Mistras Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results are compared with the corresponding 2021 periods. Dollar amounts below are in millions unless noted.
Business context
Mistras provides asset-protection services and products, including nondestructive testing, inspection, engineering, mechanical services, and monitoring software. Its segments are Services, International, and Products and Systems. Oil and gas represented approximately 57% of revenue in both Q2 and the first half of 2022.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $179.0 | $177.7 | $340.7 | $331.4 |
| Gross profit / margin | $53.6 / 29.9% | $55.3 / 31.1% | $93.5 / 27.4% | $95.3 / 28.8% |
| Operating income / margin | $9.6 / 5.3% | $11.4 / 6.4% | $4.9 / 1.4% | $6.6 / 2.0% |
| Net income (loss) attributable to Mistras | $4.6 | $5.9 | $(0.7) | $0.6 |
| Diluted earnings (loss) per share | $0.15 | $0.20 | $(0.02) | $0.02 |
- Q2 revenue increased 0.8%; first-half revenue increased 2.8%. Services revenue grew 3.1% in Q2 and 4.9% year to date. International revenue declined 7.3% in Q2 and 3.1% year to date, primarily reflecting unfavorable foreign exchange; Products and Systems revenue also declined.
- Profitability weakened despite revenue growth. Management attributed lower Services margins principally to higher U.S. benefit costs and the end of Canadian wage subsidies. International margins improved, while Products and Systems margins fell with unfavorable sales mix.
- Q2 operating income before special items, a non-GAAP measure, was $9.5 million versus $12.3 million. For the first half it was $4.2 million versus $9.0 million; margin declined to 1.2% from 2.7%. The filing cautions this measure is not a substitute for GAAP results.
- Q2 interest expense fell to $2.1 million from $3.2 million; first-half expense fell to $4.1 million from $6.4 million. The company cited lower leverage and removal of the LIBOR floor in a prior credit amendment.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $7.8 million, down from $18.1 million, which management attributed mainly to increased working capital. Accounts receivable rose to $129.6 million from $109.5 million at year-end.
- Investing cash use was $6.5 million, including $6.7 million of property and equipment purchases and $0.4 million of intangible purchases. Financing cash use was $5.1 million. Cash declined $5.5 million to $18.6 million; foreign exchange reduced cash by $1.8 million.
- At June 30, total debt was $200.4 million, including $21.2 million current; finance lease obligations totaled $13.3 million. The company reported $11.7 million of unused commitments under its existing facility and compliance with its covenants at quarter-end.
- On August 1, 2022, after quarter-end, Mistras entered a new credit agreement providing a $190 million five-year revolving facility and a $125 million term loan, maturing July 30, 2027. Borrowings use SOFR-based pricing; the facilities are secured by substantially all company assets and guaranteed by certain U.S. subsidiaries.
Outlook, risks, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it could not reliably predict the effects of ongoing market disruptions on operations, results, or liquidity.
- Risks discussed include lingering COVID-19 disruption, the Russia-Ukraine conflict and supply-chain disruption, higher European energy costs, oil-price volatility, and customer maintenance deferrals at refineries despite high oil prices. Management also noted climate-policy uncertainty for its largest market, oil and gas.
- A $0.7 million valuation allowance for a foreign jurisdiction contributed to the elevated tax rate; the first-half effective tax rate was approximately 183.6%, and Mistras reported a first-half net loss.
- Legal matters include a Texas pipeline-inspection dispute involving a customer claim of approximately $7.6 million; Mistras has reserved the $1.4 million receivable and says potential workmanship claims may be insured, but it cannot determine possible liability. A California labor settlement for $2.3 million had preliminary, but not final, court approval as of the filing.
- The company estimated approximately $2.5 million of potential multiemployer pension withdrawal liability. It also disclosed up to approximately $1.9 million of acquisition-related contingent consideration tied to performance metrics.
- Foreign-currency translation reduced first-half comprehensive income by $8.0 million. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether working-capital demands and receivables growth continue to suppress operating cash flow.
- Assess margin recovery, especially in Services and Products and Systems, and compare GAAP results with the company’s non-GAAP “before special items” measure.
- Review the terms, borrowing costs, covenant headroom, and use of proceeds under the August 2022 refinancing.
- Monitor the final approval and payment of the California settlement, the Texas litigation, and pension withdrawal-liability estimates.
- Evaluate exposure to oil-and-gas customer spending, refinery turnaround timing, foreign-exchange movements, and European energy costs.