Mistras Group, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Mistras changed its fiscal year-end from May 31 to December 31; therefore, the prior seven-month transition period is not comparable to a full year. Annual comparisons below use the filing’s unaudited calendar-year 2016 figures where available.
Business context
Mistras provides asset-protection services, products and software, including non-destructive testing, inspection, engineering and mechanical services, for energy, industrial, aerospace and public infrastructure customers. It reported three segments: Services, International, and Products and Systems. Oil and gas customers contributed 58% of 2017 revenue; aerospace contributed 13%. BP accounted for approximately 11% of revenue. The company had about 6,000 employees and 120 offices in 14 countries.
Financial results and liquidity
| Metric | FY2017 | CY2016, unaudited |
|---|---|---|
| Revenue | $701.0 million | $684.8 million |
| Gross profit / margin | $187.7 million / 26.8% | $194.1 million / 28.4% |
| Operating income / margin | $4.2 million / 0.6% | $25.5 million / 3.7% |
| Net income attributable to Mistras | $(2.2) million; $(0.08) per diluted share | $14.4 million; $0.48 per diluted share |
| Operating cash flow | $55.2 million | $63.2 million |
Revenue grew 2%, primarily from 5% growth in Services, including acquisition growth. International revenue declined 3% and Products and Systems declined 11%. Gross margin fell 160 basis points. International margin weakened amid lower German revenue, poor performance on a large contract and lower U.K. labor utilization; Products and Systems margins also declined on lower volume and less favorable mix. Operating income included $21.0 million of disclosed special items; management’s non-GAAP income before special items was $25.2 million, down 27% from $34.3 million.
FY2017 investing cash outflow was $102.8 million, including $83.4 million for acquisitions and $20.6 million for capital and intangible-asset spending. Financing provided $53.6 million, principally reflecting net borrowings. Cash ended the year at $27.5 million, of which $27.3 million was outside the U.S. Current assets were $195.0 million and current liabilities $90.2 million.
Total debt was $166.9 million and capital-lease obligations were $14.6 million at year-end. The company had $156.9 million borrowed and $4.9 million of letters of credit outstanding under its $250 million revolving facility, with $88.2 million of available borrowing capacity. A new credit agreement matures December 2022; Mistras reported compliance with its covenants at year-end. A 100-basis-point increase in rates was estimated to add about $1.6 million to annual interest expense.
Material changes, outlook and risks
- In the fourth quarter, revenue was $187.6 million versus $170.2 million a year earlier; operating income was $6.3 million versus $2.9 million, and net income attributable to Mistras was $0.9 million versus $1.0 million.
- The Products and Systems segment recorded a $13.2 million goodwill impairment after losing expected contract bids, plus $2.6 million of long-lived-asset impairment. The company began marketing a small Products and Systems subsidiary for sale.
- The Tax Act contributed to a $1.9 million income-tax provision despite a pretax loss of $0.2 million. The filing records a $3.9 million transition-tax charge and a $2.3 million deferred-tax benefit from the lower U.S. corporate rate; the tax accounting remained provisional.
- Mistras completed three acquisitions in 2017, with $83.4 million of acquisition cash outflow. Management described continued acquisition, aerospace expansion, technology investment and international growth as strategic priorities. It expected crude-oil recovery to support maintenance shutdown spending in 2018–2019, while noting customer cost-cutting pressures.
- A large contract in a challenged Services region was awarded to another contractor in early 2018, expected to affect 2018 results. A significant reduction in union-covered workers could create multi-employer pension withdrawal liability; the company said the timing and amount were uncertain.
- Other key exposures include oil-and-gas cyclicality and customer concentration, seasonal cash-flow swings, variable-rate debt, acquisition integration and impairment risk, and foreign-exchange exposure. The EPA was investigating potential contamination near a leased Cudahy, California facility; Mistras could not estimate liability and had recorded no reserve.
- Legal matters included a $1.6 million charge for a settlement paid in February 2018, an insured jury award of approximately $5.8 million plus interest, and an appealed French contingent-consideration judgment for approximately $0.4 million. The filing says the jury award is believed to be fully covered by insurance.
Important facts for investors to verify
- Whether the lost regional contract and any related workforce reduction affect 2018 revenue, margins, covenant headroom or pension obligations.
- Whether acquisition performance supports the purchase prices and goodwill, and whether Products and Systems impairment or subsidiary-sale plans lead to further charges.
- Cash conversion, working-capital seasonality, international cash availability and the pace of debt reduction after acquisition spending.
- Final Tax Act accounting and subsequent tax effects, including the transition tax and potential future tax on foreign income.
- Insurance coverage and outcomes for the pending legal and EPA matters, and the effect of the Tax Act and new accounting standards on reported results.
The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management concluded controls were effective, excluding controls at three 2017 acquisitions from its assessment; those acquired entities represented 4.0% of assets and 2.6% of revenue.