Mistras Group, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018, Mistras provided technology-enabled asset protection, inspection, testing, engineering and related services, along with products and systems, across energy, industrial and infrastructure markets. The filing is unaudited; comparisons are with Q1 2017 unless otherwise noted. Dollar amounts below are in millions.
Financial performance and liquidity
- Revenue: $187.6, up 15%. Services revenue rose 15% to $145.6; International rose 12% to $38.5; Products and Systems rose 11% to $6.2.
- Profitability: Gross profit was $48.1, up 12%; gross margin declined to 25.7% from 26.4%. Operating income rose to $6.4 from $3.3, and operating margin increased to 3.4% from 2.0%. Net income was $2.9 versus $1.7; diluted EPS was $0.10 versus $0.06.
- Cash flow: Operating cash flow was $5.8, down from $13.4, which management attributed primarily to working-capital movements, including collection timing. Investing outflow was $4.8; capital expenditures were approximately $5.3. Financing provided $4.3. Cash increased $5.6 to $33.1.
- Debt and liquidity: Total debt was $174.5, including $164.8 outstanding under the revolving credit facility; capital lease obligations were $13.4. The company reported $79.3 of available borrowing capacity and $5.9 of letters of credit. It was in compliance with credit covenants; management said existing cash, operating collections, borrowings and lease financing were sufficient for foreseeable needs.
- Balance sheet: Total assets were $560.2 and current liabilities $82.8 at March 31, 2018. Long-term debt, net of current portion, was $172.5.
Material changes and management commentary
- Revenue growth reflected high-single-digit acquisition growth, mid-single-digit organic growth and a low-single-digit favorable foreign-exchange impact. Management described market conditions as modestly positive, with that trend expected to continue through the first half of 2018; aerospace demand was strong. No specific financial guidance was provided in this filing.
- Gross margin pressure was concentrated in International, down 270 basis points to 27.8%, primarily because of lower higher-margin in-house inspections in Germany. Services margin edged down 10 basis points; Products and Systems margin was unchanged at 46.7%.
- Operating income included a $1.0 benefit from acquisition-related fair-value adjustments, compared with a $0.5 benefit in Q1 2017. Excluding the company’s specified special items, non-GAAP operating income was $5.5 versus $3.9, up 40%; this measure is not a substitute for GAAP results.
- Interest expense increased to $1.8 from $1.0, which the company linked to higher revolving-credit borrowings, primarily associated with 2017 acquisitions. The effective tax rate rose to approximately 37% from 24%, reflecting Tax Act provisions, including GILTI and executive compensation rules, and differing foreign tax rates.
- Oil and gas customers represented approximately 60% of revenue and aerospace customers 12%. The top ten customers accounted for approximately 41% of revenue. No customer represented 10% of Q1 2018 revenue.
Risks, contingencies and unusual items
- Potential withdrawal liability to multi-employer pension plans may arise following a significant project award to another contractor and a possible reduction in union-covered employees; the company had not determined whether liability would be incurred or its potential amount.
- An EPA investigation of a leased California facility remains unresolved. The company could not determine whether it has liability and recorded no accrual for the matter.
- Potential acquisition-related contingent consideration ranged from zero to approximately $6.7 million, dependent on acquired businesses’ performance. Q1 included a $1.5 million payment of contingent consideration.
- Accounting for certain Tax Act effects remained provisional, including the transition tax and related foreign tax credit and deferred-tax impacts. The company also had not selected its accounting policy for GILTI-related basis differences.
- The company classified a Products and Systems subsidiary as held for sale; it represented 0.6% of consolidated revenue in Q1 and had operating income below $0.1 million.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether revenue growth, particularly organic growth and recovery in relevant markets, continues beyond the first half of 2018.
- Whether gross-margin pressure in International persists and how acquisition-related costs and contingent-consideration revaluations affect reported operating results.
- Whether operating cash flow recovers from the working-capital-driven decline and whether leverage and borrowing capacity remain adequate.
- How the company finalizes Tax Act accounting and whether the pension-plan or EPA matters produce a measurable liability.