MISTRAS GROUP, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
ý
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended
September 30, 2019
Or
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from __ to __
Commission file number 001- 34481
Mistras Group, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware
|
|
22-3341267
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
|
|
195 Clarksville Road
Princeton Junction, New Jersey
|
|
08550
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(609) 716-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common Stock, $0.01 par value
|
MG
|
New York Stock Exchange
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
ý
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
ý
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
|
|
Emerging Growth Company
o
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
ý
No
As of
October 31, 2019
, the registrant had
28,915,088
shares of common stock outstanding.
TABLE OF CONTENTS
|
|
PAGE
|
||
|
|
|||
|
|
|
||
|
|
|||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||
|
|
|
||
|
|
|||
|
|
|
||
|
|
|||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||
|
|
|
||
i
PART I—FINANCIAL INFORMATION
ITEM 1.
Financial Statements
Mistras Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
|
September 30, 2019
|
December 31, 2018
|
||||||
|
ASSETS
|
(unaudited)
|
|
|
||||
|
Current Assets
|
|
|
|
|
|||
|
Cash and cash equivalents
|
$
|
14,372
|
|
$
|
25,544
|
|
|
|
Accounts receivable, net
|
148,024
|
|
148,324
|
|
|||
|
Inventories
|
13,419
|
|
13,053
|
|
|||
|
Prepaid expenses and other current assets
|
17,135
|
|
15,870
|
|
|||
|
Total current assets
|
192,950
|
|
202,791
|
|
|||
|
Property, plant and equipment, net
|
95,502
|
|
93,895
|
|
|||
|
Intangible assets, net
|
106,893
|
|
111,395
|
|
|||
|
Goodwill
|
283,121
|
|
279,259
|
|
|||
|
Deferred income taxes
|
2,780
|
|
1,930
|
|
|||
|
Other assets
|
46,781
|
|
4,767
|
|
|||
|
Total assets
|
$
|
728,027
|
|
$
|
694,037
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|||
|
Current Liabilities
|
|
|
|
|
|||
|
Accounts payable
|
$
|
13,428
|
|
$
|
13,863
|
|
|
|
Accrued expenses and other current liabilities
|
86,452
|
|
73,895
|
|
|||
|
Current portion of long-term debt
|
6,563
|
|
6,833
|
|
|||
|
Current portion of finance lease obligations
|
3,751
|
|
3,922
|
|
|||
|
Income taxes payable
|
1,049
|
|
1,958
|
|
|||
|
Total current liabilities
|
111,243
|
|
100,471
|
|
|||
|
Long-term debt, net of current portion
|
260,753
|
|
283,787
|
|
|||
|
Obligations under finance leases, net of current portion
|
10,799
|
|
9,075
|
|
|||
|
Deferred income taxes
|
27,458
|
|
23,148
|
|
|||
|
Other long-term liabilities
|
39,428
|
|
6,482
|
|
|||
|
Total liabilities
|
449,681
|
|
422,963
|
|
|||
|
Commitments and contingencies
|
|
|
|
|
|||
|
Equity
|
|
|
|
|
|||
|
Preferred stock, 10,000,000 shares authorized
|
—
|
|
—
|
|
|||
|
Common stock, $0.01 par value, 200,000,000 shares authorized, 28,915,088 and 28,562,608 shares issued
|
289
|
|
285
|
|
|||
|
Additional paid-in capital
|
228,287
|
|
226,616
|
|
|||
|
Retained earnings
|
76,784
|
|
71,553
|
|
|||
|
Accumulated other comprehensive loss
|
(27,202
|
)
|
(27,557
|
)
|
|||
|
Total Mistras Group, Inc. stockholders’ equity
|
278,158
|
|
270,897
|
|
|||
|
Non-controlling interests
|
188
|
|
177
|
|
|||
|
Total equity
|
278,346
|
|
271,074
|
|
|||
|
Total liabilities and equity
|
$
|
728,027
|
|
$
|
694,037
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
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, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
|
|
|
|
||||||||||||
|
Revenue
|
$
|
192,192
|
|
$
|
182,169
|
|
$
|
569,595
|
|
$
|
561,592
|
|
|||
|
Cost of revenue
|
129,241
|
|
124,260
|
|
386,721
|
|
389,131
|
|
|||||||
|
Depreciation
|
5,182
|
|
5,577
|
|
16,160
|
|
16,902
|
|
|||||||
|
Gross profit
|
57,769
|
|
52,332
|
|
166,714
|
|
155,559
|
|
|||||||
|
Selling, general and administrative expenses
|
42,328
|
|
41,931
|
|
126,014
|
|
122,232
|
|
|||||||
|
Bad debt provision for troubled customers, net of recoveries
|
—
|
|
—
|
|
2,798
|
|
—
|
|
|||||||
|
Pension withdrawal expense (benefit)
|
(45
|
)
|
5,886
|
|
489
|
|
5,886
|
|
|||||||
|
Gain on sale of subsidiary
|
—
|
|
(2,384
|
)
|
—
|
|
(2,384
|
)
|
|||||||
|
Research and engineering
|
650
|
|
745
|
|
2,261
|
|
2,414
|
|
|||||||
|
Depreciation and amortization
|
4,089
|
|
2,920
|
|
12,380
|
|
8,834
|
|
|||||||
|
Acquisition-related expense (benefit), net
|
(32
|
)
|
217
|
|
970
|
|
(1,143
|
)
|
|||||||
|
Income from operations
|
10,779
|
|
3,017
|
|
21,802
|
|
19,720
|
|
|||||||
|
Interest expense
|
2,959
|
|
1,894
|
|
10,065
|
|
5,581
|
|
|||||||
|
Income before provision for income taxes
|
7,820
|
|
1,123
|
|
11,737
|
|
14,139
|
|
|||||||
|
Provision for income taxes
|
4,733
|
|
2,133
|
|
6,493
|
|
6,229
|
|
|||||||
|
Net income (loss)
|
3,087
|
|
(1,010
|
)
|
5,244
|
|
7,910
|
|
|||||||
|
Less: Net income (loss) attributable to non-controlling interests, net of taxes
|
(6
|
)
|
1
|
|
13
|
|
13
|
|
|||||||
|
Net income (loss) attributable to Mistras Group, Inc.
|
$
|
3,093
|
|
$
|
(1,011
|
)
|
$
|
5,231
|
|
$
|
7,897
|
|
|||
|
Earnings (loss) per common share:
|
|
|
|
|
|||||||||||
|
Basic
|
$
|
0.11
|
|
$
|
(0.04
|
)
|
$
|
0.18
|
|
$
|
0.28
|
|
|||
|
Diluted
|
$
|
0.11
|
|
$
|
(0.04
|
)
|
$
|
0.18
|
|
$
|
0.27
|
|
|||
|
Weighted-average common shares outstanding:
|
|
|
|
|
|||||||||||
|
Basic
|
28,800
|
|
28,429
|
|
28,678
|
|
28,360
|
|
|||||||
|
Diluted
|
29,156
|
|
28,429
|
|
29,022
|
|
29,447
|
|
|||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Net income (loss)
|
$
|
3,087
|
|
$
|
(1,010
|
)
|
$
|
5,244
|
|
$
|
7,910
|
|
|||
|
Other comprehensive income:
|
|
|
|
|
|||||||||||
|
Foreign currency translation adjustments
|
(5,425
|
)
|
14
|
|
355
|
|
(4,051
|
)
|
|||||||
|
Comprehensive income (loss)
|
(2,338
|
)
|
(996
|
)
|
5,599
|
|
3,859
|
|
|||||||
|
Less: comprehensive income (loss) attributable to non-controlling interest
|
(8
|
)
|
—
|
|
11
|
|
10
|
|
|||||||
|
Comprehensive income (loss) attributable to Mistras Group, Inc.
|
$
|
(2,330
|
)
|
$
|
(996
|
)
|
$
|
5,588
|
|
$
|
3,849
|
|
|||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
(in thousands)
|
Three months ended
|
||||||||||||||||||||||||||||||
|
Common Stock
|
Additional
paid-in capital |
Retained
earnings |
Accumulated
other comprehensive income (loss) |
Total
Mistras Group, Inc. Stockholders’ Equity |
Noncontrolling Interest
|
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Total Equity
|
||||||||||||||||||||||||||||
|
Balance at June 30, 2019
|
28,685
|
|
$
|
286
|
|
$
|
228,883
|
|
$
|
73,691
|
|
$
|
(21,777
|
)
|
$
|
281,083
|
|
$
|
196
|
|
$
|
281,279
|
|
|||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
3,093
|
|
—
|
|
3,093
|
|
(6
|
)
|
3,087
|
|
||||||||||||||
|
Other comprehensive income, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
(5,425
|
)
|
(5,425
|
)
|
(2
|
)
|
(5,427
|
)
|
||||||||||||||
|
Share-based payments
|
—
|
|
—
|
|
1,682
|
|
—
|
|
—
|
|
1,682
|
|
—
|
|
1,682
|
|
||||||||||||||
|
Net settlement of options and restricted stock units
|
230
|
|
3
|
|
(2,278
|
)
|
—
|
|
—
|
|
(2,275
|
)
|
—
|
|
(2,275
|
)
|
||||||||||||||
|
Balance at September 30, 2019
|
28,915
|
|
$
|
289
|
|
$
|
228,287
|
|
$
|
76,784
|
|
$
|
(27,202
|
)
|
$
|
278,158
|
|
$
|
188
|
|
$
|
278,346
|
|
|||||||
|
Balance at June 30, 2018
|
28,374
|
|
$
|
283
|
|
$
|
224,634
|
|
$
|
73,624
|
|
$
|
(20,870
|
)
|
$
|
277,671
|
|
$
|
183
|
|
$
|
277,854
|
|
|||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(1,011
|
)
|
—
|
|
(1,011
|
)
|
1
|
|
(1,010
|
)
|
||||||||||||||
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
14
|
|
14
|
|
(1
|
)
|
13
|
|
||||||||||||||
|
Share-based payments
|
—
|
|
—
|
|
1,899
|
|
—
|
|
—
|
|
1,899
|
|
—
|
|
1,899
|
|
||||||||||||||
|
Net settlement of restricted stock units
|
97
|
|
1
|
|
(752
|
)
|
—
|
|
—
|
|
(751
|
)
|
—
|
|
(751
|
)
|
||||||||||||||
|
Exercise of stock options
|
25
|
|
—
|
|
273
|
|
—
|
|
—
|
|
273
|
|
—
|
|
—
|
|
||||||||||||||
|
Balance at September 30, 2018
|
28,496
|
|
$
|
284
|
|
$
|
226,054
|
|
$
|
72,613
|
|
$
|
(20,856
|
)
|
$
|
278,095
|
|
$
|
183
|
|
$
|
278,278
|
|
|||||||
|
Nine months ended
|
||||||||||||||||||||||||||||||
|
Common Stock
|
Additional
paid-in capital |
Retained
earnings |
Accumulated
other comprehensive income (loss) |
Total
Mistras Group, Inc. Stockholders’ Equity |
Noncontrolling Interest
|
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Total Equity
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2018
|
28,563
|
|
$
|
285
|
|
$
|
226,616
|
|
$
|
71,553
|
|
$
|
(27,557
|
)
|
$
|
270,897
|
|
$
|
177
|
|
$
|
271,074
|
|
|||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
5,231
|
|
—
|
|
5,231
|
|
13
|
|
5,244
|
|
||||||||||||||
|
Other comprehensive income, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
355
|
|
355
|
|
(2
|
)
|
353
|
|
||||||||||||||
|
Share-based payments
|
—
|
|
—
|
|
4,598
|
|
—
|
|
—
|
|
4,598
|
|
—
|
|
4,598
|
|
||||||||||||||
|
Net settlement of options and restricted stock units
|
349
|
|
4
|
|
(2,959
|
)
|
—
|
|
—
|
|
(2,955
|
)
|
—
|
|
(2,955
|
)
|
||||||||||||||
|
Exercise of stock options
|
3
|
|
—
|
|
32
|
|
—
|
|
—
|
|
32
|
|
—
|
|
32
|
|
||||||||||||||
|
Balance at September 30, 2019
|
28,915
|
|
$
|
289
|
|
$
|
228,287
|
|
$
|
76,784
|
|
$
|
(27,202
|
)
|
$
|
278,158
|
|
$
|
188
|
|
$
|
278,346
|
|
|||||||
|
Balance at December 31, 2017
|
28,295
|
|
$
|
282
|
|
$
|
222,425
|
|
$
|
64,716
|
|
$
|
(16,805
|
)
|
$
|
270,618
|
|
$
|
173
|
|
$
|
270,791
|
|
|||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
7,897
|
|
—
|
|
7,897
|
|
13
|
|
7,910
|
|
||||||||||||||
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
(4,051
|
)
|
(4,051
|
)
|
(3
|
)
|
(4,054
|
)
|
||||||||||||||
|
Share-based payments
|
—
|
|
—
|
|
4,763
|
|
—
|
|
—
|
|
4,763
|
|
—
|
|
4,763
|
|
||||||||||||||
|
Net settlement on vesting of restricted stock units
|
176
|
|
2
|
|
(1,407
|
)
|
—
|
|
—
|
|
(1,405
|
)
|
—
|
|
(1,405
|
)
|
||||||||||||||
|
Exercise of stock options
|
25
|
|
—
|
|
273
|
|
—
|
|
—
|
|
273
|
|
—
|
|
273
|
|
||||||||||||||
|
Balance at September 30, 2018
|
28,496
|
|
$
|
284
|
|
$
|
226,054
|
|
$
|
72,613
|
|
$
|
(20,856
|
)
|
$
|
278,095
|
|
$
|
183
|
|
$
|
278,278
|
|
|||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
|
|
Nine months ended
|
||||||
|
|
September 30, 2019
|
September 30, 2018
|
|||||
|
Cash flows from operating activities
|
|
|
|
|
|||
|
Net income
|
$
|
5,244
|
|
$
|
7,910
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|||
|
Depreciation and amortization
|
28,540
|
|
25,736
|
|
|||
|
Deferred income taxes
|
3,151
|
|
3,188
|
|
|||
|
Share-based compensation expense
|
4,598
|
|
4,760
|
|
|||
|
Bad debt provision for troubled customers, net of recoveries
|
2,798
|
|
—
|
|
|||
|
Fair value adjustments to contingent consideration
|
537
|
|
(808
|
)
|
|||
|
Foreign currency (gain) loss
|
(1,010
|
)
|
618
|
|
|||
|
Gain on sale of subsidiary
|
—
|
|
(2,384
|
)
|
|||
|
Other
|
(143
|
)
|
207
|
|
|||
|
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions
|
|
|
|||||
|
Accounts receivable
|
(3,098
|
)
|
(20,258
|
)
|
|||
|
Inventories
|
(391
|
)
|
(1,746
|
)
|
|||
|
Prepaid expenses and other assets
|
439
|
|
918
|
|
|||
|
Accounts payable
|
(261
|
)
|
3,019
|
|
|||
|
Accrued expenses and other liabilities
|
(2,465
|
)
|
7,456
|
|
|||
|
Income taxes payable
|
2,537
|
|
(4,432
|
)
|
|||
|
Net cash provided by operating activities
|
40,476
|
|
24,184
|
|
|||
|
Cash flows from investing activities
|
|
|
|
|
|||
|
Purchase of property, plant and equipment
|
(17,275
|
)
|
(15,386
|
)
|
|||
|
Disposition of business, net of cash sold
|
—
|
|
4,800
|
|
|||
|
Purchase of intangible assets
|
(704
|
)
|
(385
|
)
|
|||
|
Acquisition of business, net of cash acquired
|
(4,822
|
)
|
—
|
|
|||
|
Proceeds from sale of equipment
|
1,173
|
|
1,140
|
|
|||
|
Net cash used in investing activities
|
(21,628
|
)
|
(9,831
|
)
|
|||
|
Cash flows from financing activities
|
|
|
|
|
|||
|
Repayment of finance lease obligations
|
(3,338
|
)
|
(4,464
|
)
|
|||
|
Proceeds from borrowings of long-term debt
|
684
|
|
1,743
|
|
|||
|
Repayment of long-term debt
|
(5,189
|
)
|
(1,857
|
)
|
|||
|
Proceeds from revolver
|
20,500
|
|
28,076
|
|
|||
|
Repayment of revolver
|
(38,500
|
)
|
(43,990
|
)
|
|||
|
Payment of contingent consideration for business acquisitions
|
(755
|
)
|
(2,282
|
)
|
|||
|
Taxes paid related to net share settlement of share-based awards
|
(2,955
|
)
|
(1,404
|
)
|
|||
|
Proceeds from exercise of stock options
|
32
|
|
273
|
|
|||
|
Net cash used in financing activities
|
(29,521
|
)
|
(23,905
|
)
|
|||
|
Effect of exchange rate changes on cash and cash equivalents
|
(499
|
)
|
(916
|
)
|
|||
|
Net change in cash and cash equivalents
|
(11,172
|
)
|
(10,468
|
)
|
|||
|
Cash and cash equivalents at beginning of period
|
25,544
|
|
27,541
|
|
|||
|
Cash and cash equivalents at end of period
|
$
|
14,372
|
|
$
|
17,073
|
|
|
|
Supplemental disclosure of cash paid
|
|
|
|
|
|||
|
Interest
|
$
|
9,944
|
|
$
|
5,418
|
|
|
|
Income taxes
|
$
|
4,011
|
|
$
|
9,658
|
|
|
|
Noncash investing and financing
|
|
|
|
|
|||
|
Equipment acquired through finance lease obligations
|
$
|
5,536
|
|
$
|
3,850
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
1.
Description of Business and Basis of Presentation
Description of Business
Mistras Group, Inc. and subsidiaries ("the Company") 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, public infrastructure and commercial aerospace components. The Company combines industry-leading products and technologies, expertise in mechanical integrity (MI), non-destructive testing (NDT) and mechanical services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity assessments and management. These mission critical solutions enhance customers’ ability to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. The Company serves a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, commercial aerospace and defense, fossil and nuclear power, alternative and renewable energy, public infrastructure, chemicals, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions.
Basis of Presentation
The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the years ending
December 31, 2019
and
2018
. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K (“2018 Annual Report”) for the year ended December 31,
2018
, dated
March 15, 2019
.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Mistras Group, Inc. and its wholly and majority-owned subsidiaries. For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying Condensed Consolidated Balance Sheets. The non-controlling interests in net results, net of tax, is classified separately in the accompanying Unaudited Condensed Consolidated Statements of Income (Loss). All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassification
Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company's financial condition or results of operations as previously reported.
Customers
For each of the
nine months ended September 30, 2019
and
2018
, no customer represented 10% or more of the Company's revenue.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in Note 1–
Summary of Significant Accounting Policies and Practices
in the 2018 Annual Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, long-lived assets, goodwill and acquisitions. Since the date of the 2018 Annual Report, there have been no material changes to the Company's significant accounting policies, other than its adoption of the new leasing standard on January 1, 2019.
6
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Income Taxes
On December 22, 2017, the United States enacted fundamental changes to federal tax law following the passage of the Tax Cuts and Jobs Act (the “Tax Act”). The Company’s financial statements for the periods ended September 30, 2019 and September 30, 2018 reflected provisions of the Tax Act effective for periods beginning after December 31, 2017, which includes the reduced federal corporate tax rate of from 35% to 21%, adjustments made to executive compensation and meals and entertainment rules, and the inclusion of new categories of income, global intangible low-taxes income (“GILTI”) and foreign derived intangible income (“FDII”). The Company’s effective income tax rate was approximately
61%
and
190%
for the
three months ended September 30, 2019
and
2018
, respectively. The Company's effective income tax rate was approximately
55%
and
44%
for the
nine months ended September 30, 2019
and
2018
, respectively. The effective income tax rate for the third quarter and first nine-months of 2019 and 2018 was higher than the statutory rate due to the impact of discrete items, GILTI, executive compensation, and other provisions resulting from the passage of the Tax Act and foreign tax rates different than statutory rates in the U.S..
The Company has completed the accounting for the adoption of the Tax Act. The amounts recorded in 2019 for the Tax Act related to the calculations of the GILTI, FDII, executive compensation and meals and entertainment are the Company’s best estimates based on the current data and guidance available. The Company is continuing to evaluate the state tax conformity to the Tax Act, including the GILTI provisions. Given the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). In 2018, the Company made an accounting policy election to account for these effects under the period cost method.
Mistras and its subsidiaries file tax returns in the U.S., including various state and local returns, and in other foreign jurisdictions. The Company believes adequate provision has been made for all income tax uncertainties.
Recent Accounting Pronouncements
In February 2016, the
Financial Accounting Standards Board ("
FASB") issued Accounting Standards Update ("ASU") No. 2016-02,
Leases (Topic 842
), which the Company adopted as of January 1, 2019. Topic 842 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. The Company elected the modified retrospective method permitted by the standard, upon which prior-period information has not been restated.
The standard provided for several practical expedient options for use in transition. The Company elected to utilize the “package of practical expedients,” which permits the Company not to reassess previous conclusions reached on lease identification, lease classification and initial direct costs. The Company also elected to utilize the practical expedient available to not separate lease and non-lease components within the lease and has therefore accounted for all lease components as a single lease component.
Adoption of the new standard resulted in the recording of a right-of-use (ROU) asset and liability related to the Company’s operating leases of approximately
$38 million
as of January 1, 2019. The new standard did not have a material impact to our statements of income or cash flows.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350).
This amendment eliminates Step Two of the goodwill impairment test. Under the amendments in this update, entities should perform the annual goodwill impairment test by comparing the carrying value of their reporting units to their fair value. An entity should record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Tax deductibility of goodwill should be considered in evaluating any reporting unit's impairment loss to be taken. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the third quarter of 2017 for its condensed consolidated financial statements and related disclosures.
2. Revenue
The majority of the Company's revenues are derived from providing services on a time and material basis and are short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606,
Revenue from Contracts with Customers,
which was adopted on January 1, 2018.
7
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company provides highly integrated and bundled inspection services to its customers. Some of our contracts have multiple performance obligations, most commonly due to the contract providing both goods and services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists.
Contract modifications are not routine in the performance of our contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and services that are provided. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as a separate contract.
Our performance obligations are satisfied over time as work progresses or at a point in time. The majority of our revenue recognized over time as work progresses is related to our service deliverables, which includes providing testing, inspection and mechanical services to our customers. Revenue is recognized over time based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes an available practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. Revenue is recognized on a cost-to-cost method tracked on an input basis.
The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead.
The Company expects any significant remaining performance obligations to be satisfied within
one
year.
Contract Estimates
The majority of our revenues are short-term in nature. The Company has many Master Service Agreements (MSAs) that specify an overall framework and contract terms when the Company and customers agree upon services or products to be provided. The actual contracting to provide services or furnish products is triggered by a work order, purchase order, or some similar document issued pursuant to a MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into long-term contracts, which can range from several months to several years. Revenue on such long-term contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion. This includes contract estimates of costs to be incurred for the performance of the contract. Cost estimation is based upon the professional knowledge and experience of our project managers, engineers and financial professionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in our project performance and the recoverability of any claims. Whenever revisions of estimates, contract costs and/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.
8
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Revenue by Category
The following series of tables present our disaggregated revenues:
Revenue by industry was as follows:
|
Three Months Ended September 30, 2019
|
Services
|
International
|
Products
|
Corp/Elim
|
Total
|
||||||||||||||
|
Oil & Gas
|
$
|
100,927
|
|
$
|
11,561
|
|
$
|
71
|
|
$
|
—
|
|
$
|
112,559
|
|
||||
|
Aerospace & Defense
|
12,420
|
|
9,626
|
|
438
|
|
—
|
|
22,484
|
|
|||||||||
|
Industrials
|
15,612
|
|
5,453
|
|
506
|
|
—
|
|
21,571
|
|
|||||||||
|
Power generation & Transmission
|
7,215
|
|
3,462
|
|
461
|
|
—
|
|
11,138
|
|
|||||||||
|
Other Process Industries
|
6,942
|
|
2,674
|
|
304
|
|
—
|
|
9,920
|
|
|||||||||
|
Infrastructure, Research & Engineering
|
4,205
|
|
1,964
|
|
2,964
|
|
—
|
|
9,133
|
|
|||||||||
|
Other
|
5,251
|
|
2,310
|
|
777
|
|
(2,951
|
)
|
5,387
|
|
|||||||||
|
Total
|
$
|
152,572
|
|
$
|
37,050
|
|
$
|
5,521
|
|
$
|
(2,951
|
)
|
$
|
192,192
|
|
||||
|
Three Months Ended September 30, 2018
|
Services
|
International
|
Products
|
Corp/Elim
|
Total
|
||||||||||||||
|
Oil & Gas
|
$
|
90,584
|
|
$
|
8,843
|
|
$
|
115
|
|
$
|
—
|
|
$
|
99,542
|
|
||||
|
Aerospace & Defense
|
12,287
|
|
13,117
|
|
400
|
|
—
|
|
25,804
|
|
|||||||||
|
Industrials
|
17,523
|
|
6,080
|
|
1,191
|
|
—
|
|
24,794
|
|
|||||||||
|
Power generation & Transmission
|
6,341
|
|
3,202
|
|
1,334
|
|
—
|
|
10,877
|
|
|||||||||
|
Other Process Industries
|
6,677
|
|
1,650
|
|
11
|
|
—
|
|
8,338
|
|
|||||||||
|
Infrastructure, Research & Engineering
|
2,629
|
|
1,777
|
|
1,576
|
|
—
|
|
5,982
|
|
|||||||||
|
Other
|
5,299
|
|
2,002
|
|
1,089
|
|
(1,558
|
)
|
6,832
|
|
|||||||||
|
Total
|
$
|
141,340
|
|
$
|
36,671
|
|
$
|
5,716
|
|
$
|
(1,558
|
)
|
$
|
182,169
|
|
||||
|
Nine Months Ended September 30, 2019
|
Services
|
International
|
Products
|
Corp/Elim
|
Total
|
||||||||||||||
|
Oil & Gas
|
$
|
301,696
|
|
$
|
33,033
|
|
$
|
551
|
|
$
|
—
|
|
$
|
335,280
|
|
||||
|
Aerospace & Defense
|
38,725
|
|
31,783
|
|
1,060
|
|
—
|
|
71,568
|
|
|||||||||
|
Industrials
|
51,373
|
|
15,987
|
|
1,585
|
|
—
|
|
68,945
|
|
|||||||||
|
Power generation & Transmission
|
21,829
|
|
7,383
|
|
2,328
|
|
—
|
|
31,540
|
|
|||||||||
|
Other Process Industries
|
19,644
|
|
7,420
|
|
376
|
|
—
|
|
27,440
|
|
|||||||||
|
Infrastructure, Research & Engineering
|
9,601
|
|
7,214
|
|
4,869
|
|
—
|
|
21,684
|
|
|||||||||
|
Other
|
11,211
|
|
6,482
|
|
2,453
|
|
(7,008
|
)
|
13,138
|
|
|||||||||
|
Total
|
$
|
454,079
|
|
$
|
109,302
|
|
$
|
13,222
|
|
$
|
(7,008
|
)
|
$
|
569,595
|
|
||||
9
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
|
Nine Months Ended September 30, 2018
|
Services
|
International
|
Products
|
Corp/Elim
|
Total
|
||||||||||||||
|
Oil & Gas
|
$
|
287,620
|
|
$
|
27,512
|
|
$
|
1,052
|
|
$
|
—
|
|
$
|
316,184
|
|
||||
|
Aerospace & Defense
|
38,115
|
|
42,468
|
|
1,836
|
|
—
|
|
82,419
|
|
|||||||||
|
Industrials
|
45,847
|
|
20,298
|
|
2,656
|
|
—
|
|
68,801
|
|
|||||||||
|
Power generation & Transmission
|
23,378
|
|
6,728
|
|
3,444
|
|
—
|
|
33,550
|
|
|||||||||
|
Other Process Industries
|
18,222
|
|
6,349
|
|
49
|
|
—
|
|
24,620
|
|
|||||||||
|
Infrastructure, Research & Engineering
|
8,723
|
|
6,848
|
|
3,337
|
|
—
|
|
18,908
|
|
|||||||||
|
Other
|
12,748
|
|
6,035
|
|
4,912
|
|
(6,585
|
)
|
17,110
|
|
|||||||||
|
Total
|
$
|
434,653
|
|
$
|
116,238
|
|
$
|
17,286
|
|
$
|
(6,585
|
)
|
$
|
561,592
|
|
||||
Revenue per key geographic location was as follows:
|
Three Months Ended September 30, 2019
|
Services
|
International
|
Products
|
Corp/Elim
|
Total
|
||||||||||||||
|
United States
|
$
|
123,585
|
|
$
|
128
|
|
$
|
3,780
|
|
$
|
(1,084
|
)
|
$
|
126,409
|
|
||||
|
Other Americas
|
26,981
|
|
1,842
|
|
72
|
|
32
|
|
28,927
|
|
|||||||||
|
Europe
|
1,157
|
|
31,817
|
|
513
|
|
(1,844
|
)
|
31,643
|
|
|||||||||
|
Asia-Pacific
|
849
|
|
3,263
|
|
1,156
|
|
(55
|
)
|
5,213
|
|
|||||||||
|
Total
|
$
|
152,572
|
|
$
|
37,050
|
|
$
|
5,521
|
|
$
|
(2,951
|
)
|
$
|
192,192
|
|
||||
|
Three Months Ended September 30, 2018
|
Services
|
International
|
Products
|
Corp/Elim
|
Total
|
||||||||||||||
|
United States
|
$
|
118,415
|
|
$
|
82
|
|
$
|
2,806
|
|
$
|
(849
|
)
|
$
|
120,454
|
|
||||
|
Other Americas
|
21,712
|
|
1,894
|
|
192
|
|
(141
|
)
|
23,657
|
|
|||||||||
|
Europe
|
748
|
|
33,654
|
|
1,184
|
|
(557
|
)
|
35,029
|
|
|||||||||
|
Asia-Pacific
|
465
|
|
1,041
|
|
1,534
|
|
(11
|
)
|
3,029
|
|
|||||||||
|
Total
|
$
|
141,340
|
|
$
|
36,671
|
|
$
|
5,716
|
|
$
|
(1,558
|
)
|
$
|
182,169
|
|
||||
|
Nine Months Ended September 30, 2019
|
Services
|
International
|
Products
|
Corp/Elim
|
Total
|
||||||||||||||
|
United States
|
$
|
368,600
|
|
$
|
461
|
|
$
|
8,727
|
|
$
|
(3,638
|
)
|
$
|
374,150
|
|
||||
|
Other Americas
|
82,494
|
|
5,757
|
|
209
|
|
(232
|
)
|
88,228
|
|
|||||||||
|
Europe
|
1,855
|
|
97,098
|
|
1,370
|
|
(3,079
|
)
|
97,244
|
|
|||||||||
|
Asia-Pacific
|
1,130
|
|
5,986
|
|
2,916
|
|
(59
|
)
|
9,973
|
|
|||||||||
|
Total
|
$
|
454,079
|
|
$
|
109,302
|
|
$
|
13,222
|
|
$
|
(7,008
|
)
|
$
|
569,595
|
|
||||
|
Nine Months Ended September 30, 2018
|
Services
|
International
|
Products
|
Corp/Elim
|
Total
|
||||||||||||||
|
United States
|
$
|
364,813
|
|
$
|
506
|
|
$
|
8,846
|
|
$
|
(2,595
|
)
|
$
|
371,570
|
|
||||
|
Other Americas
|
66,170
|
|
5,751
|
|
552
|
|
(1,138
|
)
|
71,335
|
|
|||||||||
|
Europe
|
3,037
|
|
105,499
|
|
3,118
|
|
(2,752
|
)
|
108,902
|
|
|||||||||
|
Asia-Pacific
|
633
|
|
4,482
|
|
4,770
|
|
(100
|
)
|
9,785
|
|
|||||||||
|
Total
|
$
|
434,653
|
|
$
|
116,238
|
|
$
|
17,286
|
|
$
|
(6,585
|
)
|
$
|
561,592
|
|
||||
10
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the Condensed Consolidated Balance Sheets at the end of each reporting period within accounts receivables or accrued expenses and other current liabilities.
Revenue recognized in 2019 that was included in the contract liability balance at the beginning of the year was
$3.4 million
. Changes in the contract asset and liability balances during the quarter ended
September 30, 2019
, were not materially impacted by any other factors. The Company has elected to utilize a practical expedient to expense incremental costs incurred related to obtaining a contract. The Company’s expenses are expected to be amortized over a period less than
one
year.
3.
Share-Based Compensation
The Company has share-based incentive awards outstanding to its eligible employees and non-employee directors under
two
equity incentive plans: (i) the 2009 Long-Term Incentive Plan (the "2009 Plan") and (ii) the 2016 Long-Term Incentive Plan (the "2016 Plan").
No
further awards may be granted under the 2009 Plan, although awards granted under the 2009 Plan remain outstanding in accordance with their terms. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units and other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock rights.
Stock Options
For the
nine months ended September 30, 2019
and
2018
, the Company did
no
t recognize any share-based compensation expense related to stock option awards, as all outstanding stock options awards are fully vested.
No
unrecognized compensation costs remained related to stock option awards as of
September 30, 2019
.
The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of
September 30, 2019
and
September 30, 2018
:
|
|
Nine months ended September 30,
|
||||||||||||
|
|
2019
|
2018
|
|||||||||||
|
|
Common
Stock
Options
|
Weighted
Average
Exercise
Price
|
Common
Stock
Options
|
Weighted
Average
Exercise
Price
|
|||||||||
|
Outstanding at beginning of period:
|
2,105
|
|
$
|
13.47
|
|
2,130
|
|
$
|
13.43
|
|
|||
|
Granted
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|||
|
Exercised
|
(2,093
|
)
|
$
|
13.45
|
|
(25
|
)
|
$
|
10.75
|
|
|||
|
Expired or forfeited
|
(7
|
)
|
$
|
10.00
|
|
—
|
|
$
|
—
|
|
|||
|
Outstanding at end of period:
|
5
|
|
$
|
22.35
|
|
2,105
|
|
$
|
13.47
|
|
|||
Restricted Stock Unit Awards
For the
three months ended September 30, 2019
and
September 30, 2018
, the Company recognized share-based compensation expense related to restricted stock unit awards of
$1.0 million
and
$1.3 million
, respectively. For the
nine months ended September 30, 2019
and
September 30, 2018
, the Company recognized share-based compensation expense related to restricted stock unit awards of
$3.0 million
and
$3.3 million
, respectively. As of
September 30, 2019
, there was
$7.8 million
of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which is expected to be recognized over a remaining weighted-average period of
2.6 years
. Upon vesting, restricted stock units are generally net share-settled to cover the required minimum withholding tax and the remaining amount is converted into an equivalent number of shares of common stock.
11
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows:
|
|
Nine months ended September 30,
|
||||||
|
|
2019
|
2018
|
|||||
|
Restricted stock awards vested
|
148
|
|
158
|
|
|||
|
Fair value of awards vested
|
$
|
2,168
|
|
$
|
3,406
|
|
|
A summary of the fully-vested common stock the Company issued to its
six
non-employee directors, in connection with its non-employee director compensation plan, is as follows:
|
|
Nine months ended September 30,
|
||||||
|
|
2019
|
2018
|
|||||
|
Awards issued
|
30
|
|
19
|
|
|||
|
Grant date fair value of awards issued
|
$
|
450
|
|
$
|
400
|
|
|
A summary of the Company's outstanding, non-vested restricted share units is as follows:
|
|
Nine months ended September 30,
|
||||||||||||
|
|
2019
|
2018
|
|||||||||||
|
|
Units
|
Weighted
Average Grant-Date Fair Value |
Units
|
Weighted
Average Grant-Date Fair Value |
|||||||||
|
Outstanding at beginning of period:
|
443
|
|
$
|
20.55
|
|
532
|
|
$
|
21.05
|
|
|||
|
Granted
|
334
|
|
$
|
14.04
|
|
211
|
|
$
|
19.20
|
|
|||
|
Released
|
(148
|
)
|
$
|
20.17
|
|
(158
|
)
|
$
|
20.66
|
|
|||
|
Forfeited
|
(36
|
)
|
$
|
18.38
|
|
(34
|
)
|
$
|
20.36
|
|
|||
|
Outstanding at end of period:
|
593
|
|
$
|
17.08
|
|
551
|
|
$
|
20.37
|
|
|||
Performance Restricted Stock Units
The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout is based on the Company’s performance over a
one
-year period based on
three
metrics, as defined: (1) Operating Income, (2) Adjusted EBITDAS (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) and (3) Revenue. There also is a discretionary portion of the PRSUs based on individual performance, granted at the discretion of the Compensation Committee (Discretionary PRSUs). PRSUs and Discretionary PRSUs generally vest ratably on each of the first four anniversary dates upon completion of the performance period, for a total requisite service period of up to
five
years and have no dividend rights.
PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant, assuming that the target performance conditions will be achieved. Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions.
Discretionary PRSUs are liability-classified and adjusted to fair value (with a corresponding adjustment to compensation expense) based upon the targeted number of shares to be awarded and the fair value of the underlying stock each reporting period until approved by the Compensation Committee, at which point they are equity-classified.
12
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
A summary of the Company's PRSU activity is as follows:
|
|
Nine months ended September 30,
|
||||||||||||
|
2019
|
2018
|
||||||||||||
|
|
Units
|
Weighted
Average Grant-Date Fair Value |
Units
|
Weighted
Average Grant-Date Fair Value |
|||||||||
|
Outstanding at beginning of period:
|
277
|
|
$
|
17.80
|
|
278
|
|
$
|
17.00
|
|
|||
|
Granted
|
190
|
|
$
|
13.63
|
|
123
|
|
$
|
19.46
|
|
|||
|
Performance condition adjustments
|
(36
|
)
|
$
|
14.06
|
|
(28
|
)
|
$
|
19.49
|
|
|||
|
Released
|
(77
|
)
|
$
|
15.86
|
|
(61
|
)
|
$
|
15.04
|
|
|||
|
Forfeited
|
—
|
|
$
|
—
|
|
(12
|
)
|
$
|
16.16
|
|
|||
|
Outstanding at end of period:
|
354
|
|
$
|
16.45
|
|
300
|
|
$
|
18.05
|
|
|||
During the
nine months ended September 30, 2019
and
September 30, 2018
, the Compensation Committee approved the final calculation of the award metrics for calendar year 2018 and calendar year 2017, respectively. As a result, the calendar year 2018 PRSUs decreased by approximately
3,000
units and the calendar year 2017 PRSUs increased by approximately
4,000
units. Calendar year 2019 PRSUs decreased approximately
33,000
units during the
nine months ended September 30, 2019
based on forecasted results for calendar year 2019. Calendar year 2018 PRSUs decreased approximately
32,000
units during the
nine months ended September 30, 2018
based on forecasted results for calendar year 2018.
As of
September 30, 2019
, the liability related to Discretionary PRSUs was less than
$0.1 million
and is classified within Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.
For the
three months ended September 30, 2019
and
September 30, 2018
, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately
$0.5 million
and
$0.4 million
, respectively. For the
nine months ended September 30, 2019
and
September 30, 2018
, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately
$1.2 million
and
$1.0 million
, respectively. At
September 30, 2019
, there was
$3.1 million
of total unrecognized compensation costs related to approximately
354,000
non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of
2.3 years
.
4.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects: (i) the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units.
13
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
The following table sets forth the computations of basic and diluted earnings per share:
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Basic earnings per share:
|
|
|
|
|
|||||||||||
|
Numerator:
|
|
|
|
|
|||||||||||
|
Net income (loss) attributable to Mistras Group, Inc.
|
$
|
3,093
|
|
$
|
(1,011
|
)
|
$
|
5,231
|
|
$
|
7,897
|
|
|||
|
Denominator:
|
|
|
|
|
|
|
|
|
|||||||
|
Weighted-average common shares outstanding
|
28,800
|
|
28,429
|
|
28,678
|
|
28,360
|
|
|||||||
|
Basic earnings per share
|
$
|
0.11
|
|
$
|
(0.04
|
)
|
$
|
0.18
|
|
$
|
0.28
|
|
|||
|
Diluted earnings per share:
|
|
|
|
|
|||||||||||
|
Numerator:
|
|
|
|
|
|||||||||||
|
Net income (loss) attributable to Mistras Group, Inc.
|
$
|
3,093
|
|
$
|
(1,011
|
)
|
$
|
5,231
|
|
$
|
7,897
|
|
|||
|
Denominator:
|
|
|
|
|
|
|
|
|
|||||||
|
Weighted-average common shares outstanding
|
28,800
|
|
28,429
|
|
28,678
|
|
28,360
|
|
|||||||
|
Dilutive effect of stock options outstanding
(1)
|
129
|
|
—
|
|
147
|
|
739
|
|
|||||||
|
Dilutive effect of restricted stock units outstanding
(1)
|
227
|
|
—
|
|
197
|
|
348
|
|
|||||||
|
|
29,156
|
|
28,429
|
|
29,022
|
|
29,447
|
|
|||||||
|
Diluted earnings per share
|
$
|
0.11
|
|
$
|
(0.04
|
)
|
$
|
0.18
|
|
$
|
0.27
|
|
|||
(1)
For the three months ended September 30, 2018,
805
and
364
shares related to stock options and restricted stock, respectively, were excluded from the calculation of diluted EPS due to the net loss for the period.
5.
Acquisitions and Dispositions
Acquisitions
During the
nine months ended September 30, 2019
, the Company completed
one
acquisition that provides pipeline integrity management software and services to energy transportation companies. The Company acquired all the equity interest of the acquiree in exchange for aggregate consideration of
$4.8 million
in cash, contingent consideration of up to
$4.3 million
to be earned based upon the acquired business achieving specific performance metrics over the initial
three years
of operations from the acquisition date and working capital adjustments, which have not been finalized. The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations.
14
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
The following table summarizes the allocation of the preliminary purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, with the excess recorded as goodwill:
|
Cash paid
|
$
|
4,843
|
|
|
Contingent consideration
|
1,081
|
|
|
|
Total consideration
|
$
|
5,924
|
|
|
Current assets
|
$
|
1,282
|
|
|
Property, plant and equipment
|
65
|
|
|
|
Intangible assets
|
3,467
|
|
|
|
Goodwill
|
1,753
|
|
|
|
Current liabilities
|
(643
|
)
|
|
|
Net assets acquired
|
$
|
5,924
|
|
The assets and liabilities of the business acquired in 2019 are included in the Condensed Consolidated Balance Sheets based upon their estimated fair values on the date of acquisition as determined in a preliminary purchase price allocation, using available information and making assumptions management believes are reasonable. The Company is still in the process of completing its valuation of the assets acquired and liabilities assumed. Goodwill primarily relates to expected synergies and is generally fully deductible for tax purposes. Intangible assets primarily relate to technology and customer relationships.
The results of operations of the business acquired in 2019 have been included in the Services segment within the Unaudited Condensed Consolidated Statements of Income (Loss) from the closing date of this transaction and approximates
$0.6 million
for revenues and
$0.1 million
operating loss for the three and
nine months ended September 30, 2019
.
During the nine months ended
September 30, 2018
, the Company did
no
t complete any acquisitions.
The Company completed
one
acquisition during the fourth quarter of 2018. The acquired company primarily provides services to the midstream area within the oil and gas industry, with headquarters in Canada and a location in the U.S. The Company acquired
100%
of the equity interests of the acquiree's Canadian and U.S. entities in exchange for aggregate consideration of
$143.1 million
in cash. The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations.
During the three months ended September 30, 2019, the Company adjusted provisional amounts recorded and related effects as follows:
|
•
|
The Company decreased the
$8.5 million
provisional fair value of property, plant and equipment by
$0.6 million
with a corresponding increase to goodwill.
|
|
•
|
The Company increased the
$5.0 million
provisional fair value of debt and other liabilities by
$0.4 million
with a corresponding increase to goodwill.
|
The Company is still in the process of completing the remaining valuation of the assets acquired.
The Company has filed a claim with the seller and the Company's insurance carrier through which the Company has representations and warranty insurance with respect to certain matters that may impact the purchase price. This matter is currently being investigated and discussed with the seller and the Company's insurance carrier.
15
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Acquisition-Related Expense
In the course of its acquisition activities, the Company incurs costs in connection with due diligence, such as professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are reported as Acquisition-related expense (benefit), net on the Unaudited Condensed Consolidated Statements of Income (Loss) and were as follows for the three and
nine months ended September 30, 2019
and
2018
:
|
Three months ended September 30,
|
Nine months ended September 30,
|
||||||||||||||
|
|
2019
|
2018
|
2019
|
2018
|
|||||||||||
|
Due diligence, professional fees and other transaction costs
|
$
|
93
|
|
$
|
35
|
|
$
|
433
|
|
$
|
(334
|
)
|
|||
|
Adjustments to fair value of contingent consideration liabilities
|
(125
|
)
|
182
|
|
537
|
|
(809
|
)
|
|||||||
|
Acquisition-related expense (benefit), net
|
$
|
(32
|
)
|
$
|
217
|
|
$
|
970
|
|
$
|
(1,143
|
)
|
|||
The Company's contingent consideration liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets.
Dispositions
During the third quarter of 2018, substantially all of the assets and liabilities of a subsidiary in the Products and Systems segment were sold for approximately
$4.3 million
, inclusive of a
$0.5 million
post-closing adjustment. For the nine months ended September 30, 2018, the Company recognized a gain of approximately
$2.4 million
related to the sale, which is reported as a Gain on sale of subsidiary on the Unaudited Condensed Consolidated Statement of Income (Loss). The sale also included a
three
-year agreement to purchase products from the buyer, with a cumulative commitment of
$2.3 million
(see Note 14–
Commitments and Contingencies
).
6.
Accounts Receivable, net
Accounts receivable consisted of the following:
|
|
September 30, 2019
|
December 31, 2018
|
|||||
|
Trade accounts receivable
|
$
|
154,250
|
|
$
|
152,511
|
|
|
|
Allowance for doubtful accounts
|
(6,226
|
)
|
(4,187
|
)
|
|||
|
Accounts receivable, net
|
$
|
148,024
|
|
$
|
148,324
|
|
|
The Company had
$32.3 million
and
$16.1 million
of unbilled revenues accrued as of
September 30, 2019
and
December 31, 2018
, respectively. These amounts are included in the trade accounts receivable balances above. Unbilled revenues are generally billed in the subsequent quarter to their revenue recognition.
In the fourth quarter of 2018, the Company recorded a reserve of
$0.7 million
for a renewable energy industry customer, based in part on the available information about the financial difficulties of the customer. This customer filed for a voluntary insolvency proceeding on April 9, 2019 at which time payments under the previously agreed upon payment plan ceased. As a result, during the first quarter of 2019, the Company recorded an additional charge of
$5.7 million
to fully reserve for the amount of the exposure related to this customer. During the second quarter of 2019, the Company reversed
$1.0 million
of this reserve based on additional information obtained during the quarter. There were no changes during the third quarter of 2019.
16
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
During 2019, the Company sold to an unaffiliated third party, without recourse, its remaining outstanding receivables owed from a customer which filed for bankruptcy, and for which the Company had initially recorded a charge during the second quarter of 2017. During the first quarter of 2019, the Company recorded a recovery of
$0.2 million
and during the second quarter of 2019, the Company recorded a recovery
$1.7 million
, related to a bad debt provision for the receivables due from this customer. This matter is considered fully resolved.
7.
Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
|
Useful Life
(Years)
|
September 30, 2019
|
December 31, 2018
|
|||||||
|
Land
|
|
$
|
2,657
|
|
$
|
2,680
|
|
||
|
Buildings and improvements
|
30-40
|
24,031
|
|
24,338
|
|
||||
|
Office furniture and equipment
|
5-8
|
18,037
|
|
16,170
|
|
||||
|
Machinery and equipment
|
5-7
|
221,555
|
|
208,245
|
|
||||
|
|
|
266,280
|
|
251,433
|
|
||||
|
Accumulated depreciation and amortization
|
|
(170,778
|
)
|
(157,538
|
)
|
||||
|
Property, plant and equipment, net
|
|
$
|
95,502
|
|
$
|
93,895
|
|
||
Depreciation expense for each of the
three months ended September 30, 2019
and
September 30, 2018
was approximately
$5.8 million
and
$6.0 million
, respectively.
Depreciation expense for each of the
nine months ended September 30, 2019
and
September 30, 2018
was approximately
$18.0 million
and
$18.2 million
, respectively.
8. Goodwill
Changes in the carrying amount of goodwill by segment is shown below:
|
|
Services
|
International
|
Products and Systems
|
Total
|
|||||||||||
|
Balance at December 31, 2018
|
$
|
243,476
|
|
$
|
35,783
|
|
$
|
—
|
|
$
|
279,259
|
|
|||
|
Goodwill acquired during the period
|
1,753
|
|
—
|
|
—
|
|
1,753
|
|
|||||||
|
Adjustments to preliminary purchase price allocations
|
923
|
|
—
|
|
—
|
|
923
|
|
|||||||
|
Foreign currency translation
|
2,830
|
|
(1,644
|
)
|
—
|
|
1,186
|
|
|||||||
|
Balance at September 30, 2019
|
$
|
248,982
|
|
$
|
34,139
|
|
$
|
—
|
|
$
|
283,121
|
|
|||
The Company reviews goodwill for impairment on a reporting unit basis on October 1 of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. As of
September 30, 2019
, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable.
The Company's cumulative goodwill impairment as of
September 30, 2019
and
December 31, 2018
was
$23.1 million
, of which
$13.2 million
related to the Products and Systems segment and
$9.9 million
related to the International segment.
17
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
9.
Intangible Assets
The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:
|
|
|
September 30, 2019
|
December 31, 2018
|
||||||||||||||||||||||
|
|
Useful Life
(Years) |
Gross
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||||||||||||
|
Customer relationships
|
5-14
|
$
|
112,592
|
|
$
|
(65,615
|
)
|
$
|
46,977
|
|
$
|
112,624
|
|
$
|
(60,993
|
)
|
$
|
51,631
|
|
||||||
|
Software/Technology
|
3-15
|
72,198
|
|
(17,071
|
)
|
55,127
|
|
67,240
|
|
(13,319
|
)
|
53,921
|
|
||||||||||||
|
Covenants not to compete
|
2-5
|
12,735
|
|
(11,416
|
)
|
1,319
|
|
12,593
|
|
(10,825
|
)
|
1,768
|
|
||||||||||||
|
Other
|
2-12
|
10,726
|
|
(7,256
|
)
|
3,470
|
|
10,317
|
|
(6,242
|
)
|
4,075
|
|
||||||||||||
|
Total
|
|
$
|
208,251
|
|
$
|
(101,358
|
)
|
$
|
106,893
|
|
$
|
202,774
|
|
$
|
(91,379
|
)
|
$
|
111,395
|
|
||||||
Amortization expense for the
three months ended September 30, 2019
and
September 30, 2018
was approximately
$3.4 million
and
$2.5 million
, respectively.
Amortization expense for the
nine months ended September 30, 2019
and
September 30, 2018
was approximately
$10.5 million
and
$7.5 million
, respectively.
10.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
September 30, 2019
|
December 31, 2018
|
|||||
|
Accrued salaries, wages and related employee benefits
|
$
|
34,020
|
|
$
|
29,959
|
|
|
|
Contingent consideration, current portion
|
2,732
|
|
1,687
|
|
|||
|
Accrued workers’ compensation and health benefits
|
4,882
|
|
5,086
|
|
|||
|
Deferred revenue
|
5,153
|
|
5,046
|
|
|||
|
Pension accrual
|
3,064
|
|
5,585
|
|
|||
|
Right-of-use liability - operating
|
9,636
|
|
—
|
|
|||
|
Other accrued expenses
|
26,965
|
|
26,532
|
|
|||
|
Total
|
$
|
86,452
|
|
$
|
73,895
|
|
|
11.
Long-Term Debt
Long-term debt consisted of the following:
|
|
September 30, 2019
|
December 31, 2018
|
|||||
|
Senior credit facility
|
$
|
163,233
|
|
$
|
181,656
|
|
|
|
Senior secured term loan, net of debt issuance costs of $0.1 million
|
96,163
|
|
99,897
|
|
|||
|
Notes payable
|
—
|
|
68
|
|
|||
|
Other
|
7,920
|
|
8,999
|
|
|||
|
Total debt
|
267,316
|
|
290,620
|
|
|||
|
Less: Current portion
|
(6,563
|
)
|
(6,833
|
)
|
|||
|
Long-term debt, net of current portion
|
$
|
260,753
|
|
$
|
283,787
|
|
|
18
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Senior Credit Facility
The Company's revolving credit agreement with its banking group ("Credit Agreement") provides the Company with a
$300 million
revolving line of credit, which, under certain circumstances, can be increased to
$450 million
with the approval of the banks. In addition, the Credit Agreement provides the Company with a
$100 million
senior secured term loan A facility. Both the revolving line of credit and the term loan A facility under the Credit Agreement have a maturity date of December 12, 2023. The Company may borrow up to
$100 million
in non-U.S. Dollar currencies and use up to
$20 million
of the credit limit for the issuance of letters of credit. As of
September 30, 2019
, the Company had borrowings of
$259.4 million
and a total of
$5.4 million
of letters of credit outstanding under the Credit Agreement. The Company has capitalized costs associated with debt modifications of
$0.9 million
as of
September 30, 2019
, which is included in Other assets on the Condensed Consolidated Balance Sheets.
Loans under the Credit Agreement bear interest at the London Interbank Offered Rate (
"LIBOR"
) plus an applicable LIBOR margin ranging from
1%
to
2%
, or a
base rate
less a margin of
1.25%
to
0.375%
, at the option of the Company, based upon the Company’s Funded Debt Leverage Ratio. Funded Debt Leverage Ratio is generally the ratio of (1) all outstanding indebtedness for borrowed money and other interest-bearing indebtedness as of the date of determination to (2) EBITDA (which is (a) net income, less (b) income (or plus loss) from discontinued operations and extraordinary items, plus (c) income tax expenses, plus (d) interest expense, plus (e) depreciation, depletion, and amortization (including non-cash loss on retirement of assets), plus (f) stock compensation expense, less (g) cash expense related to stock compensation, plus (h) certain amounts of EBITDA of acquired business for the prior twelve months, plus (i) certain expenses related to the closing of the Credit Agreement, plus (j) non-cash expenses which do not (in the current or any future period) represent a cash item (excluding non-cash gains which increase net income), plus (k) non-recurring charges (not to exceed
$10.0 million
in the
four
consecutive quarters immediately preceding the date of determination) for items such as severance, lease termination charges, asset write-offs and litigation settlements paid, and multi-employer pension plan withdrawal liabilities, all determined for the period of
four
consecutive fiscal quarters immediately preceding the date of determination of EBITDA. The Company has the benefit of the lowest margin if its Funded Debt Leverage Ratio is equal to or less than
1.0
to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than
3.25
to 1. The Company will also bear additional costs for market disruption, regulatory changes effecting the lenders’ funding costs, and default pricing of an additional
2%
interest rate margin on any amounts not paid when due. Amounts borrowed under the Credit Agreement are secured by liens on substantially all of the assets of the Company and is guaranteed by certain of our subsidiaries.
The Credit Agreement contains financial covenants requiring that the Company maintain a Funded Debt Leverage Ratio of no greater than
4.25
to 1 through December 31, 2018, reducing to a maximum permitted ratio of
4.0
to 1 as of March 31, June 30, and September 30, 2019, a maximum permitted ratio of
3.75
to 1 as of December 31, 2019 and a maximum permitted ratio of
3.50
to 1 as of March 31, 2020 and all quarterly periods thereafter, and a Fixed Charge Coverage Ratio of at least
1.25
to 1. Fixed Charge Coverage Ratio means the ratio, as of any date of determination, of (a) (i) EBITDA for the
12
month period immediately preceding the date of determination, taken together as one accounting period, less (ii) the aggregate amount of all capital expenditures made during the period, less (iii) taxes paid in cash during the period, less (iv) Restricted Payments (as defined in the Credit Agreement) paid in cash during the period, -to- (b) the sum of (i) all interest, premium payments, debt discount, fees, charges and related expenses of the Company and its subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case, to the extent treated as interest in accordance with U.S. generally accepted accounting principles ("GAAP") and to the extent paid in cash during the period, (ii) the aggregate principal amount of all redemptions or similar acquisitions for value of outstanding debt for borrowed money or regularly scheduled principal payments made during the period, but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness otherwise expressly permitted under the Credit Agreement, and (iii) payments made during the period under all leases that have been or should be, in accordance with GAAP as in effect for the Company's 2017 audited financial statement, recorded as capitalized leases. Beginning in 2020, the Company can elect to increase the maximum Funded Debt Leverage Ratio to
4.0
to 1 for
four
fiscal quarters immediately following the fiscal quarter in which the Company acquires another business, with the maximum permitted ratio reducing back to
3.5
to 1 in the fifth fiscal quarter following such acquisition. The Company can make this election twice during the term of the Credit Agreement.
The Credit Agreement also limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends and make distributions to stockholders or repurchase our stock, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in the Company's line of business, the Company must be in compliance with the
19
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
financial covenants on a pro forma basis after taking into account the acquisition, and, if the acquired business is a separate subsidiary, in certain circumstances the lenders will receive the benefit of a guaranty of the subsidiary and liens on its assets and a pledge of its stock.
As of
September 30, 2019
, the Company was in compliance with the terms of the Credit Agreement and will continuously monitor its compliance with the covenants contained in its Credit Agreement.
Notes Payable and Other
The Company's other debt includes local bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At
September 30, 2019
, there was an aggregate of approximately
$7.9 million
outstanding, payable at various times from 2019 to 2029. Monthly payments range from
$1 thousand
to
$17 thousand
and interest rates range from
0.4%
to
6.2%
.
12.
Fair Value Measurements
The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial instruments measured at fair value on a recurring basis
The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements.
The following table represents the changes in the fair value of Level 3 contingent consideration:
|
|
Nine months ended September 30,
|
|||||||
|
2019
|
2018
|
|||||||
|
Beginning balance
|
$
|
2,365
|
|
$
|
5,508
|
|
||
|
Acquisitions
|
1,081
|
|
—
|
|
||||
|
Payments
|
(755
|
)
|
(2,282
|
)
|
||||
|
Accretion of liability
|
85
|
|
149
|
|
||||
|
Revaluation
|
452
|
|
(957
|
)
|
||||
|
Foreign currency translation
|
50
|
|
(65
|
)
|
||||
|
Ending balance
|
$
|
3,278
|
|
$
|
2,353
|
|
||
Financial instruments not measured at fair value on a recurring basis
The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and capital lease obligations approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt.
20
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
13. Leases
The Company leases certain office and operating facilities, machinery, equipment, and vehicles. Concurrent with the adoption of ASC 842, the Company recognized a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term for each lease agreement. The Company has elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less and will continue to recognize lease expense for these leases on a straight-line basis over the lease term. The Company has leases with both lease components and non-lease components, such as common area maintenance, utilities, or other repairs and maintenance. For all asset classes, the Company decided to utilize the practical expedient to include both fixed lease components and fixed non-lease components in calculating the ROU asset and lease liability. The Company identified variable lease payments, such as maintenance payments based on actual activities performed or costs incurred, at lease commencement by assessing the nature of the payment provisions, including whether the payments are subject to a minimum charge. Many of our leases include one or more options to renew. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining future lease payments. As the Company is unable to determine the discount rate implicit in its lease agreements, the Company uses its incremental borrowing rate on the commencement date to calculate the present value of future payments.
The Company’s Condensed Consolidated Balance Sheets includes the following related to operating leases:
|
Leases
|
Classification
|
Nine months ended September 30, 2019
|
||||
|
Assets
|
||||||
|
Right-of-use assets
|
Other Assets
|
$
|
42,433
|
|
||
|
Liabilities
|
||||||
|
Right-of-use liability - current
|
Accrued and other current liabilities
|
$
|
9,636
|
|
||
|
Right-of-use liability - long-term
|
Other liabilities
|
33,531
|
|
|||
|
Total right-of-use liabilities
|
$
|
43,167
|
|
|||
Included within the balance of operating leases is a lease for the Company’s headquarters which is with a related party. The ROU liability for this facility is approximately
$4.7 million
as of
September 30, 2019
and total rent payments made during the three and
nine months ended September 30, 2019
were approximately
$0.2 million
and
$0.7 million
, respectively.
As of
September 30, 2019
, the total ROU assets attributable to finance leases are approximately
$16.5 million
, which is included in Property, plant, and equipment, net on the Condensed Consolidated Balance Sheets.
The components of lease costs were as follows:
|
Classification
|
Three months ended September 30, 2019
|
Nine months ended September 30, 2019
|
||||||||
|
Finance lease expense
|
||||||||||
|
Amortization of ROU assets
|
Depreciation and amortization
|
$
|
1,205
|
|
$
|
3,605
|
|
|||
|
Interest on lease liabilities
|
Interest expense
|
194
|
|
578
|
|
|||||
|
Operating lease expense
|
Selling, General & Administrative expenses
|
3,230
|
|
9,453
|
|
|||||
|
Short-term lease expense
|
Selling, General & Administrative expenses
|
12
|
|
18
|
|
|||||
|
Variable lease expense
|
Selling, General & Administrative expenses
|
282
|
|
828
|
|
|||||
|
Total
|
$
|
4,923
|
|
$
|
14,482
|
|
||||
21
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Additional information related to leases was as follows:
|
September 30, 2019
|
|||
|
Cash paid for amounts included in the measurement of lease liabilities for finance leases
|
|||
|
Finance - financing cash flows
|
$
|
3,338
|
|
|
Finance - operating cash flows
|
$
|
578
|
|
|
Operating - operating cash flows
|
$
|
9,361
|
|
|
ROU assets obtained in the exchange for lease liabilities
|
|||
|
Finance leases
|
$
|
5,536
|
|
|
Operating leases
|
$
|
12,766
|
|
|
Weighted-average remaining lease term (in years)
|
|||
|
Finance leases
|
6.0
|
|
|
|
Operating leases
|
6.1
|
|
|
|
Weighted-average discount rate
|
|||
|
Finance leases
|
6.2
|
%
|
|
|
Operating leases
|
6.0
|
%
|
|
Maturities of lease liabilities as of
September 30, 2019
were as follows:
|
Finance
|
Operating
|
||||||
|
Remainder of 2019
|
$
|
1,761
|
|
$
|
3,130
|
|
|
|
2020
|
5,119
|
|
11,431
|
|
|||
|
2021
|
3,420
|
|
8,955
|
|
|||
|
2022
|
2,550
|
|
6,877
|
|
|||
|
2023
|
1,661
|
|
5,976
|
|
|||
|
Thereafter
|
1,465
|
|
15,677
|
|
|||
|
Total
|
15,976
|
|
52,046
|
|
|||
|
Less: Present value discount
|
(1,426
|
)
|
(8,879
|
)
|
|||
|
Lease liability
|
$
|
14,550
|
|
$
|
43,167
|
|
|
Pursuant to the Company’s adoption of the new lease accounting guidance using a modified retrospective transition approach, as permitted, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. As previously disclosed in its 2018 Annual Report, the following table presents the Company’s future minimum operating lease commitments as of December 31, 2018:
|
2019
|
$
|
10,939
|
|
|
2020
|
8,764
|
|
|
|
2021
|
6,327
|
|
|
|
2022
|
4,826
|
|
|
|
2023
|
4,239
|
|
|
|
Thereafter
|
10,667
|
|
|
|
Total
|
$
|
45,762
|
|
22
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
14.
Commitments and Contingencies
Legal Proceedings and Government Investigations
The Company is subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except possibly for certain of the matters described below, the Company does not believe that any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs of defense and amounts that may be recovered against the Company may be covered by insurance for certain matters.
Litigation and Commercial Claims
The Company’s subsidiary in France has been involved in a dispute with a former owner of a business purchased by the Company’s French subsidiary. The former owner received a judgment in his favor in the amount of
$0.4 million
for payment of the contingent consideration portion of the purchase price for the business. The Company recorded an accrual for this judgment during 2016. The Company's subsidiary appealed the judgment and the entire judgment was overturned on appeal. The appeal process was completed in July 2018 in the Company's favor, and accordingly, the Company reversed the accrual as of June 30, 2018.
The Company was a defendant in a lawsuit,
Triumph Aerostructures, LLC d/b/a Triumph Aerostructures-Vought Aircraft Division v. Mistras Group, Inc
., pending in Texas State district court, 193rd Judicial District, Dallas County, Texas, filed September 2016. The plaintiff alleged that in 2014, Mistras delivered a defective Ultrasonic inspection system and alleged damages of approximately
$2.3 million
, the amount it paid for the system. In January 2018, the Company agreed to settle this matter for a payment of
$1.6 million
and Mistras subsequently obtained ownership of the underlying ultrasonic inspection components. A charge for
$1.6 million
was recorded in 2017 and payment was made in February 2018.
A Company vehicle was involved in an accident in which individuals were injured, property was damaged, and businesses allegedly impacted by the accident have claimed economic losses.
One
lawsuit has been filed by
one
of the injured individuals in the U.S. District Court for the District of Colorado,
McAllister v. Mistras Group, Inc.
The Company has insurance for these types of matters. Most of the claims have been settled, including the claims covered by the
McAllister
case, and the
two
remaining unresolved claims are for economic loss and property damage only, and all of the claims, including the two that have not yet been resolved, have been or will be fully covered by the Company's insurance.
Government Investigations
In May 2015, the Company received a notice from the U.S. Environmental Protection Agency (“EPA”) that it performed a preliminary assessment at a leased facility the Company operates in Cudahy, California and would be investigating the site. The purpose of the investigation was to determine whether any hazardous materials were released from the facility. The Company has been informed that certain hazardous materials and pollutants have been found in the ground water in the general vicinity of the site and the EPA is attempting to ascertain the origination or source of these materials and pollutants. Given the historic industrial use of the site, the EPA determined that the site of the Cudahy facility should be examined, along with numerous other sites in the vicinity. The Company has not received any further notices from EPA regarding this matter. In addition, in 2018, the California Department of Toxic Substances Control notified the owner of the property that it will be performing an additional investigation at the property. At this time, the Company is unable to determine whether it has any liability in connection with this matter and if so, the amount or range of any such liability, and accordingly, has not established any accruals for this matter.
Pension Related Contingencies
The workforce of certain of the Company’s subsidiaries are unionized and the terms of employment for these workers are governed by collective bargaining agreements, or CBAs. Under these CBAs, the Company’s subsidiaries are required to contribute to the national pension funds for the unions representing these employees, which are multi-employer pension plans. The Company was notified that a significant project was awarded to another contractor in January 2018, and as a result,
one
of the Company’s subsidiaries experienced a significant reduction in the number of its employees covered by
one
of the CBAs.
23
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Under certain circumstances, such a reduction in the number of employees participating in multi-employer pension plans pursuant to this CBA could result in a complete or partial withdrawal liability to these multi-employer pension plans under the Employee Retirement Income Security Act of 1974 ("ERISA"). Management explored options to retain a level of union work that would avoid withdrawal liability to the pension plans, but concluded during the third quarter of 2018 that the Company's subsidiaries probably would not obtain sufficient union work to avoid withdrawal liability. Therefore, the Company determined that it is probable that its subsidiary will incur a withdrawal liability related to these multi-employer pension plans. Accordingly, the Company recorded a charge of
$5.9 million
during the third quarter of
2018
and
$0.5 million
during the
nine months ended September 30, 2019
for this potential withdrawal liability. The Company’s subsidiary reached an agreement with one of the pension funds in September 2019, for a final payment of
$0.9 million
in complete satisfaction of the withdrawal liability of the subsidiary. This payment was subsequently paid in October 2019. The balance of the estimated total amount of this potential liability as of
September 30, 2019
is approximately
$3.1 million
, which includes the
$0.9 million
paid in October 2019.
Severance and labor disputes
During the third quarter of 2018, the Company recorded approximately
$1.2 million
in charges related to labor claims for its Brazilian subsidiary, which are included within Selling, general and administrative expenses. These claims related to employees in a company acquired by the Brazilian subsidiary in a prior period. The Company believes it is entitled to indemnification from the sellers of the acquired company for most of these charges, but has not recorded the expected recovery of indemnification for these labor claims as the amount and timing of collection is uncertain as of
September 30, 2019
.
The Company’s German subsidiary provides employees to customers under temporary staff leasing arrangements. In April 2017, the German Labor Lease Act was passed in Germany limiting the duration of temporary workers to
eighteen
months, or longer as subsequently agreed with by a customer appropriate authority. Since the passing of the German Labor Lease Act, the Company explored selling its staff leasing services and concluded during the third quarter of 2018 that a sale would not be probable. As a result, the Company decided that it would not renew several of these leasing services contracts when they expire beginning in 2019. Due to the limit on the length of service allowed under the German Labor Lease Act, employees will have to be transitioned off the customer contracts. It is expected that the German subsidiary then will either terminate these employees, creating a severance obligation to the terminated employees, or transition them to the Company's other customers. As of
September 30, 2019
, the Company accrued approximately
$1.1 million
for estimated severance payment obligations, which takes into account the Company's estimate with respect to the employees that would be transitioned to the German subsidiaries' other customers. The
$1.1 million
of estimated obligations is net of
$0.2 million
in payments and
$0.2 million
in reversals due to employees being transitioned to customer contracts.
Acquisition and disposition related contingencies
The Company is liable for contingent consideration in connection with certain of its acquisitions. As of
September 30, 2019
, total potential acquisition-related contingent consideration ranged from
zero
to approximately
$7.9 million
and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next year. See Note 5–
Acquisitions and Dispositions
to these condensed consolidated financial statements for further discussion of the Company’s acquisitions.
During the third quarter of 2018, the Company sold a subsidiary in the Products and Systems segment. As part of the sale, the Company entered into a
three
-year agreement to purchase products from the buyer, with a cumulative commitment of
$2.3 million
, of which
$1.6 million
is remaining as of
September 30, 2019
. The agreement is based on third party pricing and the Company's planned purchase requirements over the three year purchase period to meet the minimum contractual purchases.
15.
Segment Disclosure
The Company’s
three
operating segments are:
|
•
|
Services.
This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT and inspection and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components.
|
24
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
|
•
|
International.
This segment offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.
|
|
•
|
Products and Systems.
This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
|
Costs incurred for general corporate services, including finance, legal, and certain other costs that are provided to the segments are reported within Corporate and eliminations. Sales to the International segment from the Products and Systems segment and subsequent sales by the International segment of the same items are recorded and reflected in the operating performance of both segments. Additionally, engineering charges and royalty fees charged to the Services and International segments by the Products and Systems segment are reflected in the operating performance of each segment. All such intersegment transactions are eliminated in the Company’s consolidated financial reporting.
Selected consolidated financial information by segment for the periods shown was as follows: (with intercompany transactions eliminated in Corporate and eliminations)
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Revenues
|
|
|
|
|
|||||||||||
|
Services
|
$
|
152,572
|
|
$
|
141,340
|
|
$
|
454,079
|
|
$
|
434,653
|
|
|||
|
International
|
37,050
|
|
36,671
|
|
109,302
|
|
116,238
|
|
|||||||
|
Products and Systems
|
5,521
|
|
5,716
|
|
13,222
|
|
17,286
|
|
|||||||
|
Corporate and eliminations
|
(2,951
|
)
|
(1,558
|
)
|
(7,008
|
)
|
(6,585
|
)
|
|||||||
|
|
$
|
192,192
|
|
$
|
182,169
|
|
$
|
569,595
|
|
$
|
561,592
|
|
|||
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Gross profit
|
|
|
|
|
|||||||||||
|
Services
|
$
|
43,330
|
|
$
|
38,838
|
|
$
|
127,903
|
|
$
|
113,675
|
|
|||
|
International
|
11,695
|
|
10,877
|
|
33,113
|
|
34,273
|
|
|||||||
|
Products and Systems
|
2,739
|
|
2,604
|
|
5,803
|
|
7,707
|
|
|||||||
|
Corporate and eliminations
|
5
|
|
13
|
|
(105
|
)
|
(96
|
)
|
|||||||
|
|
$
|
57,769
|
|
$
|
52,332
|
|
$
|
166,714
|
|
$
|
155,559
|
|
|||
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Income (loss) from operations
|
|
|
|
|
|||||||||||
|
Services
|
$
|
15,757
|
|
$
|
8,289
|
|
$
|
40,715
|
|
$
|
36,892
|
|
|||
|
International
|
2,921
|
|
(662
|
)
|
5,155
|
|
2,713
|
|
|||||||
|
Products and Systems
|
509
|
|
2,415
|
|
(1,224
|
)
|
2,032
|
|
|||||||
|
Corporate and eliminations
|
(8,408
|
)
|
(7,025
|
)
|
(22,844
|
)
|
(21,917
|
)
|
|||||||
|
|
$
|
10,779
|
|
$
|
3,017
|
|
$
|
21,802
|
|
$
|
19,720
|
|
|||
Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations.
25
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|||||||
|
Services
|
$
|
6,882
|
|
$
|
5,951
|
|
$
|
21,360
|
|
$
|
17,892
|
|
|||
|
International
|
2,027
|
|
2,179
|
|
6,158
|
|
6,720
|
|
|||||||
|
Products and Systems
|
312
|
|
362
|
|
901
|
|
1,091
|
|
|||||||
|
Corporate and eliminations
|
50
|
|
5
|
|
121
|
|
33
|
|
|||||||
|
|
$
|
9,271
|
|
$
|
8,497
|
|
$
|
28,540
|
|
$
|
25,736
|
|
|||
|
|
September 30, 2019
|
December 31, 2018
|
|||||
|
Intangible assets, net
|
|
|
|
|
|||
|
Services
|
$
|
95,350
|
|
$
|
98,362
|
|
|
|
International
|
9,982
|
|
11,143
|
|
|||
|
Products and Systems
|
1,247
|
|
1,438
|
|
|||
|
Corporate and eliminations
|
314
|
|
452
|
|
|||
|
|
$
|
106,893
|
|
$
|
111,395
|
|
|
|
|
September 30, 2019
|
December 31, 2018
|
|||||
|
Total assets
|
|
|
|
|
|||
|
Services
|
$
|
545,863
|
|
$
|
523,506
|
|
|
|
International
|
147,844
|
|
146,535
|
|
|||
|
Products and Systems
|
15,029
|
|
12,264
|
|
|||
|
Corporate and eliminations
|
19,291
|
|
11,732
|
|
|||
|
|
$
|
728,027
|
|
$
|
694,037
|
|
|
Refer to Note 2
–Revenue,
for revenues by geographic area for the
three and nine
months ended
September 30, 2019
and
2018
.
16. Repurchase of Common Stock
The Company's Board of Directors approved a
$50 million
stock repurchase plan in 2015. The Company retired all its repurchased shares during the fourth quarter of 2017. The Board of Directors approved the termination of the stock repurchase plan effective on April 1, 2019. There were
no
repurchases of common stock during 2019.
26
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) includes a narrative explanation and analysis of our results of operations and financial condition for the three and
nine months ended September 30, 2019
and
September 30, 2018
. The MD&A should be read together with our condensed consolidated financial statements and related notes included in Item 1 in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, dated March 15, 2019 (“2018 Annual Report”). Unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,” “we,” “us” and “our” refer to Mistras Group, Inc. and its consolidated subsidiaries. The MD&A includes disclosure in the following areas:
•
Forward-Looking Statements
•
Overview
•
Results of Operations
•
Liquidity and Capital Resources
•
Critical Accounting Policies and Estimates
Forward-Looking Statements
This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.
In some cases, you can identify forward-looking statements by terminology, such as “goals,” or “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “should,” “would,” “predicts,” “appears,” “projects,” or the negative of such terms or other similar expressions. You are urged not to place undue reliance on any such forward-looking statements, any of which may turn out to be wrong due to inaccurate assumptions, various risks, uncertainties or other factors known and unknown. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2018 Annual Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (“SEC”).
Overview
We offer our customers “OneSource for Asset Protection Solutions®” and are a leading global provider of technology-enabled asset protection solutions used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure, and commercial aerospace components.
Our asset protections are intended to help maximize safety and uptime of our customers' assets and facilities. These mission critical solutions enhance our customers’ ability to comply with governmental safety and environmental regulations, extend the useful life of their assets, increase productivity, minimize repair costs, manage risk and avoid catastrophic disasters. We deliver value through a comprehensive “OneSource” portfolio of customized solutions, utilizing a proven systematic method that creates a closed-loop lifecycle for addressing continuous asset protection and improvement.
Our specialized asset protection solutions include:
• Field Inspections
• Consulting
• Maintenance
• Data Management
• Access
• Monitoring
• Laboratory Quality Assurance/Control (QA/QC)
• Equipment
27
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Our OneSource model emphasizes the integration of these solutions to service our customers throughout their assets’ lifetimes. Under this business model, many customers outsource their inspection and other asset protection needs to us on a “run-and maintain” basis to ensure the continued safety and structural and operational integrity of their assets.
We have established long-term relationships as a critical solutions provider to many of the leading companies with asset intensive infrastructure in our target markets. These markets include:
• Oil & Gas (Downstream, Midstream, Upstream and Petrochemical)
• Aerospace & Defense
• Industrial
• Power Generation and Transmission (including nuclear and renewable)
• Public Infrastructure, Research and Engineering
• Process Industries
Asset protection plays a crucial role in assuring the integrity and reliability of critical infrastructure. As an asset protection solutions provider, MISTRAS seeks to maximize the uptime and safety of critical infrastructure by helping customers to detect, locate, mitigate and prevent damages such as corrosion, cracks, leaks, manufacturing flaws and other concerns to operating and structural integrity. In addition to these core utilities, the storage and analysis of collected inspection and mechanical integrity data is also a key aspect of asset protection.
NDT has historically been a prominent solution in the asset protection industry due to its capacity to detect defects without compromising the integrity of the tested materials or equipment. The supply of NDT inspection services has traditionally come from many small vendors, who provide services to a small geographic region. A trend has emerged, however, for customers to engage a select few vendors capable of providing a wider spectrum of asset protection solutions for global infrastructure, in addition to an increased demand for advanced non-destructive testing (ANDT) solutions and data acquisition software, both of which require a highly-trained workforce.
Due to these trends, we believe those vendors offering integrated solutions, scalable operations, skilled personnel and a global footprint have a distinct competitive advantage. We believe these trends also enable us to be opportunistic as we consider strategic acquisitions of smaller providers of inspection services. Moreover, we believe that vendors that are able to effectively deliver both advanced solutions and data analytics, by virtue of their access to customers’ data, create a significant barrier to entry for competitors, leading to the opportunity to further create significant recurring revenues.
Our operations consist of three reportable segments: Services, International and Products and Systems.
|
•
|
Services
provides asset protection solutions predominantly in North America with the largest concentration in the United States, followed by Canada, consisting primarily of NDT and inspection, mechanical and engineering services that are used to evaluate the structural integrity and reliability of critical energy, industrial and materials, public infrastructure and commercial aerospace components.
|
|
•
|
International
offers services, products and systems similar to those of our Services and Products and Systems segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.
|
|
•
|
Products and Systems
designs, manufactures, sells, installs and services our asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
|
Most of our revenues are generated by deploying technicians at our customers' locations. However, the majority of our revenues from aerospace and certain manufacturing clients are generated by performing inspections and testing at our various in-house laboratories.
28
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
We have focused on providing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. We have made numerous acquisitions in an effort to grow our base of experienced, certified personnel, expand our service lines and technical capabilities, increase our geographical reach and leverage our fixed costs. We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies. We believe these actions, including the acquisitions made will enhance our advantages over our competition.
Our Onstream acquisition, which was completed in December 2018, helps support many of our Corporate initiatives. Onstream's strong presence in inline inspection provides us with a strong foundation within the midstream oil and gas market, which is an important piece of our overall growth strategy. We have already generated new business opportunities through introduction of our inline inspection capabilities to existing midstream customers. The acquisition of Onstream also provides us with an additional digital solution for our customers, the Streamview™ software, which is an innovative application of advanced digital technology.
We believe the following represent key dynamics of the asset protection industry, and that the market available to us will continue to grow as these macro-market trends continue to develop:
Extending the Useful Life of Aging Infrastructure While Increasing Utilization
. Due to the prohibitive costs and challenges of building new infrastructure, many companies have chosen to extend the useful life of existing assets through enhancements, rather than replacing these assets. This has resulted in the significant aging and increased utilization of existing infrastructure in our target markets. Increasing demand for refined petroleum products, combined with high plant-utilization rates, are driving refineries to upgrade facilities to make them more efficient and expand capacities. Aging infrastructure requires more frequent inspection and maintenance in comparison to new infrastructure,thereby requiring companies and public authorities to continue to spend on asset protection to ensure their aging infrastructure assets continue to operate effectively.
Outsourcing of Non-Core Activities and Technical Resource Constraints
. Due to the increasing sophistication and automation of NDT programs, a decreasing supply of skilled professionals and increasing governmental regulations, companies are increasingly outsourcing NDT to third-party providers with advanced solution portfolios, engineering expertise and trained workforces.
Increasing Corrosion from Low-Quality Inputs
. The increased availability and low cost of crude oil from areas such as shale plays and oil sands resources have led to the use of lower-grade raw materials and feedstock. This leads to higher rates of corrosion, especially in refining processes involving petroleum with higher sulfur content, which in turn increases the need for asset protection solutions to detect and/or proactively prevent corrosion-related issues.
Increasing Use of Advanced Materials
. Customers in various of our target markets, particularly aerospace and defense, are increasingly utilizing advanced materials, such as composites and other unique technologies in their assets. These materials often cannot be tested using traditional NDT techniques. We believe that demand for more advanced testing and assessment solutions will increase along with the demand for these advanced materials during the design, manufacturing, operating and quality control phases.
Meeting Safety Regulations
. Owners and operators of refineries, pipelines and petrochemical and chemical plants increasingly face strict government regulations and more stringent process safety enforcement standards. This includes the continued implementation of the Occupational Safety and Health Administration’s (OSHA) National Emphasis Program (NEP). Failure to meet these standards can result in significant financial liabilities, increased scrutiny by government and industry regulators, higher insurance premiums and tarnished corporate brand value. As a result, these owners and operators are seeking highly reliable asset protection suppliers with a track record of assisting organizations in meeting increasingly stringent regulations. Our customers benefit from MISTRAS’ extensive engineering consulting base that supports them in devising mechanical integrity programs that both meet regulatory compliance standards and enable enhanced safety and uptime at their facilities.
Expanding Addressable End-Markets
. The continued emergence of and advances in asset protection technologies and software based systems are increasing the demand for asset protection solutions in applications where existing techniques were previously ineffective.
29
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Expanding Aerospace Industry
. We believe that increased demand will continue to come from the aerospace industry due to the approximately decade-long backlog for next-generation commercial aircraft to be built, driving the need for advanced solutions that drive cost and quality efficiencies.
Crude Oil Prices.
We believe that this present range for crude oil prices is expected to persist for the foreseeable future. With the prices lower, we have seen reductions in NDT and maintenance spending, but not to the extent as in recent years due to the price stabilization. We do believe customers will defer inspection or maintenance spending from time to time, which we will see occurring in later 2019 into early 2020.
More Effective NDT Services
. We believe customers are constantly looking for ways to reduce their overall inspection and maintenance spending, while maintaining the reliability and safety of their operations. Accordingly, we believe providers of NDT and inspection services that utilize data analytics, risk-based inspection planning and other advanced tools and platforms that can provide customers with effective inspections at an overall lower cost will be more successful and gain market share.
Note About Non-GAAP Measures
In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income (loss) before special items” is used for each of our three segments, the Corporate segment and the "Total Company", with tables reconciling the measure to a financial measure under GAAP. This non-GAAP measure excludes from the GAAP measure "Income (loss) from Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs, (b) the net changes in the fair value of acquisition-related contingent consideration liabilities, (c) impairment charges, (d) reorganization and other costs, which includes items such as severance, labor relations matters and asset and lease termination costs and (e) other special items. These adjustments have been excluded from the GAAP measure because these expenses and credits are not related to the Company’s or Segment’s core business operations. The acquisition related costs and special items can be a net expense or credit in any given period.
We believe investors and other users of our financial statements benefit from the presentation of "Income (loss) before special items" for each of our three segments, the Corporate segment and the Total Company in evaluating our performance. Income (loss) before special items excludes the identified adjustments, which provides additional tools to compare our core business operating performance on a consistent basis and measure underlying trends and results in our business. Income (loss) before special items is not used to determine incentive compensation for executives or employees, nor is it a replacement for GAAP and/or necessarily comparable to the non-GAAP financial measures of other companies.
30
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Results of Operations
Condensed consolidated results of operations for the
nine months ended September 30, 2019
and
September 30, 2018
were as follows:
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Revenues
|
$
|
192,192
|
|
$
|
182,169
|
|
$
|
569,595
|
|
$
|
561,592
|
|
|||
|
Gross profit
|
57,769
|
|
52,332
|
|
166,714
|
|
155,559
|
|
|||||||
|
Gross profit as a % of Revenue
|
30.1
|
%
|
28.7
|
%
|
29.3
|
%
|
27.7
|
%
|
|||||||
|
Total operating expenses
|
46,990
|
|
49,315
|
|
144,912
|
|
135,839
|
|
|||||||
|
Operating expenses as a % of Revenue
|
24.4
|
%
|
27.1
|
%
|
25.4
|
%
|
24.2
|
%
|
|||||||
|
Income from operations
|
10,779
|
|
3,017
|
|
21,802
|
|
19,720
|
|
|||||||
|
Income from Operations as a % of Revenue
|
5.6
|
%
|
1.7
|
%
|
3.8
|
%
|
3.5
|
%
|
|||||||
|
Interest expense
|
2,959
|
|
1,894
|
|
10,065
|
|
5,581
|
|
|||||||
|
Income before provision for income taxes
|
7,820
|
|
1,123
|
|
11,737
|
|
14,139
|
|
|||||||
|
Provision for income taxes
|
4,733
|
|
2,133
|
|
6,493
|
|
6,229
|
|
|||||||
|
Net income (loss)
|
3,087
|
|
(1,010
|
)
|
5,244
|
|
7,910
|
|
|||||||
|
Less: Net income (loss) attributable to non-controlling interests, net of taxes
|
(6
|
)
|
1
|
|
13
|
|
13
|
|
|||||||
|
Net income (loss) attributable to Mistras Group, Inc.
|
$
|
3,093
|
|
$
|
(1,011
|
)
|
$
|
5,231
|
|
$
|
7,897
|
|
|||
Revenue
Revenues for the
three months ended September 30, 2019
were
$192.2 million
, an
increase
of
$10.0 million
, or
6%
, compared with the
three months ended September 30, 2018
. Revenues for the
nine months ended September 30, 2019
were
$569.6 million
, an
increase
of
$8.0 million
, or
1%
, compared with the
nine months ended September 30, 2018
.
Revenues by segment for the three and
nine months ended September 30, 2019
and
September 30, 2018
were as follows:
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Revenues
|
|
|
|
|
|||||||||||
|
Services
|
$
|
152,572
|
|
$
|
141,340
|
|
$
|
454,079
|
|
$
|
434,653
|
|
|||
|
International
|
37,050
|
|
36,671
|
|
109,302
|
|
116,238
|
|
|||||||
|
Products and Systems
|
5,521
|
|
5,716
|
|
13,222
|
|
17,286
|
|
|||||||
|
Corporate and eliminations
|
(2,951
|
)
|
(1,558
|
)
|
(7,008
|
)
|
(6,585
|
)
|
|||||||
|
|
$
|
192,192
|
|
$
|
182,169
|
|
$
|
569,595
|
|
$
|
561,592
|
|
|||
Three Months
In the
three months ended September 30, 2019
, total revenues
increased
6%
due to a combination of mid-single-digit acquisition growth and a low single-digit organic growth, partially offset by the unfavorable impact of foreign exchange rates. Services segment revenues
increased
8%
, driven by mid-single-digit acquisition growth and low single-digit organic growth, partially offset by the low-single digit unfavorable impact of foreign exchange rates. International segment revenues
increased
1%
, driven by mid-single-digit organic growth, partially offset by the mid-single-digit unfavorable impact of foreign exchange rates. Products and Systems segment revenues
decreased
by
3%
, due primarily to the sale of a subsidiary within the segment during the third quarter of 2018.
31
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Oil and gas customer revenues comprised approximately
59%
and
55%
of total revenues for the
three months ended September 30, 2019
and
2018
, respectively. Aerospace and defense customer revenues comprised approximately
12%
and
14%
of total revenues for the
three months ended September 30, 2019
and
2018
, respectively. This decrease in aerospace and defense customer revenues is attributed to the run-off of the German staff leasing contracts in the International segment, as more fully described in Note 14–
Commitments and Contingencies
to the condensed consolidated financial statements in this Quarterly Report, and the increase in volume in the oil and gas market is due to the Onstream acquisition completed in the fourth quarter of 2018. The Company’s top ten customers comprised approximately 34% of total revenues for the
three months ended September 30, 2019
, as compared to 32% for the
three months ended September 30, 2018
, with no customer accounting for 10% or more of total revenues in either three-month period.
Nine months
In the
nine months ended September 30, 2019
, total revenues
increased
1%
due to a combination of mid-single-digit acquisition growth, partially offset by low single-digit organic decline and low single-digit unfavorable impact of foreign exchange rates. Services segment revenues
increased
5%
, driven by mid-single-digit acquisition growth, partially offset by low single-digit organic decline and the unfavorable impact of foreign exchange rates. International segment revenues
decreased
6%
, driven by the unfavorable impact of foreign exchange rates. Products and Systems segment revenues
decreased
by
24%
driven by lower sales volume and by the sale of a subsidiary in this segment during the third quarter of 2018.
Oil and gas customer revenues comprised approximately
59%
and
56%
of total revenues for the
nine months ended September 30, 2019
and
2018
, respectively. Aerospace and defense customer revenues comprised approximately
13%
and
15%
of total revenues for the
nine months ended September 30, 2019
and
2018
, respectively. This decrease in aerospace and defense customer revenues is attributed to the run-off of the German staff leasing contracts in the International segment, as more fully described in Note 14–
Commitments and Contingencies
to the condensed consolidated financial statements in this Quarterly Report, and the increased volume in the oil and gas market is due to the Onstream acquisition completed in the fourth quarter of 2018. The Company’s top ten customers comprised approximately 35% of total revenues for both the
nine months ended September 30, 2019
and the
nine months ended September 30, 2018
, with no customer accounting for 10% or more of total revenues in either nine-month period.
Gross Profit
Gross profit
increased
by
$5.4 million
, or
10%
, in the
three months ended September 30, 2019
, on an increase in sales of
6%
. Gross profit increased by
$11.2 million
, or
7%
, in the
nine months ended September 30, 2019
, on an increase in sales of
1%
.
Gross profit by segment for the
nine months ended September 30, 2019
and
September 30, 2018
was as follows:
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Gross profit
|
|
|
|
|
|||||||||||
|
Services
|
$
|
43,330
|
|
$
|
38,838
|
|
$
|
127,903
|
|
$
|
113,675
|
|
|||
|
% of segment revenue
|
28.4
|
%
|
27.5
|
%
|
28.2
|
%
|
26.2
|
%
|
|||||||
|
International
|
11,695
|
|
10,877
|
|
33,113
|
|
34,273
|
|
|||||||
|
% of segment revenue
|
31.6
|
%
|
29.7
|
%
|
30.3
|
%
|
29.5
|
%
|
|||||||
|
Products and Systems
|
2,739
|
|
2,604
|
|
5,803
|
|
7,707
|
|
|||||||
|
% of segment revenue
|
49.6
|
%
|
45.6
|
%
|
43.9
|
%
|
44.6
|
%
|
|||||||
|
Corporate and eliminations
|
5
|
|
13
|
|
(105
|
)
|
(96
|
)
|
|||||||
|
|
$
|
57,769
|
|
$
|
52,332
|
|
$
|
166,714
|
|
$
|
155,559
|
|
|||
|
% of total revenue
|
30.1
|
%
|
28.7
|
%
|
29.3
|
%
|
27.7
|
%
|
|||||||
32
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Three months
Gross profit margin was
30.1%
and
28.7%
for the three month periods ended
September 30,
2019
and
2018
, respectively. Services segment gross profit margins had a year-on-year
increase
of
90
basis points to
28.4%
during the
three months ended September 30, 2019
, due primarily to mix of sales, increase in sales volume related to the acquisition completed in the fourth quarter of 2018 and favorable operating leverage. International segment gross margins had a year-on-year
increase
of
190
basis points to
31.6%
during the
three months ended September 30, 2019
, due primarily to favorable sales mix and improved labor utilization. Products and Systems segment gross margin had a year-on-year
increase
of
400
basis points to
49.6%
during the
three months ended September 30, 2019
due to a favorable sales mix.
Nine months
Gross profit margin was
29.3%
and
27.7%
for the
nine months ended September 30, 2019
and
2018
, respectively. Services segment gross profit margins had a year-on-year
increase
of
200
basis points to
28.2%
during the
nine months ended September 30, 2019
, due primarily to favorable operating leverage and service mix, and increase in sales volume related the acquisition completed in the fourth quarter of 2018. International segment gross margins had a year-on-year
increase
of
80
basis points to
30.3%
during the
nine months ended September 30, 2019
due to a favorable sales mix. Products and Systems segment gross margin had a year-on-year
decline
of
70
basis points to
43.9%
in the
nine months ended September 30, 2019
. This decrease was primarily driven by a lower sales volume and less favorable sales mix.
33
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Income from Operations
The following table shows a reconciliation of the income from operations to income before special items for each of the Company's three segments and for the Company in total:
|
|
Three months ended
|
Nine months ended
|
|||||||||||||
|
|
September 30, 2019
|
September 30, 2018
|
September 30, 2019
|
September 30, 2018
|
|||||||||||
|
Services:
|
|
|
|
|
|||||||||||
|
Income from operations (GAAP)
|
$
|
15,757
|
|
$
|
8,289
|
|
$
|
40,715
|
|
$
|
36,892
|
|
|||
|
Bad debt provision for troubled customers, net of recoveries
|
—
|
|
—
|
|
2,778
|
|
—
|
|
|||||||
|
Reorganization and other costs
|
125
|
|
292
|
|
202
|
|
292
|
|
|||||||
|
Pension withdrawal expense (benefit)
|
(45
|
)
|
5,886
|
|
489
|
|
5,886
|
|
|||||||
|
Acquisition-related expense (benefit), net
|
(125
|
)
|
181
|
|
577
|
|
(809
|
)
|
|||||||
|
Income before special items (non-GAAP)
|
15,712
|
|
14,648
|
|
44,761
|
|
42,261
|
|
|||||||
|
International:
|
|
|
|
|
|
|
|
|
|||||||
|
Income (loss) from operations (GAAP)
|
2,921
|
|
(662
|
)
|
5,155
|
|
2,713
|
|
|||||||
|
Reorganization and other costs
|
90
|
|
2,808
|
|
355
|
|
3,544
|
|
|||||||
|
Acquisition-related expense (benefit), net
|
—
|
|
—
|
|
—
|
|
(409
|
)
|
|||||||
|
Bad debt provision for troubled customers, net of recoveries
|
—
|
|
—
|
|
20
|
|
—
|
|
|||||||
|
Income before special items (non-GAAP)
|
3,011
|
|
2,146
|
|
5,530
|
|
5,848
|
|
|||||||
|
Products and Systems:
|
|
|
|
|
|
|
|
|
|||||||
|
Income (loss) from operations (GAAP)
|
509
|
|
2,415
|
|
(1,224
|
)
|
2,032
|
|
|||||||
|
Gain on sale of subsidiary
|
—
|
|
(2,384
|
)
|
—
|
|
(2,384
|
)
|
|||||||
|
Reorganization and other costs
|
218
|
|
—
|
|
218
|
|
29
|
|
|||||||
|
Income (loss) before special items (non-GAAP)
|
727
|
|
31
|
|
(1,006
|
)
|
(323
|
)
|
|||||||
|
Corporate and Eliminations:
|
|
|
|
|
|
|
|
|
|||||||
|
Loss from operations (GAAP)
|
(8,408
|
)
|
(7,025
|
)
|
(22,844
|
)
|
(21,917
|
)
|
|||||||
|
Reorganization and other costs
|
44
|
|
305
|
|
104
|
|
305
|
|
|||||||
|
Acquisition-related expense, net
|
93
|
|
36
|
|
393
|
|
75
|
|
|||||||
|
Loss before special items (non-GAAP)
|
(8,271
|
)
|
(6,684
|
)
|
(22,347
|
)
|
(21,537
|
)
|
|||||||
|
Total Company:
|
|
|
|
|
|
|
|
|
|||||||
|
Income from operations (GAAP)
|
$
|
10,779
|
|
$
|
3,017
|
|
$
|
21,802
|
|
$
|
19,720
|
|
|||
|
Pension withdrawal expense
|
(45
|
)
|
5,886
|
|
489
|
|
5,886
|
|
|||||||
|
Gain on sale of subsidiary
|
—
|
|
(2,384
|
)
|
—
|
|
(2,384
|
)
|
|||||||
|
Bad debt provision for troubled customers, net of recoveries
|
—
|
|
—
|
|
2,798
|
|
—
|
|
|||||||
|
Reorganization and other costs
|
477
|
|
3,405
|
|
879
|
|
4,170
|
|
|||||||
|
Acquisition-related expense (benefit), net
|
(32
|
)
|
217
|
|
970
|
|
(1,143
|
)
|
|||||||
|
Income before special items (non-GAAP)
|
$
|
11,179
|
|
$
|
10,141
|
|
$
|
26,938
|
|
$
|
26,249
|
|
|||
Three months
For the
three months ended September 30, 2019
, income from operations (GAAP)
increased
$7.8 million
, or
257%
, compared with the
three months ended September 30, 2018
, while income before special items (non-GAAP)
increased
$1.0 million
, or
10%
. As a percentage of revenues, income before special items
increased
by
20
basis points to
5.8%
in the
three months ended September 30, 2019
from
5.6%
in the
three months ended September 30, 2018
.
34
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Operating expenses (GAAP), as a percentage of revenue, decreased to
24%
for the
three months ended September 30, 2019
from
27%
for the
three months ended September 30, 2018
. Operating expenses, excluding special items, (non-GAAP), as a percentage of revenues, was
24%
of revenue for the
three months ended September 30, 2019
compared to
23%
for the
three months ended September 30, 2018
. The table above highlights the special expense items that resulted in a lower GAAP operating expense percentage for 2019 compared to 2018. In addition to the special items, for both GAAP and non-GAAP comparisons, there was
$3.3
million of operating expenses relating to the Onstream acquisition, inclusive of depreciation and amortization of
$1.3
million for the
three months ended September 30, 2019
.
The Company was notified that a significant project was awarded to another contractor in January 2018, and as a result,
one
of the Company’s subsidiaries experienced a significant reduction in the number of its employees covered by
one
of the CBAs. Under certain circumstances, such a reduction in the number of employees participating in multi-employer pension plans pursuant to this CBA could result in a complete or partial withdrawal liability to these multi-employer pension plans under the Employee Retirement Income Security Act of 1974 ("ERISA"). Management explored options to retain a level of union work that would avoid withdrawal liability to the pension plans, but concluded during the third quarter of 2018 that the Company's subsidiaries probably would not obtain sufficient union work to avoid withdrawal liability. Therefore, the Company determined that it is probable that its subsidiary will incur a withdrawal liability related to these multi-employer pension plans. Accordingly, the Company recorded a charge of
$5.9 million
during the third quarter of
2018
and
$0.5 million
during the
nine months ended September 30, 2019
for this potential withdrawal liability. The Company’s subsidiary reached an agreement with one of the pension funds in September 2019, for a final payment of
$0.9 million
in complete satisfaction of the withdrawal liability of the subsidiary. This payment was subsequently paid in October 2019. The balance of the estimated total amount of this potential liability as of
September 30, 2019
is approximately
$3.1 million
, which includes the
$0.9 million
paid in October 2019.
Nine months
For the
nine months ended September 30, 2019
, income from operations (GAAP)
increased
$2.1 million
, compared with the
nine months ended September 30, 2018
, while income before special items (non-GAAP)
increased
$0.7 million
, or
3%
. As a percentage of revenues, income before special items was consistent at
4.7%
for the
nine months ended September 30, 2019
and
nine months ended September 30, 2018
, respectively.
Operating expenses (GAAP), as a percentage of revenue, increased to
25%
for the
nine months ended September 30, 2019
from
24%
for the
nine months ended September 30, 2018
. Operating expenses, excluding special items (non-GAAP), as a percentage of revenues, increased to
25%
of revenues for the
nine months ended September 30, 2019
from
23%
for the
nine months ended September 30, 2018
. The chart above highlights the special expense items that resulted in a higher GAAP operating expense percentage for 2019 compared to 2018. In addition to the special items, for both GAAP and non-GAAP comparisons, there was
$9.6
million of operating expenses for the Onstream acquisition, inclusive of depreciation and amortization of
$3.9
million for the
nine months ended September 30, 2019
.
In the fourth quarter of 2018, the Company recorded a reserve of
$0.7 million
for a renewable energy industry customer, based in part on the available information about the financial difficulties of the customer. This customer filed for a voluntary insolvency proceeding on April 9, 2019 at which time payments under the previously agreed upon payment plan ceased. As a result, during the first quarter of 2019, the Company recorded an additional charge of
$5.7 million
to fully reserve for the amount of the exposure related to this customer. During the second quarter of 2019, the Company reversed
$1.0 million
of this reserve based on additional information obtained during the quarter. There was no change during the third quarter of 2019.
During 2019, the Company sold to an unaffiliated third party, without recourse, its remaining outstanding receivables from a customer which filed a voluntary bankruptcy proceeding, which the Company had initially recorded as a charge during the second quarter of 2017. During the first quarter of 2019, the Company recorded a recovery of $0.2 million and during the second quarter of 2019, the Company recorded a recovery
$1.7 million
, related to a bad debt provision for the receivables due from this customer. This matter is considered fully resolved.
35
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Interest Expense
Interest expense was approximately
$3.0 million
and
$1.9 million
for the
three months ended September 30, 2019
and
2018
, respectively. Interest expense was approximately
$10.1 million
and
$5.6 million
for the
nine months ended September 30, 2019
and
2018
, respectively. The increases were due to higher average levels of borrowing on the Company's Credit Agreement attributable primarily to borrowings for the acquisition completed during the fourth quarter of 2018, and to a lesser extent, from an increase in the base borrowing rate.
Income Taxes
The Company’s effective income tax rate was approximately
61%
and
190%
for the
three months ended September 30, 2019
and
2018
, respectively. The Company's effective income tax rate was approximately
55%
and
44%
for the
nine months ended September 30, 2019
and
2018
, respectively. The effective income tax rate for the three and nine months ended September 30, 2019 and 2018 was higher than the statutory rate due to the impact of discrete items, GILTI and executive compensation, and other provisions resulting from the passage of the Tax Act and foreign tax rates different than statutory rates in the U.S. The discrete items had an impact on our effective tax rate of approximately 17% and 15% for the three and nine months ended September 30, 2019, respectively, and approximately 119% and 12% for the three and nine months ended September 30, 2018, respectively.
Liquidity and Capital Resources
Cash flows are summarized in the table below:
|
|
Nine months ended
|
||||||
|
|
September 30, 2019
|
September 30, 2018
|
|||||
|
Net cash provided by (used in):
|
|
|
|
|
|||
|
Operating activities
|
$
|
40,476
|
|
$
|
24,184
|
|
|
|
Investing activities
|
(21,628
|
)
|
(9,831
|
)
|
|||
|
Financing activities
|
(29,521
|
)
|
(23,905
|
)
|
|||
|
Effect of exchange rate changes on cash
|
(499
|
)
|
(916
|
)
|
|||
|
Net change in cash and cash equivalents
|
$
|
(11,172
|
)
|
$
|
(10,468
|
)
|
|
Cash Flows from Operating Activities
During the
nine months ended September 30, 2019
, cash provided by operating activities was
$40.5 million
, representing a year-on-year
increase
of
$16.3 million
, or
67%
. The increase was primarily attributable to movements in working capital.
Cash Flows from Investing Activities
During the
nine months ended September 30, 2019
, cash used in investing activities was
$21.6 million
, compared with
$9.8 million
in
2018
. Capital expenditures were
$18.0 million
for the first nine months of 2019, compared with
$15.8 million
in the comparable 2018 period. During the nine months ended September 30, 2019, the Company paid $4.8 million for an acquisition. During the nine months ended September 30, 2018, the Company received $4.8 million from the sale of a subsidiary in the Products segment. (see Note 5
–
Acquisitions and Dispositions
to the condensed consolidated financial statements in this Quarterly Report)
Cash Flows from Financing Activities
Net cash used in financing activities was
$29.5 million
for the
nine months ended September 30, 2019
. The Company paid down
$21.8 million
, net, on its Credit Agreement, inclusive of quarterly payments of the Term Loan, as well as payments of
$4.1 million
of finance lease obligations and other debt. For the comparable period in 2018, net cash used in financing activities was
$23.9 million
. The Company paid down
$15.9 million
, net, on its Credit Agreement, inclusive of quarterly payments of the Term Loan, as well as
$4.6 million
payments of capital lease obligations and other debt.
36
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
The effect of exchange rate changes on our cash and cash equivalents was a net impact of
$0.5 million
in the first nine months of 2019, compared to a net impact of
$0.9 million
for the first nine months of
2018
.
Cash Balance and Credit Facility Borrowings
The terms of our Credit Agreement have not changed from those set forth in Part II, Item 7 of our 2018 Annual Report under the Section “Liquidity and Capital Resources”, under the heading “Cash Balance and Credit Facility Borrowings,” and in Note 11–
Long-Term Debt
to these condensed consolidated financial statements in this Quarterly Report, under the heading “Senior Credit Facility.”
As of
September 30, 2019
, we had cash and cash equivalents totaling
$14.4 million
and available borrowing capacity of
$131.4 million
under our Credit Agreement with borrowings of
$259.4 million
and
$5.4 million
of letters of credit outstanding. We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.
As of
September 30, 2019
, the Company was in compliance with the terms of the Credit Agreement and will continuously monitor its compliance with the covenants contained in its Credit Agreement.
Contractual Obligations
There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2018 Annual Report.
Off-balance Sheet Arrangements
During the
nine months ended September 30, 2019
, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the 2018 Annual Report.
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 as discussed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” included in the 2018 Annual Report.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of
September 30, 2019
, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
37
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s quarter ended
September 30, 2019
that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
38
PART II—OTHER INFORMATION
ITEM 1.
Legal Proceedings
See Note 14–
Commitments and Contingencies
to the condensed consolidated financial statements included in this Quarterly Report for a description of our legal proceedings. There have been no material developments with regard to any matters disclosed under Part I, Item 3 "Legal Proceedings" in our 2018 Annual Report, except as disclosed in such Note 14–
Commitments and Contingencies
.
ITEM 1.A.
Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors discussed under the “Risk Factors” section included in our 2018 Annual Report. There have been no material changes to the risk factors previously disclosed in the 2018 Annual Report.
ITEM 2.
Unregistered Sale of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offering of Common Stock
None.
(c)
Repurchases of Our Equity Securities
The following table sets forth the shares of our common stock we acquired during the quarter as a result of the surrender of shares by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units.
|
Month Ending
|
Total Number of Shares (or
Units) Purchased
|
Average Price Paid per
Share (or Unit)
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(1)
|
|||||||||
|
July 31, 2019
|
4,831
|
|
$
|
15.02
|
|
—
|
|
$
|
—
|
|
|||
|
August 31, 2019
|
140,680
|
|
$
|
15.65
|
|
—
|
|
$
|
—
|
|
|||
|
September 30, 2019
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|||
(1) - On October 7, 2015, the Company announced that its Board of Directors approved a share repurchase plan, which authorized the expenditure of up to $50.0 million for the purchase of the Company's common stock. Effective April 1, 2019, the Company's Board of Directors terminated its share repurchase plan, of which $25.1 million was remaining before the aforementioned termination of the plan.
ITEM 3.
Defaults Upon Senior Securities
None.
ITEM 4.
Mine Safety Disclosures
Not applicable.
ITEM 5.
Other Information
None.
39
ITEM 6.
Exhibits
|
Exhibit No.
|
|
Description
|
|
|
||
|
|
|
|
|
|
||
|
|
||
|
|
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
|
|
101.SCH
|
|
XBRL Schema Document
|
|
|
|
|
|
101.CAL
|
|
XBRL Calculation Linkbase Document
|
|
|
|
|
|
101.LAB
|
|
XBRL Labels Linkbase Document
|
|
|
|
|
|
101.PRE
|
|
XBRL Presentation Linkbase Document
|
|
|
|
|
|
101.DEF
|
|
XBRL Definition Linkbase Document
|
40
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
MISTRAS GROUP, INC.
|
|
|
|
|
|
|
|
By:
|
/s/ Edward J. Prajzner
|
|
|
|
Edward J. Prajzner
|
|
|
|
Senior Vice President, Chief Financial Officer and Treasurer
|
|
|
|
(Principal Financial and Accounting Officer and duly authorized officer)
|
Date:
November 6, 2019
41
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1. A. Risk FactorsItem 2. Unregistered Sale Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits