Mistras Group, Inc. — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; quarterly figures below include the three months ended December 31, 2019. Mistras provides technology-enabled inspection, testing, maintenance, engineering, monitoring, software, and equipment solutions for industrial assets and infrastructure. Its three segments are Services, International, and Products and Systems.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $748.6 million | $742.4 million |
| Gross profit / margin | $217.3 million / 29.0% | $207.9 million / 28.0% |
| Operating income / margin | $24.1 million / 3.2% | $22.2 million / 3.0% |
| Net income attributable to Mistras | $6.1 million | $6.8 million |
| Diluted EPS | $0.21 | $0.23 |
| Operating cash flow | $59.1 million | $41.7 million |
| Capital expenditures | $22.9 million | $21.1 million |
| Cash and cash equivalents at year-end | $15.0 million | $25.5 million |
| Long-term debt, including current portion | $254.7 million | $290.6 million |
At December 31, 2019, finance lease obligations were $17.2 million. Credit-facility borrowings were $246.7 million, with $3.7 million of letters of credit outstanding and $149.6 million of available borrowing capacity. Total current assets were $179.2 million and current liabilities were $109.2 million.
Full-year revenue grew 0.8%. Services revenue increased 3.6% to $595.1 million, while International revenue fell 6.0% to $144.3 million and Products and Systems revenue declined 20.7% to $18.6 million. Oil and gas represented 58% of revenue; aerospace and defense represented 13%. No individual customer accounted for 10% or more of revenue.
Material changes versus comparable periods
- Gross margin rose 1.0 percentage point, reflecting improved Services operating leverage and mix, and favorable mix in International and Products and Systems.
- Operating expenses increased 4.0% to $193.2 million; depreciation and amortization increased to $16.7 million from $12.0 million. Bad-debt expense also increased, mainly due to customer disputes.
- Interest expense rose to $13.7 million from $8.0 million, primarily reflecting higher borrowings after the Onstream acquisition and, to a lesser extent, higher base rates. Net income declined despite higher operating income.
- Operating cash flow increased $17.4 million, primarily due to working-capital movements. Investing cash outflow narrowed substantially as 2018 included $135.7 million of net acquisition spending; financing cash flow shifted from a $114.0 million inflow in 2018 to a $44.1 million outflow in 2019.
- Fourth-quarter 2019 revenue was $179.0 million versus $180.8 million a year earlier; operating income was $2.3 million versus $2.5 million. Net income attributable to Mistras was $0.8 million, compared with a $1.1 million loss in fourth-quarter 2018; diluted EPS was $0.03 versus $(0.04).
Outlook, risks, contingencies, and unusual items
- Management stated that cash, expected operating cash flow, and available credit were expected to cover anticipated needs over the next 12 months, while warning that COVID-19 could materially affect 2020 financial position, operations, and cash flows. The impact could not then be reasonably estimated. The company was taking steps to reduce spending and preserve cash.
- No specific financial guidance was provided. Management cited expected oil-price sensitivity and possible customer deferral of inspection and maintenance spending into early 2020; it also described strong aerospace demand and opportunities from expanded pipeline-integrity regulation.
- Debt covenants constrain financial flexibility and acquisitions. Management said it did not expect acquisitions in 2020; a March 2020 credit amendment further restricted acquisitions before April 1, 2021, including a $5 million aggregate consideration cap and a leverage-ratio condition. The amendment also revised leverage covenant limits and could increase the LIBOR margin.
- Oil and gas exposure, customer concentration, seasonality, skilled-labor availability, foreign exchange, and variable-rate debt are key risks. A 100-basis-point rate increase was estimated to increase annual interest expense by about $2.5 million. Goodwill was $282.4 million; the October 2019 annual impairment test found no impairment.
- Special items included $0.8 million of 2019 pension-withdrawal expense and $3.0 million of bad-debt provision for troubled customers. The company had an estimated $2.5 million remaining multi-employer pension withdrawal liability at year-end. German staff-leasing contract changes resulted in an $0.8 million accrued severance estimate.
- A pipeline customer dispute involved approximately $1.4 million of past-due receivables and a customer damages claim of approximately $7.6 million; the company fully reserved the receivable and said it could not estimate any potential liability. An environmental investigation at a leased California site also remained unresolved, with no liability estimate or accrual recorded.
- The financial-statement audit opinion was unqualified, but the auditor issued an adverse opinion on internal control over financial reporting. Material weaknesses concerned risk assessment and the staffing and controls for income-tax accounting, including deferred tax assets and liabilities. Preliminary tax misstatements were corrected in the filed statements; remediation was underway.
Important facts for investors to verify
- Progress and testing of remediation for the material weaknesses in income-tax controls, and whether control effectiveness is restored.
- COVID-19 effects on customer-site access, revenue, working capital, cash flow, and covenant compliance, including any subsequent credit amendments.
- Debt repayment, leverage covenant headroom, interest costs, and the large scheduled 2023 debt maturity of $225.3 million.
- Recoverability of receivables and resolution of the pipeline dispute, environmental matter, and remaining pension-withdrawal liability.
- Whether Services growth and margin gains can offset declines in International and Products and Systems and continued oil-and-gas spending volatility.