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Mistras Group Announces Third Quarter Results

PRESS RELEASES

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Mistras Group Announces Third Quarter Results

Nov 5, 2018

Highlights of the Third Quarter 2018*

  • $182.2 million of revenues; increased 1%
  • Gross Margins of 29%; increased 200 basis points
  • $3.0 million of income from operations (GAAP)
  • $10.1 million of adjusted income from operations (non-GAAP), up 46%
  • $20.8 million of adjusted EBITDA; increased 22%
  • Special items; net after-tax charge of $5.4 million

*- All comparisons are versus the equivalent prior year period.

PRINCETON JUNCTION, N.J., Nov. 05, 2018 (GLOBE NEWSWIRE) -- Mistras Group, Inc. (MG: NYSE), a leading "one source" global provider of technology-enabled asset protection solutions, reported financial results for its third quarter ended September 30, 2018.

Dennis Bertolotti, Chief Executive Officer stated, "Results for the third quarter reflect continued progress in strengthening the Mistras brand and positioning the company for long-term success.  On the top line, the core business remains healthy and performance in both aerospace and mechanical services was also strong, while acquisitions were instrumental to quarterly growth. More importantly, we achieved quarterly gross margins of 29%; our highest level in two years, primarily reflecting a favorable sales mix.   Together with continued expense discipline, consolidated non-GAAP operating margins improved by 170 basis points and adjusted EBITDA was up 22% from a year ago.   Strategically, I am pleased with the margins achieved this quarter and the actions we have taken to improve our mix of business, which I believe will enable us to sustain better margins.   At the same time, we have used our strong year to date performance to continue to build our balance sheet to support our growth initiatives both organically as well as through additional acquisitions.  Finally, during this quarter, we completed the sale of a subsidiary in our Products and Systems segment and took strategic actions to address issues including the planned cessation of certain activities in our International segment. These actions will reduce the proportion of our lower-margin services and/or non-core operations and consequently, will contribute to an overall increase in our profit margins in 2019.  I am confident we are making significant progress strengthening our foundation, in order to capitalize on the growth opportunities in both our core and related markets over the long-term.”

Review of Consolidated Operations for the Third Quarter
Revenues for the third quarter of 2018 were $182 million, 1% higher than $180 million in the prior year period.  The increase in revenues was primarily due to the contribution of acquisitions completed in 2017, as well as organic growth that more than offset the reduction of approximately $10 million Services segment revenue decline related to the previously disclosed lost contract.

Gross profit for the third quarter was up 9% year-over-year to $52 million, and gross margin of 29% was a 200 basis point year-over-year improvement.

Operating income for the third quarter was $3 million, compared with a prior year operating loss of $10 million.  On a non-GAAP basis operating income for the third quarter was $10 million, up 46% compared with $7 million in the prior year period.

Adjusted EBITDA for the quarter was $21 million, up 22% from a year ago due to stronger gross margins and continued disciplined overhead spending management. The Company generated $24.2 million of net cash from operations during the first nine months of 2018.  The Company’s net debt (total debt and capital leases of $163.7 million less cash and cash equivalents of $17.1 million) was $146.6 million at September 30, 2018.

Special Items Recorded in the Quarter
During the third quarter of 2018, the Company sold a subsidiary in the Products and Systems segment, addressed a number of issues and made provisions for the cessation of certain activities in its International segment. The Company recorded a net, pre-tax charge of $7.1 million ($5.4 million after-tax), or approximately $0.19 cents per diluted share.

The special items consisted of the following:

  • In the Services Segment, we recorded a $5.9 million pre-tax, pension withdrawal liability, related to the large contract we exited in April 2018;
  • In the International Segment, we recorded a $2.8 million pre-tax, reorganization charge, primarily due to the impending exit of approximately $20 million of relatively low margin staff leasing services attributable to a German legislative change.  The reduction of these services is anticipated to have relatively little, if any, impact on segment operating income. This charge also includes employee settlement obligations in Brazil;
  • In the Product and Systems Segment, we recorded a $2.4 million gain on the sale of a subsidiary which we had previously disclosed as having been marketed for sale; and
  • We recorded an additional $0.8 million of special items across all segments.

The majority of these items will have a positive impact on our operating margins in 2019, as we prune the underlying non-core, low-margin services, which has either already commenced or in the case of the International segment, will commence at the beginning of the second quarter in 2019.

The Company also recorded an additional 2017 Tax Reform Act adjustment in the third quarter of 2018, which resulted in an increase of $1.3 million of income tax, which had the effect of a reduction of $0.04 in diluted earnings per share.

Performance by segment was as follows:
Services segment third quarter revenues were $141 million, an increase of $4 million or 3% over prior year, attributable primarily to acquisitions.  Organic growth was slightly positive, as Services was able to replace the $10 million revenue lost from the large contract in April 2018. Services segment third quarter GAAP operating income was $8 million compared with $12 million in the prior year.  Excluding the special items mentioned above, third quarter non-GAAP operating income would have been up 25% to $15 million and the operating margin would have increased by 180 basis points.  Improved profitability reflects a better overall sales mix.

International segment third quarter revenue decreased by $2 million or 4% over prior year, attributable to an organic decline and unfavorable FX rates.  International third quarter GAAP operating loss was $0.7 million compared with $1 million of operating income in the prior year.  On a non-GAAP basis, adjusted for the above-mentioned special items, non-GAAP operating income was up 53% this quarter to $2.1 million from $1.4 million a year ago, representing a 220 basis point expansion of segment operating margin.  As noted above, we expect a reduction of approximately $20 million of annualized, relatively low margin International revenue beginning in the second quarter of 2019. The operating income impact of such revenue reduction is anticipated to be close to neutral in 2019, as any lost operating income is expected to be mostly offset with overhead cost reductions.

Products and Systems segment third quarter revenue decreased by $0.6 million or 9% over prior year.  The decrease is attributable to the above-mentioned disposition of a subsidiary. GAAP operating income was $2.4 million for the third quarter compared to a $15.6 million operating loss in the prior year quarter.  Products and Systems third quarter non-GAAP operating income decreased by $0.2 million compared with the prior year.

Mr. Bertolotti concluded, “The improvement of the oil and gas market this year, compared to the low levels we saw last year, extended into the third quarter.  In addition, our aerospace and complimentary mechanical services businesses also continued to grow.  We expect the oil and gas market to remain relatively stable over the next few quarters.  In the fourth quarter, we will be comparing against a year ago quarter that benefited from the release of pent-up demand from earlier deferred work.  In addition, our Services segment will be lapping a year ago quarter that included more than $10 million of revenue from the large customer site.  We believe that remaining focused on strengthening the organization for the long term is a more effective strategy to leverage our competitive advantages across the large, global end markets that we serve.”

Based on strong year-to-date performance, the Company’s reaffirmed key metrics; revenue, adjusted EBITDA and capital expenditures guidance for fiscal 2018.  Due to the impact of the various strategic actions, the Company believes GAAP earnings guidance no longer provides a meaningful indication of the Company’s financial performance:

  • Total revenues expected to be between $725 million to $730 million;
  • Adjusted EBITDA expected to be approximately $78 million; and
  • Capital expenditures expected to be between $17 million and $20 million.

Conference Call
In connection with this release, Mistras will hold a conference call on November 6, 2018 at 9:00 a.m. (Eastern). The call will be broadcast over the Web and can be accessed on Mistras' Website, www.mistrasgroup.com. Individuals in the U.S. wishing to participate in the conference call by phone may call 1-844-832-7227 and use confirmation code 8474976 when prompted. The International dial-in number is 1-224-633-1529.

About Mistras Group, Inc.
MISTRAS is a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. Mission critical services and solutions are delivered globally and provide customers with asset life extension, improved productivity and profitability, compliance with government safety and environmental regulations, and enhanced risk management operational decisions.

MISTRAS uniquely combines its industry-leading products and technologies - 24/7 on-line monitoring of critical assets; mechanical integrity (MI) and non-destructive testing (NDT) services; destructive testing (DT) services; process and fixed asset engineering and consulting services; and its world class enterprise inspection data management and analysis software (PCMS™) to provide comprehensive and competitive products, systems and services solutions from a single source provider.

For more information, please visit the company's website at www.mistrasgroup.com or contact Nestor S. Makarigakis, Group Director, Marketing Communications at marcom@mistrasgroup.com.

Forward-Looking and Cautionary Statements

Certain statements made in this press release are "forward-looking statements" about Mistras' financial results and estimates, products and services, business model, strategy, growth opportunities, profitability and competitive position, and other matters. These forward-looking statements generally use words such as "future," "possible," "potential," "targeted," "anticipate," "believe," "estimate," "expect," "intend," "plan," "predict," "project," "will," "may," "should," "could," "would" and other similar words and phrases. Such statements are not guarantees of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved, if at all. These statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in these statements. A list, description and discussion of these and other risks and uncertainties can be found in the "Risk Factors" section of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2018, as updated by our reports on Form 10-Q and Form 8-K. The forward-looking statements are made as of the date hereof, and Mistras undertakes no obligation to update such statements as a result of new information, future events or otherwise.

Use of Non-GAAP Measures
In addition to financial information prepared in accordance with generally accepted accounting principles in the U.S. (GAAP), this press release also contains adjusted financial measures that we believe provide investors and management with supplemental information relating to operating performance and trends that facilitate comparisons between periods and with respect to projected information. The term "Adjusted EBITDA" used in this release is a financial measurement not calculated in accordance with GAAP and is defined as net income attributable to Mistras Group, Inc. plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted.  A reconciliation of Adjusted EBITDA to a financial measurement under GAAP is set forth in a table attached to this press release. In addition, the Company has also included in the attached tables non-GAAP measurement” “Segment and Total Company Income (Loss) Before Special Items”, reconciling these measurements to financial measurements under GAAP. The Company uses the term “free cash flow”, a non-GAAP measurement the Company defines as cash provided by operating activities less capital expenditures (which is classified as an investing activity). The Company also uses the term “net debt”, a non-GAAP measurement defined as the sum of the current and long-term portions of long-term debt and capital lease obligations, less cash and cash equivalents.

Media Contact:
Nestor S. Makarigakis
Group Director of Marketing Communications
marcom@mistrasgroup.com 
1(609)716-4000



Mistras Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)

    (unaudited)    
    September 30, 2018   December 31, 2017
ASSETS        
Current Assets        
Cash and cash equivalents   $ 17,073     $ 27,541  
Accounts receivable, net   155,615     138,080  
Inventories   11,133     10,503  
Prepaid expenses and other current assets   15,613     18,884  
Total current assets   199,434     195,008  
Property, plant and equipment, net   86,410     87,143  
Intangible assets, net   56,515     63,739  
Goodwill   199,625     203,438  
Deferred income taxes   1,534     1,606  
Other assets   4,630     3,507  
Total assets   $ 548,148     $ 554,441  
LIABILITIES AND EQUITY        
Current Liabilities        
Accounts payable   $ 12,937     $ 10,362  
Accrued expenses and other current liabilities   73,425     65,561  
Current portion of long-term debt   2,225     2,358  
Current portion of capital lease obligations   5,085     5,875  
Income taxes payable   1,536     6,069  
Total current liabilities   95,208     90,225  
Long-term debt, net of current portion   147,926     164,520  
Obligations under capital leases, net of current portion   8,426     8,738  
Deferred income taxes   11,827     8,803  
Other long-term liabilities   6,482     11,363  
Total liabilities   269,869     283,649  
Commitments and contingencies        
Equity        
Preferred stock, 10,000,000 shares authorized        
Common stock, $0.01 par value, 200,000,000 shares authorized, 28,496,445 and 28,294,968 shares issued   284     282  
Additional paid-in capital   226,054     222,425  
Retained earnings   72,614     64,717  
Accumulated other comprehensive loss   (20,856 )   (16,805 )
Total Mistras Group, Inc. stockholders’ equity   278,096     270,619  
Non-controlling interests   183     173  
Total equity   278,279     270,792  
Total liabilities and equity   $ 548,148     $ 554,441  


Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income (Loss)
(in thousands, except per share data)

  Three months ended   Nine months ended
  September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017
               
Revenue $ 182,169     $ 179,570     $ 561,592     $ 513,326  
Cost of revenue 124,260     126,316     389,131     360,144  
Depreciation 5,577     5,357     16,902     15,790  
Gross profit 52,332     47,897     155,559     137,392  
Selling, general and administrative expenses 41,931     38,217     122,232     113,491  
Impairment charges     15,810         15,810  
Pension withdrawal expense 5,886         5,886      
Gain on sale of subsidiary (2,384 )       (2,384 )    
Research and engineering 745     555     2,414     1,749  
Depreciation and amortization 2,920     2,738     8,834     7,854  
Litigation expenses     1,200         1,200  
Acquisition-related expense (benefit), net 217     (248 )   (1,143 )   (589 )
Income (loss) from operations 3,017     (10,375 )   19,720     (2,123 )
Interest expense 1,894     1,081     5,581     3,114  
Income (loss) before provision (benefit) for income taxes 1,123     (11,456 )   14,139     (5,237 )
Provision (benefit) for income taxes 2,133     (4,503 )   6,229     (2,199 )
Net (loss) income (1,010 )   (6,953 )   7,910     (3,038 )
Less: net income attributable to non-controlling interests, net of taxes 1     15     13     21  
Net (loss) income attributable to Mistras Group, Inc. $ (1,011 )   $ (6,968 )   $ 7,897     $ (3,059 )
Earnings (loss) per common share:              
Basic $ (0.04 )   $ (0.25 )   $ 0.28     $ (0.11 )
Diluted $ (0.04 )   $ (0.25 )   $ 0.27     $ (0.11 )
Weighted average common shares outstanding:              
Basic 28,429     28,274     28,360     28,465  
Diluted 28,429     28,274     29,447     28,465  


Mistras Group, Inc. and Subsidiaries
Unaudited Operating Data by Segment
(in thousands)

  Three months ended   Nine months ended
  September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017
Revenues              
Services $ 141,340     $ 137,194     $ 434,653     $ 397,565  
International 36,671     38,200     116,238     106,360  
Products and Systems 5,716     6,268     17,286     16,925  
Corporate and eliminations (1,558 )   (2,092 )   (6,585 )   (7,524 )
  $ 182,169     $ 179,570     $ 561,592     $ 513,326  
               
               
  Three months ended   Nine months ended
  September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017
Gross profit              
Services $ 38,838     $ 34,729     $ 113,675     $ 100,432  
International 10,877     10,432     34,273     29,720  
Products and Systems 2,604     2,753     7,707     7,313  
Corporate and eliminations 13     (17 )   (96 )   (73 )
  $ 52,332     $ 47,897     $ 155,559     $ 137,392  


Mistras Group, Inc. and Subsidiaries
Unaudited Reconciliation of
Segment and Total Company Income (Loss) from Operations (GAAP) to Income before Special Items (non-GAAP)
(in thousands)

  Three months ended   Nine months ended
  September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017
Services:              
Income from operations (GAAP) $ 8,289     $ 11,699     $ 36,892     $ 31,211  
Bad debt provision for a customer bankruptcy             1,200  
Pension withdrawal expense 5,886         5,886      
Reorganization and other costs 292     163     292     616  
Acquisition-related expense (benefit), net 181     (126 )   (809 )   (48 )
Income before special items (non-GAAP) 14,648     11,736     42,261     32,979  
International:              
Income (loss) from operations (GAAP) (662 )   1,023     2,713     3,866  
Reorganization and other costs 2,808     379     3,544     455  
Acquisition-related expense (benefit), net         (409 )   (501 )
Income before special items (non-GAAP) 2,146     1,402     5,848     3,820  
Products and Systems:              
Income (loss) from operations (GAAP) 2,415     (15,573 )   2,032     (16,913 )
Impairment charges     15,810         15,810  
Gain on sale of subsidiary (2,384 )       (2,384 )    
Reorganization and other costs         29      
Income (loss) before special items (non-GAAP) 31     237     (323 )   (1,103 )
Corporate and Eliminations:              
Loss from operations (GAAP) (7,025 )   (7,524 )   (21,917 )   (20,287 )
Litigation charges     1,200         1,200  
Reorganization and other costs 305         305      
Acquisition-related expense (benefit), net 36     (122 )   75     (40 )
Loss before special items (non-GAAP) (6,684 )   (6,446 )   (21,537 )   (19,127 )
Total Company:              
Income (loss) from operations (GAAP) $ 3,017     $ (10,375 )   $ 19,720     $ (2,123 )
Pension withdrawal expense 5,886         5,886      
Gain on sale of subsidiary (2,384 )       (2,384 )    
Impairment charges     15,810         15,810  
Litigation charges     1,200         1,200  
Bad debt provision for a customer bankruptcy             1,200  
Reorganization and other costs 3,405     542     4,170     1,071  
Acquisition-related expense (benefit), net 217     (248 )   (1,143 )   (589 )
Income before special items (non-GAAP) $ 10,141     $ 6,929     $ 26,249     $ 16,569  


Mistras Group, Inc. and Subsidiaries
Unaudited Summary Cash Flow Information
(in thousands)

  Nine months ended
  September 30, 2018   September 30, 2017
Net cash provided by (used in):      
Operating activities $ 24,184     $ 35,226  
Investing activities (9,831 )   (22,516 )
Financing activities (23,905 )   (7,114 )
Effect of exchange rate changes on cash (916 )   2,113  
Net change in cash and cash equivalents $ (10,468 )   $ 7,709  


Mistras Group, Inc. and Subsidiaries
Unaudited Reconciliation of Net Cash Provided by Operating Activities (GAAP) to Free Cash Flow (non-GAAP)
(in thousands)

  Nine months ended
  September 30, 2018   September 30, 2017
GAAP:  Net cash provided by operating activities $ 24,184     $ 35,226  
Less:      
Purchases of property, plant and equipment (15,386 )   (14,413 )
Purchases of intangible assets (385 )   (941 )
non-GAAP:  Free cash flow $ 8,413     $ 19,872  


Mistras Group, Inc. and Subsidiaries
Unaudited Reconciliation of
Net Income (Loss) to Adjusted EBITDA
(in thousands)

  Three months ended   Nine months ended
  September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017
           
Net (loss) income $ (1,010 )   $ (6,953 )   $ 7,910     $ (3,038 )
Less: net income attributable to non-controlling interests, net of taxes 1     15     13     21  
Net (loss) income attributable to Mistras Group, Inc. $ (1,011 )   $ (6,968 )   $ 7,897     $ (3,059 )
Interest expense 1,894     1,081     5,581     3,114  
Provision (benefit) for income taxes 2,133     (4,503 )   6,229     (2,199 )
Depreciation and amortization 8,497     8,095     25,736     23,644  
Share-based compensation expense 1,931     1,759     4,760     5,139  
Litigation charges     1,200         1,200  
Impairment charges     15,810         15,810  
Acquisition-related expense (benefit), net 217     (248 )   (1,143 )   (589 )
Reorganization and other related costs 3,405     542     4,170     1,071  
Pension withdrawal expense 5,886         5,886      
Gain on sale of subsidiary (2,384 )       (2,384 )    
Bad debt provision for unexpected customer bankruptcy             1,200  
Foreign exchange loss 262     271     651     597  
Adjusted EBITDA $ 20,830     $ 17,039     $ 57,383     $ 45,928  


Mistras Group, Inc. and Subsidiaries
Unaudited Reconciliation of
Net Income (Loss) (GAAP) and Diluted EPS (GAAP) to Net Income Excluding Special Items (non-GAAP)
and Diluted EPS Excluding Special Items (non-GAAP)
(in thousands, except per share data)

    Three months ended September 30,   Nine months ended September 30,
    2018   2017   2018   2017
Net (loss) income (GAAP)   $ (1,011 )   $ (6,968 )   $ 7,897     $ (3,059 )
Special items, net of tax   5,368     10,921     4,924     11,178  
Net Income Excluding Special Items (non-GAAP)   $ 4,357     $ 3,953     $ 12,821     $ 8,119  
                 
Diluted EPS (GAAP)   $ (0.04 )   $ (0.25 )   $ 0.27     $ (0.11 )
Special items, net of tax   0.19     0.38     0.17     0.38  
Diluted EPS Excluding Special Items (non-GAAP)   $ 0.15     $ 0.13     $ 0.44     $ 0.27  

 

MISTRAS Logo in 2-Color.jpg

Source: Mistras Group Inc