Mistras Group, Inc. (MG) Earnings Call Transcript

Good day, everyone. My name is [indiscernible]. I will be your conference operator today. At this time, I would like to welcome you to the MISTRAS Group, Inc. Q2 2026 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Thomas Tobolski, Senior Vice President of Finance and Treasurer.

Good morning, everyone, and welcome to MISTRAS Group's Second Quarter 2026 Earnings Conference Call. I am joined today by Natalia Shuman, President and Chief Executive Officer; and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone that remarks made during this conference call as well as supplemental information provided on our website contain certain forward-looking statements and involve risks and uncertainties as described in MISTRAS' SEC filings. The company's factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance but that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website. I will now turn the conference call over to Natalia Shuman.

Good morning, everyone, and thank you for joining us today. Our second quarter results demonstrate continued progress towards the transformation outlined on the Vision2030 as MISTRAS becomes a more diversified, technology-enabled and less cyclical company. This transformation is increasingly evident in our financial performance and business mix. Growth in Aerospace & Defense, Infrastructure and Power more than offset headwinds in Oil & Gas as our mix continued to shift towards high margin end market with deeper customer relationships and greater long-term visibility. For the quarter, revenue increased 4.2% to $193 million, marking our fourth consecutive quarter of year-over-year growth. We also delivered record second quarter adjusted EBITDA of $25.8 million, demonstrating the operating leverage in our model, while significantly improving free cash flow by $23.9 million quarter-over-quarter and continuing to position the business around higher growth, higher value end markets. Let me start with our performance by end markets, which clearly demonstrates the benefits of a more diversified platform. Starting with Oil & Gas, which remains an important end market for MISTRAS. Revenue declined by $8.5 million or 8.2% compared to the prior year period. This was primarily due to the impact of customer programs exited in 2025, of which the majority impact has already been realized. As we discussed last quarter, certain Oil & Gas customers have deferred some maintenance and project activity amid elevated commodity prices. This has affected inspection cadence, turnarounds and other work. We anticipate that the majority of the deferrals from the first half of 2026 will continue to be pushed further out. After adjusting for the level of turnarounds in 2026 and work that we exited in 2025, our Oil & Gas revenue was up 1% in the second quarter, and we anticipate this outlook to continue over the second half within our resilient Oil & Gas business. We remain selective in the opportunities we pursue with a clear focus on higher-margin, high-return engagements rather than volume. At the same time, the second quarter decline in Oil & Gas was more than offset by strong growth in our strategic end markets, which were up 28% in the aggregate. Starting with Aerospace & Defense. This market remains one of our primary growth engines, with second quarter revenue increasing by $3.2 million or 13.2% year-over-year. Our in-lab testing business continues to be particularly strong. Demand is temporarily outpacing capacity due to a healthy backlog, strong customer relationships and the mission-critical nature of the work we perform for some of the sector's most demanding customers. In response, we are investing meaningfully to expand capacity in our in-lab testing operations with a particular focus on automation and throughput. Along that line, we announced that we have expanded our in-lab capabilities in both Houston and Los Angeles. In these locations, we added equipment and services that allow customers to manage more complex aerospace manufacturing workflows in a single facility, from manufacturing support and defect characterization to weld repair, nondestructive testing and final certification. Over time, we believe these investments in facility expansion, automation and process improvements could nearly triple our in-lab testing capacity. Importantly, these investments are supported by visible customer demand, and will expand our service capabilities while strengthening our role as a trusted supply chain partner. Turning to Infrastructure. Revenue increased by $6.2 million or 76.5% year-over-year, marking another strong quarter for this key growth market. Continued investments in U.S. LNG infrastructure and data center constructions is creating meaningful opportunities for us, particularly as customers require quality assurance inspection, commissioning support and asset integrity expertise across increasingly complex projects. We are shifting more of our focus and resources towards these larger, more complex engagements because they better align with our technical capabilities, deepened customer relationships and support higher-value, longer-duration work. A good example is our Woodside's Louisiana LNG mega project, where the scope continues to expand across multiple offerings. The growth we are seeing in Infrastructure is another clear example of our Vision2030 diversification strategy translating into profitable growth opportunities. Our Power Generation business also delivered strong growth, with revenue increasing by $3.1 million or 26.4% year-over-year. This performance was driven primarily by continued maintenance demand from wind energy customers, in addition to onshore wind development, repowering activity and ongoing investment in renewable energy infrastructure. Power Generation is also benefiting from broader investment in power infrastructure, including demand associated with the rapid expansion of data centers. As customers invest across both traditional and renewable generational assets, we are continuing to diversify our customer base and position the business to capture opportunities across multiple technologies and end markets. Together, our improved sales mix and operational efficiencies contributed to a 10 basis point expansion in gross margin in the second quarter. Combined with disciplined expense management, this helped drive a record second quarter adjusted EBITDA, demonstrating the operating leverage in our model. Let me now take a few minutes to provide an update on the continued execution of the key -- 3 key strategic priorities within our strategic plan, Vision2030. As a reminder, these priorities are: First, expanding wallet share by delivering a more comprehensive, integrated and innovative solutions for our customers. Second, diversifying into attractive growth markets. And third, building greater operational leverage through continued efficiency and productivity improvements. With respect to our first strategic priority, expanding wallet share, our proprietary technology solutions, including the ART Crawler monitoring technologies and PCMS data offerings continue to play an increasingly important role in our customer inspection programs. This solution improve inspection quality, support better decision-making and provide actionable insights into customers, managing complex asset integrity needs. As customers continue to invest in asset integrity and digital transformation, particularly in Power and Energy, these capabilities are becoming more deeply embedded in customer workflows and helping strengthen long-term partnerships. To further accelerate our progress, I'm pleased to report that we have hired an Executive Director of AI, leading our AI adoption and forming an AI center of excellence from MISTRAS Group's data solutions organization, focus on applying AI to asset protection, mechanical integrity, inspection intelligence, engineering productivity, automation and customer-facing data solutions. On our second strategic priority, diversifying into attractive growth margin markets, we continue to make meaningful progress during the quarter. We secured notable contract wins across wind, energy, commercial diving and marine infrastructure service lines, underscoring the breadth of our capabilities and the value we can deliver beyond traditional entity offerings. We also hosted a Technology Day in Houston during the second quarter, giving customers a first-hand look at our capabilities and service offerings. The event was well attended, and the feedback was positive across a range of industries. These events help deepen engagement with existing customers and introduce prospective customers to the broader MISTRAS platform. During the second quarter, we also expanded our relationship with U.S. Department of Defense, securing additional project awards that reflect the strength of our technical expertise and our ability to support mission-critical infrastructure and asset integrity requirements. Together, these wins reinforce our strategic focus on broadening our end market exposure, while driving sustainable growth across our platform. For our third strategic priority, building great operational leverage, we continue to advance automation, digital initiatives across the organization. These efforts are focused on improving workflow efficiency, working capital management, collections activity, information processing and productivity in support functions. While this AI and automation initiatives are still in the very early phases, they are helping us create a more scalable operating platform by reducing administrative burden and allowing teams to focus on high-value work. As we continue to build innovative solutions and drive operating leverage, labor availability remain an important consideration. The market for qualified technicians remains tight and we continue to compete for specialized talent. We have responded by sharpening our recruiting approach and enhancing technicians' benefit plans in targeted areas where demand is the strongest, with the goal of filling labor gaps while maintaining the quality and technical expertise our customers expect. Overall, our strategic plans continues to gain traction and is increasingly evident in our results. We are strengthening technology and service integration, expanding into higher growth markets and improving operational efficiency, all of which are positioning MISTRAS for more sustainable, long-term value creation. Before Ed walks us through the financials, I want to briefly highlight a few additional achievements from the quarter that reinforce the progress. First, MISTRAS was recently recognized by MarketsandMarkets as a star in both NDT inspection services and NDT inspection equipment, reflecting the strengths of our asset protection platform and technical capabilities. Second, MISTRAS was added to several Russell growth and defensive benchmarks as a part of the latest reconstitution of the Russell family of indices, which we believe can broaden visibility and support trading liquidity over time. And finally, we recently launched AEScout, a rapid deployment acoustic emission monitoring solutions that complements conventional NDT inspections and strengthen risk-based inspection and integrity management programs. AEScout gives operators a practical way to collect evidence quickly between traditional inspection intervals, helping them prioritize inspection resources, reduce unnecessary disruption and make more confident decisions. It also supports our emerging integrity management as a service model as we aim to deliver more comprehensive, innovative solutions for our customers. In summary, we continue to execute against our long-term transformation on the Vision2030. We are expanding in Aerospace & Defense, Infrastructure and Power, managing Oil & Gas with discipline and investing in the highest return areas of the business to support profitable growth. Now I would like to turn the call over to Ed to walk through a more comprehensive overview of our second quarter results.

Thank you, Natalia, and good morning, everyone. Let me walk you through our financial performance for the second quarter. As Natalia mentioned, we delivered revenue growth of 4.2%, supported by strong execution across strategic end markets. Importantly, that growth translated into improved profitability, with gross profit margin expanding by 10 basis points year-over-year and income from operations expanding by 53.6%. These improvements were driven mainly by our continued focus on a favorable mix shift towards higher value business and continued operational and overhead cost efficiencies achieved across the business. SG&A decreased year-over-year by $1.1 million or 2.7% compared to the prior year period. Excluding the impact of foreign currency translation in 2025, SG&A expenses increased $1.7 million or 4.6%. The year-over-year comparison was affected by a change in presentation adopted in 2026, under which, foreign currency gains and losses are reported within other income and expense net. Previously, these amounts were included within SG&A. The prior year amounts were not reclassified as the impact was not material. Operating income was $12.9 million for the second quarter compared to $8.4 million in the prior year period, an increase of 53.6%. This represented a nearly 60% conversion of incremental revenue year-over-year into operating income in the second quarter. On the bottom line, we generated GAAP net income of $7.6 million, resulting in GAAP earnings per diluted share of $0.23. On a non-GAAP basis, net income and earnings per diluted share were $9.1 million and $0.28 per share, respectively. These significantly improved results, GAAP and non-GAAP net income and EPS all more than doubling, reflect our strong performance, particularly given the investments we are continuing to make to support future growth. Adjusted EBITDA was $25.8 million, an increase of 7% over the prior year quarter and represents our highest ever second quarter adjusted EBITDA to date. Adjusted EBITDA margin was 13.3%, up 30 basis points year-over-year, reflecting stable operating performance, continued cost discipline and the benefits of our ongoing mix shift. Turning to cash flow. Both cash flow from operations and free cash flow significantly improved during the second quarter. This progress reflects focused management attention on upfront building, cycle time, customer escalations and proactive collection efforts. We generated a free cash flow increase of $23.9 million compared to the prior year quarter as a result of higher net income generated and significantly improved working capital dynamics. This progress achieved during the second quarter aligns with our previously mentioned focus when driving sustainable cash generation, and we remain intently focused on further improving conversion as we continue to view cash generation as a critical area of focus for the business. We will continue to dedicate significant time and execution attention to strengthening cash flow performance. That includes accelerating the use of automation including AI, improving internal processes and working closely with customers to ensure cash collections better reflect the value and benefits that we deliver. These efforts have shown progress over the past few quarters, and we expect to return to historically favorable cash flow levels in the second half of the year. Our capital allocation priorities remain unchanged: invest in high-growth opportunities, strengthen the balance sheet through disciplined debt reduction and maintain flexibility to pursue attractive strategic opportunities. We also recently extended our credit facility by one additional year to allow us more optionality as we incorporate Vision2030. Our interest expense in the quarter was $4.1 million, which was down $0.1 million or 2.4% compared to $4.2 million in the prior year quarter, reflecting decreases in our borrowing costs. Our effective income tax rate for the second quarter was 23.1%, and we anticipate an effective tax rate of approximately 25% for the full year 2026. Our bank-defined leverage ratio was approximately 2.2x as of June 30, 2026, which is down versus 2.4x at March 31, 2026, and is well within the maximum allowable leverage of 3.75x, and this is the lowest level it has been since 2018. Our capital allocation strategy remains focused on the use of residual free cash flow to pay down debt to our targeted 2x leverage ratio by the end of 2026 as well as continue to make capital investments into higher growth, higher-value areas as governed by our strategic plan. We appreciate your continued support. And at this time, I will turn the call back over to Natalia for her closing remarks.

Thank you, Ed. Before we move to Q&A, let me close with a few final thoughts and provide our outlook for the remainder of the year. We delivered another strong quarter, highlighted by our fourth consecutive quarter of year-over-year revenue growth. We also delivered record second quarter adjusted EBITDA, demonstrating the operating leverage in our model. The steps we have taken to sharpen our go-to-market approach, streamline operations and broaden our integrated solutions are producing intangible results. Therefore, we're increasing our full year guidance ranges up to $740 million to $755 million in revenue and up to $92 million to $95 million in adjusted EBITDA. This range reflects continued strength in our strategic growth markets, particularly offset by a low level of activity in our Oil & Gas end market, attributable to our ongoing macro environment factors, including higher crude oil prices. We continue to see favorable demand trends, particularly in our Aerospace & Defense and Infrastructure end markets, which we expect to support growth throughout the remainder of the year. We remain focused on strengthening operational execution, driving greater efficiency and further improving cash flow and working capital performance. Our strategic plan continues to gain momentum. We are expanding wallet share, deepening customer relationships and advancing technology and data-enabled solutions that make MISTRAS more differentiated and better positioned for sustainable, profitable growth. We also expect to generate meaningful free cash flow while continuing to invest in the capacity, people and capabilities needed to support long-term growth. This will allow us to reduce debt, strengthen the balance sheet and maintain strategic flexibility. I'll close by thanking all of our MISTRAS employees, from the front lines to the back office, for their tireless efforts in executing on their day-to-day tasks while embracing transformative change and the evolving strategy of our company. These efforts are creating value for our customers, and in turn, our shareholders. I look forward to updating you on our performance as we progress toward our strategic goals. And with that, I'll -- let me turn the call back to [ Linus ] for questions.

[Operator Instructions] Your first question comes from the line of John Franzreb with Sidoti & Co.

Natalia, I'd like to begin where you just left off. It sounds to me that in -- raising your revenue guidance for the year, it's more a function of better demand in A&D and Infrastructure and that you anticipate Oil & Gas to remain, I don't know, a little bit of a flat to down profile in the second half? Is that the right assessment?

That's right, John. Yes, thanks for the question. It's indeed correct. We see strength in our strategic growth markets that we outlined there, Aerospace & Defense, Infrastructure, Power, and Oil & Gas is our core market. But there, what we see is more of a stabilization. Currently, we saw -- if we take out the turnaround and the exited programs, so we saw about 1% growth in Q2. So we anticipate sort of flat to moderate growth in Q2 and -- in Q3 and Q4. So that's how we look at it.

Got it. Got it. And I guess this is another thing that you said in your prepared remarks, and I don't know if I interpreted it correctly, but you talked about the increasing capacity during your breakdown of A&D being up threefold. Is that threefold just for A&D-related projects? Or is that threefold for all lab related work?

Most is for in-lab work. So what we're doing is we're expanding our capacity in in-lab, and the markets that we serve in our laboratory operations is Aerospace & Defense and Industrials. So both markets will benefit from that expanded capacity. And we project, again, according to our strategic plan, our Vision2030, we project to triple our capacity by the end of '27.

Got it. That's significant. And I guess one last question. Can you give me your thoughts about the 60% drop down, I think, is what you mentioned, Ed, the conversion. Is that a sustainable kind of number in this kind of environment? It seems relatively impressive.

Thanks, John. Good question. Yes, that was for the second quarter. For the full year, it's actually slightly higher than that. And yes, there -- in the in-lab business, in the data business, there is a fixed cost element. So when volume rises, yes, there is a very attractive contribution margin drop down there. And you'll see that in many past quarters, when volume spikes up, you get a significant drop down there. So that's a good percentage to use in future periods. That's sustainable, absolutely.

That's great. And I got to throw in one oddity question. The other income number -- or the revenue number was $8 million [ and ] change, and that's the highest number it's been in years. I'm just curious if there's any abnormal job or anything -- maybe you can just explain a little bit what's going on there?

Other income you're referring to, John, that's...

Other revenue.

Other revenue -- Sorry, that's the otherwise not classified industries. It's a lot of smaller call-out work. It's not fitting in the other predetermined end markets. But it's another example of our good diversification where we're picking up lots of work in different places beyond our core markets, but that's what that is a mix of industries and a lot of that's project work and call-out work in lots of different diverse places.