Mistras Group, Inc. — Fiscal 2014 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended February 28, 2014. Financial statements are unaudited; dollar amounts below are in millions unless noted. Mistras provides technology-enabled asset-protection, inspection, testing, products and systems for infrastructure-intensive industries.
Financial performance
| Metric | Three months ended Feb. 28, 2014 | Prior-year quarter | Nine months ended Feb. 28, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $151.7 | $133.7 | $444.3 | $384.8 |
| Gross profit | $39.3 | $34.2 | $126.6 | $109.8 |
| Gross margin | 25.9% | 25.6% | 28.5% | 28.5% |
| Operating income | $3.0 | $5.0 | $27.8 | $28.4 |
| Net income attributable to Mistras | $1.2 | $2.8 | $16.1 | $16.2 |
| Diluted EPS | $0.04 | $0.09 | $0.55 | $0.56 |
| Adjusted EBITDA (non-GAAP) | $12.5 | $12.5 | $51.1 | $51.8 |
- Quarterly revenue grew 13.5% year over year, comprising 7.2% organic growth, 5.9% acquisition growth and 0.4% foreign-exchange benefit. Nine-month revenue grew 15.5%, including 5.4% organic growth and 10.0% acquisition growth.
- Quarterly revenue growth was led by Services, up 21% to $109.1 million. International revenue was $38.1 million versus $37.5 million; Products and Systems revenue was $7.6 million versus $7.6 million. For nine months, International revenue rose 34%, principally reflecting the prior-year German acquisition; Products and Systems revenue declined.
- Quarterly operating income fell despite higher revenue; operating margin was approximately 2% versus 4%. Nine-month operating income also declined, and margin was approximately 6% versus 7%. Quarterly net income attributable to Mistras decreased to $1.2 million from $2.8 million; the effective tax rate increased to approximately 45% from 33%, primarily due to higher permanent tax differences and lower quarterly income.
- For the nine months, operating cash flow was $22.6 million versus $27.5 million. Investing used $30.3 million, including $19.1 million for acquisitions and $11.7 million for capital expenditures. Financing provided $11.3 million, including $26.1 million of net revolver borrowings. Cash increased by $2.1 million to $10.0 million.
- At February 28, 2014, total debt was $81.4 million, including $65.6 million under the revolving credit facility; capital lease obligations totaled $20.2 million. The $125 million revolver had $55.8 million of available capacity, with $3.6 million of letters of credit outstanding. Total current assets were $166.4 million and current liabilities $75.5 million. The company reported compliance with its credit covenants.
Material changes and management commentary
- Management estimated that bad weather in North America, costs to prepare for new large customer contracts in Canada and Alaska, and staffing ahead of revenue from French market-share gains adversely affected the quarter by approximately $3 million: about $2 million reduced gross profit, with the remainder increasing operating expenses.
- Management said Services and International margins improved over the first nine months, while Products and Systems margin declined because of lower sales and unfavorable mix. Quarterly Products and Systems gross margin was 48.3% versus 49.6%.
- Operating cash flow was pressured by a $13.2 million use of cash from accounts receivable amid sales growth. The company described operating cash flow before working-capital changes as approximately $41 million, compared with $40 million in the prior-year period.
- Four acquisitions were completed during the first nine months, with $19.3 million of cash consideration and $3.7 million of contingent consideration recorded in the preliminary purchase-price allocation. They contributed approximately $7.2 million of revenue and $0.5 million of operating income after closing. A further Russian asset-protection business was acquired after quarter-end for approximately $0.5 million cash plus about $0.3 million deferred consideration.
- Oil and gas remained the largest vertical: quarterly revenue grew approximately 20%, reaching 53% of total revenue. The top ten customers represented 43% of quarterly revenue, up from 41% a year earlier.
Outlook, risks and contingencies
- No specific financial guidance or numeric forecast is provided. Management expects cash sources to include operating cash flow and revolver borrowings; planned uses include acquisitions, expansion, equipment, technology, leases and debt repayment. It stated that available sources were sufficient for operations for the foreseeable future, while noting that additional financing might be needed if cash and operating flows prove insufficient.
- The company identified seasonality and working-capital needs, acquisition integration and funding, foreign-currency movements, and covenant and credit availability as relevant risks. It did not hedge foreign-currency exposures with forward contracts.
- A pipeline project owner alleged that certain radiography images did not meet API quality standards and claimed damages. No lawsuit had been filed; Mistras said it could not estimate the likely outcome or potential liability and had recorded no reserve. A separate governmental investigation concerns a 2011 environmental incident; management did not expect a material financial effect.
- Potential acquisition-related contingent consideration ranged from zero to approximately $31.0 million, based on acquired businesses meeting performance targets. The recorded fair value was $15.5 million and depends on significant unobservable assumptions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth converts into improved operating margins after the cited start-up and weather-related costs.
- Accounts-receivable collection, working-capital requirements and operating cash flow relative to earnings and continued growth.
- Acquisition performance, purchase-price allocations, goodwill and the timing and amount of contingent consideration payments.
- Debt, revolver availability and covenant headroom as borrowing and capital-lease obligations increase.
- Developments in the pipeline-image claim, including any lawsuit, estimated exposure or reserve.