Gross profit. Our gross profit was $27.8 million and increased $4.8 million, or 21% in the second quarter of fiscal 2011 compared to $23.0 million in the second quarter of fiscal 2010. As a percentage of revenues, our gross profit and its components were as follows:

 

		Three months ended November 30,
		2010				2009
		(in thousands)
Gross profit		$	27,808			$	23,016
Gross profit % comprised of:
Revenues			100.0	%			100.0	%
Cost of revenues			65.0	%			64.3	%
Depreciation			3.7	%			3.7	%
Total			31.3	%			32.0	%
Gross profit % decrease from prior year quarter			(0.7	%)			(4.3	%)

 

Our gross profit by segment for the second quarter of fiscal 2011and 2010, was as follows:

 

		Three months ended November 30,
		2010				2009
		(in thousands)
Gross profit
Services		$	21,753			$	17,405
Products and Systems			2,821				2,818
International			3,260				2,944
Corporate and eliminations			(26	)			(151	)
		$	27,808			$	23,016

 

As a percentage of revenues, our gross profit was approximately 31% and 32% for the second quarter of fiscal 2011 and fiscal 2010, respectively. Cost of revenues, excluding depreciation, as a percentage of revenues was approximately 65% and 64% in the second quarter of fiscal 2011 and fiscal 2010, respectively. Depreciation expense included in the determination of gross profit for the second quarter of fiscal 2011 and fiscal 2010 was $3.3 million and $2.6 million, respectively.

The decrease in our gross profit as a percentage of revenues for the second quarter of fiscal 2011 was primarily attributable to a lower margin product mix of sales for both our Products and Systems segment and our International segment during the second quarter of fiscal 2011. Services segment gross profit as a percentage of revenue was consistent with prior year. While competitive pricing contracts remain a focus of many of our customers, we have offset the margin pressure by focusing on manpower utilization and other controllable cost of revenues.

Income from operations. Our income from operations by segment for the second quarter of fiscal 2011 and 2010, was as follows:

 

		Three months ended November 30,
		2010				2009
		(in thousands)
Income from operations
Services		$	10,249			$	7,625
Products and Systems			976				1,111
International			1,082				808
Corporate and eliminations			(2,110	)			(1,877	)
		$	10,197			$	7,667

 

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Our income from operations of $10.2 million for the second quarter of fiscal 2011 increased $2.5 million, or 33%, compared to the first quarter of fiscal 2010. As a percentage of revenues, our income from operations was approximately 12% and 11% in the second quarter of fiscal 2011 and fiscal 2010.

As a percentage of revenues, selling, general and administrative expenses for the second quarter of fiscal 2011 and fiscal 2010 were 18% and 19%, respectively. Our selling, general and administrative expenses for the second quarter of fiscal 2011 increased approximately $1.9 million, or 14%, over the second quarter of fiscal 2010, 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 $0.5 million of this increase. Stock compensation costs increased approximately $0.3 million in the second quarter of fiscal 2011 over the second quarter of fiscal 2010. 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 additional management and corporate staff. A significant portion of these increases (as well as other increases in cost of revenues) supported our development of new and existing centers of excellence. Income from operations was also impacted by an increase in our legal provision of $0.1 million in the quarter. Depreciation and amortization included in the determination of income from operations for the second quarter of fiscal 2011 and fiscal 2010 was $1.3 million, or 1% of revenues, and $1.2 million, or 2%, respectively.

Interest expense. Interest expense was $0.7 million and $1.0 million for the second quarter of fiscal 2011 and fiscal 2010, respectively. The decrease in the second quarter of fiscal 2011 related to a decrease in average borrowings outstanding during the quarter of compared to fiscal 2010. Just prior to our IPO in October 2009, we had outstanding borrowings of approximately $66.4 million, which was subsequently repaid with the proceeds of the offering.

Net (income) loss attributable to noncontrolling interests, net of taxes. The increase in net income attributable to noncontrolling interests relates primarily to an increase in net income from PASA, our Brazilian subsidiary and IPS, our recently acquired subsidiary in France, during the second quarter. This increase was offset by the net loss incurred by Diapac, our subsidiary in Russia.

Income taxes. Our effective income tax rate was approximately 40% for the second quarter of fiscal 2011 compared to approximately 45% for the second quarter of fiscal 2010. The decrease was primarily due to the impact of permanent tax differences and an adjustment to our liabilities related to uncertain tax provisions.

Net income attributable to Mistras Group, Inc. Net income attributable to Mistras Group, Inc. for the second quarter of fiscal 2011 was $5.7 million, or 6% of our revenues, an increase of $2.1 million over the second quarter of fiscal 2010, which was $3.6 million, or 6% 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.

Net income attributable to common shareholders. Net income attributable to common shareholders for the second quarter of fiscal 2011 was $5.7 million, or 6% of our revenues, a decrease of $4.4 million when compared to the second quarter of fiscal 2010, which was $10.1 million, or 14% of revenues. This decrease was primarily due to a fair market value adjustment to preferred stock interests in the prior year, which accreted to the benefit of common shareholders. All of the preferred shares outstanding as of our IPO in October 2009 converted to common stock and all accretion recorded through the redemption price formula were credited to additional paid-in capital.

 

 

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Six months ended November 30, 2010 compared to the six months ended November 30, 2009

Our consolidated results of operations for the six months ended November 30, 2010 and 2009 were as follows:

 

		Six months ended November 30,
		2010				2009
		(in thousands)
Statement of Operations Data
Revenues		$	157,247			$	127,988
Cost of revenues			102,402				82,716
Depreciation			6,259				5,106
Gross profit			48,586				40,166
Selling, general and administrative expenses			31,094				26,819
Research and engineering			1,124				932
Depreciation and amortization			2,504				2,259
Legal reserve			351				(297	)
Income from operations			13,513				10,453
Interest expense			1,361				2,081
Loss on extinguishment of long-term debt			—				387
Income before provision for income taxes and noncontrolling interest			12,152				7,985
Provision for income taxes			4,872				3,569
Net income			7,280				4,416
Net (income) loss attributable to noncontrolling interests, net of taxes			(10	)			(39	)
Net income attributable to Mistras Group, Inc.			7,270				4,377
Accretion of preferred stock			—				6,499
Net income attributable to common shareholders		$	7,270			$	10,876

 

Our EBITDA and Adjusted EBITDA, non-GAAP measures explained above, for the six months ended November 30, 2010 and 2009, respectively, was as follows:

 

		Six months ended November 30,
		2010				2009
EBITDA and Adjusted EBITDA data		(in thousands)
Net income attributable to Mistras Group, Inc.		$	7,270			$	4,377
Interest expense			1,361				2,081
Provision for income taxes			4,872				3,569
Depreciation and amortization			8,763				7,365
EBITDA		$	22,266			$	17,392
Legal reserve			351				(297	)
Large customer bankruptcy			—				767
Stock compensation expense			1,776				1,033
Loss on extinguishment of debt			—				387
Adjusted EBITDA		$	24,393			$	19,282

 

See explanation and definition of EBITDA and Adjusted EBITDA above on page 22.

 

 

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Revenues. Revenues were $157.2 million for the six months ended November 30, 2010 compared to $128.0 million for the six months ended November 30, 2009. Revenues by segment for the six months ended November 30, 2010 and 2009 are as follows:

 

		Six months ended November 30,
		2010				2009
		(in thousands)
Revenues
Services		$	131,390			$	106,640
Products and Systems			10,538				8,369
International			18,390				15,230
Corporate and eliminations			(3,071	)			(2,251	)
		$	157,247			$	127,988

 

Our growth rates for the six months ended November 30, 2010 and 2009 were as follows:

		Six months ended November 30,
		2010				2009
Revenue growth		$	29,259			$	21,716
% Growth over prior year			22.9	%			20.4	%
Comprised of:
% of organic growth			16.2	%			9.7	%
% of acquisition growth			6.8	%			12.6	%
% foreign exchange decrease			(0.1	%)			(1.9	%)
			22.9	%			20.4	%

 

Revenues increased $29.3 million, or approximately 23%, for the six months ended November 30, 2010 compared to the six months ended November 30, 2009 as a result of growth in all our segments. For the six months ended November 30, 2010 and 2009, our organic growth rate, as compared to growth driven by acquisitions, was approximately 16% and 10%, respectively. This organic growth was the result of continued demand for our asset protection solutions, including growth from new and existing customers. For the six months ended November 30, 2010, our growth from acquisitions was approximately $8.8 million, or approximately 7%, compared to approximately $13.5 million, or approximately 13%, in the six month ended November 30, 2009. We completed three acquisitions in six months ended November 2010 and three acquisitions in six months ended Nove mber 30, 2009, further increasing our capabilities and adding to our base of qualified technicians.

For the six months ended November 30, 2010, our growth continued in many of our target markets. The largest dollar increase during this period was attributable to customers in the oil and gas market which was recognized from several new and existing projects, including an increase in our portfolio of “run and maintain” outsourced contracts and new work, some of which were obtained through our acquisitions. This revenue was achieved globally and provided approximately 60% and 62% of our total revenues for the six months ended November 30, 2010 and 2009, respectively. We also experienced high growth in several of our other target markets, including chemical, fossil power, and industrial markets. Our largest customer accounted for approximately 16% and 20% of our total revenues for the six months ended November 30, 2010 and 20 09, respectively. No other customer accounted for more than 8% of our total revenues for the six months ended November 30, 2010.

 

 

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Gross profit. Our gross profit was $48.6 million and increased $8.4 million, or 21%, during the six months ended November 30, 2010 compared to $40.1 million during the six months ended November 30, 2009. As a percentage of revenues, our gross profit and its components were as follows:

 

		Six months ended November 30,
		2010				2009
		(in thousands)
Gross profit		$	48,586			$	40,166
Gross profit % comprised of:
Revenues			100.0	%			100.0	%
Cost of revenues			65.1	%			64.6	%
Depreciation			4.0	%			4.0	%
Total			30.9	%			31.4	%
Gross profit % decrease from prior year quarter			(0.5	%)			(4.5	%)

 

Our gross profit by segment for the second quarter of fiscal 2011and 2010, was as follows:
 

		Six months ended November 30,
		2010				2009
		(in thousands)
Gross profit
Services		$	36,754			$	29,933
Products and Systems			5,390				4,506
International			6,531				5,990
Corporate and eliminations			(89	)			(263	)
		$	48,586			$	40,166

 

As a percentage of revenues, our gross profit was approximately 31% for each six months ended November 30, 2010 and 2009. Cost of revenues, excluding depreciation, as a percentage of revenues was approximately 65% in each of the six months ended November 30, 2010 and 2009. Depreciation expense included in the determination of gross profit was approximately $6.3 million and $5.1 million for the six months ended November 30, 2010 and 2009, respectively.

With our increase in revenues in the first half of fiscal 2011, our gross profit as a percentage of revenues decreased approximately 50 basis points as compared to the first half of fiscal 2010. We incurred a slight decrease in gross profit percentage in the Services segment that was primarily attributable to sales derived from several new contracts, which drove market share growth but were competitive from a pricing perspective in the short term. Historically, by introducing more advanced NDT tools to new customers, margin enhancement follows. This slight decrease was partially offset by improved efficiencies in our utilization rates when compared to the second quarter of fiscal 2010. Our Products and Systems segment and our International segment also had decreases in gross profit percentage which was primarily attributable to a lower margin product mix of sales during the period.

 

 

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Income from operations. Our income from operations by segment for the second quarter of fiscal 2011 and 2010, was as follows:

 

		Six months ended November 30,
		2010				2009
		(in thousands)
Income from operations
Services		$	14,097			$	10,857
Products and Systems			1,767				1,041
International			2,110				2,070
Corporate and eliminations			(4,461	)			(3,515	)
		$	13,513			$	10,453

 

Our income from operations for the six months ended November 30, 2010 increased $3.1 million, or 29%, to $13.5 million compared $10.5 million for the six months ended November 30, 2009. As a percentage of revenues, our income from operations was approximately 9% and 8% for the six months ended November 30, 2010 and 2009, respectively.

As a percentage of revenues, selling, general and administrative expenses were 20% and 21% for the six months ended November 30, 2010 and 2009 respectively. Our selling, general and administrative expenses for the six months ended November 30, 2010 increased approximately $4.3 million, or 16%, over same period in the prior year. This increase was 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 $0.7 million of this increase. Stock compensation costs increased approximately $0.7 million in fiscal 2011 compared to fiscal 2010. Other increases in our selling, general and administrative expenses included higher compensation and benefit expenses over the previous year attributed to normal salary increas es, 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 new and existing centers of excellence. These increases were offset by a decrease in our provision for bad debts, certain professional fees, and travel-related expenses. Income from operations was also negatively impacted by a legal provision of $0.4 million in the first half of fiscal 2011 as compared to a reversal of a legal provision of $0.3 million in the first half of fiscal 2010. Depreciation and amortization included in the determination of income from operations for the six months ended November 30, 2010 and 2009 was $2.5 million, or 2% of revenues, and $2.3 million, or 2%, respectively.

Interest expense. The decrease in interest expense for the six months ended November 30, 2010 related to a decrease in average borrowings outstanding during the period as compared to the six months ended November 30, 2009. Just prior to our IPO in October 2009, we had outstanding borrowings under our revolving credit facility of approximately $66.4 million, which was subsequently repaid with the proceeds of the offering.

Net (income) loss 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, and the year to date net loss incurred by IPS, our recently acquired subsidiary in France, offset by an increase in net income of our Brazilian subsidiary, PASA.

Income taxes. Our effective income tax rate was approximately 40% for the six months ended November 30, 2010 compared to approximately 45% for the six months ended November 30, 2009. The decrease was primarily due to the impact of permanent tax differences and an adjustment to our liabilities related to uncertain tax provisions

Net income attributable to Mistras Group, Inc. Net income attributable to Mistras Group, Inc. for the six months ended November 30, 2010 was $7.3 million, or 5% of our revenues, which is greater than our net income attributable to Mistras Group, Inc. for the six months ended November 30, 2009, which was $4.4 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 and an increase to our legal provision.

Net income attributable to common shareholders. Net income attributable to common shareholders for the six months ended November 30, 2010 was $7.3 million, or 5% of our revenues, a decrease of $3.6 million when compared to the six months ended November 30, 2009, which was $10.9 million, or 8% of revenues. This decrease was primarily due to a fair market value adjustment to preferred stock interests in the prior year, which accreted to the benefit of common shareholders. All of the preferred shares outstanding as of our IPO in October 2009 converted to common stock and all accretion recorded through the redemption price formula were credited to additional paid-in capital.

 

 

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Liquidity and Capital Resources

Cash Flows Table

Our cash flows are summarized in the table below:

 

		Six months ended November 30,
		2010				2009
		(in thousands)
Net cash provided by (used in):
Operating Activities		$	11,095			$	8,620
Investing Activities			(20,766	)			(15,049	)
Financing Activities			198				15,319
Effect of exchange rate changes on cash			205				(5	)
Net change in cash and cash equivalents		$	(9,268	)		$	8,885

 

Cash Flows from Operating Activities

During the six months ended November 30, 2010, cash provided by our operating activities was $11.1 million, an increase of $2.5 million from the comparable period of fiscal 2010. Positive operating cash flow was primarily attributable to higher net income, excluding depreciation, amortization and other non-cash expenses, of $17.7 million. We used $6.6 million to fund an increase in our working capital, which resulted from an increase in our trade accounts receivable due to a seasonal increase in revenues in the second quarter of fiscal 2011.

During the six months ended November 30, 2009, cash provided by our operating activities was $8.6 million, an increase of $8.2 million from the comparable period of fiscal 2009. Positive operating cash flow was primarily attributable to net income, excluding depreciation and amortization and other non-cash expenses, of $13.6 million. We used $5.0 million to fund an increase in working capital, which resulted from an increase in our trade accounts receivable due a seasonal increase in revenues in our second quarter of fiscal 2010.

Cash Flows from Investing Activities

During the six months ended November 30, 2010, cash used in investing activities was $20.8 million compared to $15.0 million from the comparable period of fiscal 2010. Cash purchases of property, plant and equipment were $3.7 million and were primarily related to equipment used by our technicians, and land purchased that is to be used to build a new facility for a portion of our Services operations near Houston, Texas. Cash used in investing activities also included our acquisition of three asset protection businesses for cash payments aggregating $16.9 million.

During the six months ended November 30, 2009, cash used in investing activities was $15.0 million and was primarily comprised our acquisition of three asset protection businesses for cash payments aggregating $14.4 million. Cash used in investing activities also included cash purchases of property, plant and equipment totaling $0.6 million relating to equipment used by our technicians.

Cash Flows from Financing Activities

Net cash provided by financing activities was $0.2 million for the six months ended November 30, 2010 and related primarily to net borrowings under our revolving credit facility of $6.6 million offset by repayments of capital lease obligations and long-term debt.

Net cash provided by financing activities was $15.3 million for the six months ended November 30, 2009. In October 2009, we completed our initial public offering in which we received net proceeds of approximately $74.1 million. The Company used approximately $66.4 million of the net proceeds to repay the outstanding borrowings under our senior credit facility.

 

 

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Effect of Exchange Rate on Changes on Cash and Cash Equivalents

The effect of exchange rate changes on our cash and cash equivalents was approximately $0.2 million for the six months ended November 30, 2010 and was de minimis for the six months ended November 30, 2009, respectively.

Cash balance and credit facility borrowings

As of November 30, 2010, we had cash and cash equivalents totaling $6.8 million and approximately $48.4 million available to us under our revolving credit facility. Our outstanding borrowings under our revolving credit facility were $6.6 million as of November 30, 2010. 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.

In July 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 be re-borrowed at any time. Borrowings made under the revolving credit facility are payable in July 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 to be applicable. As of November 30, 2010, the interest rate for the borrowings under our revolving credit facility was 2.75%.

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.

At November 30, 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 when necessary, and seller notes. We may also obtain capital through the issuance of debt or equity securities, or a combination of both.

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. 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, including 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. In October 2010, we entered into an agreement fo r the construction of a new facility that will consolidate our facilities in the Houston, Texas metro area. This facility will serve as our Gulf Region headquarters and is expected to be completed by the end of the first quarter of fiscal 2012. The total construction costs per the agreement are approximately $3.3 million.

 

 

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Our anticipated acquisitions may also require capital. For example, we have completed four acquisitions in fiscal 2011, including an acquisition completed in December 2010, with an initial cash outlay of approximately $18.3 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 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.

Off-balance sheet arrangements

During the six months ended November 30, 2010, 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.

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

        

Foreign Currency Risk

We have foreign currency exposure related to our operations in foreign locations where the functional currency is not the U.S. dollar. This foreign currency exposure, particularly the Euro, British Pound Sterling (GBP), Brazilian Real, Russian Ruble, Japanese Yen 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 GBP 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 foreign 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. For our foreign subsidiaries, assets and liabilities are translated at period ending rates of exchange. Translation adjustments for the assets and liability accounts are included in accumulated other comprehensive income in stockholders’ equity (deficit). We had approximately $0.6 million of foreign currency translation gains in other comprehensive income for the first six months of fiscal 2011. We do not currently enter into forward exchange contracts to hedge exposures to foreign currencies. We may consider entering into hedging or forward exchange contracts in t he future.

 

 

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Interest Rate Sensitivity

The interest rate on our revolving credit facility, currently 2.75%, is variable and adjusts periodically. We had $6.6 million of outstanding borrowings under our revolving credit facility at of November 30, 2010. A hypothetical 100 basis point adverse shift in interest rates would not have had a material effect on our results of operations for the three or six month periods ended November 30, 2010.

From time to time, we enter into interest rate swap contracts whereby we would receive or pay an amount equal to the difference between a fixed rate and LIBOR on a quarterly basis in order to reduce our exposure to interest rate fluctuations. All gains and losses are recognized as an adjustment to interest expense and the combined fair values are recorded in other liabilities on the consolidated balance sheet. At November 30, 2010, we had no such contracts in effect.

We had cash and cash equivalents of $6.8 million at November 30, 2010. These amounts are held for working capital purposes and were invested primarily in short-term interest-bearing accounts. 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.

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.

 

ITEM 4.

Controls and Procedures

                   

Limitations on Effectiveness of Control.

Our management, including the principal executive and financial officers, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of our control system reflects the fact that there are resource constraints and the benefits of such controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of management’s assessments of the current effectiveness of our disclosure controls and procedures and its internal control over financial reporting are subject to risks. However, our disclosure controls and procedures are designed to provide reasonable assurance that the objectives of our control system are met.

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), 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 Exchange Act). This evaluation included consideration of the various processes carried out under the direction of our disclosure committee in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC. This evaluation also considered the work completed relating to our compliance efforts with regards to the requirements of S ection 404 of the Sarbanes-Oxley Act of 2002.

 

 

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Based on this evaluation, our CEO and CFO concluded that, as of November 30, 2010, our disclosure controls and procedures were operating effectively to ensure that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the requisite time periods and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

We intend to regularly review and evaluate the design and effectiveness of our disclosure controls and procedures and internal controls over financial reporting on an ongoing basis and to improve these controls and procedures over time.

Changes in Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-13(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the second quarter of fiscal 2011.

 

 

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PART II—OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

 

See Note 12 to the financial statements included in this report for a description of our legal proceedings.

 

ITEM 1.A.

Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed under the “Risk Factors” section included in our Annual Report on Form 10-K, filed with the SEC on August 17, 2010. There have been no material changes to the risk factors previously disclosed in the Annual Report.

 

ITEM 2.

Unregistered Sale of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities

 

None.

(b) Use of Proceeds from Public Offering of Common Stock

None

(c) Repurchases of Our Equity Securities

None.

 

ITEM 3.

Defaults Upon Senior Securities

 

None.

 

ITEM 5.

Other Information

 

None.

 

ITEM 6.

Exhibits

See Exhibit Index on Page 37 of this report, and incorporated herein by reference.

 

 

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Signatures

Pursuant to the requirements 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/ Francis T. Joyce
		Francis T. Joyce
		Chief Financial Officer
		(Principal financial officer and duly authorized officer)

 

Date: January 13, 2011

 

 

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EXHIBIT INDEX

 

Exhibit No.		Description
10.1		Form of Restricted Stock Unit Certificate for awards under the 2009 Long-Term Incentive Plan.
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2		Certification of Chief 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.

 

 

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Exhibit 10.1

 

MISTRAS GROUP, INC.

RESTRICTED STOCK UNIT CERTIFICATE

Granted To:
Total Units:	Grant Date:
Vesting Dates:

1.   Award.  In accordance with the Mistras Group, Inc. 2009 Long-Term Incentive Plan (the “Plan”), Mistras Group, Inc. (“the Company”) has made an award to you of restricted stock units (the “Units”), which is represented by this certificate. Each Unit, upon vesting, will become one share of the Company’s common stock.  The award and the Units are subject to the provisions of the Plan and, to the extent not inconsistent with the Plan, the terms and conditions of this certificate.  Capitalized terms that are used but not defined in this certificate shall have the meanings ascribed t o them by the Plan.

2.   Vesting of Units.  Except as otherwise provided herein or the Plan, the Units will vest in four (4) equal annual installments, with 25% of the Units vesting on each of the dates set forth above, subject to your continuous employment or other service with the Company or a Subsidiary from the Grant Date until the applicable vesting date.

3.   Termination of Employment; Forfeiture of Unvested Units.  Unless the Committee, acting in its sole and absolute discretion, determines otherwise, upon the termination of your employment and other service with the Company and its Subsidiaries (“Termination of Employment”), you will forfeit all right, title and interest in the unvested Units.

4.   Transfer Restrictions.  You may not sell, assign, transfer, pledge, hedge, hypothecate, encumber or dispose of in any way (whether by operation of law or otherwise) any unvested Units, and unvested Units shall not be subject to execution, attachment or similar process.  Any attempt by you or any other person claiming against, through or under you to cause unvested Units to be transferred or assigned in any manner and for any purpose not permitted hereunder or under the Plan shall be null and void and without effect upon the Company, you or any other person.

5.   No Ownership of Stock; No Dividends or Voting Rights.  The Units do not represent shares of the Company’s common stock, and no dividends or other distributions will be payable on unvested Units, and you will not have any voting rights with respect to the unvested Units.

6.   Issuance of Shares Upon Vesting.  If, as and when a Unit becomes vested, and subject to the satisfaction of applicable withholding and other legal requirements, the vested Unit becomes void and you shall own one share of common stock of the Company for each vested Unit.

7.   Withholding.  The vesting of Units covered by this certificate shall be subject to and conditioned upon the satisfaction by you of applicable tax withholding obligations.  The Company and its Subsidiaries may require you to remit an amount sufficient to satisfy applicable withholding taxes or deduct or withhold such amount from any payments otherwise owed to you.  By accepting this award, you expressly authorizes the Company to deduct from any compensation or any other payment of any kind due to you, including withholding shares issued in exchange for vested Units, for the amount of any federal, state, local or foreign taxes required by law to be withheld in connection with the vesting of Units; provided, however, that the value of the Units withheld may not exceed the statutory maximum withholding amount required by law.

 

 

 

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8.   Provisions of the Plan and the Committee’s Authority Control.  This certificate is subject to all the terms, conditions and provisions of the Plan and to the rules, regulations and interpretations as may be established or made by the Committee acting within the scope of its authority and responsibility under the Plan.  A copy of the Plan is available to you and may be obtained from the Company’s Corporate Secretary at the Company’s corporate headquarters.  The applicable provisions of the Plan shall govern in any situation where this certificate is silent or where the applicable provisions of this cer tificate are contrary to or not reconcilable with such Plan provisions.  The Committee shall have complete discretion in the exercise of its rights, powers, and duties with respect to the award represented by this certificate.  Any interpretation or construction of any provision of, and the determination of any question arising under, this certificate shall be made by the Committee in its discretion and such exercise shall be final, conclusive, and binding.  The Committee may designate any individual or individuals to perform any of its functions hereunder.

9.   No Employment Rights.  Nothing contained herein or in the Plan shall confer upon you any right of continued employment or other service with the Company or a Subsidiary or interfere in any way with the right of the Company and its Subsidiaries at any time to terminate your employment or other service with the Company or its Subsidiaries or to increase, decrease or otherwise adjust your compensation and any other terms and conditions of your employment or other service.

10.          Successors.  This certificate shall be binding upon, and inure to the benefit of, any successor or successors of the Company, you and any of your beneficiaries.

11.          Entire Understanding. This certificate and the terms of Plan constitute the entire terms of the award represented by this certificate and may not be amended, except as provided in the Plan, other than by a written instrument executed by the Company and you.

12.          Governing Law. All rights and obligations under this certificate shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to its principles of conflict of laws.

 

Mistras Group, Inc.
By:

 

 

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Exhibit 31.1

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

EXCHANGE ACT OF 1934

 

	I, Sotirios J. Vahaviolos, certify that:
1.	I have reviewed this report on Form 10-Q 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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.

 

Date: January 13, 2011

 

	/s/ Sotirios J. Vahaviolos
	Sotirios J. Vahaviolos
	Chief Executive Officer

 

 

 

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Exhibit 31.2

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

EXCHANGE ACT OF 1934

 

	I, Francis T. Joyce, certify that:
1.	I have reviewed this report on Form 10-Q 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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.

 

Date: January 13, 2011

 

	/s/ Francis T. Joyce
	Francis T. Joyce
	Chief Financial Officer

 

 

 

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Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Mistras Group, Inc. (the “Company”), that, to his knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended November 30, 2010 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Report.

Dated: January 13, 2011

 

	/s/ Sotirios J. Vahaviolos
	Sotirios J. Vahaviolos
	Chief Executive Officer
	/s/ Francis T. Joyce
	Francis T. Joyce
	Chief Financial Officer
	Mistras Group, Inc.

 

 

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