Mistras (MG) - 2019 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents unaudited condensed consolidated financial statements for Q1 2019, including balance sheets, income, comprehensive income, equity, cash flows, and detailed notes on business and accounting policies Condensed Consolidated Balance Sheets Total assets increased by $31.4 million to $725.4 million, liabilities by $33.4 million to $456.3 million, and equity decreased by $2.0 million to $269.1 million | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :------------------------------ | :------------------------------- | :-------------------- | :--------- | | Total Assets | $725,437 | $694,037 | $31,400 | 4.5% | | Total Liabilities | $456,341 | $422,963 | $33,378 | 7.9% | | Total Equity | $269,096 | $271,074 | $(1,978) | (0.7%) | | Cash and cash equivalents | $24,600 | $25,544 | $(944) | (3.7%) | | Accounts receivable, net | $138,505 | $148,324 | $(9,819) | (6.6%) | | Other assets | $41,204 | $4,767 | $36,437 | 764.5% | | Accrued expenses and other current liabilities | $79,641 | $73,895 | $5,746 | 7.8% | | Other long-term liabilities | $34,427 | $6,482 | $27,945 | 431.1% | Unaudited Condensed Consolidated Statements of (Loss) Income Q1 2019 saw a net loss of $5.3 million, down from $2.9 million income, with revenue decreasing 6% to $176.8 million and operating loss reaching $4.4 million | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :--------- | | Revenue | $176,787 | $187,630 | $(10,843) | (5.8%) | | Gross profit | $48,874 | $48,145 | $729 | 1.5% | | Gross profit as a % of Revenue | 27.6% | 25.7% | 1.9 pp | | | (Loss) income from operations | $(4,396) | $6,399 | $(10,795) | (168.7%) | | Net (loss) income | $(5,286) | $2,919 | $(8,205) | (281.1%) | | Basic EPS | $(0.19) | $0.10 | $(0.29) | (290.0%) | | Diluted EPS | $(0.19) | $0.10 | $(0.29) | (290.0%) | Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income Comprehensive loss for Q1 2019 was $3.2 million, a significant decrease from $4.4 million comprehensive income in Q1 2018, driven by net loss | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :--------- | | Net (loss) income | $(5,286) | $2,919 | $(8,205) | (281.1%) | | Foreign currency translation adjustments | $2,131 | $1,500 | $631 | 42.1% | | Comprehensive (loss) income | $(3,155) | $4,419 | $(7,574) | (171.4%) | Unaudited Condensed Consolidated Statements of Equity Total equity decreased slightly to $269.1 million at March 31, 2019, primarily due to a $5.3 million net loss, partially offset by other comprehensive income | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :------------------------------ | :------------------------------- | :-------------------- | :--------- | | Total Equity | $269,096 | $271,074 | $(1,978) | (0.7%) | | Net (loss) income | $(5,286) | N/A | N/A | N/A |\ | Other comprehensive income, net of tax | $2,133 | N/A | N/A | N/A |\ | Share-based payments | $1,427 | N/A | N/A | N/A | Unaudited Condensed Consolidated Statements of Cash Flows Net cash from operations increased to $8.2 million, while cash used in investing was $5.0 million and financing used $3.9 million, resulting in a $0.9 million decrease in cash and cash equivalents | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :--------- | | Net cash provided by operating activities | $8,177 | $5,818 | $2,359 | 40.5% | | Net cash used in investing activities | $(5,001) | $(4,772) | $(229) | 4.8% | | Net cash (used in) provided by financing activities | $(3,949) | $4,261 | $(8,210) | (192.7%) | | Net change in cash and cash equivalents | $(944) | $5,591 | $(6,535) | (116.9%) | | Cash and cash equivalents at end of period | $24,600 | $33,132 | $(8,532) | (25.7%) | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures for the financial statements, covering business, accounting policies, revenue, compensation, acquisitions, assets, liabilities, debt, leases, and segment information 1. Description of Business and Basis of Presentation Mistras Group provides global asset protection solutions; Q1 2019 financials are unaudited GAAP, with ASC 842 adoption and a 33% effective income tax rate - Mistras Group, Inc. is a leading "one source" global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability of critical energy, industrial, and public infrastructure[24] - The Company's effective income tax rate was approximately 33% for the three months ended March 31, 2019, higher than the statutory rate due to discrete items, GILTI, executive compensation provisions from the Tax Act, and foreign tax rates[31] - The Company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, resulting in the recording of approximately $38 million in right-of-use (ROU) assets and liabilities, with no material impact on statements of (loss) income or cash flows[34][36] 2. Revenue Revenue is primarily from services recognized over time; Q1 2019 total revenue decreased 6% to $176.8 million, with Products and Systems down 45%, and Oil & Gas as the largest industry segment - The majority of the Company's revenues are derived from providing services on a time and material basis, recognized over time as work progresses[38][43] | Segment | Q1 2019 Revenue (in thousands) | Q1 2018 Revenue (in thousands) | Change (in thousands) | % Change | | :------------------- | :----------------------------- | :----------------------------- | :-------------------- | :--------- | | Services | $140,298 | $145,595 | $(5,297) | (3.6%) | | International | $35,162 | $38,456 | $(3,294) | (8.6%) | | Products and Systems | $3,432 | $6,184 | $(2,752) | (44.5%) | | Total | $176,787 | $187,630 | $(10,843) | (5.8%) | | Industry | Q1 2019 Revenue (in thousands) | Q1 2018 Revenue (in thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | | Oil & Gas | $101,385 | $111,961 | | Aerospace & Defense | $24,755 | $27,589 | | Industrials | $21,630 | $18,657 | 3. Share-Based Compensation Share-based compensation expense for restricted stock units was $0.9 million in Q1 2019, with $10.0 million unrecognized costs over 2.9 years - Share-based compensation expense for restricted stock unit awards was $0.9 million for Q1 2019, compared to $0.8 million for Q1 2018[58] - As of March 31, 2019, there was $10.0 million of unrecognized compensation costs related to restricted stock unit awards, expected to be recognized over a remaining weighted average period of 2.9 years[58] - Aggregate share-based compensation expense related to Performance Restricted Stock Units (PRSUs) was approximately $0.2 million for Q1 2019, compared to $0.1 million for Q1 2018[67] 4. Earnings per Share Basic and diluted EPS for Q1 2019 were both $(0.19), a decrease from $0.10 in Q1 2018, reflecting the net loss | Metric | 3 Months Ended March 31, 2019 | 3 Months Ended March 31, 2018 | | :--------------------------------- | :---------------------------- | :---------------------------- | | Net (loss) income attributable to Mistras Group, Inc. | $(5,293) (in thousands) | $2,907 (in thousands) | | Basic EPS | $(0.19) | $0.10 | | Diluted EPS | $(0.19) | $0.10 | | Weighted average common shares outstanding (Basic) | 28,574 (in thousands) | 28,304 (in thousands) | | Weighted average common shares outstanding (Diluted) | 28,574 (in thousands) | 29,362 (in thousands) | 5. Acquisitions No acquisitions occurred in Q1 2019 or Q1 2018; acquisition-related expenses, net, were $0.5 million in Q1 2019 due to contingent consideration adjustments - The Company did not complete any acquisitions during the three months ended March 31, 2019, or March 31, 2018[76] | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Acquisition-related expense (benefit), net | $453 | $(994) | 6. Accounts Receivable, net Net accounts receivable decreased to $138.5 million at March 31, 2019, with a $5.7 million charge for a troubled customer increasing the allowance for doubtful accounts | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Trade accounts receivable | $148,070 | $152,511 | | Allowance for doubtful accounts | $(9,565) | $(4,187) | | Accounts receivable, net | $138,505 | $148,324 | - During Q1 2019, the Company recorded an additional charge of $5.7 million to fully reserve for a troubled renewable energy customer, partially offset by a net $0.2 million recovery of an unrelated bad debt provision[80][82] 7. Property, Plant and Equipment, net Net property, plant, and equipment remained stable at $93.9 million at March 31, 2019, with depreciation expense of approximately $6.1 million for Q1 2019 | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :---------------------------- | :------------------------------- | | Property, plant and equipment, net | $93,916 | $93,895 | - Depreciation expense for both the three months ended March 31, 2019, and March 31, 2018, was approximately $6.1 million[83] 8. Goodwill Goodwill increased slightly to $280.7 million at March 31, 2019, due to foreign currency translation adjustments, with no impairment indicators found | Segment | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------- | :---------------------------- | :------------------------------- | | Services | $245,496 | $243,476 | | International | $35,200 | $35,783 | | Total | $280,696 | $279,259 | - As of March 31, 2019, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable[84] 9. Intangible Assets Net intangible assets decreased to $109.1 million at March 31, 2019, with amortization expense for Q1 2019 increasing to $3.6 million | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------- | :---------------------------- | :------------------------------- | | Intangible assets, net | $109,055 | $111,395 | - Amortization expense for the three months ended March 31, 2019, was approximately $3.6 million, compared to $2.5 million for the three months ended March 31, 2018[89] 10. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities increased to $79.6 million at March 31, 2019, including an $8.7 million right-of-use liability from ASC 842 adoption | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------------- | :---------------------------- | :------------------------------- | | Accrued expenses and other current liabilities | $79,641 | $73,895 | | Right-of-use liability - operating | $8,700 | — | 11. Long-Term Debt Total debt decreased to $287.7 million at March 31, 2019; the Company obtained a waiver for non-compliance with its Funded Debt Leverage Ratio covenant | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :---------------------------- | :------------------------------- | | Total debt | $287,706 | $290,620 | | Long-term debt, net of current portion | $280,919 | $283,787 | - The Company's Credit Agreement provides a $300 million revolving line of credit and a $100 million senior secured term loan A facility, both maturing on December 12, 2023[92][94] - As of March 31, 2019, the Company was not in compliance with its Funded Debt Leverage Ratio covenant but obtained a waiver for such non-compliance[99] 12. Fair Value Measurements Contingent consideration liabilities are measured at fair value (Level 3) using discounted cash flow, increasing to $2.7 million at March 31, 2019 - The fair value of contingent consideration liabilities is estimated using a discounted cash flow technique, representing a Level 3 fair value measurement[103] | Metric | 3 Months Ended March 31, 2019 (in thousands) | 3 Months Ended March 31, 2018 (in thousands) | | :--------------- | :--------------------------------------- | :--------------------------------------- | | Beginning balance | $2,365 | $5,508 | | Ending balance | $2,699 | $2,909 | 13. Leases ASC 842 adoption led to $36.3 million ROU assets and $37.0 million lease liabilities; total Q1 2019 lease costs were $4.9 million | Metric | As of March 31, 2019 (in thousands) | | :--------------------------------- | :---------------------------------- | | Right-of-use assets (Operating) | $36,289 | | Right-of-use liability - current | $8,700 | | Right-of-use liability - long term | $28,340 | | Total right-of-use liabilities | $37,040 | | Lease Cost Component | 3 Months Ended March 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------------------- | | Finance lease expense (Amortization of ROU assets) | $1,292 | | Finance lease expense (Interest on lease liabilities) | $197 | | Operating lease expense | $3,023 | | Short-term lease expense | $133 | | Variable lease expense | $272 | | Total | $4,917 | | Metric | March 31, 2019 | | :--------------------------------------- | :------------- | | Weighted average remaining lease term (Operating leases) | 6.0 years | | Weighted average discount rate (Operating leases) | 5.97% | 14. Commitments and Contingencies The Company faces legal proceedings, recorded a $0.5 million pension withdrawal liability (totaling $4.9 million), and has $1.6 million in German Labor Lease Act severance obligations - The Company recorded a charge of $0.5 million during Q1 2019 for a potential multi-employer pension plan withdrawal liability, bringing the estimated total balance to approximately $4.9 million as of March 31, 2019[120] - The Company estimated approximately $1.6 million in severance payment obligations as of March 31, 2019, due to the German Labor Lease Act limiting temporary workers' duration[122] - Total potential acquisition-related contingent consideration ranged from zero to approximately $5.8 million as of March 31, 2019[123] 15. Segment Disclosure The Company's three segments (Services, International, Products and Systems) saw Q1 2019 revenue declines of 3.6%, 8.6%, and 44.5% respectively, with Services operating income significantly declining | Segment | Q1 2019 Revenue (in thousands) | Q1 2018 Revenue (in thousands) | % Change | | :------------------- | :----------------------------- | :----------------------------- | :--------- | | Services | $140,298 | $145,595 | (3.6%) | | International | $35,162 | $38,456 | (8.6%) | | Products and Systems | $3,432 | $6,184 | (44.5%) | | Segment | Q1 2019 Gross Profit (in thousands) | Q1 2018 Gross Profit (in thousands) | % Change | | :------------------- | :---------------------------------- | :---------------------------------- | :--------- | | Services | $37,365 | $34,710 | 7.6% | | International | $10,360 | $10,707 | (3.2%) | | Products and Systems | $1,239 | $2,890 | (57.1%) | | Segment | Q1 2019 Income (Loss) from Operations (in thousands) | Q1 2018 Income (Loss) from Operations (in thousands) | | :------------------- | :--------------------------------------------------- | :--------------------------------------------------- | | Services | $4,053 | $12,275 | | International | $(215) | $920 | | Products and Systems | $(1,328) | $273 | 16. Repurchase of Common Stock The $50 million stock repurchase plan was terminated on April 1, 2019; no common stock was repurchased in Q1 2019, except for tax withholding shares - The Company's Board of Directors approved the termination of its $50 million stock repurchase plan on April 1, 2019, with $25.1 million remaining[132][199] - No common stock was repurchased under the plan during the three months ended March 31, 2019, other than 20,440 shares acquired from employees to satisfy tax withholding obligations[132][199] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial condition and results for Q1 2019, covering business overview, market dynamics, operations, liquidity, and critical accounting policies Forward-Looking Statements This section contains forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements that express plans, anticipation, intent, contingency, goals, targets or future development, which are not statements of historical fact[134] - These statements are subject to known and unknown risks and uncertainties that could cause actual results and developments to differ materially[134][135] Overview Mistras Group provides global asset protection solutions, leveraging technology and acquisitions like Onstream, driven by market dynamics such as aging infrastructure and stringent safety regulations - Mistras Group offers "OneSource for Asset Protection Solutions" globally, evaluating the safety, structural integrity, and reliability of critical energy, industrial, and public infrastructure, and commercial aerospace components[136] - Key market dynamics include extending the useful life of aging infrastructure, outsourcing of non-core activities, increasing corrosion from low-quality inputs, increasing use of advanced materials, meeting safety regulations, and an expanding aerospace industry[149][150][151][152][153][154][155] - The Onstream acquisition (December 2018) strengthens the Company's presence in the midstream oil and gas market and provides the Streamview™ software, an advanced digital solution[148] Note About Non-GAAP Measures The Company uses "Income (loss) before special items" as a non-GAAP measure to evaluate core business performance, excluding acquisition expenses, impairment, and reorganization costs - The non-GAAP financial performance measure "Income (loss) before special items" is used to evaluate performance, excluding transaction expenses, contingent consideration adjustments, impairment charges, reorganization costs, and other special items[157] - This non-GAAP measure provides additional tools to compare core business operating performance on a consistent basis and measure underlying trends[158] Results of Operations Q1 2019 revenue decreased 6% to $176.8 million, leading to a GAAP operating loss of $4.4 million and a 58% decrease in non-GAAP income before special items, impacted by bad debt and pension expenses | Metric | Q1 2019 (in thousands) | Q1 2018 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :--------------------- | :--------------------- | :--------- | | Revenues | $176,787 | $187,630 | (5.8%) | | Gross profit | $48,874 | $48,145 | 1.5% | | Gross profit as a % of Revenue | 27.6% | 25.7% | 1.9 pp | | (Loss) income from operations (GAAP) | $(4,396) | $6,399 | (168.7%) | | Income before special items (non-GAAP) | $2,298 | $5,494 | (58.2%) | | Interest expense | $3,527 | $1,792 | 96.8% | | Net (loss) income | $(5,286) | $2,919 | (281.1%) | - Total revenues decreased 6% in Q1 2019 due to a mid-single digit organic decline (including a $10 million reduction from a contract ending after Q1 2018) and a low-single digit unfavorable foreign exchange impact[161][163] - Operating expenses (GAAP) increased to 30% of revenue in Q1 2019 (from 22% in Q1 2018), driven by special items including a $5.7 million bad debt provision for a troubled customer and a $0.5 million pension withdrawal expense, plus $3.2 million in Onstream acquisition operating expenses[172][173][174] Liquidity and Capital Resources Net cash from operations increased 41% to $8.2 million; the Company ended Q1 2019 with $24.6 million cash and $114.1 million borrowing capacity, having obtained a waiver for a debt covenant non-compliance | Cash Flow Activity | Q1 2019 (in thousands) | Q1 2018 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :--------------------- | :--------------------- | :-------------------- | :--------- | | Net cash provided by operating activities | $8,177 | $5,818 | $2,359 | 40.5% | | Net cash used in investing activities | $(5,001) | $(4,772) | $(229) | 4.8% | | Net cash (used in) provided by financing activities | $(3,949) | $4,261 | $(8,210) | (192.7%) | - As of March 31, 2019, the Company had $24.6 million in cash and cash equivalents and $114.1 million in available borrowing capacity under its Credit Agreement[183] - The Company was not in compliance with its Funded Debt Leverage Ratio covenant as of March 31, 2019, but obtained a waiver for this non-compliance[184] Critical Accounting Policies and Estimates There have been no significant changes to the Company's critical accounting policies and estimates since the 2018 Annual Report - There have been no significant changes to the Company's critical accounting policies and estimates from the information provided in the 2018 Annual Report[187] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk There have been no significant changes to the Company's quantitative and qualitative disclosures about market risk from the information provided in the 2018 Annual Report - There have been no significant changes to the Company's quantitative and qualitative disclosures about market risk as discussed in the 2018 Annual Report[189] ITEM 4. Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019[190] - There has been no change in the Company's internal control over financial reporting that materially affected, or is reasonably likely to materially affect, such internal control during the quarter ended March 31, 2019[191] PART II—OTHER INFORMATION ITEM 1. Legal Proceedings Legal proceedings are described in Note 14, with no material developments beyond prior disclosures in Note 14 and the 2018 Annual Report - Legal proceedings are described in Note 14 to the condensed consolidated financial statements[194] - There have been no material developments with regard to any matters disclosed in the 2018 Annual Report, except as disclosed in Note 14[194] ITEM 1.A. Risk Factors No material changes to risk factors, except for non-compliance with the Funded Debt Leverage Ratio covenant as of March 31, 2019, for which a waiver was obtained - The Company failed to maintain a Funded Debt Leverage Ratio of 4.00 to 1.00 for the twelve months ended March 31, 2019, as required by the Credit Agreement[195] - A waiver was obtained for the non-compliance with the Funded Debt Leverage Ratio covenant[195] - There can be no assurance that the Company will be in compliance with this covenant at the end of the next quarter, and if necessary, similarly obtain a waiver of any such noncompliance[195] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales or public offering proceeds were reported; the stock repurchase plan was terminated, and no shares were purchased in Q1 2019, except for tax withholding - No unregistered sales of equity securities or use of proceeds from public offerings occurred during the quarter[196][197] - The Company's share repurchase plan was terminated on April 1, 2019, with $25.1 million remaining[199] - During Q1 2019, 20,440 shares were acquired as a result of employees surrendering shares to satisfy tax withholding obligations in connection with the vesting of restricted stock units[199] ITEM 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities - No defaults upon senior securities were reported[200] ITEM 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[202] ITEM 5. Other Information The Company reported no other information for the period - No other information was reported[203] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and XBRL-related documents - Exhibits include certifications from the Chief Executive Officer (31.1) and Chief Financial Officer (31.2), a certification pursuant to Section 906 of the Sarbanes-Oxley Act (32.1), and various XBRL documents (101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF)[204] SIGNATURES The report was duly signed on behalf of Mistras Group, Inc. by Edward J. Prajzner, Senior Vice President, Chief Financial Officer, and Treasurer, on May 7, 2019 - The report was signed by Edward J. Prajzner, Senior Vice President, Chief Financial Officer and Treasurer, on May 7, 2019[207]