Mistras Group, Inc. — FY2016 Form 10-K
Period note: The filing is the annual report for the fiscal year ended May 31, 2016, not a standalone 2015 Q4 filing. It includes unaudited quarterly results, including the quarter ended May 31, 2016. Financial amounts below are in U.S. dollars.
Business context and reporting period
Mistras provides non-destructive and destructive testing, inspection, engineering, asset-integrity services, related products and software for energy, industrial and public infrastructure customers. It reports three segments: Services, International, and Products and Systems. Services generated about 77% of FY2016 revenue. The company had approximately 5,700 employees and 120 offices in 14 countries.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $719.2 million | $711.3 million | Up 1% |
| Gross profit / margin | $203.0 million / 28.2% | $184.7 million / 26.0% | Margin up 220 basis points |
| Operating income / margin | $43.2 million / 6.0% | $30.4 million / 4.3% | Up 42% |
| Net income attributable to Mistras | $24.7 million | $16.1 million | Up 53% |
| Diluted EPS | $0.82 | $0.54 | Up 52% |
| Adjusted EBITDA (non-GAAP) | $88.1 million | $71.9 million | Up 23% |
| Operating cash flow | $68.1 million | $49.8 million | Up 37% |
| Free cash flow (non-GAAP) | $51.9 million | $33.9 million | Up $18.0 million |
FY2016 investing cash outflow was $16.8 million, including $16.2 million of capital expenditures and intangible-asset purchases. Financing cash outflow was $40.4 million, principally reflecting $36 million of net debt repayments. Cash rose to $21.2 million from $10.6 million.
At year-end, total debt was $85.0 million and capital-lease obligations were $19.8 million, for combined debt and lease obligations of approximately $104.8 million, down from $132.8 million a year earlier. The company had $69.0 million drawn on its revolving facility, $4.8 million of letters of credit outstanding, and reported $101.2 million of available borrowing capacity. It was in compliance with its credit agreement covenants. Management said cash, expected operating cash flow and available borrowing capacity should cover anticipated needs for the next 12 months.
The effective income tax rate was 35.8%, versus 37.9% in FY2015. Total assets were $482.7 million and stockholders’ equity was $276.2 million at May 31, 2016.
Material changes versus prior periods
- Services revenue increased 2% to $553.3 million, supported by modest organic and acquisition growth despite weak inspection-market conditions. Services gross margin improved to 26.3% from 25.0%, with better contract profitability and technician utilization.
- International revenue fell 3% to $143.0 million as unfavorable currency translation more than offset high-single-digit organic growth. Its gross margin recovered to 30.5% from 23.5%, and the segment returned to operating income of $9.3 million from a $0.6 million operating loss.
- Products and Systems revenue declined 3% to $30.3 million on lower sales volume; gross margin edged up to 46.3% through mix and cost improvements.
- Oil and gas customers provided 56% of consolidated revenue, up from 52%. Revenue from those customers increased 9%; one customer, BP, represented approximately 10% of total revenue. The top ten customers represented 36%, versus 33% in FY2015.
- FY2016 fourth-quarter revenue was $184.2 million, compared with $174.7 million a year earlier; operating income was $4.9 million versus $4.6 million, and net income attributable to Mistras was $2.8 million versus $2.2 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management cited market-share gains and growth opportunities but noted customers were reducing inspection spending amid low commodity prices. It expects normal seasonality to continue: Services revenue is typically stronger in fiscal Q2 and Q4, while cash collections can lag in those quarters.
- Industry and concentration risks: Oil and gas accounted for 56% of revenue; prolonged weakness in that sector, customer spending cuts, or loss of major customers could materially affect results. Foreign-exchange movements also pressured International revenue. Wildfires near Fort McMurray reduced Canadian revenue and earnings in Q4.
- Special items: FY2016 included a $6.3 million pre-tax charge for settlement-related costs in a California wage-and-hour class and collective action. Management agreed to a $6 million settlement, subject to court approval. The filing’s non-GAAP adjusted EBITDA and income-before-special-items measures exclude certain items; they should not be viewed as substitutes for GAAP results.
- Other contingencies: A pipeline project owner demanded approximately $6 million over alleged defects in radiography images; the company could not estimate the outcome or liability and recorded no reserve. An EPA investigation of a leased Cudahy, California site was ongoing; potential liability was undetermined and no reserve was recorded. The company recorded a reserve of approximately $0.4 million for an appealed French judgment. Potential acquisition-related contingent consideration could reach $16.6 million.
- Controls and audit: Management disclosed a material weakness in controls over a report-writer IT application, identified in Q4 and originating in prior periods. It reported remediation by May 31, 2016, with no resulting financial-statement misstatements; management and the external auditor concluded internal control over financial reporting was effective at year-end. KPMG gave an unqualified opinion on the financial statements and internal controls.
- Capital allocation and other risks: The board approved a stock repurchase program of up to $50 million; the company did not expect to pay cash dividends. Other disclosed risks include acquisition integration and goodwill impairment, safety and service-quality claims, technician availability, regulation, cybersecurity, and variable-rate debt exposure.
Important facts for investors to verify
- Whether the $6 million labor settlement received court approval and whether final costs differed from the $6.3 million accrual.
- Developments, potential exposure and insurance coverage relating to the pipeline claim and the EPA site investigation; neither had a recorded reserve.
- Whether Services growth and margin improvement persisted amid oil-and-gas spending pressure, and the effect of customer concentration, including BP.
- International operating performance and the sensitivity of revenue and earnings to currency movements.
- Debt repayment, facility availability and covenant headroom, alongside planned acquisitions, capital spending and any stock repurchases.
- The effectiveness of the remediated IT reporting controls in subsequent periods and any effects of adopting the accounting standards discussed in the filing.