Mistras Group, Inc. — Form 10-Q Summary
Business context and reporting period
Mistras provides technology-enabled asset-protection products and services, including nondestructive testing and inspection, to infrastructure-intensive industries. This unaudited filing covers the three months ended August 31, 2012, the first quarter of fiscal 2013, and compares results with the three months ended August 31, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $113.4 | $91.4 | +24.0% |
| Gross profit | $33.7 | $27.4 | +23% |
| Gross margin | 29.7% | 30.0% | Down 0.3 percentage points |
| Operating income | $8.0 | $6.0 | +34% |
| Operating margin | About 7% | About 7% | Broadly unchanged |
| Net income attributable to Mistras | $4.3 | $3.2 | +33% |
| Diluted EPS | $0.15 | $0.11 | Up $0.04 |
| Adjusted EBITDA (non-GAAP) | $15.5 | $12.0 | +29% |
Revenue growth comprised estimated organic growth of 8.8%, acquisition-driven growth of 16.8%, and a 1.6% foreign-exchange decrease. International revenue increased to $24.4 million from $9.8 million, largely reflecting prior-year acquisitions. Services revenue was $82.4 million, and Products and Systems revenue was $9.5 million. Oil and gas accounted for 47% of revenue, down from 56%; that market grew about 4%, while other target markets collectively grew about 49%.
Gross margin slipped slightly. Management attributed pressure mainly to the lower-margin mix of acquired International services, project mix and somewhat higher unbillable labor, partly offset by improved product-sales mix. SG&A rose $4.1 million, including $3.1 million from businesses acquired in the prior 12 months and costs supporting growth. Interest expense increased to $1.0 million from $0.7 million. The effective tax rate declined to about 38% from 40%.
Cash flow, balance sheet and liquidity
- Operating cash flow was $21.5 million, versus $12.8 million. Management cited higher earnings and $8.8 million of working-capital cash generation, primarily from receivable collections.
- Investing activities used $2.6 million, including $2.7 million of property and equipment purchases. Financing activities used $19.8 million, including $15.0 million of revolver repayments, $1.6 million of long-term debt repayments, $1.6 million of capital-lease repayments and $1.1 million of acquisition contingent-consideration payments.
- Cash declined by $1.1 million during the quarter to $7.3 million. At August 31, current assets were $113.8 million and current liabilities were $54.1 million.
- Long-term debt, including current maturities, was $23.7 million at August 31, compared with $40.2 million at May 31. Capital-lease obligations were $18.9 million, compared with $19.0 million. The company reported $10.0 million of revolver borrowings, $3.0 million of letters of credit and $112.0 million of available borrowing capacity at August 31.
- The $125 million credit facility matures in December 2016 and is secured by substantially all company assets. Mistras reported compliance with its financial covenants at quarter-end. It also reported approximately $42.2 million of revolver borrowings as of October 1, 2012.
Outlook, risks and unusual items
No specific revenue or earnings guidance is provided. Management said cash from operations and the revolving facility should be sufficient to fund operations for the foreseeable future. Expected cash uses include acquisitions, international expansion, equipment, technology and software investment, leases and debt service; capital expenditures excluding acquisitions have historically been about 3%–4% of revenue. Management cautioned that growth and seasonality can increase working-capital needs and that additional financing, if needed, may not be available on acceptable terms.
After quarter-end, in September 2012, a German subsidiary acquired an inspection and asset-protection company for approximately $36.0 million: $28.3 million in cash and $7.7 million in subordinated notes payable over three years. Additional contingent consideration may be payable based on performance. The filing states that the purchase-price allocation was still in process. The acquisition followed the quarter-end and is not included in the quarter’s cash flows.
BP was the largest customer, representing 12% of quarterly revenue, down from 16%; the top ten customers represented 32%, down from 40%. The company disclosed a U.S. criminal investigation related to alleged hazardous-waste storage and labeling at its Cudahy, California facility, including a concern about possible obstruction of justice involving employee conduct. Management said it could not predict the outcome but did not expect a material financial effect based on its investigation to date. A $4,000 fine relating to the 2011 incident had previously been paid. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
Foreign-currency translation reduced other comprehensive income by about $2.0 million in the quarter. Mistras did not hedge foreign-currency exposure and had no interest-rate swaps outstanding. Management reported no material change to previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- How the September German acquisition affects debt, liquidity, integration costs and future margins; note the reported increase in revolver borrowings to $42.2 million by October 1.
- Developments in the Cudahy environmental investigation, including potential charges, penalties or other consequences.
- Whether acquisition-led growth can be sustained while improving International segment margins and preserving overall profitability.
- Customer concentration, particularly BP’s continuing contribution, and exposure to oil-and-gas activity.
- Ongoing covenant compliance, working-capital cash generation, and the effects of foreign-exchange movements.