Mistras Group, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Mistras provides technology-enabled asset-protection, inspection, testing, engineering, and related services, plus products and systems. This unaudited filing covers the quarter and six months ended June 30, 2018, compared with the same 2017 periods. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
- Revenue: Q2 revenue was $191.8 million, up 13% year over year; first-half revenue was $379.4 million, up 14%. Growth reflected mid-single-digit acquisition growth, mid-single-digit organic growth, and a low-single-digit favorable foreign-exchange effect. Oil and gas represented about 55% of Q2 revenue; aerospace and defense about 15%.
- Profit and margins: Q2 gross profit was $55.1 million, up 19%, and gross margin increased to 28.7% from 27.2%. Operating income was $10.3 million versus $5.0 million; operating margin was 5.4% versus 2.9%. Net income attributable to Mistras was $6.0 million versus $2.2 million; diluted EPS was $0.20 versus $0.07. For the first half, gross profit was $103.2 million, operating income $16.7 million, net income attributable to Mistras $8.9 million, and diluted EPS $0.30, compared with $89.5 million, $8.3 million, $3.9 million, and $0.13, respectively, in 2017.
- Segment performance: Q2 Services revenue increased 10% and operating income rose to $16.3 million from $12.1 million. International revenue increased 21%; the segment reported $2.5 million of operating income versus a $0.2 million loss. Products and Systems revenue increased 6%, but the segment continued to report an operating loss of $0.7 million.
- Cash flow: First-half operating cash flow was $20.1 million, down from $23.0 million, primarily due to working-capital movements and collection timing. Investing cash outflow was $10.3 million, including $11.0 million of property and equipment purchases; no acquisitions were completed in the period. Financing cash outflow was $19.3 million, including a net $14.0 million repayment under the credit agreement. Cash declined $10.0 million to $17.5 million.
- Debt and liquidity: Total reported debt was $152.2 million at June 30, down from $166.9 million at year-end 2017; capital-lease obligations were an additional $13.7 million. Revolver borrowings were $142.6 million, with $5.4 million of letters of credit and $102.0 million of available borrowing capacity. The company reported compliance with credit-facility covenants. Current assets were $191.3 million and current liabilities $89.4 million.
Changes versus the prior comparable period
- Higher revenue and improved gross margins, combined with lower operating expenses as a percentage of revenue, supported a more than doubling of GAAP operating income in both Q2 and the first half.
- Interest expense increased to $1.9 million from $1.0 million in Q2 and to $3.7 million from $2.0 million in the first half, principally reflecting borrowings associated with 2017 acquisitions and, to a lesser extent, higher base rates.
- Foreign-currency translation reduced first-half comprehensive income: the translation adjustment was a $4.1 million loss, versus a $7.5 million gain in the first half of 2017.
- Cash declined, while debt decreased from year-end. Working-capital use included an $8.4 million increase in accounts receivable in first-half 2018, compared with a decrease in the prior-year period.
Outlook, risks, and unusual items
- Outlook: Management said market conditions strengthened in the second half of 2017 and continued improving in the first half of 2018, including oil and gas spending and deferred work catching up during spring turnarounds. It expects petroleum prices in their then-current range and relatively stable oil and gas inspection spending for the remainder of 2018, and described aerospace demand as strong. The filing provides no quantitative earnings or revenue guidance.
- Tax: Effective tax rates fell to approximately 29% in Q2 and 31% for the first half, versus 44% and 37%, respectively, in 2017. The company’s accounting for certain Tax Cuts and Jobs Act effects remained provisional, including the transition tax and deferred-tax effects; it was still evaluating GILTI accounting and state tax conformity.
- Contingencies: The company could not determine whether it would incur, or quantify, potential multi-employer pension withdrawal liability following a significant project award to another contractor. It also could not determine whether it had liability, or estimate any amount, in an EPA investigation involving a leased California facility. Potential acquisition-related contingent consideration ranged from zero to approximately $6.7 million. The company reversed a $0.4 million accrual after a French appeal was resolved in its favor.
- Other items and risk factors: Q2 included a $0.4 million net acquisition-related benefit; first-half results included a $1.4 million net benefit, substantially reflecting contingent-consideration fair-value adjustments. A subsidiary classified as held for sale had a $0.3 million Q2 operating loss. Oil and gas remained the largest end market, although customer concentration eased: the top ten customers contributed about 35% of Q2 revenue versus 40% a year earlier. The filing reported no material changes to previously disclosed risk factors.
- Management stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improvement in organic growth and margins persists, particularly in Services and International, and whether Products and Systems can improve profitability.
- Whether oil and gas spending remains stable as management expected, given the segment’s approximately 55% share of Q2 revenue, and how aerospace growth develops.
- Receivables, unbilled revenue, and cash conversion: net receivables reached $144.2 million, including $23.6 million of unbilled revenue, while first-half operating cash flow declined year over year.
- Debt repayment, interest expense, available revolver capacity, and ongoing compliance with credit-facility covenants.
- Resolution of the potential pension withdrawal liability and EPA investigation, the final accounting for Tax Act provisions, and the outcome of remaining contingent consideration obligations.