●	alerts that notify customers when to perform special testing services on suspect areas, enabling them to identify and resolve flaws on a timely basis by using our PCMS risk-based inspection (“RBI”) software module; and
●	schedules for the maintenance and retirement of assets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	unexpected loss of key personnel and customers of the acquired company;
●	making the acquired company’s financial and accounting standards consistent with our standards;
●	assumption of liability for risks and exposures (including environmental-related costs), some of which we may not discover during our due diligence; and
●	potential disruption of our ongoing business and distraction of management.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	our ability to integrate our technology with new and existing hardware and software systems;
●	our ability to anticipate and support new standards, especially Internet-based standards; and
●	our ability to integrate additional software modules under development with our existing technology and operational processes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our credit agreement contains financial and operating restrictions that may limit our access to credit. If we fail to comply with financial or other covenants in our credit agreement, we may be required to repay indebtedness to our existing lenders, which may harm our liquidity.

 

 

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Income from operations

 

Our income from operations is our gross profit less our selling, general and administrative expenses, research and engineering and depreciation and amortization included in income from operations. We refer to our income from operations as a percentage of our revenues as our operating margin.

 

Interest expense

 

Our interest expense consists primarily of interest paid to our lenders under our credit agreement. Also included is the interest incurred on our capital leases and on subordinated notes issued as part of our acquisitions. We adjust the interest differential on our interest rate swap quarterly to reflect the difference from our current borrowing rate to the notional amount of our interest rate swap contracts.

 

Income taxes

 

Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of meals and entertainment expense, changes to deferred tax assets valuation allowances and other permanent differences. Prior to fiscal 2007, we had net operating loss carryforwards (NOLs) for federal and state purposes, but as a result of our pre-tax income in fiscal 2007, we used a majority of these NOLs. As of May 31, 2010 we had $2.0 million of NOLs available to offset state taxable income in future years. These state NOLs will expire, if not utilized, at varying dates beginning in 2011 depending on the laws of each state and as such, we have provided a valuation allowance of $0.2 million. Our effective income tax rate will be subject to many variables, including the absolute amount and future geographic dist ribution of our pre-tax income. We also plan to continue our acquisition strategy, and, as such, we anticipate that there will be variability in our effective tax rate from quarter to quarter and year to year, especially to the extent that our permanent differences increase or decrease. As a result of any of these factors, our future effective income tax rate may fluctuate significantly over the next few years.

 

Noncontrolling interest, net of taxes

 

The noncontrolling interest represents the ownership interests of other stockholders in our international subsidiaries, where 100% ownership is not permitted or de minimis local ownership is helpful for business purposes.

 

 

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Consolidated results of operations

 

Fiscal 2010, 2009 and 2008

 

Our revenues, gross profit, income from operations and net income for fiscal 2010, 2009 and 2008 were as follows:

 

		For the years ended May 31,
		2010				2009				2008
		(in thousands, except share and per share data)
Revenues		$	272,128			$	209,133			$	152,268
Gross profit			83,138				69,266				54,831
Gross profit %			31	%			33	%			36	%
Income from operations			20,897				14,825				16,358
Operating income as percentage of revenues			8	%			7	%			11	%
Interest expense			3,531				4,614				3,531
Income before provision for income taxes and noncontrolling interest			16,979				10,211				12,827
Provision for income taxes			6,527				4,558				5,380
Income before noncontrolling interests			10,452				5,653				7,447
(Income) attributable to noncontrolling interests			(23	)			(187	)			(8	)
Net income attributable to Mistras Group, Inc.			10,429				5,466				7,439
Net income attributable to Mistras Group, Inc. as a percentage of revenues			4	%			3	%			5	%

 

We estimated that our growth rates for fiscal 2010, 2009 and 2008, respectively, were as follows:

 

		For the years ended May 31,
		2010				2009				2008
		(in thousands, except share and per share data)
Revenue growth		$	62,995			$	56,865			$	30,027
% Growth over prior year			30	%			37	%			25	%
Comprised of:
% of organic growth			18	%			16	%			17	%
% of acquisition growth			12	%			23	%			6	%
% foreign exchange increase (decrease)			< 1	%			(2	%)			1	%
			30	%			37	%			24	%

 

Fiscal 2010 compared to fiscal 2009

 

Revenues. Our revenues, by segment for fiscal 2010, 2009 and 2008, were as follows:

 

		Years ended May 31,
		2010				2009				2008
Revenues (1)
Services		$	227,782			$	167,543			$	116,027
Products and Systems			18,875				17,310				16,675
International			30,920				29,165				23,727
Corporate and eliminations			(5,449	)			(4,885	)			(4,161	)
		$	272,128			$	209,133			$	152,268

 

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(1)	Revenues by operating segment includes intercompany transactions, which are eliminated in corporate and eliminations.

 

 

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Revenues increased $63.0 million, or 30%, for fiscal 2010 compared to fiscal 2009 as a result of growth in all our segments. For fiscal 2010 and fiscal 2009, we estimate that our organic growth rate, as compared to growth driven by acquisitions, was approximately 18% and 16%, respectively. In fiscal 2010, we estimate that all of our segments had organic growth, with the Services segments leading the way with 20%. Although growth was slower due to the lingering effects of the economy, especially as to capital spending patterns, our Products and Systems segment and our International segment each had organic growth of 9% and 7% respectively. This organic growth was the result of continued demand for our asset protection solutions, including growth from new and existing customers. In fiscal 2010, we estimate that growth from acquisitions w as approximately $25.8 million, or 12%, compared to $33.6 million, or 23%, in fiscal 2009. We completed three acquisitions in fiscal 2010 compared to five acquisitions in fiscal 2009, and seven acquisitions in fiscal 2008, increasing our capabilities and adding to our base of qualified technicians.

 

Despite the prolonged downturn in the global economy, we continued to experience growth in many of our target markets in fiscal 2010 as compared to fiscal 2009. The largest dollar increase was attributable to customers in the oil and gas market which was achieved globally on several new and existing projects, including an increase in our portfolio of “run and maintain” contracts and new work obtained due to our acquisitions. Overall the oil and gas market provided approximately 63% and 58% of our total revenues for fiscal 2010 and 2009, respectively. Within this market, we provide services to refineries, as well as midstream and upstream customers, petrochemical and other industry segments. Refineries are currently the largest area of this market and represent approximately 39% of our total revenues. As of May 31, 2010, we serviced approximately 31% of the U.S. refineries and 57% of refineries producing 100,000 or more barrels per day, but this only represents approximately 6% of the world’s refineries. We also experienced high growth in several of our other target markets, including chemical, fossil and nuclear power. These increases were partially offset by declines in capital projects, turnaround work and reduced pipeline, aerospace and industrial parts inspection activity and the completion of certain projects as compared to fiscal 2009. Our top ten customers represented approximately 45% of our revenues for fiscal 2010 compared to 36% in fiscal 2009. Our largest customer accounted for approximately 18% and 17% of our revenues in fiscal 2010 and 2009, respectively. No other customer accounted for more than 7% of our revenues in fiscal 2010.

 

Gross profit. Our gross profit in total and its components as a percentage of revenues for fiscal 2010, 2009 and 2008 was as follows:

 

		For the years ended May 31,
		2010				2009				2008
		(in thousands, except share and per share data)
Gross profit		$	83,138			$	69,266			$	54,831
Gross profit % comprised of:
Revenues			100	%			100	%			100	%
Cost of revenues			65	%			63	%			60	%
Depreciation			4	%			4	%			4	%
Total			31	%			33	%			36	%
Gross profit % (decrease) increase from prior year			(2	%)			(3	%)			2	%

 

Our gross profit, by segment for fiscal 2010, 2009 and 2008, was as follows:

 

		Years ended May 31,
		2010				2009				2008
Gross profit
Services		$	61,963			$	48,480			$	36,301
Products and Systems			9,915				8,476				8,829
International			11,668				12,602				9,932
Corporate and eliminations			(408	)			(292	)			(231	)
		$	83,138			$	69,266			$	54,831

 

 

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Our gross profit increased $13.9 million, or 20%, in fiscal 2010 compared to fiscal 2009. As a percentage of revenues, our gross profit was approximately 31% and 33% in fiscal 2010 and fiscal 2009, respectively. The non-depreciation portion of our cost of revenues as a percentage of revenues increased to approximately 65% in fiscal 2010 from approximately 63% in fiscal 2009. Depreciation expense included in determining gross profit for fiscal years 2010 and 2009 was $10.5 million, or 4% of revenues, and $8.7 million, or 4% of revenues, respectively.

 

Despite the increase in our fiscal 2010 revenues, our gross profit as a percentage of revenues declined to 31% in fiscal 2010 from 33% in fiscal 2009. Some of this decline resulted from our sales mix, since our Services segment generated the largest portion of the revenue increase and our gross margins on revenues from our Services segment are generally lower than that of our other segments. In addition, we increased our market share through new customer contracts and through acquisitions, which often leads to lower margins in the near term until such time as we can fully integrate these acquisitions into our business model and deliver a stronger mix of advanced asset protection solutions to our customers, which generally carry higher margins.

 

Another contributing factor was the continued economic downturn. We experienced revenue declines in high margin shop work in the aerospace and industrial markets. In addition, many of our existing customers, primarily refineries, requested and received pricing adjustments, which we granted to expand and preserve market share. During fiscal 2010 certain of our customers managed project activity and turnarounds differently than in the past, stopping or changing planned work schedules more abruptly. This created inefficiencies in the planning and utilization of labor. In fiscal 2010 we continued to develop several new specialties within our asset protection solutions by hiring and training new employees and creating “centers of excellence”, including centers for industrial tube and off-shore oil rig platform inspections a nd new pipeline construction. This investment in our technicians to gain future market share, however, contributes to non-billable labor until these markets develop.

 

Income from operations. Our income from operations, by segment for fiscal 2010, 2009 and 2008, was as follows:

 

		Years ended May 31,
		2010				2009				2008
Income from operations
Services		$	22,614			$	13,681			$	14,649
Products and Systems			2,572				1,664				2,723
International			3,008				4,091				2,408
Corporate and eliminations			(7,297	)			(4,611	)			(3,422	)
		$	20,897			$	14,825			$	16,358

 

Our income from operations of $20.9 million for fiscal 2010 increased $6.1 million, or 41%, compared to fiscal 2009. As a percentage of revenues, our income from operations increased to 8% compared to 7% in fiscal 2009.

 

As a percentage of revenues, selling, general and administrative expenses for fiscal 2010 were 20% compared to 22% for fiscal 2009. Our selling, general and administrative expenses for fiscal 2010 increased approximately $8.4 million, or 18%, over fiscal 2009, primarily due to the cost of additional infrastructure to support our growth, including new locations obtained through our acquisitions. Our recent acquisitions accounted for approximately $4.2 million of this increase. Stock compensation costs increased approximately $2.4 million in fiscal 2010 over fiscal 2009. In addition, we increased our allowance for doubtful accounts by $0.4 million, net of estimated recoveries, related to the bankruptcy of one of our customers. Other increases in our selling, general and administrative expenses included higher compensation and benefit exp enses over the previous year attributed to normal salary increases as well as our investment in additional management and corporate staff. A significant portion of these increases (as well as other increases in cost of revenues) supported our development of additional centers of excellence. Our professional fees also increased in fiscal 2010, which related primarily to increased costs associated with operating as a publicly traded company, including our continued efforts to comply with the Sarbanes-Oxley Act, as well as certain costs associated with our initial public offering in October 2009. Depreciation and amortization included in the determination of income from operations for fiscal 2010 and fiscal 2009 was $4.7 million, or 2% of revenues, and $3.9 million, or 2% of revenues, respectively.

 

Interest expense. Interest expense was $3.5 million and $4.6 million for fiscal 2010 and fiscal 2009, respectively. The $1.1 million decrease in fiscal 2010 interest expense related directly to our repayment of approximately $66.4 million in borrowings in October 2009, which was the primary use of the net proceeds we received from our initial public offering. In both years, we incurred additional expense related to the market rate adjustments to our interest rate swaps, as the fixed rate on these swaps was higher than market rates during both annual periods. The total interest expense adjustments for these swap arrangements for fiscal 2010 and fiscal 2009 was approximately $ (0.5) million and $0.2 million, respectively.

 

 

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Net income attributable to noncontrolling interests, net of taxes. The decrease in net income attributable to noncontrolling interests relates primarily to a decrease in net income from Diapac, our subsidiary in Russia offset by an increase in net income of our Brazilian subsidiary, PASA. In fiscal 2009, net income attributable to noncontrolling interests was primarily attributable $0.2 million in the minority interest is related to the increased profit, primarily from Diapac, our subsidiary in Russia.

 

Income taxes. Our effective income tax rate was approximately 38% for fiscal 2010 compared to approximately 45% for fiscal 2008. The decrease was primarily due to the impact of permanent tax differences and an adjustment to our liabilities related to uncertain tax provisions offset by higher state taxes and U.S. federal taxes on our foreign profits.

 

Net income. Our net income for fiscal 2010 of $10.4 million, or 4% of our revenues, was approximately $4.9 million higher than our net income for fiscal 2009, which was $5.5 million, or 3% of revenues. This increase in net income was primarily the result of our revenue growth and lower interest expense, offset by higher selling, general and administrative expense and research and engineering expenses. In addition, in fiscal 2009 we incurred expense of $2.1 million related to the settlement of a lawsuit.

 

Fiscal 2009 compared to fiscal 2008

 

Revenues. Revenues increased $56.9 million, or 37%, for fiscal 2009 compared to fiscal 2008 as a result of growth in all our segments. For fiscal 2009 and fiscal 2008, we estimate that our organic, as compared to acquisition-driven, growth rate was approximately 16% and 17%, respectively. In fiscal 2009, we estimate that all of our segments had organic growth, and that the Services and International segments had double digit organic growth rates. This organic growth was the result of continued demand for our asset protection solutions, including growth from new and existing customers, and did not result from any unusually large one-time projects. In fiscal 2009, we estimate that growth from acquisitions was approximately 23% compared to 6% in fiscal 2008, primarily because we acquired five NDT companies in fiscal 2009 and 7 NDT companies in 2008, increasing our capabilities and adding to our base of qualified technicians.

 

In the second half of fiscal 2009 we believe the economic downturn resulted in greater than usual reductions or delays in capital spending by our customers. Several anticipated regular maintenance projects as well as projects requiring intensive work during a temporary asset shutdown, or “turnaround” projects, were either reduced in scope or have been delayed until fiscal 2010 or later.

 

Despite the economic downturn, we experienced growth in many of our target markets in fiscal 2009 as compared to fiscal 2008. The largest dollar increase was attributable to customers in the oil and gas market, which accounted for approximately 58% of our total revenues. This growth was achieved globally on several new and existing projects. Overall this market provided 58% and 50% of our total revenues for fiscal 2009 and 2008, respectively. The remainder of the growth in our revenues was broadly distributed among customers in our other target markets, with the largest increases in this period attributable to customers in the chemical market, where we obtained a new long-term service contract, and in the industrial and manufacturing sector where we obtained new customers through our acquisitions. The most significant decrease in fisca l 2009 was in the electronics and transportation industries, but these industries together accounted for less than 2% of our total revenues in fiscal 2009. Our top ten customers represented 36% of our revenues for fiscal 2009 compared to 35% in fiscal 2008. One of these top ten customers filed for bankruptcy in January 2009. Our revenues from this customer were $6.4 million for fiscal 2009. Although we have increased our allowance for doubtful accounts receivable attributable to this long-term customer by approximately $1.6 million as a result of this bankruptcy, we continue to work for this customer under the protection of the bankruptcy court.

 

Gross profit. Our gross profit increased $14.4 million, or 26%, in fiscal 2009 compared to fiscal 2008. As a percentage of revenues, our gross profit was 33% and 36% in fiscal 2009 and fiscal 2008, respectively. The non-depreciation portion of our cost of revenues as a percentage of revenues increased to 63% in fiscal 2009 from 60% in fiscal 2008. Depreciation expense included in determining gross profit for fiscal years 2009 and 2008 was $8.7 million, or 4% of revenues, and $6.8 million, or 5% of revenues, respectively.

 

 

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Despite the 37% increase in our fiscal 2009 revenues, our gross profit as a percentage of revenues declined to 33% in fiscal 2009 from 36% in fiscal 2008. Some of this decline resulted from our sales mix, since our Services segment generated the largest portion of the revenue increase and our gross margins on revenues from our Services segment are generally lower than that of our other segments. A large portion of this cost can be attributed to the economic downturn, because when our customers delay or reschedule projects, this delays our recognition of revenues from those projects while we continue to incur labor expenses. We also incurred the cost to hire and train employees in order to develop several new specialties within our asset protection solutions, or “centers of excellence”, including centers for industrial tube and off-shore oil rig platform riser inspections and new pipeline construction. In addition, our business was disrupted during September 2008 by Hurricane Ike and in our third fiscal quarter by strikes threatened by employees of several of our customers, which were subsequently resolved. As we anticipated, several of our recently acquired businesses had lower margins than we normally achieve and we would expect that these margins will improve as we fully integrate these acquired businesses into our business model. Our payroll costs, including workers’ compensation insurance, also increased during fiscal 2009, but unlike in fiscal 2008, we did not benefit from a $1.0 million adjustment, resulting from favorable claims experienced.

 

Income from operations. Our income from operations of $14.8 million for fiscal 2009 decreased $1.5 million, or 9%, compared to fiscal 2008. As a percentage of revenues, our income from operations was 7% in fiscal 2009, compared to 11% in fiscal 2008. In fiscal 2009, we increased our allowance for doubtful accounts by approximately $1.6 million to provide for estimated losses in connection with a large customer bankruptcy and incurred $2.1 million in expenses in connection with a lawsuit settlement. Without these charges, our fiscal 2009 income from operations would have been approximately 9% of revenues.

 

The percentage of total operating income for fiscal 2009 contributed by our segments was Services: 92%; Products and Systems: 11%; International: 28%; and Corporate and Eliminations: (31%). For fiscal 2008, the operating income contributed by our segments was: Services: 89%; Products and Systems: 17%; International: 15%; and Corporate and Eliminations: (21%).

 

As a percentage of revenues, selling, general and administrative expenses for fiscal 2009 were 23% compared to 22% for fiscal 2008. Our selling, general and administrative expenses for fiscal 2009 increased $14.2 million, or 43%, over fiscal 2008, primarily due to the cost of additional infrastructure to support our growth, including several new locations obtained through our acquisitions. Our recent acquisitions accounted for approximately $6.0 million of this increase. In addition, the $1.6 million increase in our allowance for doubtful accounts due to the bankruptcy of our customer was included in this expense category. Other increases in our selling, general and administrative expenses included higher compensation and benefit expenses over the previous year attributed to normal salary increases as well as our investment in addition al management and corporate staff. A significant portion of these increases (as well as other increases in cost of revenues) supported our development of additional centers of excellence. Our professional fees were also higher as we incurred more expense in connection with the preparations necessary to operate as a publicly traded company. Depreciation and amortization included in the determination of income from operations for fiscal 2009 and fiscal 2008 was $3.9 million, or 2% of revenues, and $4.6 million, or 3% of revenues, respectively.

 

Interest expense. Interest expense was $4.6 million and $3.5 million for fiscal 2009 and fiscal 2008, respectively. The $1.1 million increase in fiscal 2009 interest expense was primarily due to increased borrowing for our acquisitions and purchases of equipment, as well as working capital requirements. For both years, we incurred additional expense related to the market rate adjustments to our interest rate swaps, as the fixed rate on these swaps was higher than market rates during both annual periods. The total interest expense adjustments for these swap arrangements for fiscal 2009 and fiscal 2008 were approximately $0.2 million and $0.6 million, respectively. On July 1, 2008, we borrowed $20.0 million to replenish our revolving line of credit and finance several acquisitions and on January 7, 2009, we increased our revolver by $5.0 million for a total of $20.0 million.

 

Minority Interest, net of taxes. The increase in fiscal 2009 of $0.2 million in minority interest, net of taxes is related to the increase in net income, primarily from Diapac, our subsidiary in Russia. For fiscal 2008, this amount primarily consisted of the net income of Envirocoustics A.B.E.E., which we first consolidated in fiscal 2006. We acquired this entity on April 25, 2007.

 

Income taxes. Our effective income tax rate was approximately 45% for fiscal 2009 compared to approximately 42% for fiscal 2008. The increase was primarily due to the impact of higher state taxes and US taxes on our foreign profits, net of other adjustments.

 

Net income. Our net income for fiscal 2009 of $5.5 million, or approximately 3% of our revenues, was $2.0 million lower than our net income for fiscal 2008, which was $7.4 million, or approximately 5% of revenues. This decrease in net income was primarily the result of the a decrease in gross profit and increase in other operating costs such our bad debt expense of $1.6 million and higher interest expense, depreciation and income tax expense. The $1.6 million increase in our allowance for doubtful accounts and $2.1 million incurred in connection with the lawsuit settlement, both of which we consider generally non-recurring, caused our net income to be lower by approximately 1% on an after-tax basis. Our net income in fiscal 2008 also benefited from a $1.0 million pre-tax adjustment.

 

Segment results for fiscal 2010, 2009 and 2008

 

Segment discussions that follow provide supplemental information regarding the significant factors contributing to the changes in results for each of our business segments.

 

 

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Services segment

 

Selected financial information for the Services segment was as follows for fiscal 2010, 2009 and 2008:

 

		Years ended May 31,
		2010				2009				2008
		(in thousands)
Services segment
Revenues		$	227,782			$	167,543			$	116,027
Cost of revenues		$	157,007			$	111,809			$	73,914
Depreciation and amortization			8,812				7,254				5,812
Gross profit		$	61,963			$	48,480			$	36,301
Gross profit as a % of segment revenue			27	%			29	%			31	%
Income from operations		$	22,614			$	13,681			$	14,649
Income from operations as % of segment revenue			10	%			8	%			13	%
Total depreciation and amortization		$	12,862			$	10,603			$	9,529

 

Revenues. Over the last three years, the largest increase in our total revenues was from our Services segment. Our Services segment revenues had a CAGR of 36% during this period with annual increases in fiscal 2010, 2009 and 2008 of $60.2 million, $51.5 million and $25.2 million, respectively. As a percentage of prior year segment revenues, these increases were approximately 36%, 44% and 28%, respectively. Our organic growth in this segment has averaged approximately 19% a year over this three-year period. In fiscal 2010, the organic growth in our Services segment was estimated to be approximately 20%. On average, over the past three fiscal years, customers in the oil and ga s industry accounted for approximately 63% of the business of our Services segment and in fiscal 2010 customers in the oil and gas industry accounted for 68% of the segment revenues, primarily due several new multi-year contracts we entered into this year. The three-year CAGR from this target market has been approximately 44%. We also have experienced double digit CAGRs in most of our other target markets due to strong demand, the addition of new customers and revenues from existing customers. We continue to increase our revenues by providing existing customers different types of asset protection solutions.

 

In fiscal 2010, our Services revenues increased $60.2 million, or 36%, compared to fiscal 2009. We estimate $25.8 million of the increase in revenues are from acquisitions compared to $33.6 million in the prior year. The balance of the growth came from several new multi-year contracts, particularly in the form of “evergreen” accounts, as well as from other overall growth in the segment. Also contributing to our revenue growth was an increase in turnaround projects and other large-scale projects that had been postponed in the third and fourth quarters of fiscal 2009. Although less than 5% of our Service segment revenues, our PCMS software and our related Asset Integrity Management (“AIMS”) implementation services increased 72%. We expect continued growth in this market having secured several new AIMS projects. In several of our non-energy related markets, we did experience slowing in our revenue growth because of the continuation of the economic downturn. Across all markets, we experienced pricing pressure, especially on new business and existing contract renewals. While our customers are always price sensitive, the overall pressure from the current economic conditions has lessened from existing customers, but we expect continued price sensitivity on new business, as our competition attempts to gain market share. However, we believe that our market differentiation should help prevent any significant erosion of profitability.

 

In fiscal 2009, our Services revenues increased $51.5 million, or 44%, compared to fiscal 2008. We estimate $33.6 million of these revenues are from acquisitions compared to $7.3 million in the prior year. The balance of the growth came from new projects as well as from other overall growth in the segment. Our revenue growth was lessened as a result of the economic downturn, especially in our third and fourth fiscal quarters. We attribute this to an uncertain economy, a customer bankruptcy during the year, and threatened strikes by employees of several customer refineries that were subsequently resolved. In addition, many of our customers postponed holiday turnaround projects and other large-scale projects and as such, unlike most prior years, we did not have many large scale turnarounds in fiscal 2009. In addition, in September 2008 o ur operations in the Gulf Coast region were disrupted by Hurricane Ike.

 

Our top ten customers accounted for approximately 53%, 44% and 45% of our Services segment revenues during fiscal 2010, 2009 and 2008, respectively. As previously noted, one of our top ten customers in this segment had filed for bankruptcy in January 2009. During their reorganization under bankruptcy protection, we continued to provide services to this customer and have renewed the contract between us. Revenues from this customer represented 4% of revenues in our Services segment for each of fiscal 2010 and 2009, respectively.

 

 

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Gross profit. During this three-year period, gross profit as a percentage of revenues in our Services segment has been approximately 27%, 29% and 31% for fiscal 2010, 2009 and 2008, respectively. Cost of our Services has been approximately 69%, 67% and 64% during respective fiscal period. Depreciation included in the determination of gross profit has been approximately 4%, 4% and 5% during each respective fiscal period. We continued to invest in additional field test equipment and fleet vehicles, which generate depreciation expense, to support our growth and reduce other operating costs, such as repairs and maintenance.

 

Our gross profit for fiscal 2010 was $62.0 million, or 27% as a percentage of revenue, an increase of $13.5 million over fiscal 2009. The decrease in gross profit percentage in fiscal 2010 however, relates to an increase in revenues from our new multi-year contracts that often start with providing traditional NDT services, which generally produce lower margins, until such time as we are engaged in a stronger mix of advanced asset protection solutions, which carry higher margins. This was coupled with an expansion of our new centers of excellence and training which represents our continued investment in our technicians and our ability to provide new NDT solution, but contributes to non-billable time. In addition, the integration of certain recently acquired businesses had lower margins than those normally achieved under our business mod el. In fiscal 2010, our depreciation increased $1.6 million, a 22% increase, and represents both new assets acquired and increased depreciation from our acquired businesses.

 

The pricing pressure noted above in the discussion of revenues, the mix of our revenues and intake of new traditional business, including start-up costs on new multi-year, contracts has led to lower profitability on our time and material billings. During fiscal 2010 certain of our customers managed project activity and turnarounds differently than in the past, stopping or changing planned work schedules more abruptly or frequently than in the past, which has created inefficiencies in the planning and utilization of labor. Compared to fiscal 2009, our complement of certified technicians and related fringe benefit costs, particularly healthcare costs, increased. However, we believe this increase in technical staff gives us the ability to further leverage our existing resources and related costs by through revenue growth.

 

Our gross profit for fiscal 2009 was $48.5 million, or 29% as a percentage of revenue, an increase of $12.2 million over fiscal 2008. The decrease in gross profit in fiscal 2009 over 2008 was caused by higher amounts of non-billable time that resulted from (i) our establishment of our new centers of excellence and training or (ii) represented lost billing opportunities related to the economic downturn. Several of our customers extended holiday shut-downs or delayed scheduled work, requiring us to pay our employees without any corresponding revenues. Additionally, Hurricane Ike negatively impacted our margins in the Gulf Coast as we lost revenues and incurred higher costs related to non-productive labor. In fiscal 2009, our depreciation increased $1.4 million or 25% and represents both new assets acquired and increased depreciation from our acquired businesses.

 

Income from operations. As a percentage of segment revenues, our income from operations was approximately 10%, 8% and 13% in fiscal 2010, 2009 and 2008, respectively.

 

Our segment income from operations was $22.6 million, $13.7 million, and $14.6 million for fiscal 2010, 2009 and 2008, respectively. Selling, general and administrative expenses in our Services segment for fiscal 2010, 2009 and 2008 were 15%, 18% and 16% of segment revenues, respectively.

 

In fiscal 2010, significantly higher segment revenues, coupled with decreases in legal settlement costs and bad debt expense were the primary drivers for the increase in our operating margin. Selling, general and administrative expenses in our Services segment for fiscal 2010 compared to fiscal 2009 increased $5.8 million, or 20%. Major increases in these expenses included approximately $5.4 million related to higher operating costs (primarily payroll expense and a corresponding increase in occupancy costs for rents and utilities) supporting our acquisitions and overall growth. In addition, we continued our investment in new training, safety and quality programs to support new customer offerings and infrastructure. These increases were offset by a net decrease of approximately $1.6 million in our provision for bad debt as in fiscal 200 9 we had a large customer file for bankruptcy. Depreciation and amortization expense used in determining income from operations was $4.0 million, or 2% of segment revenues and $3.3 million, or 2% of segment revenues for fiscal 2010 and fiscal 2009, respectively.

 

In fiscal 2009, our higher cost of revenues, along with the additional $1.6 million allowance for doubtful accounts for a customer bankruptcy and a $2.1 million legal settlement, were the primary causes of the decrease in operating margin. Selling, general and administrative expenses in our Services segment for fiscal 2009 compared to fiscal 2008 increased $11.4 million, or 64%. In addition to a $2.0 million increase in our allowance for doubtful accounts, major increases in these expenses included approximately $6.0 million related to higher operating costs (primarily payroll expense and a corresponding increase in occupancy costs for rents and utilities) supporting our acquisitions. In addition, we hired new management and other personnel, and invested in new training, safety and quality programs to support new customer offerings and infrastructure, and we estimate this additional compensation and other expense accounted for another $1.5 million of the increase. Other expense increases for travel, lab support, supplies and other miscellaneous increases comprised the balance or $1.9 million of the net increase. Depreciation and amortization expense used in determining income from operations was $3.3 million, or 2% of revenues and $3.7 million, or 3% of revenues for fiscal 2009 and fiscal 2008, respectively.

 

 

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Products and Systems segment

 

Selected financial information for the Products and Systems segment was as follows for fiscal 2010, 2009 and 2008:

 

		Years ended May 31,
		2010				2009				2008
		(in thousands)
Products and Systems segment
Revenues		$	18,875			$	17,310			$	16,675
Cost of revenues			8,290				7,994				7,137
Depreciation and amortization			670				840				709
Gross profit		$	9,915			$	8,476			$	8,829
Gross profit as a % of segment revenue			53	%			49	%			53	%
Income from operations		$	2,572			$	1,664			$	2,723
Income from operations as % of segment revenue			14	%			10	%			16	%
Total depreciation and amortization		$	887			$	1,038			$	1,017

 

Revenues. The Products and Systems segment also experienced growth in their revenues in the last three years. Revenues were $18.9 million, $17.3 million and $16.7 million for fiscal 2010, 2009 and 2008, respectively. In fiscal 2010, 2009 and 2008, the segment revenue growth was 9%, 4%, and 12%, respectively, a CAGR of 8% overall. The largest customer for this segment is our International segment, which distributes these products primarily to our European, and Asian and North African markets, or, to a lesser extent, uses the products in their field testing and engineering services. Other larger markets representing approximately 53% of total segment revenues have been other t est and research laboratories, nuclear power and industrial companies, including aerospace companies.

 

In fiscal 2010, our Products and Systems revenues increased $1.6 million compared to fiscal 2009 due to an increase in acoustic emission revenues and several large NDT orders received during the year. We also continued our expansion of our sales distribution channels by hiring additional industry-focused sales representatives to continue to drive sales growth. Offsetting these increases in revenues were decreases in our vibrametrics and customer service product lines.

 

In fiscal 2009, our Products and Systems revenues increased $0.6 million compared to fiscal 2008 due to increases across many of our product lines, including our acoustic emission and vibration systems, as well as on-line monitoring systems. In addition, shipments to our North America, or NAFTA, customers’ international subsidiaries increased $1.6 million compared to the same period last year because of increased demand, primarily for our AE products and systems. Offsetting these increases in revenues was a $1.1 million decrease in revenues from direct sales to third-party international customers as compared to fiscal 2008, when the segment had a large system sale to such a customer. In this segment we had no concentration risk from any single customer since our largest customer represents less than 4.0% of our segment revenues.< /font>

 

Gross profit. Our segment gross profit for fiscal 2010, 2009 and 2008 was $9.9 million, $8.5 million, and $8.8 million, respectively. Our segment gross profit as a percentage of revenues for the same three years was 53%, 49%, and 53%, respectively. Depreciation expense used in determining gross profit for fiscal 2010, 2009 and 2008 was $0.7 million, or 4% of segment revenues, $0.8 million, or 5% of segment revenues, and $0.7 million, or 4% of revenues, respectively. The improvement in gross profit percentage was attributable to sales of higher margin products and several costs cutting initiatives implemented during the year. The gross profit in this segment can fluctuate dep ending on volume and product mix. For example, our ultrasonic NDT solutions require custom product engineering to automatically inspect a wide range of parts varying in size and shape. This may include a small part from a jet engine to a major component of a Boeing 787 jet. The inspection of these large components requires the fabrication of large structures to facilitate testing, for which we generally use subcontractors. The utilization of subcontractors for this work often yields lower gross margins.

 

 

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For the majority of fiscal 2009, our segment gross margin was higher than the fiscal 2008. However, segment revenues in the fourth quarter of the year were 12% below the same quarter in fiscal 2008 due to the economic downturn, which reduced our margins for all of fiscal 2009. This was primarily due to our customers delaying or canceling sales orders, though requests for proposals from our customers remained at reasonable levels throughout the quarter.

 

Income from operations. Our segment income from operations for fiscal 2010, 2009 and 2008 was $2.6 million $1.7 million and $2.7 million, respectively. As a percentage of segment revenues, our operating income was 14%. 10% and 16% in fiscal 2010, 2009 and 2008, respectively. The improvement in gross profit was the principal driver of the operating income improvement. Our selling, general and administrative expenses in fiscal 2010 were 26% of segment revenues compared to 27% of revenues in fiscal 2009. For all periods, the depreciation and amortization expense in determining segment income from operations was approximately 1% in fiscal 2010 and 2009 respectively, and 2% in fi scal 2008.

 

Segment selling, general and administrative expenses, which after gross profit, are the largest determinant of our income from operations in fiscal 2010, 2009 and 2008, were $4.9 million, or 26% of segment revenues, $4.7 million, or 27% of segment revenues, and $4.1 million, or 26% of segment revenues, respectively. The largest increase in these costs can be attributed to increases in our sales force to better capture market opportunities in our target markets. Due to the time required for technical training of new sales personnel, we believe the financial benefit of these new hires have not yet matched our investment. Similarly, our research and engineering expenses have increased as a result of new hires, and were $2.3 million, $1.9 million and $1.7 million in fiscal 2010, 2009 and 2008, respectively. As a percentage of our Products and Systems segment sales, these costs have represented 12%, 11% and 10% for the three years, respectively.

 

International segment

 

Selected financial information for our International segment was as follows for fiscal 2010, 2009 and 2008:

 

		Years ended May 31,
		2010				2009				2008
		(in thousands)
International segment
Revenues		$	30,920			$	29,165			$	23,727
Cost of revenues			18,224				15,957				13,439
Depreciation and amortization			1,028				606				356
Gross profit			11,668				12,602				9,932
Gross profit as a % of segment revenue			38	%			43	%			42	%
Income from operations			3,008				4,091				2,408
Income from operations as % of segment revenue			10	%			14	%			10	%
Total depreciation and amortization		$	1,308			$	900			$	861

 

Revenues. Our International segment revenues for fiscal 2010, 2009 and 2008 were $30.9 million, $29.2 million and $23.7 million, respectively, and are subject to currency fluctuations. For the last three fiscal years, the segment revenues, including currency fluctuations, had a CAGR of 14%, with annual increases of 6%, 23% and 13% during fiscal 2010, 2009 and 2008, respectively. We estimate the organic segment growth during the fiscal 2010, fiscal 2009 and fiscal 2008 to be approximately 7%, 27%, and 6%, respectively. Revenues from customers in the oil and gas and chemicals markets have historically comprised at least 50% of our International segment revenues. Most of this business is centered in major oil refineries in Russia and Brazil. Other revenues are more widely distributed including infrastructure, industrial, manufacturing and other testing companies, research centers and universities.

 

Our International segment contributed $1.8 million to our revenue growth for fiscal 2010 compared to fiscal 2009. For fiscal 2010, we estimate the organic segment growth was approximately 7%. In fiscal 2010 we had no segment growth attributable to acquisitions. We estimate that the slowing of our organic segment growth continued from the second half of fiscal 2009 into the first half of fiscal 2010. However organic segment growth rebounded in the second half of fiscal 2010 to finish the year at 7%, $2.0 million of our overall segment growth was from services we provided to a major oil and gas customer in Brazil $1.5 million was from the United Kingdom, the Netherlands and India, offset by $1.0 million decrease in revenue from a large contract in Russia and a $0.7 million decrease in revenues in France.

 

 

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Our International segment contributed $5.4 million to our revenue growth for fiscal 2009 compared to fiscal 2008. For fiscal 2009, we estimate the organic segment growth was approximately 27% and acquisition segment growth was approximately 9%. Currency fluctuations compared to fiscal year 2008 resulted in 12% less segment revenues. The overall decrease caused by the strengthening of the U.S. dollar was $2.9 million, most of this variance occurring in the last half of the fiscal year. As with our other segments, we estimate that our organic segment growth slowed in the third and fourth fiscal quarters, but was still approximately 7% in our fourth fiscal quarter. $2.2 million of our growth was from a new project for a refinery in Russia and $1.2 million was from the United Kingdom and The Netherlands, where a portion of the growth was a ttributable to an acquisition of a company specializing in tank inspections. All of our other foreign locations in this segment also had positive growth of revenues.

 

Gross profit. Our segment gross profit was $11.7 million, or 38% of segment revenues, $12.6 million, or 43% of segment revenues, and $9.9 million, or 42% of segment revenues in fiscal 2010, 2009 and 2008, respectively. As with our other segments, our gross profit is dependent on our product mix. For fiscal 2010, the decrease in gross profit relates to fewer overall acoustic emission product sales, which have a higher margin profile, an increase in more traditional NDT services, which carry lower margins, and an increase in reimbursable expenses, for which we receive only modest margins.

 

Income from operations. Our income from operations from our International segment for fiscal 2010, 2009 and 2008 was $3.0 million, $4.1 million and $2.4 million, respectively. As a percentage of segment revenues, our income from operations was 10%, 14% and 10% in fiscal 2010, 2009 and 2008, respectively. Our segment selling, general and administrative expenses, the largest factor, aside from gross profit, in determining income from operations for fiscal 2010, 2009 and 2008 were $8.3 million or 27% of segment revenues, $8.0 million, or 28% of segment revenues, and $6.8 million, or 29% of segment revenues, respectively. The overall decrease in our operating income from fiscal 2009 is primarily attributable to lower profitability at our Russian and French operations. The overall increase from fiscal 2008 is attributable to new segment expenses related to an acquisition made in Holland and additional hires and training costs in our South American operation. Foreign currency transaction gains and losses included in income from operations were $0.2 million and $0.2 million in fiscal 2010 and 2009 and were not significant in fiscal 2008.

 

Corporate and eliminations

 

The elimination in revenues and cost of revenues primarily relates to the elimination in consolidation of revenues from sales of our Products and Systems segment to the International segment. The other major item in the corporate and eliminations grouping are the general and administrative costs not allocated to the other segments. These costs primarily include those for non-segment management, accounting and auditing, acquisition transactional costs and stock compensation expense and certain other costs. As a percentage of our total revenues, these costs have generally remained constant over the last three fiscal years, consisting of 3%, 2%, and 2% of total revenues for fiscal 2010, 2009 and 2008, respectively. The increase in operating expenses in 2010, 2009 and 2008 primarily related to higher compensation and additional staff, audi t and accounting fees and other general increases in expense at our corporate offices.

 

Liquidity and capital resources

 

Overview

 

We have primarily funded our operations through the issuance of preferred stock in a series of financings, bank borrowings, capital lease financing transactions and cash provided from operations. We have used these proceeds to fund our operations, develop our technology, expand our sales and marketing efforts to new markets and acquire small companies or assets, primarily to add certified technicians and enhance our capabilities and geographic reach. In October 2009, we raised approximately $74.0 million in net proceeds through our IPO, which we subsequently used to repay our bank borrowings under our credit facility and to increase our cash and cash equivalents. We believe that our existing cash and cash equivalents, our anticipated cash flows from operating activities, and our available borrowings under our credit agreement will be s ufficient to meet our anticipated cash needs over the next 12 months.

 

 

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Cash flows table

 

The following table summarizes our cash flows for fiscal 2010, 2009 and 2008:

 

Fiscal year		2010				2009				2008
(in thousands)
Net cash provided by (used in):
Operating Activities		$	18,987			$	12,661			$	12,851
Investing Activities			(16,534	)			(15,888	)			(19,446	)
Financing Activities			8,083				4,912				6,320
Effect of exchange rate changes on cash			(167	)			428				63
Net change in cash and cash equivalents		$	10,369			$	2,113			$	(212	)

 

Cash flows from operating activities

 

Cash provided by our operating activities primarily consists of net income adjusted for certain non-cash items, such as depreciation and amortization, deferred taxes and bad debt expense along with the effect of changes in working capital and other activities.

 

Cash provided by our operating activities in fiscal 2010 was $19.0 million and consisted of $10.4 million of net income plus $18.3 million of non-cash items, consisting primarily of depreciation and amortization of $15.2 million and stock compensation of $2.7 million, less $9.8 million of net cash used for working capital purposes and other activities. Cash used for working capital and other activities in fiscal 2010 primarily reflected a $15.2 million increase in accounts receivable attributable to our increase in revenues, a $0.8 million increase in inventories, prepaid expenses and other current assets. These were partially offset by a $3.7 million increase in income taxes payable related to our increase in taxable net income, and an increase of $1.8 million in accounts payable which was a result of the overall growth in our operati ons.

 

Cash provided by our operating activities in fiscal 2009 was $12.7 million and consisted of $5.5 million of net income plus $15.4 million of non-cash items, consisting primarily of depreciation and amortization of $12.6 million and provision for doubtful accounts of $2.1 million, less $8.2 million of net cash used for working capital purposes and other activities. Cash used for working capital and other activities in fiscal 2009 primarily reflected a $8.8 million increase in accounts receivable attributable to our increase in revenues, a $1.1 million increase in prepaid expenses and other current assets due to an increase in estimated tax payments and a decrease in accounts payable of $2.2 million due primarily to the timing of payments to vendors. These were partially offset by a $6.0 million increase in accrued expenses and other cur rent liabilities due to a $2.1 million accrual in connection with our fiscal 2009 legal settlement and the overall growth in our operations.

 

Cash flows from investing activities

 

Cash used in investing activities for fiscal 2010 was $16.5 million of which $14.7 million was used to acquire three services businesses. In connection with the acquisitions, we also incurred $5.7 million of seller notes payable and related obligations. Additionally, in fiscal 2010 we acquired $7.5 million in property and equipment, of which $1.9 million were cash purchases and $6.0 million were acquired through capital leases.

 

Cash used in investing activities for fiscal 2009 was $15.9 million of which $10.5 million was used to acquire four services businesses and one international business. In connection with the acquisitions, we also incurred $9.3 million of seller notes payable and related obligations. Additionally, in fiscal 2009 we acquired $12.9 million in property and equipment, of which $5.4 million were cash purchases and $7.5 million were acquired through capital leases.

 

Cash flows from financing activities

 

For fiscal 2010, net cash provided by financing activities was $8.1 million, an increase of $3.2 million from fiscal 2009. In October 2009, we completed our initial public offering where we sold 6,700,000 shares at a price of $12.50 per share in the offering. The net proceeds to the Company were approximately $74.0 million after deducting underwriters’ commissions and other expenses. The Company used approximately $66.6 million of the net proceeds to repay the outstanding principal balance of the term loan ($25.0 million), outstanding balance of the revolver ($41.4 million) and accrued interest thereon ($0.1 million) in October 14, 2010. Also, the Company made capital lease payments of $6.1 million during fiscal 2010.

 

 

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For fiscal 2009, cash provided from financing activities was $4.9 million, which included $20.0 million in borrowings from long-term debt to finance five acquisitions and net borrowings of $2.4 million from our revolving credit facility to fund operations. During fiscal 2009 we made $12.3 million and $4.8 million in principal repayments on our long-term debt and capital leases, respectively. During fiscal 2009, we refinanced our existing term loan and revolver with a new credit facility comprised of a $25.0 million term loan and $55.0 million revolver, a portion of which ($2.0 million U.S. dollar equivalent) will be available to be borrowed in Canadian dollars. The proceeds were used to repay the outstanding indebtedness of our prior credit agreement and to fund two acquisitions that closed after the end of fiscal 2009.

 

Effect of exchange rate on changes in cash

 

For fiscal 2010, 2009 and 2008, exchange rate changes (decreased) increased our cash by $(0.2) million, $0.4 million and $0.1 million, respectively.

 

Cash balance and credit facility borrowings

 

As of May 31, 2010, we had cash and cash equivalents totaling $16.0 million and $55.0 million available to us under our current revolving credit facility. We finance our operations primarily through our net income, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our capital expenditures, debt maturities and other business needs.

 

On July 22, 2009, we entered into our current credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A., which provided for a $25.0 million term loan and a $55.0 million secured revolving credit facility. The proceeds from this transaction were used to repay the outstanding indebtedness from our former credit facility and to fund acquisitions.

 

In October 2009, we repaid the outstanding principal balance of the term loan and the outstanding balance of the revolving credit facility using the proceeds from our initial public offering. Credit extended under the term loan may not be re-borrowed under the current credit agreement. Credit extended under the revolving credit facility may re-borrowed at any time. Borrowings made under the revolving credit facility are payable on July 21, 2012. In December 2009, we signed an amendment to our current credit agreement that, among other things, adjusted certain affirmative and negative covenants including delivery of financial statements, the minimum consolidated debt service coverage ratio, the procedures for obtaining lender approval in acquisitions and the removal of the minimum EBITDA requirement.

 

Under the amended agreement, borrowings under the credit agreement bear interest at the LIBOR or base rate, at our option, plus an applicable LIBOR margin ranging from 1.75% to 3.25%, or base rate margin ranging from -0.50% to 0.50%, and a market disruption increase of between 0.0% and 1.0%, if the lenders determine it applicable.

 

The credit agreement also contains financial and other covenants limiting our ability to, among other things, create liens, make investments and certain capital expenditures, incur more indebtedness, merge or consolidate, acquire other companies, make dispositions of property, pay dividends and make distributions to stockholders, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The agreement’s financial covenants require us to maintain a minimum debt service coverage ratio, and a funded debt leverage ratio, all as defined in the credit agreement. There is a provision in the credit facility that requires us to repay 25% of the immediately preceding fiscal year’s “free cash flow” if our ratio of “funded debt” to EBITDA, as defined in the c redit agreement, is greater than a specified amount on or before October 1 each year.

 

As of May 31, 2010, we were in compliance with the terms of the credit agreement.

 

Liquidity and capital resources outlook

 

Future sources of cash

 

We expect our future sources of cash to include cash flow from operations, cash borrowed under our revolving credit facility and cash borrowed from leasing companies to purchase equipment and fleet service vehicles. Our revolving credit facility is available for cash advances required for working capital and for letters of credit to support our operations. To meet our short-and long-term liquidity requirements, we expect primarily to rely on cash generated from our operating activities. We are currently funding our acquisitions through our available cash, borrowings under our revolving credit facility and seller notes. We may also obtain capital through the issuance of debt or equity securities, or a combination of both.

 

 

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Future uses of cash

 

We expect our future uses of cash will primarily be for acquisitions, international expansion, purchases or manufacture of field testing equipment to support growth, additional investments in technology and software products and the replacement of existing assets and equipment used in our operations. In June 2010, we purchased land costing approximately $0.9 million in Houston, Texas and expect to construct a new building that houses our regional headquarters in fiscal 2011. The current estimated construction costs are approximately $3.3 million, which we will likely finance. We often make purchases to support new sources of revenues, particularly in our Services segment, but generally only do so with a high degree of certainty about related customer orders and pricing. In addition, we have a certain amount of replacement equipment, in cluding our fleet vehicles. We historically spend approximately 4% to 5% of our total revenues on capital expenditures, excluding acquisitions, and expect to fund these expenditures through a combination of cash and lease financing. Our cash capital expenditures, excluding acquisitions, for fiscal 2010, 2009 and 2008 were approximately 1%, 3% and 2% of revenues, respectively.

 

Our anticipated acquisitions may also require capital. For example, subsequent to May 31, 2010, we made two acquisitions with an initial cash outlay of approximately $5.3 million. In some cases, additional equipment will be needed to upgrade the capabilities of these acquired companies. In addition, our future acquisition and capital spending may increase as we aggressively pursue growth opportunities. Other investments in infrastructure, training and software may also be required to match our growth, but we plan to continue using a disciplined approach to building our business. In addition, we will use cash to fund our operating leases, capital leases and long-term debt repayment and various other obligations, including the commitments discussed in the table below, as they arise.

 

We will also use cash to support our working capital requirements for our operations, particularly in the event of further growth and due to the impacts of seasonality on our business. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents and future cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, tech nologies or products that will complement our existing operations. In the event additional funding is required, we may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all.

 

Contractual obligations

 

We generally do not enter into long-term minimum purchase commitments. Our principal commitments, in addition to those related to our long-term debt discussed below, consist of obligations under facility leases for office space and equipment leases.

 

The following table summarizes our outstanding contractual obligations as of May 31, 2010:

 

		Total				Fiscal 2011				Fiscal 2012				Fiscal 2013				Fiscal 2014				Fiscal 2015				Beyond fiscal 2016
(in thousands)
Long-term debt		$	11,994			$	6,303			$	3,264			$	1,762			$	322			$	50			$	293
Capital lease obligations (1)			16,349				6,193				4,519				2,815				2,128				694				—
Operating lease obligations			8,272				2,837				2,085				1,673				1,066				605				6
Contingent consideration obligations			1,850				587				839				339				85				—				—
Total		$	38,465			$	15,920			$	10,707			$	6,589			$	3,601			$	1,349			$	299

 

(1)   Includes estimated cash interest to be paid over the remaining terms of the leases.

 

Long-term debt listed in the table above consists primarily of seller notes payable in connection with our acquisitions.

 

In addition to the above, we have certain acquisition related contingent payments that may become payable if certain financial measures, as defined in each respective agreement, are achieved.

 

 

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Off-balance sheet arrangements

 

During fiscal 2010, 2009 and 2008, 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

 

The preparation of financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Our more significant estimates include: the valuation of goodwill and intangible assets; the impairment of long-lived assets, allowances for doubtful accounts; foreign currency translation; derivative financial instruments; reserves for self-insured workers compensation and health benefits; and deferred income tax valuation allowances. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this Annual Report.

 

We believe that of our significant accounting policies, which are described below and in Note 2 to our audited consolidated financial statements included in this Item 8 of this Annual Report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

 

Accounts receivable

 

Accounts receivable are stated net of an allowance for doubtful accounts and sales allowances. Outstanding accounts receivable balances are reviewed periodically, and allowances are provided at such time as management believes it is probable that such balances will not be collected within a reasonable period of time. We extend credit to our customers based upon credit evaluations in the normal course of business, primarily with 30-day terms. Bad debts are provided on the allowance method based on historical experience and management’s evaluation of outstanding accounts receivable. Accounts are written off when they are deemed uncollectible. The allowance for doubtful accounts was $1.6 million and $3.3 million as of May 31, 2010 and 2009, respectively.

 

Foreign currency translation

 

The financial position and results of operations of our foreign subsidiaries are measured using the their functional currency, which in all cases presently, is the local currency. There are a total of eight foreign subsidiaries operating in a currency other than the U.S. dollar. Assets and liabilities of the foreign subsidiaries are translated into the U.S. dollar at the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the year. Translation gains and losses are reported as a component of other comprehensive income for the period and included in accumulated other comprehensive income within stockholders’ equity.

 

We are at risk for changes in foreign currencies relative to the U.S. dollar. See “Quantitative and qualitative disclosures about market risk—Foreign currency risk.” We currently do not believe there are other outcomes that are reasonably likely to occur with regard to our translation process that would have a material impact on our fiscal 2010 and 2009 financial statements.

 

Long-lived assets, net outside of the U.S. totaled $11.2 million and $11.1 million as of May 31, 2010 and 2009, respectively.

 

Goodwill and intangible assets

 

Goodwill represents the excess of the purchase price over the fair market value of net assets of the acquired business at the date of acquisition. We test goodwill for impairment annually in our fiscal fourth quarter using a two-step process. The first step identifies potential impairment by comparing the fair value of our reporting units to their carrying value. If the fair value is less than the carrying value, the second step measures the amount of impairment, if any. The impairment loss is the amount by which the carrying amount of goodwill exceeds the implied fair value of that goodwill. For purposes of our goodwill impairment testing, we have identified our reporting units as our operating segments. Presently, only the Services segment and International segment, specifically Physical Acoustics Ltd., or PAL, a division within the International segment, have goodwill. The fair value of the reporting unit is determined using a market approach valuation model, specifically the quoted price method, and an income approach valuation model, specifically discounted cash flows. Our discounted cash flow analysis incorporates the following key assumptions: growth projections, our weighted average costs of capital, future capital expenditures and tax rates. There have been no significant changes in the assumptions and methodologies used for valuing goodwill since the prior year. There was $44.3 million and $38.6 million of goodwill at May 31, 2010 and 2009, respectively. The fair value of our reporting units significantly exceeds the carrying value of these reporting units for fiscal 2010 and 2009. Accordingly, there have been no impairments of goodwill. There were no impairment indicators present in the reporting units in fiscal 2010. A material negative change in our key assumptions would need to occur for our step one tests to indicate an imp airment. Intangible assets are recorded at cost, with finite lives and are amortized on a straight-line basis over their estimated useful lives. We review intangible assets subject to amortization periodically to determine if any adverse condition exists or change in circumstances has occurred that would indicate impairment or change in useful life. If impairment exists, and it is determined that there is no recoverability, an impairment charge is recorded.

 

 

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Impairment of long-lived assets

 

We perform a review of long-lived assets for impairment when events or changes in circumstances indicate the carrying value of such assets may not be recoverable. If an indication of impairment is present, the Company compares the estimated undiscounted future cash flows to be generated by the asset to its carrying amount. If the undiscounted future cash flows are less than the carrying amount of the asset, the Company records an impairment loss equal to the excess of the asset’s carrying amount over its fair value. The fair value is determined based on valuation techniques such as a discounted cash flow analysis or a comparison to fair values of similar assets. We had $40.0 million and $36.5 million in net property, plant and equipment as of May 31, 2010 and 2009, respectively, and did not record any impairment charges in the tw o fiscal years ended on those dates.

 

Derivative financial instruments

 

We recognize our derivatives as either assets or liabilities, and measure those instruments at fair value and recognize the changes in fair value of the derivative in net income or other comprehensive income, as appropriate. We hedge a portion of our variable rate interest payments on debt using interest rate swap contracts to convert variable payments into fixed payments. We do not apply hedge accounting to our interest rate swap contracts. Changes in the fair value of these instruments are reported as a component of interest expense. Derivative liabilities were $0.2 million and $0.7 million at May 31, 2010 and 2009, respectively.

 

Stock-based compensation

 

We measure the cost of employee services received in exchange for an award of equity instruments based upon the grant-date fair value of the award. We use the “straight-line” attribution method for allocating compensation costs and recognized the fair value of each stock option on a straight-line basis over the vesting period of the related awards.

 

We use the Black-Scholes option-pricing model to estimate the fair value of the stock-based awards as of the grant date. The Black-Scholes model, by its design, is highly complex and dependent upon key data inputs estimated by management. The primary inputs with the greatest degree of judgment are the expected term of stock-based awards and the estimated volatility of our common stock price. The Black-Scholes model is sensitive to changes in these two variables. We consider many factors in determining the expected term assumption, but the expected term of our stock options is generally determined using the mid-point between the vesting period and the end of the contractual term. Expected stock price volatility is typically based on the daily historical trading data for a period equal to the expected term. Because our historical tr ading data only dates back to October 8, 2009, the first trading date after our IPO, we have estimated expected volatility using an analysis of the stock price volatility of comparable companies in its industry. Prior to our IPO, the exercise price for each stock option equaled the grant date estimated fair market value of our common stock, as determined by our board of directors. Since our IPO, the exercise price of stock option grants is determined using the closing market price of our common stock on the date of grant.

 

Revenue recognition

 

Revenue recognition policies for the various sources of revenues are as follows:

 

Services

 

We predominantly derive revenues by providing our services on a time and material basis and recognize revenues when services are rendered. At the end of any reporting period, there may be earned but unbilled revenues that are accrued. Payments received in advance of revenue recognition are reflected as deferred revenues.

 

 

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Software

 

Revenues from the sale of perpetual licenses are recognized upon the delivery and acceptance of the software. Revenues from term licenses are recognized ratably over the period of the license. Revenues from maintenance, unspecified upgrades and technical support are recognized ratably over the period such items are delivered. For multiple-element arrangement software contracts that include non-software elements, and where the software is essential to the functionality of the non-software elements (collectively referred to as software multiple-element arrangements), we apply the rules as noted below.

 

Products

 

Revenues from product sales are recognized when risk of loss and title passes to the customer, which is generally upon product delivery. The exceptions to this accounting treatment would be for multiple-element arrangements (defined below) or those situations where specialized installation or customer acceptance is required. Payments received in advance of revenue recognition are reflected as deferred revenues.

 

Percentage of completion

 

A portion of our revenues are generated from engineering and manufacturing of custom products under long-term contracts that may last from several months to several years, depending on the contract. Revenues from long-term contracts are recognized on the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting revenues are recognized as work is performed. The percentage of completion at any point in time is based on total costs or total labor dollars incurred to date in relation to the total estimated costs or total labor dollars estimated at completion. The percentage of completion is then applied to the total contract price to determine the amount of revenue to be recognized in the period. Application of the percentage-of-completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. Contract costs include all direct materials, direct labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and all costs associated with operation of equipment. The costs estimation process is based upon the professional knowledge and experience of our engineers, project managers and financial professionals. Factors that are considered in estimating the work to be completed include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in our project performance and the recoverability of any claims. Whenever revisions of estimated contract costs and 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.

 

Multiple-element arrangements

 

We occasionally enter into transactions that represent multiple-element arrangements, which may include any combination of services, software and hardware. Vendor-specific objective evidence is utilized to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if: (1) the delivered item has value on a standalone basis; and (2) there is objective and reliable evidence of the fair value of the undelivered items if the delivery or performance of the undelivered items is probable and within our control.

 

If these criteria are not met, then revenues are deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value.

 

Income taxes

 

Income taxes are accounted for under the asset and liability method. This process requires that we assess temporary differences between the book and tax basis of assets resulting from differing treatment between book and tax of certain items, such as depreciation. Deferred income tax assets and liabilities are recognized based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income i n the period that includes the enactment date. A valuation allowance is provided if it is more likely than not that some or all of the deferred income tax assets will not be realized. We consider all available evidence, both positive and negative, to determine whether, based on the weight of the evidence, a valuation allowance is needed. Evidence used includes information about our current financial position and our results of operations for the current and preceding years, as well as all currently available information about future years, including our anticipated future performance, the reversal of deferred tax liabilities and tax planning strategies. As of May 31, 2010 and 2009, we had net deferred income tax expense of $0.9 million and $0.1 million, respectively. We believe that it is more likely than not that we will have sufficient future taxable income to allow us to realize the benefits of the net deferred tax assets. We currently do not believe there are other outcomes that are reasonably likel y to occur with regard to income taxes that would have a material impact on our fiscal 2010 and 2009 financial statements.

 

 

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Recent accounting pronouncements

 

In January 2010, the FASB issued amendments to its fair value guidance which requires additional disclosures that include: 1) separate disclosures on significant transfers into and out of Level 3; 2) the amount of transfers between Level 1 and Level 2 and the reasons for such transfers; 3) lower level of disaggregation for fair value disclosures by class rather than by major category and 4) additional details on the valuation techniques and inputs used to determine Level 2 and Level 3 measurements. The Company has included these additional disclosures within the Company’s Annual Report on Form 10-K for the year ended May 31, 2010 and they did not have a significant impact on the financial statements of the Company.

 

In October 2009, the FASB issued guidance on revenue recognition related to multiple-element arrangements. This new guidance requires companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third party evidence of value is not available. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted retrospectively from the beginning of an entity’s fiscal year. The Company does not expect this will have a significant impact on the financial statements of the Company.

 

ITEM 7A.

Quantitative and qualitative disclosures about market risk

 

Interest rate sensitivity

 

We had cash and cash equivalents of $16.0 million at May 31, 2010. These amounts are held for working capital purposes and were invested primarily in bank deposits, money market funds and short-term, interest-bearing, investment-grade securities. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had fallen by 10% in fiscal 2010, our interest income would not have been materially affected.

 

We use interest rate swaps to manage our floating interest rate exposure. In fiscal 2007, we entered into two interest rate swap contracts whereby we would receive or pay an amount equal to the difference between a fixed rate and the quoted 90-day LIBOR rate on a quarterly basis. In November 2009, one of these contracts matured. At May 31, 2010, there remains one interest rate swap contract outstanding the significant terms of which and the amount we will pay above our contractual rates follows:

 

Contract date		Term		Notional Amount			Variable interest rate		Fixed interest rate			2010				2009
November 20, 2006		4 years		$	8,000		LIBOR		5.17	%		$	(210	)		$	(199	)
November 30, 2006		3 years			8,000		LIBOR		5.05	%			—				(517	)
				$	16,000							$	(210	)		$	(716	)

 

Foreign currency risk

 

We have foreign currency exposure related to our operations in foreign locations. This foreign currency exposure, particularly the Euro, British Pound Sterling, Brazilian Real, Russian Ruble, Japanese Yen, Canadian Dollar and the Indian Rupee, arises primarily from the translation of our foreign subsidiaries’ financial statements into U.S. dollars. For example, a portion of our annual sales and operating costs are denominated in British pound sterling and we have exposure related to sales and operating costs increasing or decreasing based on changes in currency exchange rates. If the U.S. dollar increases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will decrease. Conversely, if the U.S. dollar decreases in value against these fo reign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will increase. Thus, increases and decreases in the value of the U.S. dollar relative to these foreign currencies have a direct impact on the value in U.S. dollars of our foreign currency denominated assets and liabilities, even if the value of these items has not changed in their original currency. We do not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies. A 10% change in the average U.S. dollar exchange rates for fiscal 2010 would cause a change in consolidated operating income of approximately $0.2 million. We may consider entering into hedging or forward exchange contracts in the future.

 

 

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Fair value of financial instruments

 

We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with a remaining maturity of three months or less. We do not use derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future.

 

Effects of inflation and changing prices

 

Our results of operations and financial condition have not been significantly affected by inflation and changing prices.

 

 

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

On August 10, 2010, we issued a press release containing our financial results for the quarter and year ended May 31, 2010, which we furnished as an exhibit to a Current Report on Form 8-K prior to hosting a conference call on August 11, 2010. Subsequent to August 11, 2010, we made fourth quarter adjustments to our cost of revenues, depreciation and amortization, research and engineering, and selling general and administrative expenses, all of which impacted our tax provision. A portion of these adjustments related to prior fiscal periods; however, the adjustments were not material to any prior period. As a result, our fourth quarter net income is $5.3 million or $0.20 per diluted share, compared with net income of $4.9 million or $0.18 per diluted share, as reported on August 10, 2010.   For the year ended May 31, 2010, our net income is $10.4 million or $0.43 per diluted share, compared with net income of $10.1 million or $0.41 per diluted share, as reported on August 10, 2010.

 

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Mistras Group, Inc.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of Mistras Group, Inc. and subsidiaries at May 31, 2010 and May 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2010 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, NY
August 16, 2010

 

 

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Mistras Group, Inc. and Subsidiaries

Consolidated balance sheets

May 31, 2010 and 2009

(in thousands, except share and per share data)

 

		May 31, 2010				May 31, 2009
ASSETS
Current Assets
Cash and cash equivalents		$	16,037			$	5,668
Accounts receivable, net			54,721				39,509
Inventories, net			8,736				8,554
Deferred income taxes			2,189				1,593
Prepaid expenses and other current assets			5,292				7,550
Total current assets			86,975				62,874
Property, plant and equipment, net			39,981				36,547
Intangible assets, net			16,088				11,949
Goodwill			44,315				38,642
Other assets			1,273				3,421
Total assets		$	188,632			$	153,433
LIABILITIES, PREFERRED STOCK AND EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt		$	6,303			$	14,390
Current portion of capital lease obligations			5,370				4,981
Accounts payable			4,640				2,797
Accrued expenses and other current liabilities			20,090				20,499
Income taxes payable			3,281				3,600
Total current liabilities			39,475				46,267
Long-term debt, net of current portion			5,691				51,861
Obligations under capital leases, net of current portion			9,199				9,544
Deferred income taxes			2,087				1,199
Other long-term liabilities			1,417				1,246
Total libilities			58,078				110,117
Commitments and contingencies (Notes 13 and 14)
Preferred stock, 1,000,000 shares authorized
Class B Convertible Redeemable Preferred Stock, $0.01 par value, 221,205 shares issued and outstanding as of May 31, 2009			—				38,710
Class A Convertible Redeemable Preferred Stock, $0.01 par value, 298,701 shares issued and outstanding as of May 31, 2009			—				52,273
Total preferred stock			—				90,983
Equity (deficit)
Common stock, $0.01 par value, 200,000,000 shares authorized, 26,663,528 shares issued and outstanding as of May 31, 2010 and 35,000,000 shares authorized, 13,000,000 shares issued and outstanding as of May 31, 2009			267				130
Additional paid-in capital			162,054				917
Accumulated deficit			(30,448	)			(47,376	)
Accumulated other comprehensive loss			(1,587	)			(1,583	)
Total Mistras Group, Inc. stockholders’ equity (deficit)			130,286				(47,912	)
Noncontrolling interest			268				245
Total equity (deficit)			130,554				(47,667	)
Total liabilities, preferred stock and equity (deficit)		$	188,632			$	153,433

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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Mistras Group, Inc. and Subsidiaries

Consolidated statements of operations

Years ended May 31, 2010, 2009 and 2008

(in thousands, except share and per share data)

 

		For the year ended May 31,
		2010				2009				2008
Revenues:
Services		$	248,672			$	190,637			$	134,183
Products			23,456				18,496				18,085
Total revenues			272,128				209,133				152,268
Cost of Revenues:
Cost of services			169,591				123,336				83,623
Cost of goods sold			8,889				7,831				6,967
Depreciation of services			9,840				7,860				6,167
Depreciation of products			670				840				680
Total cost of revenues			188,990				139,867				97,437
Gross profit			83,138				69,266				54,831
Selling, general and administrative expenses			54,849				46,456				32,243
Research and engineering			2,402				1,949				1,654
Depreciation and amortization			4,673				3,936				4,576
Legal settlement			(297	)			2,100				—
Acquisition related costs			614				—				—
Income from operations			20,897				14,825				16,358
Other expenses
Interest expense			3,531				4,614				3,531
Loss on extinguishment of long-term debt			387				—				—
Income before provision for income taxes and noncontrolling interest			16,979				10,211				12,827
Provision for income taxes			6,527				4,558				5,380
Net income			10,452				5,653				7,447
Net income attributable to noncontrolling interests			(23	)			(187	)			(8	)
Net income attributable to Mistras Group, Inc.			10,429				5,466				7,439
Accretion of preferred stock			6,499				(27,114	)			(32,872	)
Net income (loss) attributable to common stockholders		$	16,928			$	(21,648	)		$	(25,433	)
Earnings (loss) per common share:
Basic		$	0.78			$	(1.67	)		$	(1.96	)
Diluted		$	0.43			$	(1.67	)		$	(1.96	)
Weighted average common shares outstanding:
Basic			21,744				13,000				13,000
Diluted			24,430				13,000				13,000

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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Mistras Group, Inc. and Subsidiaries

Consolidated statements of stockholders’ equity (deficit)

Years ended May 31, 2010, 2009 and 2008

(in thousands)

										Additional paid-in capital				Retained earnings (accumulated deficit)				Accumulated other comprehensive income (loss)
		Common Stock																				Noncontrolling								Comprehensive
		Shares				Amount																Interest				Total				income (loss)
Balance at May 31, 2007			13,000			$	130			$	407			$	269			$	97			$	50			$	953			$	—
Accretion of preferred stock			—				—				—				(32,872	)			—				—				(32,872	)			—
Net income			—				—				—				7,439				—				8				7,447				7,447
Foreign currency translation adjustment			—				—				—				—				301				—				301				301
Stock compensation expense			—				—				318				—				—				—				318				—
Adoption of accounting pronouncement			—				—				—				(564	)			—				—				(564	)			—
Exercise of stock options			—				—				—				—				—				—				—				—
Balance at May 31, 2008			13,000				130				725				(25,728	)			398				58				(24,417	)		$	7,748
Accretion of preferred stock			—				—				—				(27,114	)			—				—				(27,114	)			—
Net income			—				—				—				5,466				—				187				5,653				5,653
Foreign currency translation adjustment			—				—				—				—				(1,981	)			—				(1,981	)			(1,981	)
Stock compensation			—				—				192				—				—				—				192				—
Balance at May 31, 2009			13,000				130				917				(47,376	)			(1,583	)			245				(47,667	)		$	3,672
Accretion of preferred stock			—				—				—				6,499				—				—				6,499				—
Issuance of common stock upon conversion of class A & B preferred stock			6,759				68				84,416				—				—				—				84,484				—
Issuance of common stock from initial public offering, net			6,700				67				73,950				—				—				—				74,017				—
Net income			—				—				—				10,429				—				23				10,452				10,452
Foreign currency translation adjustment			—				—				—				—				(4	)			—				(4	)			(4	)
Stock compensation			—				—				2,695				—				—				—				2,695				—
Exercise of stock options			204				2				76				—				—				—				78				—
Balance at May 31, 2010			26,663			$	267			$	162,054			$	(30,448	)		$	(1,587	)		$	268			$	130,554			$	10,448

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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Mistras Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Fiscal Years Ended May 31, 2010, 2009 and 2008

(in thousands)

 

		For the year ended May 31,
		2010				2009				2008
Cash flows from operating activities
Net income attributable to Mistras Group, Inc.		$	10,429			$	5,466			$	7,439
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			15,183				12,636				11,423
Deferred income taxes			907				146				329
Provision for doubtful accounts			532				2,097				376
Loss on extinguishment of long-term debt			387				—				—
Loss (gain) on sale of assets disposed			196				(34	)			(114	)
Amortization of deferred financing costs			206				196				105
Stock compensation expense			2,695				192				318
Noncash interest rate swap			(506	)			161				598
Noncontrolling interest			23				187				8
Unrealized foreign currency gain			(1,284	)			(213	)			—
Changes in operating assets and liabilities, net of effect of acquisitions
Accounts receivable			(15,213	)			(8,849	)			(9,226	)
Inventories			(116	)			(887	)			(1,802	)
Prepaid expenses and other current assets			(682	)			(1,119	)			(1,997	)
Other assets			1,259				(403	)			(990	)
Accounts payable			1,806				(2,225	)			2,203
Income taxes payable			3,748				(1,442	)			46
Accrued expenses and other current liabilities			(583	)			6,752				4,135
Net cash provided by operating activities			18,987				12,661				12,851
Cash flows from investing activities
Purchase of property, plant and equipment			(1,947	)			(5,367	)			(3,718	)
Purchase of intangible asset			(36	)			(346	)			(712	)
Acquisition of businesses, net of cash acquired			(14,699	)			(10,464	)			(15,535	)
Proceeds from sale of equipment			148				289				519
Net cash used in investing activities			(16,534	)			(15,888	)			(19,446	)
Cash flows from financing activities
Repayment of capital lease obligations			(6,071	)			(4,825	)			(3,605	)
Repayments of long-term debt			(68,942	)			(12,332	)			(3,219	)
Net payments against revolver			(15,505	)			2,360				13,144
Proceeds from borrowings of long-term debt			25,000				20,000				—
Debt issuance costs			(484	)			(291	)			—
Net proceeds from issuance of common stock			74,007				—				—
Proceeds from the exercise of stock options			78				—				—
Net cash provided by financing activities			8,083				4,912				6,320
Effect of exchange rate changes on cash and cash equivalents			(167	)			428				63
Net change in cash and cash equivalents			10,369				2,113				(212	)
Cash and cash equivalents
Beginning of period			5,668				3,555				3,767
End of period		$	16,037			$	5,668			$	3,555
Supplemental disclosure of cash paid
Interest		$	3,943			$	4,031			$	2,974
Income taxes		$	2,306			$	6,510			$	4,814
Noncash investing and financing
Equipment acquired through capital lease obligations		$	5,986			$	7,485			$	5,021
Issuance of notes payable and other debt obligations primarily related to acquisitions		$	5,739			$	9,289			$	13,531

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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Mistras Group, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

(tabular dollars 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 global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. The Company combines industry-leading products and technologies, expertise in mechanical integrity (MI) and non-destructive testing (NDT) 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 dis asters. Given the role the Company services play in ensuring the safe and efficient operation of infrastructure, the Company has historically provided a majority of its services to its customers on a regular, recurring basis. The Company serves a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, fossil and nuclear power, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industry.

 

Principles of consolidation

 

The accompanying consolidated financial statements include the accounts of Mistras Group, Inc. and its wholly or majority-owned subsidiaries: Quality Service Laboratories, Inc., CONAM Inspection & Engineering Services, Inc. (“Conam”) (merged into Mistras Group, Inc. on May 31, 2009), Cismis Springfield Corp., Mistras Group, S.A. (formerly Euro Physical Acoustics, S.A.), Nippon Physical Acoustics Ltd., Physical Acoustics South America, Diapac Company, Mistras Canada, Inc. and Physical Acoustics Ltd. and its wholly or majority-owned subsidiaries, Physical Acoustics India Private Ltd., Physical Acoustics B.V. and Envirocoustics A.B.E.E. (“Envac”). Where the Company’s ownership interest is less than 100%, the noncontrolling interests are reported in the accompanying consolidated balance sheets. The noncont rolling interest in net income, net of tax, is classified separately in the accompanying consolidated statements of operations.

 

All significant intercompany accounts and transactions have been eliminated in consolidation. All foreign subsidiaries’ reporting year ends are April 30, while Mistras Group and the domestic subsidiaries year ends are May 31. The effect of this difference in timing of reporting foreign operations on the consolidated results of operations and consolidated financial position is not significant.

 

Reclassification

 

Certain amounts previously reported for prior periods have been reclassified to conform to the current year presentation in the accompanying consolidated financial statements. Such reclassifications did not have a material effect on the Company’s financial condition or results of operations as previously reported.

 

2. Summary of significant accounting policies

 

Revenue recognition

 

Revenue recognition policies for the various sources of revenues are as follows:

 

Services

 

The Company predominantly derives revenues by providing its services on a time and material basis and recognizes revenues when services are rendered. At the end of any reporting period, there may be earned but unbilled revenues that are accrued. Payments received in advance of revenue recognition are reflected as deferred revenues.

 

 

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Mistras Group, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Software

 

Revenues from the sale of perpetual licenses are recognized upon the delivery and acceptance of the software. Revenues from term licenses are recognized ratably over the period of the license. Revenues from maintenance, unspecified upgrades and technical support are recognized ratably over the period such items are delivered. For multiple-element arrangement software contracts that include non-software elements, and where the software is essential to the functionality of the non-software elements (collectively referred to as software multiple-element arrangements), the Company applies the rules as noted below.

 

Products

 

Revenues from product sales are recognized when risk of loss and title passes to the customer, which is generally upon product delivery. The exceptions to this accounting treatment would be for multiple-element arrangements (described below) or those situations where specialized installation or customer acceptance is required. Payments received in advance of revenue recognition are reflected as deferred revenues.

 

Percentage of completion

 

A portion of the Company’s revenues are generated from engineering and manufacturing of custom products under long-term contracts that may last from several months to several years, depending on the contract. Revenues from long-term contracts are recognized on the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting revenues are recognized as work is performed. The percentage of completion at any point in time is based on total costs or total labor dollars incurred to date in relation to the total estimated costs or total labor dollars estimated at completion. The percentage of completion is then applied to the total contract price to determine the amount of revenue to be recognized in the period. Application of the percentage-of-completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. Contract costs include all direct materials, direct labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and all costs associated with operation of equipment. The costs estimation process is based upon the professional knowledge and experience of the Company’s engineers, project managers and financial professionals. Factors that are considered in estimating the work to be completed include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in our project performance and the recoverability of any claims. Whenever revisions of estimated contract costs and 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.

 

Multiple-element arrangements

 

The Company occasionally enters into transactions that represent multiple-element arrangements, which may include any combination of services, software, hardware and financing. Vendor-specific objective evidence is utilized to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if: (1) the delivered item has value on a standalone basis; and (2) there is objective and reliable evidence of the fair value of the undelivered items if the delivery or performance of the undelivered items is probable and in the control of the Company.

 

If these criteria are not met, then revenues are deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements. The more significant estimates include valuation of goodwill and intangible assets, useful lives of long-lived assets, allowances for doubtful accounts, inventory valuation, reserves for self-insured workers compensation and health benefits and provision for income taxes. Actual results could differ from those estimates.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Cash and cash equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Accounts receivable

 

Accounts receivable are stated net of an allowance for doubtful accounts and sales allowances. Outstanding accounts receivable balances are reviewed periodically, and allowances are provided at such time that management believes it is probable that such balances will not be collected within a reasonable period of time. The Company extends credit to its customers based upon credit evaluations in the normal course of business, primarily with 30-day terms. Bad debts are provided for based on historical experience and management’s evaluation of outstanding accounts receivable. Accounts are written off when they are deemed uncollectible.

 

Inventories

 

Inventories are stated at the lower of cost, as determined by using the first-in, first-out method, or market. Work in process and finished goods inventory include material, direct labor, variable costs and overhead.

 

Software costs

 

Costs that are related to the conceptual formulation and design of licensed programs are expensed as research and engineering. For programs the Company licenses to customers, the Company capitalizes costs that are incurred to produce the finished product after technological feasibility has been established. The capitalized amounts are amortized using the straight-line basis over three years, which is the estimated life of the related software. The Company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenues. Costs to support or service these licensed programs are expensed as the costs are incurred.

 

The Company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software, which includes software coding, installation, testing and data conversion. Capitalized costs are amortized on a straight-line basis over three years.

 

Property, plant and equipment

 

Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed utilizing the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed utilizing the straight-line method over the shorter of the remaining lease term or estimated useful life. The cost and accumulated depreciation and amortization applicable to assets retired or otherwise disposed of are removed from the asset accounts and any gain or loss is included in the consolidated statement of operations. Repairs and maintenance costs are expensed as incurred.

 

Goodwill and intangible assets

 

Goodwill represents the excess of the purchase price over the fair value of net assets of the acquired business at the date of acquisition. The Company tests goodwill for impairment annually, in its fiscal fourth quarter, using a two-step process. The first step identifies potential impairment by comparing the fair value of the Company’s reporting units to its carrying value. If the fair value is less than the carrying value, the second step measures the amount of impairment, if any. The impairment loss is the amount by which the carrying amount of goodwill exceeds the implied fair value of that goodwill. There was no impairment of goodwill for the years ended May 31, 2010, 2009 and 2008.

 

Intangible assets are recorded at cost. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Impairment of long-lived assets

 

The Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total expected future undiscounted cash flows are less than the carrying amount of the assets, a loss is recognized for the difference between fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.

 

Shipping and handling costs

 

Shipping and handling costs are included in cost of revenues.

 

Taxes collected from customers

 

Taxes collected from customers and remitted to governmental authorities are presented in the consolidated statements of operations on a net basis.

 

Research and engineering

 

Research and product development costs are expensed as incurred.

 

Advertising, promotions and marketing

 

The costs for advertising, promotion and marketing programs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expense was approximately $0.8 million, $0.5 million and $0.3 million for fiscal 2010, 2009 and 2008, respectively.

 

Fair value of financial instruments

 

The Company includes disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that fair value. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate fair value based on the short-term nature of the accounts. The fair value of the Company’s debt and capital lease obligations at May 31, 2010 was approximately $1.2 million lower than carrying value. The Company estimated fair value using a discounted cash flow analysis using pricing for similar debt arrangements in an active market.

 

Foreign currency translation

 

The financial position and results of operations of the Company’s foreign subsidiaries are measured using their functional currency, which in all cases presently, is the local currency. Assets and liabilities of the foreign subsidiaries are translated into the U.S. dollar at the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the year. Translation gains and losses are reported as a component of other comprehensive income for the period and included in accumulated other comprehensive income within stockholders’ equity. Foreign currency transaction gains and losses are included in net income and were approximately $0.2 million and $0.2 million in fiscal 2010 and 2009, respectively and not significant in fiscal 2008.

 

Derivative financial instruments

 

The Company recognizes its derivatives as either assets or liabilities, measures those instruments at fair value and recognizes the changes in fair value of the derivative in net income or other comprehensive income, as appropriate. The Company has hedged a portion of the variable rate interest payments on debt using interest rate swap contracts to convert variable payments into fixed payments. The Company does not apply hedge accounting to its interest rate swap contracts. Changes in the fair value of these instruments are reported as a component of interest expense.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Concentration of credit risks

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times, bank deposits may exceed the limits insured by the Federal Deposit Insurance Corporation. The Company believes it is not exposed to any significant credit risk related to the nonperformance of financial institutions.

 

The Company sells primarily to large companies, extends reasonably short collection terms, performs credit evaluations and does not require collateral. The Company maintains reserves for potential credit losses.

 

The Company has one major customer with multiple business units that accounted for 18%, 17%, and 17% of revenues for fiscal 2010, 2009 and 2008, respectively. Accounts receivable from this customer was approximately 10% and 18% of total accounts receivable, net at May 31, 2010 and 2009, respectively.

 

Self insurance

 

The Company is self insured for certain losses relating to workers compensation and health benefits claims. The Company maintains third-party excess insurance coverage for all workers compensation and health benefit claims in excess of approximately $0.3 million, to reduce its exposure from such claims. Self-insured losses are accrued when it is probable that an uninsured claim has been incurred but not reported and the amount of the loss can be reasonably estimated at the balance sheet date. Management monitors and reviews all claims and their related liabilities on an ongoing basis.

 

Stock-based compensation

 

The Company measures the cost of employee services received in exchange for an award of equity instruments based upon the grant-date fair value of the award. The Company uses the “straight-line” attribution method for allocating compensation costs and recognizes the fair value of each stock option on a straight-line basis over the vesting period of the related awards.

 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of the stock-based awards as of the grant date. The Black-Scholes model, by its design, is highly complex and dependent upon key data inputs estimated by management. The primary data inputs with the greatest degree of judgment are the expected term of stock-based awards and the estimated volatility of the Company’s common stock price. The Black-Scholes model is sensitive to changes in these two variables. Since the Company’s initial public offering (“IPO”), the expected term of the Company’s stock options is generally determined using the mid-point between the vesting period and the end of the contractual term. Expected stock price volatility is typically based on the daily historical trading data for a period equal to the expected term. Because the Company’s historical trading data only dates back to October 8, 2009, the first trading date after its IPO, the Company has estimated expected volatility using an analysis of the stock price volatility of comparable peer companies. Prior to the Company’s IPO, the exercise price equaled the estimated fair market value of the Company’s common stock, as determined by its board of directors. Since the Company’s IPO, the exercise price of stock option grants is determined using the closing market price of the Company’s common stock on the date of grant.

 

The fair value of stock based awards was estimated at the date of grant using the Black-Scholes option-pricing model with the following range of assumptions for the years ended May 31, 2010, 2009 and 2008, respectively;

 

		2010			2009			2008
Dividend yield		0.0	%		0.0	%		0.0	%
Expected volatility		44	%		41	%		38	%
Risk-free interest rate		1.9%-3.0	%		3.3	%		5.0	%
Expected term (years)		4.0-6.3			4.0			4.0

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

All stock-based awards granted to employees prior to June 1, 2006 were accounted for under the intrinsic value method and were fully vested as of May 31, 2008. The pro-forma effect on the Company’s net income for the year ended May 31, 2008 had the fair value method been utilized is as follows:

 

		Year Ended May 31, 2008
Net income		$	7,439
Less: Share-based compensation expense under the fair value method, net of income taxes			239
Proforma net income		$	7,200

 

Income taxes

 

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided if it is more likely than not that some or all of the deferred income tax asset will not be realized.

 

Income tax accounting standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. These standards also provide guidance on de-recognition, measurement, and classification of amounts relating to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim periods and disclosures required. Interest and penalties are recognized as incurred within “provision for income taxes” in the consolidated statements of operations.

 

Comprehensive income

 

Comprehensive income is defined to include all changes in equity, except those resulting from investments by stockholders and distribution to stockholders, and is reported in the statement of stockholders’ equity (deficit). Included in the Company’s comprehensive income are net income and foreign currency translation adjustments.

 

Recent accounting pronouncements

 

In January 2010, the FASB issued amendments to its fair value guidance which requires additional disclosures that include: (i) separate disclosures on significant transfers into and out of Level 3; (ii) the amount of transfers between Level 1 and Level 2 and the reasons for such transfers; (iii) lower level of disaggregation for fair value disclosures by class rather than by major category and (iv) additional details on the valuation techniques and inputs used to determine Level 2 and Level 3 measurements. The Company has included these additional disclosures within this Annual Report on Form 10-K.

 

In October 2009, the FASB issued guidance on revenue recognition related to multiple-element arrangements. The new guidance requires companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third party evidence of value is not available. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted retrospectively from the beginning of an entity’s fiscal year. The Company does not expect this adoption will have a significant impact on the financial statements of the Company.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

3. Earnings per share

 

Basic earnings per share are computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share are 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 the assumed exercise of stock options using the treasury stock method. For the fiscal year ended May 31, 2010, the amount of net income (numerator) used in the computation of diluted earnings per share did not include preferred stock accretion as such accretion provided an anti-dilutive effect. 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 t han the average market price of common shares during the period and ii) the conversion of the weighted average number of preferred shares outstanding during the period. For the fiscal years ended May 31, 2009 and 2008, there was no difference in the amount of net income (numerator) used in the computation of basic and diluted earnings per share. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects only 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.

 

The following table sets forth the computations of basic and diluted earnings (loss) per share:

 

		For the years ended May 31,
		2010				2009				2008
Basic earnings (loss) per share
Numerator:
Net income (loss) attributable to common shareholders		$	16,928			$	(21,648	)		$	(25,433	)
Denominator
Weighted average common shares outstanding			21,744				13,000				13,000
Basic earnings (loss) per share		$	0.78			$	(1.67	)		$	(1.96	)
Diluted earnings (loss) per share:
Numerator:
Net income (loss) attributable to common shareholders		$	10,429			$	(21,648	)		$	(25,433	)
Denominator
Weighted average common shares outstanding			21,744				13,000				13,000
Dilutive effect of stock options outstanding			298				—				—
Dilutive effect of conversion of preferred shares			2,388
Total shares			24,430				13,000				13,000
Diluted earnings (loss) per share		$	0.43			$	(1.67	)		$	(1.96	)

 

The following weighted-average common shares and equivalents related to options outstanding under the Company’s stock option plans and the conversion of its outstanding preferred stock conversion were excluded from the computation of diluted earnings (loss) per share as the effect would have been anti-dilutive:

 

		For the years ended May 31,
		2010				2009				2008
Common stock equivalents attributable to stock options outstanding			387				556				345
Common stock equivalents attributable to conversion of preferred shares			—				6,759				6,759
Total shares			387				7,315				7,104

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

4. Accounts receivable and allowance for doubtful accounts

 

An allowance for doubtful accounts is provided against accounts receivable for amounts management believes may be uncollectible. Changes in the allowance for doubtful accounts are represented by the following:

 

		2010				2009				2008
Balance, beginning of year		$	3,303			$	1,332			$	1,309
Increase due to acquistions			—				43				—
Provision for doubtful accounts			525				2,097				376
Write-offs, net of recoveries			(2,180	)			(81	)			(353	)
Foreign exchange valuation			13				(88	)			—
Balance, end of year		$	1,661			$	3,303			$	1,332

 

In January 2009, a customer filed to reorganize under Chapter 11 of the U.S Bankruptcy Code. Total pre-petition accounts receivable from this customer as of May 31, 2010 was approximately $2.3 million. As of May 31, 2010, the Company wrote off approximately $2.0 million, or 84% of the pre-petition balance. This customer is expected to emerge from Chapter 11 during the Company’s fiscal year ending 2011.

 

5. Inventories

 

Inventories consist of the following at May 31, 2010 and 2009:

 

		2010				2009
Raw materials		$	2,564			$	2,832
Work in process			2,252				1,782
Finished goods			2,655				2,635
Supplies			1,265				1,305
		$	8,736			$	8,554

 

Inventories are net of reserves for slow-moving and obsolete inventory of approximately $0.9 million and $0.6 million at May 31, 2010 and 2009, respectively.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

6. Property, plant and equipment, net

 

Property, plant and equipment consist of the following at May 31, 2010 and 2009:

 

		Useful Life (Years)				2010				2009
Land						$	1,304			$	1,295
Building and improvements			30-40				10,240				9,836
Office furniture and equipment			5-8				1,479				1,624
Machinery and equipment			5-7				68,238				54,898
							81,261				67,653
Accumulated depreciation and amortization							41,280				31,106
						$	39,981			$	36,547

 

Depreciation and amortization expense was $10.9 million, $8.8 million and $7.3 million for the years ended May 31, 2010, 2009 and 2008, respectively.

 

7. Goodwill

 

The changes in the carrying amount of goodwill, substantially all of which relates to our Services segment (Note 20), at May 31, 2010 and 2009 are as follows:

 

		2010				2009
Balance, beginning of year		$	38,642			$	28,627
Goodwill acquired during the year			5,189				10,830
Post-acquisition adjustments			393				(500	)
Foreign currency translation			91				(315	)
Balance, end of year		$	44,315			$	38,642

 

8. Acquisitions

 

In recent years, the Company has made several acquisitions for strategic market expansion, including the addition of trained technical professionals. These acquisitions were not significant, individually or in the aggregate. Assets and liabilities of the acquired businesses are initially recorded based on their estimated fair value on the date of acquisition. The results of operations for each of the entities have been included in the consolidated financial statements from the respective dates of acquisition.

 

For acquisitions completed subsequent to June 1, 2009, the Company measures, at fair value as of the acquisition date, assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. The Company also recognizes contingent consideration at fair value as of the acquisition date, expenses acquisition-related costs as incurred and, as applicable, recognized in-process research and development costs as indefinite-lived intangible assets. In addition, any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are recognized in earnings. For acquisitions completed prior to June 1, 2009, the total purchase price was allocated to the assets and liabilities based on their fair values at the acquisition date.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

The Company made three acquisitions during Fiscal 2010, two of which were completed in July 2009, and one which was completed in November 2009. Revenues included in the 2010 Consolidated Statement of Operations from these acquisitions for the period subsequent to the closing of each respective transaction was approximately $24.7 million. On a pro forma basis from the beginning of fiscal 2010, revenues from these acquisitions would have been approximately $29.2 million. Operating income or other financial measures for these acquisitions both from the date of closing of each respective transaction and on a pro forma basis is impractical to estimate due to the integration of these entities post-acquisition.

 

 

		2010				2009				2008
Number of entities			3				5				7
Total cost:
Cash paid		$	14,350			$	10,464			$	15,535
Subordinated notes issued			5,399				7,343				8,137
Other consideration, primarily obligations under covenants not to compete			687				471				3,151
Debt assumed			—				1,475				1,175
			20,436				19,753				27,998
Current assets acquired			939				697				2,052
Property, plant and equipment			5,124				4,244				3,369
Deferred tax asset			1,067				—				—
Intangibles, primarily customer lists			8,239				3,982				8,842
Goodwill			5,067				10,830				13,735
		$	20,436			$	19,753			$	27,998

 

Conditional consideration is contingent on the acquired entity achieving certain revenue and profit targets during calendar and fiscal years ending 2009 thru 2011. Upon achievement, conditional consideration payments may be made in accordance with each specific agreement in the form of direct payments or in the form of a note payable. The Company also entered into certain finite at-will employment, or consulting agreements with the owners or managers of these companies.

 

In addition to the above, the Company acquired a patent in 2008 that will be used in developing new product sales as well as be used by the Services segment. The purchase price for the patent and certain related inventory and equipment was approximately $0.7 million. In connection with this patent purchase, the Company is obligated for royalty payments on sales generated by the technology developed or licensed for six years until November 2013. No such payments were made in fiscal 2010, 2009 or 2008.

 

9. Intangible assets

 

The gross carrying amount and accumulated amortization of intangible assets at May 31, 2010 and 2009 are as follows:

 

						2010												2009
		Useful Life (Years)				Gross Amount				Accumulated Amortization				Net Carrying Amount				Gross Amount				Accumulated Amortization				Net Carrying Amount
Software			3-5			$	5,343			$	4,166			$	1,177			$	5,230			$	4,334			$	896
Customer lists			5-7				27,191				14,256				12,935				19,541				11,869				7,672
Coventants not to compete			2-5				7,075				5,709				1,366				6,471				4,425				2,046
Other			2-5				3,704				3,094				610				3,312				1,977				1,335
						$	43,313			$	27,225			$	16,088			$	34,554			$	22,605			$	11,949

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Amortization expense for the years ended May 31, 2010, 2009 and 2008 was $4.2 million, $3.8 million and $4.1 million, respectively, including amortization of software for the years ended May 31, 2010, 2009 and 2008 of $0.5 million, $0.7 million, and $0.6 million, respectively.

 

The following is the approximate amount of amortization expense in each of the years ending subsequent to May 31, 2010:

 

2011		$	4,078
2012			3,124
2013			2,671
2014			2,437
2015			2,241
Thereafter			1,537
Total		$	16,088

 

10. Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consist of the following at May 31, 2010 and 2009:

 

		2010				2009
Accrued salaries, wages and related employee benefits		$	8,158			$	5,992
Other accrued expenses			2,739				6,111
Accrued worker compensation and health benefits			8,041				6,982
Deferred revenues			1,151				1,414
Total		$	20,089			$	20,499

 

11. Long-term debt

 

Long-term debt consists of the following at May 31, 2010 and 2009:

 

		2010				2009
Senior credit facility:
Revolver		$	—			$	15,505
Term loans			—				36,319
Notes payable			11,023				12,113
Other			971				2,314
			11,994				66,251
Less: Current maturities			6,303				14,390
Long-term debt, net of current maturities		$	5,691			$	51,861

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Senior credit facility

 

On July 22, 2009, the Company entered into its current credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A., which provided for a $25.0 million term loan and a $55.0 million secured revolving credit facility. The proceeds from this transaction were used to repay the outstanding indebtedness of the former credit facility and to fund acquisitions.

 

The outstanding principal balance of the term loan was subsequently repaid in October 2009 in connection with the Company’s IPO and may not be re-borrowed under the current credit agreement. The Company also repaid the outstanding balance of the revolving credit facility but may re-borrow the revolving credit facility at any time during the term of the agreement. Borrowings made under the revolving credit facility are payable on July 21, 2012. In December 2009, the Company signed an amendment to its current credit agreement that, among other things, adjusted certain affirmative and negative covenants including delivery of financial statements, the minimum consolidated debt service coverage ratio, the procedures for obtaining lender approval for acquisitions and the removal of the minimum EBITDA requirement.

 

Under the amended agreement, borrowings under the credit agreement bear interest at the LIBOR or base rate, at the Company’s option, plus an applicable LIBOR margin ranging from 1.75% to 3.25%, or base rate margin ranging from -0.50% to 0.50%, and a market disruption increase of between 0% and 1.0%, if the lenders determine its applicable.

 

Notes payable and other

 

In connection with acquisitions it has made through fiscal 2010, the Company issued subordinated notes payable to the sellers and assumed certain other notes payable. These notes generally mature three years from the date of acquisition with interest rates ranging from 3% to 7%. The Company has discounted these obligations to reflect a 5.5% to 10.0% imputed interest. Unamortized discount on the notes was approximately $0.3 million and $0.2 million as of May 31, 2010 and 2009, respectively. Amortization is recorded as interest expense in the consolidated statements of operations. Payments under these various acquisition obligations are made either monthly or quarterly.

 

Scheduled principal payments due under all borrowing agreements in each of the five years and thereafter subsequent to May 31, 2010 are as follows:

 

2011		$	6,303
2012			3,264
2013			1,762
2014			322
2015			50
Thereafter			293
Total		$	11,994

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

12. Financial instruments

 

The Company hedged a portion of the variable rate interest payments on debt using interest rate swap contracts to convert variable payments into fixed payments. The Company does not apply hedge accounting to its interest rate swap contracts. Changes in the fair value of these instruments are reported as a component of interest expense. The Company repaid all of its variable rate debt in October 2009. In November 2009, an interest rate swap with a notional amount of $8.0 million matured. The Company has an additional interest rate swap that remains outstanding with a notional amount of $8.0 million and a fair value of ($210) thousand which is recorded in accrued expenses and other current liabilities in the consolidated balance sheet as of May 31, 2010. The following outlines the significant terms of the contracts at May 31, 2010 and 20 09, respectively,:

 

Contract date		Term		Notional Amount				Variable interest rate			Fixed interest rate			2010				2009
November 20, 2006		4 years		$	8,000			LIBOR			5.17	%		$	(210	)		$	(199	)
November 30, 2006		3 years			8,000			LIBOR			5.05	%			—				(517	)
				$	16,000									$	(210	)		$	(716	)

 

The Company classifies its interest rate swaps at fair value in the following categories:

 

	Level 1—Quoted prices in active markets for identical assets or liabilities.
	Level 2—Inputs other than quoted market prices in active markets that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
	Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The fair value of the Company’s interest rate swap liability, approximately $0.2 million at May 31, 2010, was determined using quoted prices in an active market and was classified as a Level 1 liability within the fair value hierarchy.

 

13. Obligations under capital leases

 

The Company leases certain office space, including its headquarters, and service equipment under capital leases, requiring monthly payments ranging from $1 thousand to $62 thousand, including effective interest rates that range from approximately 5% to 14% expiring through May 2015. The net book value of assets under capital lease obligations is $14.0 million and $15.6 million at May 31, 2010 and 2009, respectively.

 

Scheduled future minimum lease payments subsequent to May 31, 2010 are as follows:

 

2011		$	6,193
2012			4,519
2013			2,815
2014			2,128
2015			694
Thereafter			—
Total Minimum Lease Payments			16,349
Less: amount representing interest			1,780
Present value of minimum lease payments			14,569
Less: current portion of obligations under capital leases			5,370
Obligations under capital leases, net of current portion		$	9,199

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

14. Commitments and contingencies

 

Operating leases

 

The Company is party to various noncancelable lease agreements, primarily for its international and domestic office and lab space. Minimum future lease payments under noncancelable operating leases in each of the five years subsequent to May 31, 2010 are as follows:

 

2011		$	2,837
2012			2,085
2013			1,673
2014			1,066
2015			605
Thereafter			6
Total		$	8,272

 

Total rent expense was $3.2 million, $3.1 million, and $2.4 million for the years ended May 31, 2010, 2009 and 2008, respectively.

 

Litigation

 

The Company is subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. Although the Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it, 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, except as disclosed below. The costs of defense and amounts that may be recovered in such matters may be covered by insurance.

 

The Company is a defendant in two related purported class action lawsuits in California, based upon violations of California labor and employment law. The first case, Quiroz v. Mistras Group, Inc., et al, U.S. District Court, Central District of California (Case No. CV09-7146 PSG), was originally filed in California State court in September 2009, and was removed to Federal Court. This matter was a purported class action case on behalf of existing and former California employees of the Company and its subsidiaries for violation of various labor and employment laws, primarily for failure to pay wages timely and for having defective wage statements, as well as other claims, and is seeking penalties under the California Private Atto rneys General Act. In March 2010, the plaintiff’s request to certify the case as a class action suit was denied. The Plaintiffs have sought to remand the case back to California State Court, but the Federal Court has retained jurisdiction.

 

The second case is Ballard v. Mistras Group, Inc., et al, U.S. District Court, Central District of California (Case No. 2:10-cv-03186 (PSG)), filed in late March 2010 in California State Court and removed to Federal court. This matter is also a purported class action case, based on substantially identical claims as the Quiroz case, and was filed by the same attorney representing the plaintiff in the Quiroz case, approximately two weeks after class action certification was denied in Quiroz. The plaintiff is attempting to remand this case back to California State Court and is seeking class action certification.

 

The Company has agreed to mediation for the Quiroz and Ballard cases together, which is currently scheduled for September 2010. The Company and the plaintiffs in Quiroz and Ballard, with the Judge’s approval, have delayed all further hearings on motions and other matters until after the mediation.

 

At the present time, the Company is unable to determine the likely outcome or reasonably estimate the amount or range of potential liability related to these cases, and accordingly, has not established any reserves for these matters. An unfavorable outcome in these matters could have a material adverse effect on our financial position and results of operations.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Acquisition related

 

The Company is liable for contingent consideration in connection with its acquisitions (See Note 8).

 

15. Employee benefit plans

 

The Company provides a 401(k) savings plan for eligible U.S. based employees. Employee contributions are discretionary up to the IRS limits each year and catch up is allowed for employees 50 years of age or older. Under the 401(k) plan, employees become eligible to participate on the 1st day of the month after six months of continuous service. Under this plan, the Company matches 50% of the employee’s contributions up to 6% of the employee’s annual compensation, as defined by the plan. There is a five-year vesting schedule for the Company match. The Company’s contribution to the plan was approximately $1.4 million, $1.0 million and $0.8 million for the years ended May 31, 2010, 2009 and 2008, respectively.

 

The Company participates with other employers in contributing to a union plan, which covers certain U.S. based union employees. The plan is not administered by the Company and contributions are determined in accordance with provisions of a collective bargaining agreement. The Company’s contributions to the plan were approximately $0.5 million, $0.3 million, and $0.1 million for the years ended May 31, 2010, 2009 and 2008, respectively. The Company has benefit plans covering certain employees in selected foreign countries. Amounts charged to expense under these plans were not significant in any year.

 

16. Income taxes

 

Income before provision for income taxes is as follows:

 

		For the years ended May 31,
		2010				2009				2008
Income before provision for income taxes from:
U.S. operations		$	14,557			$	6,426			$	11,399
Foreign operations			2,422				3,785				1,428
Earnings before income taxes		$	16,979			$	10,211			$	12,827

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

The provision for income taxes consists of the following:

 

		For the years ended May 31,
		2010				2009				2008
Current
Federal		$	3,797			$	2,079			$	4,088
States and local			1,044				860				472
Foreign			890				1,379				416
Reserve for uncertain tax positions			(112	)			94				75
Total current			5,619				4,412				5,051
Deferred
Federal			883				275				(71	)
States and local			453				(12	)			248
Foreign			(230	)			(142	)			(33	)
Total deferred			1,106				121				144
Net change in valuation allowance			(198	)			25				185
Net deferred			908				146				329
Provision for income taxes		$	6,527			$	4,558			$	5,380

 

The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to income tax as follows:

 

		For the years ended May 31,
		2010								2009								2008
Federal tax at statutory rate		$	5,943				35.0	%		$	3,472				34.0	%		$	4,489				35.0	%
State taxes, net of federal benefit			987				5.8	%			560				5.5	%			468				3.7	%
Foreign tax at lower rates			(189	)			(1.1	%)			(37	)			(0.4	%)			(117	)			(0.9	%)
Permanent differences			255				1.5	%			414				4.1	%			76				0.6	%
Other			(271	)			(1.6	%)			124				1.2	%			279				2.1	%
Change in valuation allowance			(198	)			(1.2	%)			25				0.2	%			185				1.4	%
Total provision for income taxes		$	6,527				38.4	%		$	4,558				44.6	%		$	5,380				41.9	%

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Deferred income tax attributes resulting from differences between financial accounting amounts and income tax basis of assets and liabilities at May 31 are as follows:

 

		For the years ended May 31,
		2010				2009				2008
Deferred income tax assets
Allowance for doubtful accounts		$	539			$	1,074			$	386
Inventory			393				236				261
Intangible assets			4,314				3,607				3,064
Accrued expenses			1,848				451				536
Net operating loss carryforward			595				442				285
Capital lease obligation			998				1,187				1,372
Other			219				472				413
Deferred income tax assets			8,906				7,469				6,317
Valuation allowance			(13	)			(210	)			(185	)
Net deferred income tax assets			8,893				7,259				6,132
Deferred income tax liabilities
Property and equipment			(5,015	)			(3,419	)			(2,629	)
Goodwill			(2,613	)			(2,658	)			(2,003	)
Intangible assets			(277	)			—				(564	)
Other			(886	)			(788	)			—
Deferred income tax liabilities			(8,791	)			(6,865	)			(5,196	)
Net deferred income taxes		$	102			$	394			$	936

 

At May 31, 2010, the Company has recorded a valuation allowance against certain foreign deferred income tax assets based on its assessment that the respective deferred income tax assets would not be realized as a result of losses incurred in 2009 and certain prior years. As of May 31, 2010, the Company has available state net operating losses of $2.0 million with expiration dates starting in 2011.

 

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

 

Balance at May 31, 2008		$	639
Additions for tax positions related to fiscal 2009			276
Additions for tax positions related to prior years			—
Settlements			—
Reductions related to the expiration of statutes of limitations			(182	)
Balance at May 31, 2009			733
Additions for tax positions related to fiscal 2010			—
Additions for tax positions related to prior years			204
Settlements			—
Reductions related to the expiration of statutes of limitations			(316	)
Balance at May 31, 2010		$	621

 

The Company has recorded the unrecognized tax benefits in Other Long-Term Liabilities in the consolidated balance sheets as of May 31, 2010 and 2009. All of the Company’s unrecognized tax benefits at May 31, 2010, if recognized, would favorably affect the effective tax rate. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense and are not significant for the years ended May 31, 2010 and 2009.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

The Company has not recognized U.S. tax expense on its undistributed international earnings of approximately $1.8 million and $2.5 million for fiscal 2010 and 2009, respectively, since it intends to reinvest the earnings outside the United States for the foreseeable future. Any additional U.S. income taxes incurred would be reduced by available foreign tax credits. If the earnings of such foreign subsidiaries were not indefinitely reinvested, a deferred tax liability would have been required.

 

17. Stockholders’ equity

 

Common Stock

 

In October 2009, the Company completed its initial public offering of 10,000,000 shares of common stock at a price of $12.50 per share. The Company sold 6,700,000 shares. The Company received net proceeds of approximately $74.0 million from the offering. The Company used approximately $68.0 million of the net proceeds to repay the outstanding principal balance of the term loan ($25.0 million), outstanding balance of the revolver ($41.4 million) and accrued interest thereon ($0.1 million) in October 2009, as well as approximately $1.5 million to pay costs and expenses related to the offering. The remaining proceeds (approximately $6.0 million) was used for acquisitions and working capital purposes.

 

Dividends on common stock will be paid when, and if declared by the board of directors. Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held.

 

Preferred stock

 

Prior to its IPO in October 2009, the Company completed several private placements of its Class A and Class B preferred stock. These preferred shares included various redemption and conversion features and were reported outside equity and adjusted to fair value, which represented their redemption value at each reporting date. Immediately prior to the IPO, the redemption value was reduced, resulting in an increase to retained earnings (deficit). All of the preferred shares outstanding as of the offering converted to common stock and all accretion recorded through the redemption price formula were credited to additional paid-in capital.

 

Stock options

 

In September 2009, the Company’s board of directors and shareholders adopted and approved the 2009 Long-Term Incentive Plan (the “2009 Plan”), which became effective upon the closing of the IPO. Awards may be in the form of stock options, restricted stock and other forms of stock-based incentives, including stock appreciation rights and deferred stock rights. The term of each incentive and non-qualified stock option is ten years. Vesting generally occurs over a period of four years, the expense for which is recorded on a straight-line basis over the requisite service period. As of May 31, 2010, there were approximately 2,286,000 shares reserved underlying options granted under the 2009 Plan and approximately 2,251,000 shares available for future grants under the 2009 Plan.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Prior to the Company’s IPO in October 2009, the Company had two stock option plans: (i) the 1995 Incentive Stock Option and Restricted Stock Purchase Plan (the “1995 Plan”), and (ii) the 2007 Stock Option Plan (the “2007 Plan”). No additional awards may be granted from these two plans. The Company recognized stock-based compensation expense of approximately $2.6 million, $0.2 million, and $0.3 million for the years ended May 31, 2010, 2009 and 2008, respectively. As of May 31, 2010, there was approximately $10.3 million of unrecognized compensation costs, net of estimated forfeitures, related to stock-based awards which are expected to be recognized over a weighted average period of 3.2 years. The Company received cash proceeds from options exercised during the years ended May 31, 2010 of approximately $0. 1 million. The aggregate intrinsic value of options exercised during the year ended May 31, 2010 was approximately $2.2 million. There were no stock option exercises during the years ended May 31, 2009 and 2008, respectively. A summary of the stock option activity and weighted average exercise prices follows (in thousands, except per share amounts):

 

		For the years ended May 31,
		2010								2009								2008
		Common Stock Options				Weighted Average Exercise Price				Common Stock Options				Weighted Average Exercise Price				Common Stock Options				Weighted Average Exercise Price
Outsanding at beginning of year:			940			$	6.81				488			$	3.44				247			$	0.38
Granted			2,219			$	13.48				452			$	10.46				267			$	6.53
Exercised			(205	)		$	0.38				—			$	—				—			$	—
Expired or forfeited			(29	)		$	9.54				—			$	—				(26	)		$	6.15
Outstanding at end of year:			2,925			$	12.29				940			$	6.81				488			$	3.44
Options exercisable at end of year			263								334								212
Weighted average fair value (per share) of options granted during the period						$	5.10							$	3.74							$	2.39

 

A summary of stock options outstanding and exercisable as of May 31, 2010 is as follows (in thousands, except per share amounts):

 

							Options Outstanding								Options Exercisable
Range of Exercise Prices			Total Options Outstanding				Weighted Average Remaining Life (Years)				Weighted Average Exercise Price				Number Exercisable				Weighted Average Exercise Price
$0.38 - $6.15				250			6.8				$	5.18				146			$	4.48
$6.16 - 14.67				2,675			9.2				$	12.96				117			$	10.40
				2,925												263
Aggregate Intrinsic Value			$	2,418											$	1,281

 

As of May 31, 2010, there were approximately 2,925,000 options outstanding, net of estimated forfeitures, that had vested or are expected to vest. The weighted-average exercise price of these options was $12.29 per option; the weighted-average remaining contractual life of these options was 8.7 years; and the aggregate intrinsic value of these options was approximately $2.4 million.

 

19. Related party transactions

 

The Company leases its headquarters under a capital lease (Note 13) from a shareholder and officer of the Company requiring monthly payments through October 2014. Total rent payments made during fiscal 2010 were approximately $0.8 million.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

The Company has a lease for office space located in France, which is partly owned by a shareholder and officer, requiring monthly payment through January 2016. Total rent payment made during fiscal 2010 were approximately $0.2 million.

 

20. Segment disclosure

 

The Company’s three segments are:

 

●	Services. This segment provides asset protection solutions in North and Central America with the largest concentration in the United States.
●	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.
●	International. This segment offers services, products and systems similar to those of our other segments to global markets, principally in Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by our Products and Systems segment.

 

General corporate services, including accounting, audit, and contract management, are provided to the segments which are reported as intersegment transactions 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 corporate and eliminations.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 2. Segment income from operations is determined based on internal performance measures used by the Chief Executive Officer, the chief operating decision maker, to assess the performance of each business in a given period and to make decisions as to resource allocations. In connection with that assessment, the Chief Executive Officer may exclude items such as charges for stock-based compensation and certain other acquisition-related charges and balances, technology and product development costs, certain gains and losses from dispositions, and litigation settlements or other charges. Certain general and administrative costs such as human resources, information technology and training are allocated t o the segments. Segment income from operations also excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of depreciation on the corporate office facilities and equipment, administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment.

 

Selected consolidated financial information by segment for the periods shown was as follows:

 

		Years ended May 31,
		2010				2009				2008
Revenues (1)
Services		$	227,782			$	167,543			$	116,027
Products and Systems			18,875				17,310				16,675
International			30,920				29,165				23,727
Corporate and eliminations			(5,449	)			(4,885	)			(4,161	)
		$	272,128			$	209,133			$	152,268

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Revenues by operating segment includes intercompany transactions, which are eliminated in corporate and eliminations.

 

The Services segment had sales to other operating segments of $0.5 million, $0.1 million and $0.1 million for fiscal 2010, 2009 and 2008, respectively.

 

The Products and Systems segment had sales to other operating segments of $4.4 million, $3.9 million and $3.6 million for fiscal 2010, 2009 and 2008, respectively.

 

The International segment had sales to other operating segments of $0.6 million, $0.3 million and $0.2 million for fiscal 2010, 2009 and 2008, respectively.

 

		Years ended May 31,
		2010				2009				2008
Gross profit
Services		$	61,963			$	48,480			$	36,301
Products and Systems			9,915				8,476				8,829
International			11,668				12,602				9,932
Corporate and eliminations			(408	)			(292	)			(231	)
		$	83,138			$	69,266			$	54,831

 

		Years ended May 31,
		2010				2009				2008
Income from operations
Services		$	22,614			$	13,681			$	14,649
Products and Systems			2,572				1,664				2,723
International			3,008				4,091				2,408
Corporate and eliminations			(7,297	)			(4,611	)			(3,422	)
		$	20,897			$	14,825			$	16,358

 

Operating income by operating segment includes intercompany transactions, which are eliminated in corporate and eliminations.

 

		Years ended May 31,
		2010				2009				2008
Depreciation and amortization
Services		$	12,862			$	10,603			$	9,529
Products and Systems			887				1,038				1,017
International			1,308				900				861
Corporate and eliminations			126				95				16
		$	15,183			$	12,636			$	11,423

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

		As of May 31,
		2010				2009
Intangible assets, net
Services		$	14,042			$	9,686
Products and Systems			1,016				1,127
International			504				710
Corporate and eliminations			526				426
		$	16,088			$	11,949

 

		As of May 31,
		2010				2009
Goodwill
Services		$	42,804			$	37,141
Products and Systems			—				—
International			1,511				1,501
Corporate and eliminations			—				—
		$	44,315			$	38,642

 

		As of May 31,
		2010				2009
Long-lived assets
Services		$	91,040			$	75,197
Products and Systems			3,837				4,553
International			4,957				5,137
Corporate and eliminations			550				2,717
		$	100,384			$	87,604

 

Fiscal 2010 capital expenditures for the Services segment, Products and Systems segment and International segment were approximately $6.0 million, $0.3 million, and $1.1 million, respectively.

 

		As of May 31,
		2010				2009
Total assets
Services		$	148,462			$	121,973
Products and Systems			13,533				13,677
International			19,163				16,250
Corporate and eliminations			7,474				1,533
		$	188,632			$	153,433

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

Revenues by geographic area

 

Net revenues by geographic area for the fiscal years ended May 31, 2010, 2009 and 2008 were as follows:

 

		Years ended May 31,
		2010				2009				2008
Revenues
United States		$	223,808			$	162,815			$	118,316
Other Americas			16,366				16,293				6,641
Europe			20,454				20,692				16,914
Asia-Pacific			11,500				9,333				10,397
		$	272,128			$	209,133			$	152,268

 

No individual foreign country’s revenues or long-lived assets were material for disclosure purposes.

 

21. Subsequent event

 

Subsequent to the fiscal 2010, the Company acquired two unrelated entities to continue its strategic efforts in market expansion. The total cost of the acquisitions was approximately $6.9 million, of which approximately $5.3 million was paid in cash and the balance by the issuance of subordinated seller notes. The notes are payable over three years and bear interest at rates ranging from 0% to 3.5%. The Company is in the process of completing the preliminary purchase price allocations, which includes potential future contingent purchase price adjustments. In connection with the acquisitions, the Company has also entered into finite at-will consulting and employment agreements with certain sellers.

 

These acquisitions were not, individually or in the aggregate, significant.

 

In June 2010, the Company acquired land near Houston, Texas for the purposes of building a new regional headquarters. The cost of the land was approximately $0.9 million. While the Company has not yet entered into any agreements with respect to the construction of the new facility, the cost of construction is currently estimated at $3.3 million, which will likely be financed.

 

On July 12, 2010, Francis T. Joyce was appointed Executive Vice President, Chief Financial Officer and Treasurer of the Company, replacing the Company’s retiring CFO, Paul “Pete” Peterik. Mr. Peterik will remain with the Company for a period of time to assist with the transition.

 

 

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Notes to Consolidated Financial Statements—(continued)

(tabular dollars in thousands, except per share data)

 

22. Selected quarterly financial information (unaudited)

 

The following is a summary of the quarterly results of operations for the years ended May 31, 2010 and 2009 (in thousands, except per share amounts):

 

Fiscal quarter ending		May 31, 2010				February 28, 2010				November 30, 2009				August 31, 2009				May 31, 2009				February 28, 2009				November 30, 2008				August 31, 2008
(in thousands)
Revenues		$	79,784			$	64,356			$	71,899			$	56,089			$	55,860			$	47,001			$	59,275			$	46,997
Cost of Revenues			51,780				43,984				46,248				36,468				35,358				31,607				35,676				28,526
Depreciation			2,659				2,745				2,635				2,471				2,490				2,290				2,061				1,859
Gross Profit			25,345				17,627				23,016				17,150				18,012				13,104				21,538				16,612
Selling, general and administrative expense			13,920				14,110				13,686				13,133				12,464				11,943				11,153				10,896
Research and engineering			884				586				449				483				521				484				481				463
Depreciation and amortization			1,115				1,299				1,214				1,045				819				891				798				1,428
Legal settlement			—				—				—				(297	)			(40	)			89				1,915				136
Acquisition-related costs			614				—				—				—				—				—				—				—
Income from operations			8,812				1,632				7,667				2,786				4,248				(303	)			7,191				3,689
Net income (loss)		$	5,278			$	774			$	3,562			$	815			$	1,502			$	(788	)		$	3,235			$	1,517

 

In the fourth quarter ended May 31, 2010, the Company made adjustments to its cost of revenues, depreciation and amortization, research and engineering, and selling, general and administrative expenses, all of which impacted its tax provision. These adjustments related to prior quarterly and fiscal year periods; however, they were not material to any prior period. In total, these items increased net income by approximately $0.9 million. The quarterly tables and segment data presented in Note 20 were impacted as follows:

 

Adjustments — Fiscal Quarter Ended May 31, 2010
		Services1				Products and Systems2				International				Corporate and Eliminations3				Total
Cost of Revenues		$	881			$	—			$	—			$	—			$	881
Depreciation			—				130				—				—				130
Gross profit			881				130				—				—				1,011
Selling, general and administrative expenses			219				—				—				471				690
Research and Engineering			—				(260	)			—				—				(260	)
Depreciation and amortization			—				—				—				—				—
Income from operations		$	1,100			$	(130	)		$	—			$	471			$	1,441
Net income																		$	887

 

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1	Related to adjustments to the Company’s liability for workers’ compensation claims.
2	Related to adjustments to overhead estimates for internally developed software.
3	Related to a reclassification of prior period foreign currency transactions from accumulated other comprehensive income to net income.

 

 

92

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Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) re ports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Internal Control over Financial Reporting

 

This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarterly period ended May 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.

Other Information

 

None.

 

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors

 

The information required by Item 10 is incorporated herein by reference to the information contained under the caption “Corporate Governance” in our definitive proxy statement related to the 2010 annual meeting of stockholders.

 

Executive Officers

 

The information concerning our executive officers required by this Item 10 is provided under the caption “Executive Officers of the Registrant” in Part I hereof.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

The information concerning Section 16(a) Beneficial Ownership Reporting Compliance by our directors and executive officers is incorporated by reference to the information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement related to the 2010 annual meeting of stockholders.

 

 

93

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Code of Ethics

 

The information concerning our Code of Ethics is incorporated by reference to the information contained under the caption “Governance of the Company—in our definitive proxy statement related to the 2010 annual meeting of stockholders.

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information required by this Item 11 is incorporated by reference to the information contained in our definitive proxy statement related to the 2010 annual meeting of stockholders.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by Item 12 regarding Security Ownership of Certain Beneficial Owners and Manaagement and Related Stockholders is incorporated by reference to the information contained in our definitive proxy statement related to the 2010 annual meeting of stockholders.

 

Equity Compensation Plan Information

 

    The following table provides certain information as of May 31, 2010 concerning the shares of our common stock that may be issued under existing equity compensation plans.

 

Plan Category		Number of Securities to be Issued Upon Exercise of Outstanding Options				Weighted Average Exercise Price of Outstanding Options				Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity Compensation Plans Approved by Security Holders (1)		2,294,900				$	12.29			2,251,318
Equity Compensation Plans Not Approved by Security Holders		—					—			—
Total		2,294,900					12.29			2,251,318

 

(1)	Includes all the Company’s plans: 1995 Incentive Stock Option and Restricted Stock Plan, 2007 Stock Option Plan and 2009 Long-Term Incentive Plan.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

    The information required by Item 13 is incorporated by reference to the information contained in our definitive proxy statement related to the 2010 annual meeting of stockholders.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

    The information required by Item 14 is incorporated by reference to the information contained in our definitive proxy statement related to the 2010 annual meeting of stockholders.

 

 

94

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PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) DOCUMENTS FILED AS PART OF THIS REPORT

 

(1)   The following financial statements are included:

 

		Page
Report of independent registered public accounting firm		64
Consolidated financial statements		65
Balance sheets as of May 31, 2010 and May 31, 2009		65
Statements of operations for the years ended May 31, 2010, 2009 and 2008		66
Statements of stockholders’ equity (deficit) for the years ended May 31, 2010, 2009 and 2008		67
Statements of cash flows for the years ended May 31, 2010, 2009 and 2008		68
Notes to consolidated financial statements		69

 

(2)   Exhibits:

 

Exhibit No.		Description
3.1		Second Amended and Restated Certificate of Incorporation (filed as exhibit 3.1 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
3.2		Amended and Restated Bylaws (filed as exhibit 3.2 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
10.1		Form of Indemnification Agreement for directors and officers (filed as exhibit 10.1 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
10.2		Amended and Restated Credit Agreement (filed as exhibit 10.2 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
10.3		Second Amended and Restated Credit Agreement dated as of July 22, 2009 (filed as exhibit 10.3 to Registration Statement on Form S-1 (Amendment No. 5) filed on September 23, 2009 (Registration No. 333-151559) and incorporated herein by reference)
10.4		Amendment dated as of December 14, 2009, to the Second Amended and Restated Credit Agreement (filed as exhibit 10.1 to Current Report on Form 8-K filed December 18, 2009 and incorporated herein by reference)
10.5		Employment Agreement between the Company and Sotirios J. Vahaviolos (filed as exhibit 10.4 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
10.6		1995 Incentive Stock Option and Restricted Stock Purchase Plan (filed as exhibit 99.1 to the Registration Statement on Form S-8 filed on February 3, 2010 (Registration No. 333-164688) and incorporated herein by reference)
10.7		2007 Stock Option Plan and form of Stock Option Agreement (filed as exhibit 10.5 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
10.8		2009 Long-Term Incentive Plan (filed as exhibit 10.6 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference).

 

 

95

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10.9		Form of 2009 Long-Term Incentive Plan Stock Option Agreement (filed as exhibit 10.7 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
10.10		Form of 2009 Long-Term Incentive Plan Restricted Stock Agreement (filed as exhibit 10.8 to Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
21.1		Subsidiaries of the Registrant
23.1		Consent of PricewaterhouseCoopers LLP
24.1		Power of Attorney (included as part of the signature page to this report)
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

96

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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/ SOTIRIOS VAHAVIOLOS
		Sotirios Vahaviolos
		Chairman, President and Chief Executive Officer

 

Date: August 16 , 2010

 

We, the undersigned directors and officers of Mistras Group, Inc., hereby severally constitute Sotirios J. Vahaviolos, Francis T. Joyce and Michael C. Keefe, and each of them singly, as our true and lawful attorneys with full power to each of them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

This power of attorney may only be revoked by a written document executed by the under signed that expressly revokes this power by referring to the date and subject hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Sotirios J. Vahaviolos		Director, Chairman, President and Chief		August 16 , 2010
Sotirios J. Vahaviolos		Executive Officer (Principal Executive Officer)
/s/ Paul Peterik		Principal Financial and Accounting Officer		August 16 , 2010
Paul Peterik
/s/ Elizabeth A. Burgess		Director		August 16 , 2010
Elizabeth A. Burgess
/s/ Daniel M. Dickinson		Director		August 16 , 2010
Daniel M. Dickinson
/s/ James J. Forese		Director		August 16 , 2010
James J. Forese
/s/ Richard H. Glanton		Director		August 16 , 2010
Richard H. Glanton
/s/ Michael J. Lange		Director and Group Executive		August 16 , 2010
Michael J. Lange		Vice President, Services
/s/ Manuel N. Stamatakis		Director		August 16 , 2010
Manuel N. Stamatakis

 

 

97

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Exhibit 21.1

 

Mistras Group, Inc. Subsidiaries:

 

		Other Names under which
Name		Subsidiary Does Business		State of Organization
Anru Physical ALC TLP Beheer B.V.				The Netherlands
CISMIS Springfield Corp.				Delaware
DIAPAC Ltd.				Russia
Envirocoustics A.B.E.E.				Greece
Euro-Physical Acoustics S.A.				France
Mistras Canada Inc.				Canada
Nippon Physical Acoustics Ltd.				Japan
Physical Acoustics Argentina S.A.				Argentina
Physical Acoustics Corporation				Delaware
Physical Acoustics India Private Ltd.				India
Physical Acoustics Ltd.				England & Wales
Physical Acoustics South America LTDA				Brazil
Quality Services Laboratories, Inc.				Delaware
ThermTech Services, Inc.				Florida

 

 

 

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Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-164688) of Mistras Group, Inc. of our report dated August 16, 2010 relating to the financial statements, which appears in this Form 10-K.

 

/s/ PricewaterhouseCoopers LLP
New York, New York
August 16, 2010

 

 

 

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Exhibit 31.1

 

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

	I, Sotirios J. Vahaviolos, certify that:
1.	I have reviewed this annual report on Form 10-K of Mistras Group, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 16, 2010

 

	By:	/s/ Sotirios J. Vahaviolos
		Sotirios J. Vahaviolos
		Chairmn, President and Chief Executive Officer
		(Principal Executive Officer)

 

 

 

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Exhibit 31.2

 

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

	I, Paul Peterik, certify that:
1.	I have reviewed this annual report on Form 10-K of Mistras Group, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

	a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 16, 2010

 

	By:	/s/ PAUL PETERIK
		PAUL PETERIK
		Principal Financial Officer and Principal Accounting Officer

 

 

 

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Exhibit 32.1

 

CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the accompanying Annual Report on Form 10-K of Mistras Group, Inc. (the “Company”) for the year ended May 31, 2010, I, Sotirios Vahaviolos, Chairman, President, and Chief Executive Officer, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

	(1)	such Annual Report on Form 10-K for the year ended May 31, 2010, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
	(2)	the information contained in such Annual Report on Form 10-K for the year ended May 31, 2010, fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

The foregoing certification is being furnished solely to accompany such Annual Report on Form 10-K for the year ended May 31, 2010, pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

Date: August 16, 2010		/s/ SOTIRIOS VAHAVIOLOS
		Sotirios Vahaviolos Chairman, President, and Chief Executive Officer (Principal Executive Officer)

 

 

 

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Exhibit 32.2

 

CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the accompanying Annual Report on Form 10-K of Mistras Group, Inc. (the “Company”) for the year ended May 31, 2010, I, Paul Peterik, Principal Financial and Accounting Officer, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

	(1)	such Annual Report on Form 10-K for the year ended May 31, 2010, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
	(2)	the information contained in such Annual Report on Form 10-K for the year ended May 31, 2010, fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

The foregoing certification is being furnished solely to accompany such Annual Report on Form 10-K for the year ended May 31, 2010, pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

Date: August 16, 2010		/s/ PAUL PETERIK
		PAUL PETERIK (Principal Financial and Accounting Officer)

 

 

 

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