Mistras Group, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, with unaudited quarterly results including the quarter ended December 31, 2018. The company previously changed its fiscal year-end from May 31 to December 31; annual 2018 and 2017 results are comparable full-year periods. Amounts below are in U.S. dollars and rounded unless stated otherwise.
Business context
Mistras provides technology-enabled asset-protection services, products and software, including nondestructive testing, inspection, maintenance, engineering and condition monitoring. It reports three segments: Services, International, and Products and Systems. Oil and gas contributed 56% of 2018 revenue; aerospace and defense contributed 15%. No customer accounted for 10% or more of 2018 revenue. The top ten customers together represented approximately 34%.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $742.4 million | $701.0 million |
| Gross profit / gross margin | $207.9 million / 28.0% | $187.7 million / 26.8% |
| Operating income / operating margin | $22.2 million / 3.0% | $4.2 million / 0.6% |
| Net income (loss) attributable to Mistras | $6.8 million | $(2.2) million |
| Diluted EPS | $0.23 | $(0.08) |
| Cash from operating activities | $41.7 million | $55.8 million |
Revenue rose 6%, mainly from Services and International. Gross margin improved across all three segments: Services to 26.4%, International to 29.6%, and Products and Systems to 45.1%. Management’s non-GAAP income before special items was $31.7 million, up 26% from $25.2 million; this measure excludes specified acquisition, restructuring, impairment and other items and is not a GAAP measure.
For fourth-quarter 2018, unaudited revenue was $180.8 million versus $187.6 million in fourth-quarter 2017; gross profit was $52.3 million versus $50.3 million. Operating income was $2.5 million versus $6.3 million, and net loss attributable to Mistras was $1.1 million versus net income of $0.9 million.
Balance sheet, debt and liquidity
- At December 31, 2018, cash and cash equivalents were $25.5 million, total assets $694.0 million, total liabilities $423.0 million, and stockholders’ equity $270.9 million.
- Total debt was $290.6 million; capital-lease obligations were $13.0 million, for combined debt and lease obligations of approximately $303.6 million. Debt increased from $166.9 million at year-end 2017, primarily reflecting acquisition funding.
- Operating cash flow declined by $14.1 million year over year, primarily due to working-capital movements and collection timing. Investing cash use was $155.5 million, including $140.0 million of net cash for acquisitions and dispositions and $21.1 million of capital and intangible-asset purchases. Financing provided $114.0 million, primarily through net borrowings.
- The amended credit facility provides a $300 million revolver and a $100 million term loan, maturing December 2023. At year-end, borrowings and letters of credit under the facility were $281.7 million and $5.4 million, respectively; reported additional borrowing capacity was $112.9 million. The company stated it was covenant-compliant and expected cash, operating cash flow and borrowing capacity to meet anticipated needs for the next 12 months.
Material changes, outlook and significant items
- Onstream was acquired in December 2018 for approximately $143.1 million in cash, expanding inline inspection capabilities in the midstream oil and gas market. The purchase allocation included $83.2 million of goodwill. The acquired business contributed approximately $0.3 million of post-close 2018 revenue; its post-close operating loss was approximately $2.0 million, including $1.3 million of acquisition-related expense.
- 2018 operating results included a $5.9 million charge for probable multi-employer pension withdrawal liability, a $1.6 million accrual for potential German staff-leasing severance, approximately $1.2 million of Brazilian labor-claim charges, and a $2.4 million gain on sale of a subsidiary. Total pre-tax special-item charges were reported as $9.4 million.
- Interest expense increased to $8.0 million from $4.4 million, primarily due to higher borrowings and, to a lesser extent, higher base rates. The effective tax rate was approximately 52%, including Tax Act-related and other tax effects.
- Management described oil and gas spending as improved through 2018 and expected relatively stable inspection-services spending in 2019, subject to oil-price fluctuations. It cited strong aerospace demand and continued expansion efforts. No formal numerical earnings or revenue guidance is provided in the filing.
- Key risks include exposure to oil and gas market cycles, seasonality, customer concentration, acquisition integration and elevated debt, credit-agreement covenants and variable interest rates, labor availability and safety, foreign currency and international operations, and goodwill impairment. A Cudahy, California site is under EPA investigation; the company said potential liability could not be determined and recorded no reserve. The auditor issued an unqualified opinion and concluded internal control over financial reporting was effective; the acquired Onstream entity was excluded from the company’s control assessment.
Important facts for investors to verify
- Whether operating cash flow and receivables collection improve, given the 2018 decline and working-capital explanation.
- Onstream’s subsequent revenue, profitability, integration progress and realized synergies relative to its acquisition cost and associated goodwill.
- Debt levels, interest expense, remaining borrowing capacity and compliance with leverage and fixed-charge coverage covenants.
- The eventual amount and timing of pension withdrawal liability, German severance and Brazilian labor claims, including any indemnification recoveries.
- Whether the Cudahy environmental investigation results in liability, and whether oil and gas spending and aerospace demand develop as management anticipated.