Mistras Group, Inc. — Form 10-Q Summary
Business context and reporting period. Mistras provides asset-protection, inspection, non-destructive testing, products and related services to infrastructure-intensive industries. This unaudited filing covers the fiscal third quarter ended February 28, 2013, and the nine months then ended; comparisons are with the corresponding periods ended February 29, 2012. Fiscal years end May 31.
Key financial results
| Metric | Three months ended Feb. 28, 2013 | Year-over-year change | Nine months ended Feb. 28, 2013 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $133.7 million | +28.4% | $384.8 million | +24.2% |
| Gross profit / margin | $34.2 million / 25.6% | +15.6% / down 2.8 percentage points | $109.8 million / 28.5% | +19.1% / down 1.3 percentage points |
| Operating income / margin | $5.0 million / 3.7% | −8.1% / down 1.5 percentage points | $28.4 million / 7.4% | +13.3% / down 0.7 percentage points |
| Net income attributable to Mistras | $2.8 million | −9.4% | $16.2 million | +13.9% |
| Diluted EPS | $0.09 | Compared with $0.11 | $0.56 | Compared with $0.50 |
| Adjusted EBITDA (non-GAAP) | $12.5 million | Compared with $13.4 million | $51.8 million | Compared with $45.9 million |
Cash flow and liquidity. Nine-month operating cash flow was $27.5 million, versus $21.0 million. Investing used $42.4 million, including $33.6 million for acquisitions and $8.9 million for property and equipment. Financing provided $15.1 million, principally reflecting $26.0 million of net revolving-credit borrowings. Cash increased $0.5 million to $8.9 million.
At February 28, 2013, long-term debt, including current maturities, was $72.9 million; capital-lease obligations totaled $18.6 million. Revolver borrowings were $51.0 million, with $3.3 million in letters of credit and reported available borrowing capacity of $70.7 million. Total assets were $396.9 million and total equity was $215.7 million.
Material changes and management commentary
- Quarterly growth was driven by acquisitions and organic expansion: management estimated 22.6% acquisition growth and 5.7% organic growth. Nine-month estimates were 19.7% and 5.1%, respectively. International revenue rose substantially, while Products and Systems revenue declined.
- Management attributed lower gross margins mainly to acquired International businesses’ traditional, lower-margin NDT work, Services project mix, reduced contribution from higher-margin advanced services, and higher employee benefit costs. Quarterly operating income fell despite higher revenue.
- Oil and gas remained the largest market, at about 50% of quarterly revenue versus 55% a year earlier. Revenue from markets outside oil and gas grew about 43% in the quarter. BP and affiliates accounted for 13% of quarterly revenue; the top ten customers accounted for 41%.
- The company acquired three businesses during fiscal 2013 for approximately $35.0 million cash, $7.7 million in seller notes, and contingent consideration. Acquisition valuations and purchase-price allocations remained preliminary. Acquisition-related fair-value adjustments benefited quarterly operating income; these estimates are subject to revision.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said it expects to fund operations primarily with operating cash flow and credit-facility borrowings, and anticipates cash uses for acquisitions, international expansion, equipment, technology, working capital and debt and lease payments. It believes available sources are sufficient for the foreseeable future, while noting additional financing may be needed and may not be available on acceptable terms.
- The $125 million revolving facility matures in December 2016 and includes leverage and interest-coverage covenants. The company reported covenant compliance at February 28, 2013. Borrowings are secured by substantially all company assets.
- Potential acquisition contingent consideration was up to approximately $27.2 million; the recorded fair value was $17.5 million. Payments depend on acquired businesses meeting performance targets. Fiscal 2013 acquisitions alone had potential contingent consideration of up to $15.0 million.
- The company is a target of a U.S. criminal investigation concerning alleged hazardous-waste storage and labeling violations at its Cudahy, California facility, and a possible obstruction-of-justice issue involving employee conduct. Management said it could not predict the outcome but did not expect a material financial effect based on its investigation to date. The filing also discusses ordinary-course litigation, which management did not expect to have a material adverse effect.
- Foreign-currency movements affect reported results; the company had no currency hedges in place. It reported that a hypothetical 100-basis-point adverse interest-rate shift would not have materially affected results. Management cited a fragile global economy and identified forward-looking statements as subject to risks and uncertainties.
Important facts for investors to verify
- Whether acquired businesses deliver expected growth and earnings, and how final acquisition valuations, goodwill and contingent-consideration estimates compare with preliminary amounts.
- Whether margins recover as integration proceeds, given lower quarterly gross and operating margins and slower organic growth than in the prior-year periods.
- Debt growth, revolver availability, covenant headroom, working-capital needs and the cash requirements of acquisitions and capital spending.
- Developments and potential financial consequences of the Cudahy environmental investigation and any other contingencies.
- Customer concentration and exposure to BP, as well as the effect of currency movements and demand across the company’s end markets.