Mistras (MG) - 2020 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION This part provides the unaudited financial statements, management's discussion, market risk disclosures, and controls and procedures Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Q1 2020, revealing a significant net loss of $98.5 million driven by impairment charges and a decrease in total assets Condensed Consolidated Financial Statements The financial statements for Q1 2020 show a significant deterioration, with total assets decreasing to $583.5 million and a net loss of $98.5 million due to impairment charges Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $168,818 | $179,155 | | Goodwill | $196,289 | $282,410 | | Intangible assets, net | $72,019 | $109,537 | | Total assets | $583,545 | $719,878 | | Total current liabilities | $101,420 | $109,240 | | Total liabilities | $411,792 | $433,856 | | Total equity | $171,753 | $286,022 | Condensed Consolidated Statement of Income (Loss) (in thousands) | Account | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Revenue | $159,465 | $176,787 | | Gross profit | $40,644 | $48,874 | | Impairment charges | $106,062 | $— | | Loss from operations | $(111,228) | $(4,396) | | Net loss attributable to Mistras Group, Inc. | $(98,509) | $(5,293) | | Diluted EPS | $(3.40) | $(0.19) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Account | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,107 | $8,177 | | Net cash used in investing activities | $(4,204) | $(5,001) | | Net cash provided by (used in) financing activities | $492 | $(3,949) | | Net change in cash and cash equivalents | $2,011 | $(944) | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail the financial statements, explaining significant non-cash impairment charges from COVID-19 and oil price drops, revenue disaggregation, and credit facility amendments - The COVID-19 pandemic and a significant drop in oil prices adversely affected the company's operations and financial markets, necessitating a reassessment of asset values[25][26] Impairment Charges for Q1 2020 (in millions) | Asset Type | Impairment Charge | | :--- | :--- | | Goodwill | $77.1 | | Intangible Assets | $28.8 | | Right-of-use Asset | $0.2 | | Total | $106.1 | - Due to uncertainty from the pandemic and oil price drop, the company amended its credit agreement on May 15, 2020, to modify financial covenants[27][108] Revenue by Industry (in thousands) | Industry | Q1 2020 Revenue | Q1 2019 Revenue | | :--- | :--- | :--- | | Oil & Gas | $92,498 | $101,385 | | Aerospace & Defense | $22,214 | $24,755 | | Industrials | $18,274 | $21,630 | | Other | $26,479 | $29,017 | | Total | $159,465 | $176,787 | Goodwill Impairment by Segment - Q1 2020 (in thousands) | Segment | Impairment Charge | | :--- | :--- | | Services | $(57,227) | | International | $(19,862) | | Total | $(77,089) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A attributes the 9.8% revenue decline and $111.2 million operating loss to COVID-19 and oil price drops, detailing cost reductions and liquidity management Overview This overview describes the company's asset protection solutions business and the adverse impact of COVID-19 and oil price drops, leading to impairment and cost reductions - The company operates as a "OneSource for Asset Protection Solutions®" provider, evaluating the structural integrity of critical infrastructure in energy, aerospace, and industrial markets[146] - The COVID-19 pandemic and the significant drop in oil prices have adversely affected the company's workforce, operations, and the markets in which it operates[151][152] - In response to the economic downturn, the company initiated a cost reduction program, including temporary salary reductions for named executive officers ranging from 25% to 45%[153] Results of Operations Operational performance for Q1 2020 shows a 9.8% revenue decrease to $159.5 million and a $111.2 million operating loss, primarily due to impairment charges Financial Performance Summary (in thousands) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Revenues | $159,465 | $176,787 | | Gross Profit | $40,644 | $48,874 | | Gross Profit Margin | 25.5% | 27.6% | | Loss from Operations | $(111,228) | $(4,396) | | Net Loss | $(98,522) | $(5,286) | - The 9.8% decrease in total revenue was primarily the result of the impact of COVID-19, as many customers cut back operations. All three segments (Services, International, and Products and Systems) experienced revenue declines[161] - Operating expenses increased by 185% year-over-year, predominantly due to impairment charges of $106.1 million recorded in Q1 2020[169] Reconciliation of GAAP Loss from Operations to Non-GAAP Income (Loss) before Special Items (in thousands) | | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Loss from operations (GAAP) | $(111,228) | $(4,396) | | Impairment charges | $106,062 | $— | | Bad debt provision | $— | $5,491 | | Other adjustments | $(557) | $1,203 | | Income (loss) before special items (non-GAAP) | $(5,723) | $2,298 | Liquidity and Capital Resources Liquidity details show cash from operations decreased to $6.1 million, with $17.0 million cash on hand and a credit agreement amendment to modify financial covenants Cash Flow Summary (in thousands) | Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Operating activities | $6,107 | $8,177 | | Investing activities | $(4,204) | $(5,001) | | Financing activities | $492 | $(3,949) | - As of March 31, 2020, the company had cash and cash equivalents of $17.0 million and available borrowing capacity of $139.7 million under its Credit Agreement[179] - On May 15, 2020, the company amended its Credit Agreement to modify financial covenants in response to the uncertain impact of the COVID-19 pandemic and the significant drop in oil prices[181] Item 3. Quantitative and Qualitative Disclosures about Market Risk No significant changes occurred in the company's quantitative and qualitative disclosures about market risk since the 2019 Annual Report - There have been no significant changes to the company's quantitative and qualitative disclosures about market risk as discussed in the 2019 Annual Report[185] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2020, due to material weaknesses in income tax accounting, with remediation efforts underway - Management concluded that as of March 31, 2020, the company's disclosure controls and procedures were not effective[186] - The ineffectiveness is due to material weaknesses in internal control over financial reporting previously disclosed in the 2019 Annual Report, related to accounting for income taxes[188] - Management is actively engaged in remediation efforts, including enhancing the design of controls and expanding income tax accounting resources[189] PART II—OTHER INFORMATION This part details legal proceedings, new COVID-19 related risk factors, unregistered equity sales, and a list of filed exhibits Item 1. Legal Proceedings This section details legal proceedings, including a dispute over pipeline weld inspections where the company seeks $1.4 million and faces a $7.6 million counterclaim - The company is involved in a lawsuit with a customer regarding pipeline weld inspections. The company is seeking to recover $1.4 million in past due receivables, while the customer has filed a counterclaim for approximately $7.6 million in damages[127] Item 1.A. Risk Factors New risk factors highlight the adverse impact of COVID-19 on operations and demand, including potential difficulty meeting amended credit agreement financial covenants - The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, the company's business, operations, and customer demand, particularly in the oil and gas and aerospace industries[193] - There is a risk that the company may have difficulty meeting the amended financial covenants in its credit agreement due to the economic disruption from COVID-19, which could lead to a default and impact its ability to continue as a going concern[195] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, but 41,446 shares were repurchased in March 2020 from employees for tax withholding on restricted stock units Repurchases of Equity Securities - Q1 2020 | Month Ending | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 31, 2020 | — | $— | | February 29, 2020 | — | $— | | March 31, 2020 | 41,446 | $3.78 | - The shares were acquired as a result of surrender by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units[198] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the credit agreement amendment, CEO/CFO certifications, and XBRL data - The report includes several exhibits, such as an amendment to the company's credit agreement, CEO/CFO certifications, and XBRL data files[204]