Mistras Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Mistras provides asset-protection, inspection, testing and related services, with operations in Services, International, and Products and Systems. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $124.4 | $200.6 | $283.9 | $377.4 |
| Gross profit / margin | $41.2 / 33.1% | $60.1 / 29.9% | $81.8 / 28.8% | $108.9 / 28.9% |
| Operating income (loss) | $(0.4) | $15.4 | $(111.6) | $11.0 |
| Net income (loss) | $(2.7) | $7.4 | $(101.2) | $2.2 |
| Diluted EPS | $(0.09) | $0.26 | $(3.49) | $0.07 |
- Q2 revenue fell 38.0% year over year; first-half revenue fell 24.8%. COVID-19-related project disruption and customer spending cuts, particularly in oil and gas and aerospace, were the primary factors cited.
- Q2 gross margin improved to 33.1%, from 29.9%, mainly due to better employee utilization and sales mix; Services also cited Canadian wage subsidies. First-half gross margin was essentially flat at 28.8%.
- First-half operating results included $106.1 million of impairment charges: $77.1 million for goodwill and $28.8 million for intangible assets, plus a $0.2 million right-of-use asset impairment. Excluding impairment, first-half operating loss before special items was $4.9 million, versus $15.8 million of income before special items a year earlier; this is a company-defined non-GAAP measure.
- Cash from operations was $34.9 million for the first half, versus $21.1 million in 2019, primarily reflecting working-capital movements. Investing cash outflow was $7.2 million; financing cash outflow was $20.3 million. Cash rose to $22.6 million from $15.0 million at year-end.
- At June 30, total debt was $239.4 million, compared with $254.7 million at December 31, 2019; finance lease obligations were $15.6 million. The company reported $33.1 million of available borrowing capacity, in addition to cash. Total current assets were $153.6 million and current liabilities $100.5 million.
- Total assets declined to $567.7 million from $719.9 million at year-end, largely reflecting impairment charges and currency translation. Equity declined to $176.5 million from $286.0 million.
Material changes and management commentary
- All three segments had lower Q2 revenue: Services $100.7 million, down 37.5%; International $21.3 million, down 42.5%; Products and Systems $4.0 million, down 6.3%. Services and International declines reflected organic weakness and, to a lesser extent, unfavorable foreign exchange.
- Management implemented cost reductions beginning in Q2, including temporary executive salary cuts of 25%–45%, lower reductions for certain other salaried staff, and suspension of the U.S. and Canadian employer savings-plan match. Most measures were expected to continue through Q3, with reassessment thereafter.
- A May 2020 credit-agreement amendment reduced the revolving facility from $300 million to $175 million and revised financial covenants. The amendment waived certain leverage and fixed-charge tests for specified 2020 quarters, established interim minimum EBITDA and $20 million minimum liquidity requirements through September 30, 2020, and increased borrowing margins. Mistras said it was compliant at June 30 and believed it could meet the amended covenants, while cautioning that pandemic and market uncertainty limited certainty.
- The company expects the pandemic to continue adversely affecting demand, operations, cash flow and results for the rest of fiscal 2020 and potentially longer, but gave no quantified revenue or earnings guidance. Management said it could not reliably predict the magnitude or duration of the impact.
- On July 3, 2020, a Canadian subsidiary entered a 49%-owned joint venture with Mikisew First Nation to provide inspection and related services in Alberta’s Greater Wood Buffalo region.
Risks, contingencies and unusual items
- COVID-19, oil-price volatility and lower aerospace activity may further reduce demand, delay or cancel customer work, impair customer collections, and strain liquidity. A failure to satisfy amended debt covenants could give lenders rights to restrict borrowing or accelerate debt.
- Disclosure controls were deemed ineffective at June 30 due to material weaknesses in financial reporting processes and income-tax accounting. Remediation was underway; management said the weaknesses would not be considered remediated until controls operated effectively for a sufficient period.
- A Texas pipeline-inspection customer dispute includes a $1.4 million fully reserved receivable and a customer counterclaim alleging approximately $7.6 million in damages. The company had not accrued a liability because it could not determine whether, or how much, it might owe; it believed any successful workmanship claim would be covered by insurance subject to a deductible.
- Estimated multi-employer pension withdrawal liability was approximately $2.5 million at June 30. Estimated German severance obligations were approximately $0.4 million. Potential acquisition-related contingent consideration ranged from zero to approximately $5.7 million.
- The company disclosed no formal quantified outlook. Its liquidity sufficiency and covenant expectations depend on uncertain operating conditions and forecast assumptions used in impairment testing.
Key facts for investors to verify
- Whether revenue, utilization and customer work recover, especially in oil and gas, aerospace and International markets.
- Cash conversion and working-capital trends, available revolver capacity, and compliance with the amended minimum liquidity, EBITDA and leverage covenants.
- Whether further asset impairments or deferred-tax-asset valuation allowances become necessary if earnings weaken.
- Progress and testing results for remediation of the disclosed internal-control material weaknesses.
- Developments in the pipeline litigation, pension and severance obligations, and contingent consideration.