Mistras Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Mistras provides asset-protection, inspection, testing and related services, with significant exposure to oil and gas, aerospace and industrial markets. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $159.5 million | $176.8 million | Down 9.8% |
| Gross profit / margin | $40.6 million / 25.5% | $48.9 million / 27.6% | Margin down 2.1 percentage points |
| Operating loss | $111.2 million | $4.4 million | Includes $106.1 million impairment charges |
| Net loss attributable to Mistras | $98.5 million; $3.40 per share | $5.3 million; $0.19 per share | Loss widened substantially |
| Operating cash flow | $6.1 million | $8.2 million | Down $2.1 million |
- Revenue declined across all segments: Services fell 8.1%, International 17.3%, and Products and Systems 18.1%. Management attributed the downturn primarily to COVID-19-related customer cutbacks, with foreign exchange also weighing on International revenue.
- Oil and gas generated approximately 58% of revenue, versus 57% a year earlier; aerospace and defense accounted for approximately 14% in both periods.
- Impairment charges comprised $77.1 million of goodwill, $28.8 million of intangible assets and $0.2 million of a right-of-use asset. Excluding special items, the company reported an operating loss of $5.7 million, compared with income of $2.3 million in Q1 2019; this is a company-defined non-GAAP measure.
- Cash used in investing activities was $4.2 million, including $4.3 million of property and equipment purchases. Cash increased $2.0 million during the quarter to $17.0 million.
Balance sheet and liquidity
- At March 31, cash was $17.0 million, current assets $168.8 million and current liabilities $101.4 million.
- Total debt was $258.0 million, including $250.3 million under the senior credit facilities; finance lease obligations totaled $16.2 million. Reported available borrowing capacity under the credit agreement was $139.7 million, with $3.7 million of letters of credit outstanding.
- Total assets fell to $583.5 million from $719.9 million at year-end 2019, principally reflecting impairments and foreign-currency translation. Stockholders’ equity declined to $171.6 million from $285.8 million.
- Operating cash flow exceeded property and equipment purchases by approximately $1.8 million; this simple comparison is not a company-reported free-cash-flow measure.
Outlook, risks and unusual items
- Management said it could not reliably predict the overall impact of COVID-19 and sharply lower oil prices, and expected adverse effects to continue through the remainder of fiscal 2020 and potentially longer. No numerical earnings or revenue guidance was provided.
- Subsequent credit amendment: On May 15, 2020, after quarter-end, Mistras amended its credit agreement because it expected not to meet upcoming covenants. The amendment reduced the revolving facility from $300 million to $175 million; waived leverage and fixed-charge tests for specified periods; introduced interim minimum EBITDA and $20 million minimum-liquidity requirements through September 30, 2020; and increased the LIBOR margin range to 1.50%–4.15%. The company said it believed compliance and liquidity were probable, but could not assure this given uncertainty. The amendment also restricts acquisitions and includes a cash-based revolver prepayment provision.
- For Q2 2020, executives took temporary salary reductions of 25%–45%, other salaried employees had smaller reductions, and the company suspended its voluntary U.S. and Canadian savings-plan match. Management said it would reassess measures if the downturn persisted.
- A Texas pipeline customer dispute includes a customer counterclaim seeking approximately $7.6 million. Mistras had $1.4 million of related past-due receivables, fully reserved; it said any successful workmanship claim would be covered by insurance subject to a deductible, but it could not estimate potential liability and recorded no accrual for the claim.
- An estimated $2.5 million multi-employer pension withdrawal liability remained at quarter-end. Mistras also disclosed that its disclosure controls were ineffective because of previously identified material weaknesses in income-tax accounting and reporting controls; remediation was ongoing.
Key facts for investors to verify
- Whether operating demand, volumes and gross margins recover or deteriorate further, particularly in oil and gas and aerospace.
- Whether the company meets the amended credit agreement’s EBITDA, liquidity and later-period leverage covenants, and how much usable borrowing capacity remains under the reduced revolver.
- Whether further asset impairments, customer credit losses or cash-flow pressure arise as forecasts and market conditions change.
- The outcome and potential financial exposure of the pipeline litigation, including insurance coverage, and the remaining pension withdrawal liability.
- Progress and testing results for remediation of the income-tax control weaknesses.