Mistras Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial amounts below are in millions unless stated otherwise. Mistras provides asset-protection services, including inspection and non-destructive testing, engineering, and related products and digital solutions, across Services, International, and Products and Systems segments.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $174.6 | $147.9 | $506.0 | $431.8 |
| Gross profit / margin | $52.2 / 29.9% | $47.4 / 32.0% | $147.6 / 29.2% | $129.2 / 29.9% |
| Operating income (loss) | $9.2 | $5.7 | $15.9 | $(105.9) |
| Net income (loss) attributable to Mistras | $3.4 | $1.5 | $4.0 | $(99.6) |
| Diluted earnings (loss) per share | $0.11 | $0.05 | $0.13 | $(3.43) |
- Q3 revenue rose 18.0%; nine-month revenue rose 17.2%. Management attributed growth mainly to recovery in end markets and organic growth, with a low-single-digit favorable foreign-exchange effect.
- Q3 gross margin fell 2.1 percentage points, primarily from Services mix and higher reimbursable travel costs. Nine-month margin declined 0.7 points; favorable mix and utilization in International and Products and Systems partly offset Services pressure.
- Nine-month operating results improved substantially from 2020, which included $106.1 million of impairment charges. Excluding special items, operating income was $9.5 million in Q3 2021 versus $6.2 million in Q3 2020, and $18.5 million for the first nine months versus $1.2 million a year earlier; these are company-defined non-GAAP measures.
- Operating cash flow was $22.5 million for the first nine months, down from $41.8 million. The filing attributes the decline mainly to working-capital use, including receivables growth as collections lagged increased activity. Investing cash outflow was $15.5 million, including $16.0 million of capital expenditures.
- Cash was $22.6 million at September 30, 2021, versus $25.8 million at December 31, 2020. Total debt was $215.9 million, versus $220.2 million; finance-lease obligations totaled $14.1 million. The company reported $22.2 million of unused credit commitments and $4.3 million of letters of credit outstanding.
- Current assets were $180.0 million and current liabilities $126.1 million at quarter-end. Accounts receivable, net, increased to $127.7 million from $107.6 million at year-end.
Material changes and management outlook
- Recovery from COVID-19 disruption supported revenue growth, particularly in oil and gas. Oil and gas represented about 56% of Q3 revenue; aerospace and defense represented about 10%. Products and Systems revenue declined, while Services and International revenue increased.
- The company said it had reinstated substantially all temporary 2020 cost reductions, including the savings-plan employer match and pre-pandemic wage levels. Interest expense declined year over year, partly due to lower leverage and removal of the 1% LIBOR floor under a May 2021 credit amendment.
- No quantified revenue or earnings guidance is provided. Management described activity in certain markets, especially oil and gas, as approaching pre-pandemic levels, but said it could not predict the overall effects of the pandemic, oil-price volatility, or climate initiatives.
- The May 2021 credit amendment reduced the revolving facility to $155 million at September 30, with a further reduction to $150 million scheduled for December 31, 2021. It increased scheduled term-loan payments and requires a maximum total consolidated debt leverage ratio of 4.0x through the quarter ending March 31, 2022, then 3.5x. The company reported covenant compliance at quarter-end and considered compliance and liquidity sufficient, while acknowledging uncertainty.
Risks, contingencies, and unusual items
- Oil and gas concentration exposes results to oil-price and industry-spending changes. Management also identified pandemic-related uncertainty, aerospace-market volatility, and potential long-term effects of climate policies reducing fossil-fuel use; such policies could also benefit its alternative-energy business.
- A California labor-law settlement provides for $2.3 million plus employer payroll taxes, subject to court approval. The company recorded $1.6 million of expense in Q1 2021 and $0.8 million in Q4 2020.
- A Texas pipeline customer alleges inspection-related damages of approximately $7.6 million and has counterclaimed; Mistras disputes liability and says any successful workmanship claim is expected to be covered by insurance, subject to a deductible. The filing says liability and amount cannot be determined; a $1.4 million receivable was fully reserved in 2019.
- Estimated potential multi-employer pension withdrawal liability was approximately $2.5 million. Potential acquisition-related contingent consideration ranged from zero to approximately $2.8 million.
- The 2020 impairment charges were not repeated in 2021. Management reported no subsequent goodwill impairment trigger through September 30, 2021, but noted future adverse changes could result in material charges.
Key investor verification points
- Track whether revenue recovery converts into cash; verify receivables, collections, and operating cash flow against continued growth.
- Assess whether gross-margin pressure in Services persists and whether the company can sustain operating profitability after reinstating costs.
- Review debt, revolver availability, scheduled term-loan repayments, and covenant headroom as facility capacity declines and leverage limits tighten.
- Monitor oil and gas concentration and developments affecting oil prices, aerospace activity, and climate-related regulation.
- Check court approval and final cost of the California settlement, and updates to the Texas pipeline dispute and pension contingency.