Mistras Group, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended November 30, 2012; comparable periods ended November 30, 2011. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Business context
Mistras provides asset-protection services, products, and systems, including non-destructive testing and inspection for energy, industrial, and public infrastructure. It reported approximately 4,200 employees and operations in 16 countries. Oil and gas remained its largest end market, accounting for 52% of Q2 revenue versus 57% a year earlier.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $137.7m | $114.2m | $251.1m | $205.7m |
| Gross profit | $41.9m | $35.2m | $75.6m | $62.6m |
| Gross margin | 30.4% | 30.8% | 30.0% | 30.5% |
| Operating income | $16.0m | $14.1m | $24.0m | $20.0m |
| Net income attributable to Mistras | $9.2m | $8.0m | $13.4m | $11.2m |
| Diluted EPS | $0.32 | $0.28 | $0.46 | $0.39 |
| Adjusted EBITDA, non-GAAP | $23.9m | $20.6m | $39.3m | $32.5m |
Cash flow and liquidity: First-half operating cash flow was $27.4m, compared with $0.4m; investing cash outflow was $32.3m versus $18.2m; financing cash inflow was $4.6m versus $12.3m. Cash declined $0.4m to $8.0m. Management attributed stronger operating cash flow to earnings and improved working-capital management, as well as approximately $2.9m in tax payments deferred after the October 2012 Northeast hurricane.
At November 30, total debt was $59.7m, including $37.3m drawn on the revolver; capital lease obligations were $19.7m. The $125m revolving facility had $84.7m of available borrowing capacity, after outstanding borrowings and letters of credit. The facility matures December 20, 2016. The company reported compliance with its financial covenants. Total assets were $381.0m, total liabilities $171.7m, and equity $209.4m.
Material changes and drivers
- Revenue rose 20.6% in Q2 and 22.1% in the first half. Management estimated Q2 growth was approximately 1.6% organic and 19.4% acquisition-related; first-half growth was 4.8% organic and 18.2% acquisition-related. Organic growth was notably slower than the prior-year comparable periods.
- International revenue more than doubled in Q2, principally reflecting acquisitions. Services also grew; Products and Systems revenue declined in Q2. In the first half, revenue outside oil and gas grew approximately 40%, while oil and gas revenue grew approximately 8%.
- Gross margin declined 0.4 percentage points in Q2 and 0.5 points for the first half. Management cited the acquired international businesses’ lower-margin traditional inspection services and revenue mix; Q2 Products and Systems mix also weighed on margin. Services utilization improvements partly offset these effects.
- Operating income increased 14% in Q2 and 20% year to date. Higher SG&A and depreciation and amortization partly offset revenue growth. Q2 SG&A increased about $4.0m, including $3.5m from businesses acquired in the preceding 12 months; first-half SG&A increased about $8.1m, including $5.4m from acquisitions.
- Interest expense was approximately flat in Q2 and increased $0.3m for the first half, primarily reflecting higher average borrowings. The effective tax rate was approximately 38% versus 39% in both comparable periods.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management expected to rely on operating cash flow and revolver borrowings for liquidity, and stated these sources were sufficient for foreseeable operations. It expected capital expenditures, excluding acquisitions, to historically remain around 3%–4% of revenue, while identifying acquisitions, international expansion, equipment, technology, and working capital as cash needs.
- In September 2012, Mistras acquired a German asset-protection company for approximately $28.3m cash, $7.7m in seller notes, and estimated contingent consideration of $7.5m. Potential consideration for that acquisition ranged from zero to $12.9m. Acquisition-related contingent consideration liabilities overall totaled $18.4m, with total potential payments of up to approximately $30.2m. Purchase-price allocation remained preliminary.
- After quarter-end, the company acquired businesses in France and Canada for approximately $6.6m cash. Management also reported three acquisitions since the start of fiscal 2013 through January 8, 2013, with initial cash outlays totaling $34.9m.
- A subsequent adjustment of $8.2m to the November 30 balance sheet increased goodwill, deferred income taxes, total assets, and total liabilities and equity; the filing states that no other financial statements were affected.
- The company disclosed a U.S. Attorney’s Office criminal investigation relating to alleged hazardous-waste storage and labeling at its Cudahy, California facility, including a possible obstruction concern involving employees. 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 from an earlier local investigation had been paid.
- Foreign-currency translation exposure affected reported results; first-half translation loss in other comprehensive income was approximately $0.5m. Mistras did not hedge foreign-currency exposure and had no interest-rate swaps outstanding. It reported that a hypothetical 100-basis-point adverse rate change would not materially affect results.
Important facts for investors to verify
- Whether acquisition-led growth can translate into sustained organic growth, and whether acquired businesses meet performance expectations without further pressure on margins.
- The final purchase-price allocations, goodwill and intangible-asset valuations, and potential contingent-consideration payments from acquisitions.
- Working-capital and cash-flow trends, the effect of deferred tax payments, acquisition spending, and additional borrowing needs.
- Compliance with credit-facility covenants as debt rises, and the terms and capacity remaining under the revolver.
- Developments and potential consequences of the Cudahy environmental investigation, and the impact, if any, of the $8.2m balance-sheet adjustment.