Mistras Group, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Mistras provides asset-protection, inspection, testing and related technology solutions through Services, International, and Products and Systems segments. This unaudited quarter ended March 31, 2017. The company changed its fiscal year-end from May 31 to December 31 in 2016; the 2016 International segment comparison retains a one-month reporting lag, while 2017 does not, limiting comparability.
Financial performance
- Revenue: $163.3 million, down 2.5% from $167.5 million. Services revenue fell 4% to $126.3 million; International rose 11% to $34.3 million; Products and Systems fell 17% to $5.6 million. U.S. revenue declined to $111.5 million from $121.3 million.
- Profit and margins: Gross profit was $43.2 million, down 1.9%; gross margin was 26.4%, versus 26.3%. Operating income fell 42% to $3.3 million (2.0% of revenue versus 3.4%); net income was $1.7 million versus $3.5 million. Net income attributable to Mistras was $1.7 million, or $0.06 per diluted share, versus $3.4 million, or $0.11 per diluted share.
- Segment performance: Services operating income declined to $7.4 million from $11.3 million; International operating income improved to $3.0 million from $0.7 million; Products and Systems reported an operating loss of $0.4 million.
- Cash flow: Operating cash flow was $13.4 million, compared with $29.1 million. Investing used $8.1 million, including $4.5 million for an acquisition; financing provided $2.9 million. Cash increased $8.4 million to $27.6 million.
- Debt and liquidity: Total debt was $97.8 million, including $93.0 million outstanding under the senior credit facility; capital lease obligations were $15.2 million. The company reported $76.3 million of available facility capacity, after $5.7 million of letters of credit. It was in compliance with credit-facility covenants and said cash, operating receipts, borrowings and lease financing were expected to fund operations for the foreseeable future.
- Balance sheet: Total assets were $469.7 million and current liabilities $74.8 million at March 31, 2017. Accounts receivable, net, was $124.2 million, with a $3.8 million allowance for doubtful accounts.
Material changes and management commentary
- Management attributed lower revenue principally to oil-and-gas weakness and customer spending restraint amid soft market conditions and lower oil prices. Oil and gas represented approximately 59% of revenue in both periods.
- Operating expenses increased $1.6 million, principally due to a $1.2 million bad-debt provision related to a customer’s Chapter 11 bankruptcy. Excluding that provision, severance and acquisition-related items, non-GAAP income before special items was $3.9 million versus $5.5 million; the company’s stated margin declined to 2.4% from 3.3%.
- Operating cash flow fell 54%, which management attributed primarily to collection timing and payment of a $6.3 million legal settlement. The settlement had been accrued in 2016 and was paid in February 2017.
- The company acquired a U.S. NDT, chemical and special-processing services business for $4.5 million cash, with up to $3.5 million additional contingent consideration. The acquisition contributed approximately $0.3 million revenue and $0.1 million operating income after closing.
- During the quarter, Mistras repurchased approximately 256,000 shares for $6.0 million. Approximately $35.0 million remained under its $50 million repurchase authorization.
Outlook, risks and contingencies
- The filing provides no specific financial guidance. Management described current markets as soft, citing lower oil prices and customer spending cuts, while stating that it believed growth opportunities remained across its target markets.
- Customer concentration is notable: BP accounted for approximately 11% of Q1 2017 revenue, and the top ten customers represented approximately 43%.
- A pipeline-related lawsuit alleges damages of approximately $6 million; a separate inspection-system lawsuit alleges approximately $2.3 million. The company said it could not estimate likely outcomes or potential liability and recorded no reserves for these matters. An EPA investigation of a leased California facility also remained unresolved, with liability undetermined.
- Potential acquisition-related contingent consideration ranged from zero to approximately $16.9 million, payable if specified performance targets are achieved.
- The company reported no material changes to previously disclosed risk factors, contractual obligations, or market-risk disclosures. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the revenue and operating-profit decline reflects underlying performance versus the changed fiscal-year and International reporting-lag treatment.
- Whether Services revenue and margins stabilize, and whether International’s improvement continues; assess continued oil-and-gas exposure and customer concentration.
- Whether receivable collections and operating cash flow recover, particularly after the customer bankruptcy provision and settlement payment.
- Debt, available revolver capacity, covenant headroom, and the use of borrowings to fund acquisitions and share repurchases.
- Updates on the unreserved legal and environmental matters and the range and likelihood of acquisition earn-out payments.