Mistras Group, Inc. — Form 10-Q Summary
Reporting period: Quarter ended February 29, 2012, the third quarter of Mistras’s fiscal 2012, with nine-month comparisons to February 28, 2011. Although the request metadata says “2011 Q3,” the filing covers fiscal 2012 Q3. Financial figures below are in millions of dollars unless stated otherwise.
Business context
Mistras provides technology-enabled asset-protection products, software and inspection services, including non-destructive testing, to energy, industrial and infrastructure customers. Services are generally recurring. Oil and gas remained its largest market, representing about 55% of quarterly revenue and 56% of nine-month revenue.
Financial performance
| Metric | Three months ended Feb. 29, 2012 | Three months ended Feb. 28, 2011 | Nine months ended Feb. 29, 2012 | Nine months ended Feb. 28, 2011 |
|---|---|---|---|---|
| Revenue | $104.1 | $79.2 | $309.8 | $236.5 |
| Gross profit / margin | $29.6 / 28.4% | $22.6 / 28.5% | $92.2 / 29.8% | $71.2 / 30.1% |
| Operating income / margin | $5.5 / 5.3% | $4.7 / 5.9% | $25.6 / 8.3% | $18.2 / 7.7% |
| Net income attributable to Mistras | $3.0 | $2.4 | $14.2 | $9.7 |
| Diluted EPS | $0.11 | $0.09 | $0.50 | $0.36 |
| Adjusted EBITDA (non-GAAP) | $13.4 | $10.5 | $45.9 | $34.9 |
- Quarterly revenue grew 31.4%; management attributed an estimated 16.5% to organic growth and 15.2% to acquisitions, with foreign exchange reducing growth by 0.3%. For nine months, growth was 31.0%, comprising estimated organic growth of 18.5%, acquisition growth of 11.9% and foreign-exchange benefit of 0.6%.
- Quarterly revenue growth came from all segments. Services revenue was $80.9 million, Products and Systems $9.8 million, and International $17.2 million before corporate eliminations. Non-oil-and-gas markets grew about 63% in the quarter and 49% over nine months.
- Quarterly gross margin was nearly unchanged year over year; nine-month gross margin declined 0.3 percentage points. Management cited revenue mix, including a higher share of lower-margin oil-and-gas work, and higher unbilled direct labor. Quarterly operating margin fell, with acquisition integration costs and higher corporate and selling, general and administrative expenses among the factors.
- Operating cash flow was $21.0 million for nine months, versus $18.6 million. Investing used $32.8 million, including $26.3 million for acquisitions and $6.4 million of property and equipment purchases. Financing provided $9.4 million, principally from $19.1 million of net revolver borrowings. Cash declined $2.9 million to $7.9 million.
- At February 29, current assets were $127.0 million and current liabilities $60.5 million. Long-term debt was $40.6 million, including $22.9 million outstanding on the revolver; capital lease obligations totaled $19.5 million. The filing reported $98.3 million of available revolver capacity and stated the company was in compliance with its credit covenants.
Material changes, outlook and risks
- Mistras acquired eight businesses during the nine months, for a purchase price of $36.5 million, including cash, seller notes, assumed liabilities and contingent consideration. Acquisitions contributed $12.9 million of revenue and an operating loss of about $0.5 million after closing. Purchase-price allocations remained preliminary. Two additional acquisitions closed in March 2012 for approximately $1.8 million in cash.
- In December 2011, the company entered a new $125 million revolving credit agreement, potentially expandable to $150 million, maturing December 20, 2016. It is secured by substantially all company assets and includes leverage and interest-coverage covenants, as well as restrictions on certain activities.
- No specific revenue or earnings guidance was provided. Management said it expected to fund operations and growth primarily through operating cash flow and revolver borrowings. Anticipated cash uses include acquisitions, international expansion, equipment, technology and software investment, working capital, leases and debt repayments. Management believed available sources were adequate for the foreseeable future, while noting additional funding might be needed if cash and operating flows were insufficient.
- BP accounted for 16% of revenue in both the quarter and nine-month period. Customer concentration declined year over year, but BP remained a significant customer. The oil-and-gas market also exposes results to industry and contract mix.
- The company disclosed foreign-currency translation losses of about $2.0 million in other comprehensive income for the nine-month period and did not use currency hedges. It reported no material effect from a hypothetical 100-basis-point interest-rate increase on period results.
- A California hazardous-waste incident from February 2011 prompted a U.S. Attorney’s Office criminal investigation. In April 2012, after the reporting date, the company was informed it was a target concerning potential Resource Conservation and Recovery Act violations and a possible obstruction issue involving employees. Management said it could not predict the outcome but did not expect a material financial effect based on its investigation to date. The company had paid a $4,000 state fine related to the incident.
- The filing states that other pending legal matters were not expected to have a material adverse effect. It also notes that interim results are not necessarily indicative of full-year results and that acquisition valuation estimates remained subject to completion.
Most important facts for investors to verify
- Whether organic growth and margins persist as acquisition contributions increase and acquired businesses are integrated.
- Cash conversion and working-capital needs, particularly receivables, which used cash during the period.
- Debt, lease obligations, borrowing availability and continued compliance with credit covenants.
- Final purchase-price allocations, contingent consideration and operating performance of recent acquisitions.
- Developments and potential financial or operational consequences of the Cudahy environmental investigation.
- Continuing dependence on BP and exposure to oil-and-gas industry conditions, alongside the reported growth in other markets.