Mistras Group Waits Patiently for Energy to Recover

In the past, companies that had equipment and other working assets in far-flung places across remote areas had little choice but to have workers visit them on a regular basis to ensure they were functioning properly. Now, Mistras Group (NYSE: MG) offers the ability to provide both remote monitoring of equipment and asset-protection services. Those services have value to clients in a large number of businesses. But one clear application involves oil and gas assets, and Mistras has struggled to boost its business with companies in that industry, which are dealing with low energy prices and their impact on capital and operational spending.

Coming into Monday's third-quarter financial report, Mistras investors were ready for another round of reduced earnings and revenue due to tough conditions in the oil patch. The company's results were mixed, with solid sales gains despite summer hurricanes affecting Texas, Florida, the Gulf of Mexico, and the Caribbean. Yet profits remained under pressure, and Mistras knows it has more work to do in order to produce long-term success. Let's look more closely at how Mistras Group did, and what's ahead for the company.

Mistras Group sees some improvement

Mistras Group's third-quarter results at least exceeded expectations on the top line. Revenue jumped more than 6% to $179.6 million, defying expectations for a nearly 1% drop in sales. Substantial impairment charges hit Mistras' bottom line, however, and even after making allowances for those one-time items, adjusted net income of $4 million would have worked out to $0.13 per share. That was less than the consensus forecast among analysts of $0.15 per share in adjusted earnings.

Mistras Group took several actions in dealing with special items. A write-off of intangible assets related to its products and system segment cost the company $15.8 million in operating income. Smaller moves included severance packages for let-go workers of about $500,000, and a litigation settlement reserve of $1.2 million. Including those items, Mistras would have lost $7 million on a GAAP (generally accepted accounting principles) basis, or $0.25 per share.

Mistras Group's segments showed a few signs of life amid ongoing challenges. In the services segment, revenue was up 8% despite summer hurricanes, with the company citing one single region as being especially problematic for the company without explicitly naming it. Outside that region, revenue was up 13%, much of which came from organic growth. Segment operating income was down 7% on an adjusted basis, with hurricane-related impacts leading to some reductions in technician utilization during the period.

In the international segment, Mistras saw sales climb 1%. The company said that performance would have been better were it not for organic declines in the German aerospace industry. Segment operating income plunged more than 80% due to weakness in the U.K. and Germany. Meanwhile, the products and systems business saw an 8% drop in revenue.

CEO Dennis Bertolotti emphasized the best parts of Mistras Group's business. "I continue to be pleased with the performance of our services segment," he said. "As expected, market conditions in the fall of 2017 turned modestly positive compared with an unusually low level of prior-year activity." The CEO pointed to minimal physical damage as a result of the hurricanes during the period.

What's ahead for Mistras Group?

Mistras will work hard to restructure and refocus on its best prospects. Strategic moves in the services unit are already paying off, but the company said that one of its subsidiaries in the products and systems segment is no longer aligned with its overall business goals. As a result, Bertolotti said that he anticipates that Mistras "will take decisive action there," in addition to implementing cost controls throughout the company to boost profits.

Mistras Group's guidance for the rest of 2017 reflected the results. Service segment results are expected to be better in the fourth quarter than in the prior year's period, with full-year results in line with previous guidance after taking hurricane-related expenses into account. However, in the international and products and systems segments, performance has lagged expectations, and Mistras now sees those segments adversely affecting overall pre-tax operating income. For 2018, Mistras is optimistic that it will see growth in sales and earnings in each of its segments, due to a combination of growth initiatives and cost-reduction programs, but the company didn't specify dollar amounts.

Mistras Group investors didn't have a huge immediate reaction to the report, with the stock easing lower by just a fraction of a percent in after-hours trading following the announcement. If energy starts to rebound more vigorously, as Mistras expects, then its core business should see a nice move higher. Long-term investors simply have to decide whether they're patient enough to wait for that eventuality.

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