Mistras Group, Inc. — Form 10-Q summary
Period clarification: The supplied filing covers the unaudited quarter and nine months ended February 29, 2016 (fiscal 2016 Q3), not 2015 Q3. Comparisons below are against the corresponding periods ended February 28, 2015. Figures are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Business context and reporting period
Mistras provides technology-enabled asset protection, inspection, testing and engineering services, products and systems to infrastructure-intensive industries. It reports Services, International, and Products and Systems segments. Oil and gas represented about 59% of revenue in the quarter and 56% year to date.
Key financial results
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $160.4 million, down 1.7% | $535.0 million, down 0.3% |
| Gross profit / margin | $42.8 million / 26.7%, versus $38.7 million / 23.7% | $151.0 million / 28.2%, versus $139.8 million / 26.0% |
| Operating income / margin | $5.8 million / 3.6%, versus $3.9 million / 2.4% | $38.3 million / 7.2%, versus $25.7 million / 4.8% |
| Net income attributable to Mistras | $3.6 million, versus $1.8 million | $21.9 million, versus $13.9 million |
| Diluted EPS | $0.12, versus $0.06 | $0.74, versus $0.47 |
| Operating cash flow | Not provided separately for the quarter | $55.8 million, versus $34.5 million |
| Free cash flow (company-defined, non-GAAP) | Not provided separately for the quarter | $43.5 million, versus $22.2 million |
For the nine months, EBITDA was $62.1 million and Adjusted EBITDA, a company-defined non-GAAP measure, was $66.7 million, compared with $50.6 million and $54.0 million, respectively. Interest expense was $4.4 million, up from $3.4 million, primarily due to interest on seller notes from prior acquisitions. The nine-month effective tax rate was approximately 35%, versus 38%; favorable discrete tax items reduced the current-period rate by about 2 percentage points year to date.
Financial position and liquidity
At February 29, 2016, cash was $18.1 million and current assets were $174.6 million against current liabilities of $84.9 million. Total debt was $87.4 million, including $71.5 million under the senior credit facility; capital lease obligations were $17.5 million. Debt declined from $113.5 million at May 31, 2015. The company reported $99.0 million of available borrowing capacity, after $4.5 million of letters of credit, under its $175 million revolving facility. It was in compliance with its credit covenants and said existing cash, operating cash flows, borrowings and lease financing were sufficient for the foreseeable future.
Nine-month operating cash flow increased by $21.3 million, which management attributed primarily to improved Adjusted EBITDA and a three-day reduction in days sales outstanding. Investing cash outflow was $13.0 million, including $12.3 million of capital expenditures and $1.7 million for acquisitions. Financing cash outflow was $34.3 million; the company used most of its free cash flow to reduce debt and capital lease obligations by $31.3 million. Cash increased by $7.5 million to $18.1 million.
Changes versus prior comparable periods
- Revenue was nearly flat year to date despite an estimated $24 million, or 4%, adverse impact from foreign exchange and dispositions. Services revenue grew 2% year to date, International revenue declined 7%, and Products and Systems revenue grew 3%.
- Quarterly Services revenue increased 1%; International revenue declined 5%, and Products and Systems revenue declined 20%, which management attributed mainly to timing of sales.
- Gross margin and operating income improved in both the quarter and year to date. Management cited better technical labor utilization, sales mix, contract management and lower overhead in Services and International.
- International operating results improved substantially: quarterly operating income was $1.1 million versus a $1.3 million loss, and year-to-date income was $6.9 million versus $1.2 million.
- Top ten customers contributed about 40% of quarterly revenue, up from 36%, and 36% year to date, up from 33%.
Outlook, commentary, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Management expressed confidence that its funding sources would support operations for the foreseeable future, while noting low oil prices, slow economic growth, currency volatility and uncertain financial markets.
- Oil and gas revenue grew about 6% in the quarter and at a mid-single-digit rate year to date, but the segment’s large share of sales leaves results exposed to conditions in energy markets. Foreign exchange and dispositions also weighed on revenue, particularly in International.
- Quarterly corporate operating expenses were higher partly because of elevated legal costs and a more normal level of share-based compensation than in the unusually low prior-year comparison.
- Acquisition-related fair-value adjustments produced a net benefit to operating income of $1.1 million for the nine months, compared with a $3.0 million benefit in the prior-year period. This is a non-cash, potentially variable item; reported operating income includes it.
- Contingencies include a consolidated California employee wage-and-hour class action, a customer claim alleging deficiencies in pipeline radiography work, and an EPA investigation of a leased California facility. The company had not accrued reserves for these matters because it could not determine likely outcomes or reasonably estimate potential liabilities. Potential acquisition-related contingent consideration ranged from zero to approximately $17.8 million.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It also disclosed an immaterial correction to prior-period cash-flow classifications; the correction did not affect net income, the balance sheet or equity.
Important facts for investors to verify
- Confirm the period being analyzed: this filing is for fiscal 2016 Q3, ended February 29, 2016, despite the request metadata’s “2015 Q3” label.
- Assess whether improved gross margins and operating income can persist while revenue is flat and oil and gas remains a major revenue source.
- Review debt reduction, borrowing availability, covenant headroom and the impact of seller-note interest and lease obligations.
- Monitor customer concentration, currency exposure and International segment performance.
- Track the status and potential financial exposure of the California litigation, pipeline claim, EPA investigation and contingent acquisition payments.
- Distinguish GAAP results from management’s non-GAAP Adjusted EBITDA and free-cash-flow measures, and evaluate the effects of acquisition-related fair-value benefits and discrete tax items.