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Text: As with last quarter, let me first begin with some comments on the current state of the market and what we've seen so far and briefly update you on the actions that Mistras has taken to keep our employees, customers and partners safe while simultaneously mitigating these challenging conditions.
First, let me say that I'm extremely proud of how our team has responded to current conditions.
They have remained focused on the safety and well-being of our associates, clients, and partners.
They are continuing to deliver outstanding services which is helping our clients best manage through these unprecedented times, all the while positioning Mistras to emerge from this global pandemic stronger and better prepared to further our industry leadership.
In the first quarter, we posted solid operating results with revenues better than forecasted and our asset-light business model has continued to generate positive cash flow for which we have become well-known.
We have achieved this despite a quarter that experienced the dual impacts of a weak energy market continuing from late last year and the global pandemic that began to take root toward the end of the first quarter.
As it became clear that we were entering a period of incredible uncertainty, we took immediate action to adjust to these new realities.
The immediate focus was on things that we could control, with our goal being to preserve and protect our reputation and to reinforce our position as our customer's preferred partner.
So we doubled down our efforts to provide our customers with the high quality of service in which they have come to rely upon from Mistras.
We found innovative new uses for our technology.
MISTRAS Digital to help customers lower their cost and this is currently getting a high level of interest.
We believe this dedication to the needs of our clients not only enhances our franchise today but establishes a solid foundation on which to build upon the market’s eventual recovery.
At the same time, we took decisive actions in response to this new business environment.
We have significantly reduced cost, we've cut capex in line with revenue expectations and are more effectively managing working capital to maintain and enhance our positive cash flow.
We have accelerated some of the structural changes to improve margins while deploying technology to further improve productivity.
I and other members of the executive team along with nearly all salaried employees have taken pay cuts and our Board has also forgone some of their compensation.
Additionally, we have made adjustments to our variable headcount and broadly rationalize our assets to align with anticipated future levels of activity.
We are taking these actions while maintaining our commitment to delivering superior services which help our customers increase their efficiency, reduce their costs, and improve their outcomes.
Consequently, we continue to forge ahead in areas that offer the greatest returns.
For instance, customers are anxious to adapt digital technology that will help them improve efficiencies, as well as transition to more predictive solutions.
In this respect, we continue to work with our customers to leverage our MISTRAS Digital solution that helps reduce non-productive time and improve labor and asset efficiency.
Complementary to MISTRAS Digital is our industrial Internet of Things offerings such as remote sensor monitoring where we are having great success as our MISTRAS Digital ruggedized tablets are that are revolutionizing field reporting and we are seeing a steady increase in our mechanical work.
All of these actions and initiatives are helping diversify our revenue streams and significantly strengthen our foundation for long-term growth and profitability.
And while our customers in the energy industry are trying to stretch their dollars just like everyone else's, they nevertheless have an obligation to keep their facilities in compliance with regulations and operating at top efficiency.
So we are sensing new opportunities in even this environment of demand contraction.
We believe the second quarter should represent the largest deviation with our revenues potentially down as much as the high 30% range from a year ago.
April looks like it should be a peak revenue decline as we are already sensing that May will be better and June could potentially see further improvement if oil prices continue to recover and states continue to relax shelter-in-place orders.
The third quarter and fourth quarter will then be expected to rebound nicely.
Given the impact of COVID-19 to our business, we did perform an assessment of the carrying value of goodwill and other intangibles in the first quarter of 2020 and the result was that we recorded non-cash impairment charges of $106 million.
Ed will go through the details.
With our expectation of positive operating cash flow, each quarter this year, limited capital expenditure needs and our amended credit agreement, we have sufficient liquidity to support our operations and this would be while simultaneously reducing outstanding debt by the end of the year, including $4.5 million already paid down in the second quarter.
Our job is to build on the legacy Mistras has created over the years and it is our vision to take Mistras to the next level through more integrated programs and more predictive intelligence that will define our industry in the future.
First quarter revenues were somewhat better than expected, down a little less than 10% from a year ago.
As anticipated, our oil and gas revenues in our Services segment saw the largest decline, which was somewhat offset by nearly $2 million improvements in domestic aerospace and defense.
Conversely, revenues in our International segment were impacted by a decline in European aerospace revenues where production at our large facility in France was hampered by that country's complete shutdown, as well as a continued run-off of the staff leasing business in Germany.
Gross profit for the quarter was $40.6 million or 25.5% with margins down from a year ago, mostly due to underutilization resulting from the decrease in revenues.
To a much lesser extent, margins reflected a somewhat tighter pricing environment.
On a segment basis, both Services and International revenues were down.
Services primarily due to the weakness in energy markets, while International experienced a decrease in aerospace revenues, driven by the wind-down of staff leasing and the adverse foreign currency translation impact.
Gross margins were also down from a year ago, consistent with the decrease in revenues.
Selling, general and administrative expenses decreased from a year ago despite the addition of New Century's overhead to this year's cost.
Early in the second quarter of 2020, we initiated a cost reduction and efficiency program, which should reduce the run rate of overhead by approximately 10% beginning in the second quarter, a reduction we believe is consistent with our outlook for the year.
This program includes temporary adjustments to capital spends, reduction in travel and certain R&D, limiting of new hires, and the scaled reduction for salary expenses for essentially all overhead positions.
Also, note that all non-employee members of our Board also took a reduction in their compensation during the second quarter.
We typically review goodwill for impairment each October 1 or whenever events or changes in circumstances indicate that the carrying value of goodwill and intangibles may not be recoverable.
COVID-19 and the related impact to crude oil prices was deemed to be a triggering event requiring us to perform an interim assessment.
As a result, we recorded a non-cash charge of $106.1 million for permits in the first quarter of 2020, comprised of $77.1 million related to goodwill and $29 million related to primarily intangible assets.
On an after-tax basis, this was $92.1 million or $3.18 per diluted share exclusive of a $0.02 per diluted share benefit from other special items or $3.16 per diluted share on a net basis for all special items.
Although we were in compliance with our bank covenants as of March 31, 2020, we nevertheless executed an amendment effective May 15, 2020, to gain additional covenant flexibility.
We maintained the remaining maturity of our existing credit agreement through December 2023, including a $93.75 million term loan, but we reduced our revolving credit line to a maximum of $175 million to save cost related to the unused commitment, while ensuring a sufficient level of liquidity to fund our business.
We additionally maintained a $100 million uncommitted accordion within the amended credit agreement for potential expansion in the future.
Our net debt, total debt less cash, and cash equivalents was $241 million at March 31, 2020, compared to $239.7 million at December 31, 2019.
Gross debt increased by $3.3 million during the first quarter of 2020 from $254.7 million at the end of the year to $258 million at March 31, 2020.
As Dennis mentioned, we have already paid down an additional $4.5 million of debt in the second quarter of 2020.
Reiterating one of our key themes.
Our business has historically generated strong cash flow.
In the first quarter of 2020, we further enhanced that reputation with cash from operating activities of $6.1 million.
We did utilize a little over $4 million for capital expenditures in the first quarter, in line with our goal to reduce total capex this year from our typical run rate, in line with revenue expectations.
We recorded a net loss of $98.5 million for the first quarter of 2020 compared with a net loss of $5.3 million in the prior-year period, due primarily to the aforementioned non-cash impairment charges.
But we did nevertheless generate adjusted EBITDA of $5.4 million for the second quarter of 2020 and our goal remains to maintain adjusted EBITDA as well as positive operating cash flow in each quarter of this year.
Ongoing macro concerns attributable to the impact of COVID-19 coronavirus continue to put crude oil prices under intense pressure.
Given the continuing economic uncertainty, we are not providing guidance for the full year of 2020.
We do anticipate revenues for the second quarter of 2020 to decrease up to a high 30% range from the prior-year period level although cash from operations and adjusted EBITDA are expected to remain positive.
While it is extremely difficult to forecast with any degree of certainty at this time, we are optimistic that consolidated revenue in the second half of 2020 will be higher than that of the first half of 2020 with corresponding improvements in both cash flow and adjusted EBITDA.
This outlook is contingent on continuing macroeconomic improvements, including stabilization in crude oil prices and relaxing of certain stay-at-home mandates.
We are confident in our sustainable business model and we remain firmly committed to carrying on our strategy today and over the long term.
Mistras is essential to global energy infrastructure as well as to the aerospace, alternative energy, and other industries whether at our facilities or those of our customers' our teams are hard at work ensuring the safety and security of valuable assets, while observing today's coronavirus inspired rules of engagement.
We are far from out of the woods.
We intend to keep a consistent eye on our expected revenues and be sure we match our resources accordingly.
The crude oil prices have recently stabilized and are beginning to improve and more states around the country are beginning to relax some stay-at-home restrictions.
Conversations with our customers have become more constructive.
These are all positive signs and much different than the signals we were hearing in mid to late March.
Mistras intends to emerge from this pandemic stronger, determined and prepared to capitalize on the opportunities, which we believe exist within our industry.
Customers know they can count on Mistras to be there when they need us.
We have deep relationships built over years of dedicated service delivering on time and on budget and we are developing new age tools that customers know they're going to need as budgets shrink and we all have to learn how to do more with less.
We are excited about Mistras's future and are committed to our success.
Our industry is under intense pressure to optimize the efficiency of their assets and to continue to comply with increasingly complex safety, environmental, and other regulations.
This is creating a growing demand for our services.
In the short run, that trend may be disrupted, but over the long-term, we think these factors will drive growth in our markets and we intend to outpace that growth.
Our utmost concern remains safety of our employees as well as those of our customers and the many other Mistras associates.
Let me again state my deep appreciation for the hard work all the Mistras technicians and professionals are doing to keep our customers' assets safe while facing all the challenges, they must endure to get the work done.
Let me also commend all the administrative and management Mistras folks for finding a way to make this new normal work for us.
Our focus on cash generation, collection, and normal administrative processes has not diminished one bit and we are as strong and nimble as we ever have been.
I also want to sincerely recognize the patience of our long-term shareholders who continue to support us through this journey.
Gigi, please open up the phone lines.

user
mistras group not providing guidance for full year 2020.
strategic actions implemented to lower costs further in 2020.
covid-19 and related impact on crude oil prices trigger non-cash impairment charges of $106.1 million in quarter.
not providing guidance for full year 2020.
does anticipate revenues for q2 to decrease up to high 30% from prior period level.
optimistic that consolidated revenue in h2 of 2020 will be higher than h1 of 2020.

assistant