new lease standard added about $38 million of operating lease right-of-use assets and liabilities at January 1, 2019; it had no material income-statement or cash-flow effect.
Changes, outlook, and risks
- Q2 growth reflected acquisition contribution, low-single-digit organic growth, and unfavorable foreign exchange. The December 2018 Onstream acquisition added operating expenses of $3.2 million in Q2 and $6.3 million for the first half; increased borrowing related to the acquisition also contributed to higher interest expense.
- First-half GAAP operating income included a $2.8 million net provision for troubled-customer bad debt, $0.5 million pension withdrawal expense, and $1.0 million net acquisition-related expense. A $1.0 million reserve reversal in Q2 partly offset the first-quarter charge for a renewable-energy customer in insolvency. Non-GAAP operating income before special items was $15.8 million for the first half, versus $16.0 million a year earlier.
- Management expected relatively stable oil and gas customer spending and steady 2019 maintenance-shutdown spending, while continuing efficiency and cost-saving initiatives. The filing provides no specific numerical full-year earnings or revenue guidance.
- Oil and gas represented about 61% of Q2 revenue; the top ten customers represented 39%, although no individual customer reached 10%. Investors should consider sector and customer concentration alongside foreign-exchange exposure and weaker International and Products and Systems results.
- Other contingencies include an estimated $4.0 million multi-employer pension withdrawal liability, approximately $1.4 million of estimated German severance obligations, and an EPA investigation at a leased California site for which the company could not estimate potential liability and had recorded no accrual. Management reported no material changes to previously disclosed risk factors and no material developments in other legal matters.
Important facts for investors to verify
- Whether Services growth and improved gross margins persist, and whether International and Products and Systems revenue stabilize.
- How much of reported Q2 and first-half performance reflects organic trends versus acquisition effects, foreign exchange, and special items.
- Whether receivables and customer-credit exposures improve, including collections from the insolvent renewable-energy customer.
- Debt repayment, revolver availability, covenant headroom, and the impact of acquisition-related interest costs.
- Final amounts and timing for pension, severance, environmental, and acquisition-contingent liabilities.