Mistras Group, Inc. — Form 10-Q Summary
Business context and period. The filing covers the unaudited three months ended August 31, 2011—the first quarter of fiscal 2012 (fiscal year ending May 31, 2012)—compared with the three months ended August 31, 2010. Mistras provides asset-protection services, products, systems and software, including nondestructive testing and inspection. Oil and gas remained its largest market.
Key financial results
Amounts below are in millions of dollars except per-share data.
| Metric | Quarter ended Aug. 31, 2011 | Prior-year quarter |
|---|---|---|
| Revenue | $91.4 | $68.4 |
| Gross profit / margin | $27.4 / 30.0% | $20.8 / 30.4% |
| Operating income / margin | $6.0 / 6.5% | $3.3 / 4.8% |
| Net income attributable to Mistras | $3.2 | $1.6 |
| Diluted earnings per share | $0.11 | $0.06 |
| Operating cash flow | $12.8 | $9.2 |
| Cash and cash equivalents at quarter-end | $6.5 | $13.9 |
Revenue grew 33.7%, comprising estimated organic growth of 19.3%, acquisition growth of 12.4% and foreign-exchange benefit of 2.0%. Adjusted EBITDA, a non-GAAP measure, was $12.0 million versus $8.5 million. Gross margin declined 0.4 percentage points, which management attributed mainly to revenue mix, including growth in lower-margin oil-and-gas work; technician utilization and cost controls partly offset the pressure.
Cash, debt and liquidity. Investing activities used $8.8 million, including $5.6 million of cash paid for acquisitions and $3.1 million of property and equipment purchases. Financing activities used $8.6 million, principally for debt and lease repayments. At August 31, long-term debt, including current maturities, was $16.0 million; capital-lease obligations totaled $17.6 million. No revolver borrowings were outstanding at quarter-end, and available borrowing capacity was $54.1 million. The revolving facility matures in July 2012. The company reported compliance with its credit agreement. By October 3, 2011, it had approximately $4.0 million outstanding on the revolver and $2.0 million of letters of credit.
Material changes, outlook and risks
- Services revenue increased to $75.7 million from $55.3 million; Products and Systems revenue rose to $7.5 million from $5.3 million; International revenue was $9.8 million versus $9.0 million. Services drove most of the growth. Non-oil-and-gas target-market revenue rose approximately 48%; oil-and-gas revenue rose approximately 24% and represented 56% of total revenue, down from 61%.
- The company completed three acquisitions for a preliminary purchase price of $8.1 million. Their post-acquisition contribution in the quarter was approximately $0.4 million of revenue and a $0.1 million operating loss. Purchase-price allocations, including certain acquired intangible valuations, remained preliminary. Acquisition-related contingent consideration across the company ranged from zero to $10.7 million; $1.1 million was accrued for the quarter’s acquisitions.
- Management said cash, operating cash flow and borrowing capacity should fund operations for the foreseeable future. It expects cash uses to include acquisitions, expansion, equipment, technology, working capital and debt and lease payments; it provided no quantified earnings or revenue guidance. Historical capital expenditures, excluding acquisitions, were approximately 3%–4% of revenue.
- BP accounted for 16% of quarterly revenue and approximately 11% of accounts receivable at August 31. The company also cited foreign-currency exposure and does not currently hedge it with forward contracts. It disclosed no material change to the risk factors in its 2011 Form 10-K.
- A California labor-law class-action settlement received final court approval in August 2011; the related $0.3 million charge was recorded in the prior-year quarter. Total potential contingent acquisition consideration was up to $10.7 million. The filing also revised prior-period cash-flow classification for insurance-premium financing: 2010 operating cash flow increased by $0.96 million and financing cash flow decreased by the same amount, with no change in net cash movement.
Important facts for investors to verify
- Whether organic growth, acquisition contributions and margin trends persist, particularly given the lower gross margin and competitive pricing on new contracts.
- Acquisition performance, completion of purchase-price valuations and potential contingent-consideration payments.
- Liquidity and covenant headroom, including revolver usage after quarter-end and the July 2012 facility maturity.
- Exposure to BP and other major customers, foreign exchange, and the company’s ability to fund planned growth and capital spending.
- The implications of the cash-flow reclassification when comparing periods; the filing says the revision did not affect net cash movement.