Mistras Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; dollar amounts below are in millions unless noted. Mistras provides asset-protection, inspection, testing, engineering, maintenance, software, and related products and services across industrial markets.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $177.7 | $124.4 | $331.4 | $283.9 |
| Gross profit | $55.3 | $41.2 | $95.3 | $81.8 |
| Gross margin | 31.1% | 33.1% | 28.8% | 28.8% |
| Operating income (loss), GAAP | $11.4 | $(0.4) | $6.6 | $(111.6) |
| Net income (loss) attributable to Mistras | $5.9 | $(2.7) | $0.6 | $(101.2) |
| Diluted EPS | $0.20 | $(0.09) | $0.02 | $(3.49) |
- Q2 revenue increased 42.8% year over year, predominantly from organic recovery versus the pandemic-affected 2020 quarter, with a low-single-digit benefit from foreign exchange. First-half revenue increased 16.7%.
- Services revenue grew 44.0% in Q2 and 17.3% in the first half; International grew 49.7% and 18.3%, respectively. Products and Systems revenue declined in both comparisons.
- Q2 gross margin fell 2.0 percentage points, which management attributed mainly to Services mix and higher reimbursable travel costs; favorable mix and utilization in International and Products and Systems partly offset this. First-half gross margin was unchanged.
- Q2 operating income before special items, a non-GAAP measure, was $12.3 million, or 6.9% of revenue, versus $0.8 million, or 0.6%, a year earlier. First-half results were $9.0 million, or 2.7%, versus a $4.9 million loss, or (1.7%).
Cash flow, balance sheet, and debt
- First-half operating cash flow was $18.1 million, down from $34.9 million, primarily because receivables and working capital rose as business activity recovered. Investing cash outflow was $10.3 million, including $10.2 million of property and equipment purchases and $0.6 million of intangible purchases. Financing cash outflow was $13.0 million.
- Cash was $19.9 million at June 30, 2021, versus $25.8 million at year-end. First-half free cash flow, calculated as operating cash flow less property, equipment, and intangible purchases, was approximately $7.3 million.
- Total debt was $211.2 million, including $17.8 million current and $193.3 million long-term; finance lease obligations totaled $14.4 million. The company reported $203.9 million of borrowings and $4.3 million of letters of credit under its credit agreement, with $41.2 million of unused commitments.
- In May 2021, the credit agreement amendment removed the 1% LIBOR floor and revised leverage covenants: maximum total consolidated debt leverage of 4.0x through Q1 2022 and 3.5x thereafter. Revolver capacity was reduced to $165 million, with scheduled reductions to $155 million in September 2021 and $150 million in December 2021. Term-loan quarterly payments increased to $3.75 million through Q1 2022 and $5 million thereafter. The facility matures in December 2023.
- Mistras stated it was in covenant compliance at quarter-end and believed available funding was adequate, while noting uncertainty from pandemic, oil-price, and aerospace-market conditions.
Outlook, risks, and unusual items
- No quantified revenue, earnings, or cash-flow guidance is provided. Management said activity was approaching pre-pandemic levels in some markets, particularly oil and gas, but could not predict the continuing effects of COVID-19, oil-price volatility, or climate initiatives.
- Oil and gas accounted for approximately 57% of Q2 revenue and 59% of first-half revenue. Aerospace and defense represented approximately 10% in both 2021 periods. The top ten customers accounted for about 35% of revenue in Q2 and the first half; no individual customer represented 10% or more.
- The company cautioned that climate-change measures or private-sector action to reduce fossil-fuel use could adversely affect its largest market, while potentially benefiting alternative-energy work. Pandemic disruption and weaker aerospace activity remain relevant risks.
- Q2 2020 comparisons were affected by COVID-19 disruption. First-half 2020 results also included $106.1 million of impairment charges; consequently, the large reported improvement in first-half GAAP operating results is not directly comparable without considering that unusual charge.
- A California wage-and-hour settlement was agreed in May for $2.3 million, subject to court approval, plus the employer share of payroll taxes. Mistras recorded $1.6 million of expense in Q1 2021 and $0.8 million in Q4 2020. A separate Texas pipeline-inspection dispute includes a customer counterclaim of about $7.6 million; the company says potential workmanship claims may be insured, but it cannot estimate any liability and has not accrued one. A $1.4 million receivable reserve was recorded in 2019.
- Estimated potential multi-employer pension withdrawal liability was approximately $2.5 million; related charges were incurred in 2018 and 2019. Acquisition-related contingent consideration could range from zero to approximately $2.8 million.
Key investor verification points
- Whether the recovery in revenue and operating performance persists, especially in oil and gas, and whether Q2 gross-margin pressure in Services continues.
- Receivables collection and working-capital conversion, given the decline in operating cash flow despite revenue growth.
- Debt covenant headroom, the staged revolver-capacity reductions, required term-loan amortization, and liquidity through the December 2023 maturity.
- Settlement court approval and final costs, the outcome and insurance coverage of the Texas pipeline dispute, and the status of pension-related exposure.
- Potential longer-term effects of fossil-fuel transition policies and continued pandemic or aerospace-market disruption.