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Mistras Group Falls as Challenging Market Conditions Persist

By Dan Caplinger – Aug 9, 2017 at 11:00AM

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The monitoring equipment specialist saw some signs of recovery, but the difficult environment for its customers in the oil and gas industry held it back.

Many companies have assets in hard-to-reach places that nevertheless require regular monitoring and testing. Mistras Group (MG -3.98%) provides the technology to solve the logistical problems involved with remote asset protection and monitoring, and it has had great success over the years at attracting customers from a variety of industries. However, the oil and gas industry provides a significant share of its business, and tough times in the energy sector have had an impact on the company in the past.

Coming into Tuesday's second-quarter financial report, Mistras investors understood that energy industry headwinds would likely hit the company's results again, but they still hoped to see some hints of better days ahead. Instead, Mistras Group's numbers showed weaker earnings and revenue, and its outlook for the future remains cloudy because of energy's weakness. Let's take a closer look.

Leak detecting equipment checking a hole in a piece of machinery.

Image source: Mistras Group.

Mistras Group is still stuck in the mud

The Q2 numbers reflected the challenges that the company has faced for a while now. Revenue fell 4% to $170.4 million, which was almost exactly what most investors had expected to see. However, a 20% drop in net income to $2.22 million was unexpected, and even after accounting for some extraordinary items, adjusted earnings of $0.09 per share were well below the $0.15 per share consensus forecast among analysts following the stock.

The monitoring company said that it incurred a small charge because of its decision to close some of its smaller laboratory facilities. Yet because the year-ago figure included an even larger charge for a legal settlement, the roughly 60% deterioration in adjusted net income was even larger than the decline in the GAAP numbers.

The various segments under Mistras Group's corporate umbrella had sluggish performances. Its services segment saw revenue fall 2%, and operating income was down 5% from year-ago levels after accounting for one-time items. Yet Mistras said that results began to improve during the quarter, and noted that one particularly challenging region was primarily responsible for the downward pressure on the unit's performance. Strong results elsewhere  pointed to better conditions in most of its markets.

Segment revenue from Mistras' international business was down a sharper 7%, with a $2.6 million hit to operating income. The company said that  conditions declined in some formerly strong areas, with revenue and profit falling in Germany, the U.K., and France. Various timing issues have hit its European results, including when projects take place and how customers place their orders. For the products and systems segment, quarterly revenue dropped $1.4 million, sending operating income lower by $800,000.

New CEO Dennis Bertolotti tried to emphasize the positives for Mistras. "Although spring 2017 market conditions were challenging as expected in North America," Bertolotti said, "our services results have been resilient, realizing year-on-year revenue and profit gains with the exception of one challenged region." He expects that results from nondestructive testing services will look better going into the fall, especially given that year-over-year comparisons will be made to a particularly weak Q3 2016.

Can Mistras Group bounce back?

Mistras also announced a three-pronged plan to reposition itself for its next phase of growth: restructuring top management positions in its services segment; increasing investment in Canada and other promising locations; and further reducing costs. Bertolotti is optimistic that those efforts, in addition to seeking new business opportunities, should allow the company to  start growing again in 2018.

However, Mistras had to reduce its guidance for the full 2017 year. Although performance from the services segment has been consistent with expectations, in the international segment, it has not, so the company cut its net income forecast to between $13 million and $15 million. That led to earnings-per-share guidance of between $0.42 and $0.52, which is $0.26 per share lower than what Mistras had predicted last quarter.

Mistras investors weren't happy with the news, and the stock plunged 10% shortly after the market opened on Wednesday morning. It will take success from its turnaround efforts to get investors confident about this company's prospects again, and until conditions improve in some of its key customer industries, Mistras could have trouble realizing the full potential of its business.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Mistras Group. The Motley Fool has a disclosure policy.

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