Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 29, 2012

 

Or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period to

 

Commission file number 001- 34481

 


 

Mistras Group, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

22-3341267

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

195 Clarksville Road
Princeton Junction, New Jersey

 

08550

(Address of principal executive offices)

 

(Zip Code)

 

(609) 716-4000
(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No

 

As of April 2, 2012, the registrant had 27,938,173 shares of common stock outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

PAGE

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

Financial Statements

2

 

 

 

 

 

 

Unaudited Consolidated Balance Sheets as of February 29, 2012 and May 31, 2011

2

 

 

 

 

 

 

Unaudited Consolidated Statements of Operations for the three and nine months ended February 29, 2012 and February 28, 2011

3

 

 

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the nine months ended February 29, 2012 and February 28, 2011

4

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended February 29, 2012 and February 28, 2011

5

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

 

 

ITEM 4.

Controls and Procedures

34

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

35

 

 

 

 

 

ITEM 1.A.

Risk Factors

35

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

36

 

 

 

 

 

ITEM 5.

Other Information

36

 

 

 

 

 

ITEM 6.

Exhibits

36

 

 

 

 

SIGNATURES

 

37

 

i



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1.     Financial Statements (unaudited)

 

Mistras Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands, except share data)

 

 

 

February 29, 2012

 

May 31, 2011

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

7,931

 

$

10,879

 

Accounts receivable, net

 

95,257

 

78,031

 

Inventories, net

 

13,173

 

9,830

 

Deferred income taxes

 

1,324

 

1,278

 

Prepaid expenses and other current assets

 

9,354

 

6,761

 

Total current assets

 

127,039

 

106,779

 

Property, plant and equipment, net

 

58,570

 

49,168

 

Intangible assets, net

 

33,559

 

27,304

 

Goodwill

 

80,053

 

64,146

 

Other assets

 

1,511

 

1,240

 

Total assets

 

$

300,732

 

$

248,637

 

 

 

 

 

 

 

LIABILITIES, PREFERRED STOCK AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

5,963

 

$

7,226

 

Current portion of capital lease obligations

 

6,644

 

5,853

 

Accounts payable

 

7,142

 

6,656

 

Accrued expenses and other current liabilities

 

40,332

 

28,028

 

Income taxes payable

 

466

 

2,825

 

Total current liabilities

 

60,547

 

50,588

 

Long-term debt, net of current portion

 

34,645

 

14,625

 

Obligations under capital leases, net of current portion

 

12,847

 

9,623

 

Deferred income taxes

 

2,425

 

2,863

 

Other long-term liabilities

 

5,197

 

3,452

 

Total liabilities

 

115,661

 

81,151

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Preferred stock, 10,000,000 shares authorized

 

 

 

Equity

 

 

 

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 27,938,173 and 27,667,122 shares issued and outstanding as of February 29, 2012 and May 31, 2011, respectively

 

279

 

277

 

Additional paid-in capital

 

185,984

 

180,594

 

Retained earnings (accumulated deficit)

 

204

 

(14,017

)

Accumulated other comprehensive (loss) income

 

(1,675

)

303

 

Total Mistras Group, Inc. stockholders’ equity

 

184,792

 

167,157

 

Noncontrolling interest

 

279

 

329

 

Total equity

 

185,071

 

167,486

 

Total liabilities, preferred stock and equity

 

$

300,732

 

$

248,637

 

 

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

 

2



Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
(in thousands, except per share data)

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Services

 

$

94,253

 

$

72,411

 

$

281,097

 

$

216,616

 

Products

 

9,865

 

6,802

 

28,688

 

19,844

 

Total revenues

 

104,118

 

79,213

 

309,785

 

236,460

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Cost of services

 

66,336

 

50,696

 

194,270

 

147,754

 

Cost of products sold

 

4,238

 

2,460

 

12,094

 

7,804

 

Depreciation related to services

 

3,760

 

3,307

 

10,639

 

9,252

 

Depreciation related to products

 

200

 

153

 

563

 

467

 

Total cost of revenues

 

74,534

 

56,616

 

217,566

 

165,277

 

Gross profit

 

29,584

 

22,597

 

92,219

 

71,183

 

Selling, general and administrative expenses

 

20,806

 

16,005

 

59,565

 

47,099

 

Research and engineering

 

578

 

514

 

1,769

 

1,638

 

Depreciation and amortization

 

1,805

 

1,385

 

4,787

 

3,889

 

Acquisition-related costs

 

849

 

 

510

 

 

Legal reserve

 

 

 

 

351

 

Income from operations

 

5,546

 

4,693

 

25,588

 

18,206

 

Other expenses

 

 

 

 

 

 

 

 

 

Interest expense

 

814

 

596

 

2,620

 

1,957

 

Loss on extinguishment of long-term debt

 

113

 

 

113

 

 

Income before provision for income taxes

 

4,619

 

4,097

 

22,855

 

16,249

 

Provision for income taxes

 

1,548

 

1,690

 

8,672

 

6,562

 

Net income

 

3,071

 

2,407

 

14,183

 

9,687

 

Net (income) loss attributable to noncontrolling interests, net of taxes

 

(34

)

36

 

38

 

26

 

Net income attributable to Mistras Group, Inc.

 

$

3,037

 

$

2,443

 

$

14,221

 

$

9,713

 

Earnings per common share (see Note 4):

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

$

0.09

 

$

0.51

 

$

0.36

 

Diluted

 

$

0.11

 

$

0.09

 

$

0.50

 

$

0.36

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

27,921

 

26,667

 

27,794

 

26,665

 

Diluted

 

28,829

 

26,919

 

28,563

 

26,824

 

 

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

 

3



Table of Contents

 

Mistras Group, Inc. and Subsidiaries

Unaudited Consolidated Statements of Stockholders’ Equity

(in thousands)

 

 

 

 

 

 

 

Additional

 

Retained
earnings

 

Accumulated
other

 

Total
Mistras Group,
Inc.

 

 

 

 

 

 

 

Common Stock

 

paid-in

 

(accumulated

 

comprehensive

 

Stockholders’

 

Noncontrolling

 

 

 

 

 

Shares

 

Amount

 

capital

 

deficit)

 

income (loss)

 

Equity

 

Interest

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended February 28, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 31, 2010

 

26,664

 

$

267

 

$

162,054

 

$

(30,448

)

$

(1,587

)

$

130,286

 

$

268

 

$

130,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

9,713

 

 

9,713

 

(26

)

9,687

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

880

 

880

 

5

 

885

 

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

10,593

 

(21

)

10,572

 

Stock compensation

 

1

 

 

2,680

 

 

 

2,680

 

 

2,680

 

Exercise of stock options

 

5

 

 

30

 

 

 

30

 

 

30

 

Noncontrolling interest in subsidiary

 

 

 

 

 

 

 

117

 

117

 

Balance at February 28, 2011

 

26,670

 

$

267

 

$

164,764

 

$

(20,735

)

$

(707

)

$

143,589

 

$

364

 

$

143,953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended February 29, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 31, 2011

 

27,667

 

$

277

 

$

180,594

 

$

(14,017

)

$

303

 

$

167,157

 

$

329

 

$

167,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

14,221

 

 

14,221

 

(38

)

14,183

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

(1,978

)

(1,978

)

(12

)

(1,990

)

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

12,243

 

(50

)

12,193

 

Stock compensation

 

14

 

 

3,791

 

 

 

3,791

 

 

3,791

 

Net settlement on vesting of restricted stock units

 

36

 

 

(281

)

 

 

 

(281

)

 

(281

)

Excess tax benefit from stock compensation

 

 

 

405

 

 

 

405

 

 

405

 

Exercise of stock options

 

221

 

2

 

1,475

 

 

 

1,477

 

 

1,477

 

Balance at February 29, 2012

 

27,938

 

$

279

 

$

185,984

 

$

204

 

$

(1,675

)

$

184,792

 

$

279

 

$

185,071

 

 

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

 

4



Table of Contents

 

Mistras Group, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

Cash flows from operating activities

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

14,221

 

$

9,713

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

15,989

 

13,608

 

Deferred income taxes

 

(479

)

171

 

Provision for doubtful accounts

 

189

 

45

 

Loss on extinguishment of long-term debt

 

113

 

 

(Gain) loss on sale of assets

 

(40

)

38

 

Amortization of deferred financing costs

 

116

 

127

 

Stock compensation expense

 

3,791

 

2,680

 

Interest rate swap

 

 

(210

)

Noncontrolling interest

 

(38

)

(26

)

Foreign currency loss (gain)

 

231

 

(310

)

Changes in operating assets and liabilities, net of effect of acquisitions of businesses

 

 

 

 

 

Accounts receivable

 

(10,160

)

(6,620

)

Inventories

 

(2,624

)

(1,377

)

Prepaid expenses and other current assets

 

(1,386

)

(1,743

)

Other assets

 

(42

)

971

 

Accounts payable

 

(1,310

)

410

 

Income taxes payable

 

(2,302

)

(302

)

Accrued expenses and other current liabilities

 

4,703

 

1,468

 

Net cash provided by operating activities

 

20,972

 

18,643

 

Cash flows from investing activities

 

 

 

 

 

Purchase of property, plant and equipment

 

(6,407

)

(6,051

)

Purchase of intangible assets

 

(437

)

(398

)

Acquisition of businesses, net of cash acquired

 

(26,273

)

(18,301

)

Proceeds from sale of equipment

 

301

 

170

 

Net cash used in investing activities

 

(32,816

)

(24,580

)

Cash flows from financing activities

 

 

 

 

 

Repayment of capital lease obligations

 

(5,136

)

(4,631

)

Repayment of long-term debt

 

(4,420

)

(6,808

)

Net borrowings from revolver

 

19,050

 

5,000

 

Net (repayments) proceeds from other short-term borrowings

 

(1,868

)

2,722

 

Proceeds from borrowings of long-term debt

 

837

 

42

 

Payment of financing costs

 

(623

)

 

Taxes paid related to net share settlement of equity awards

 

(281

)

 

Excess tax benefit from stock compensation

 

405

 

 

Proceeds from the exercise of stock options

 

1,477

 

30

 

Net cash provided by (used in) financing activities

 

9,441

 

(3,645

)

Effect of exchange rate changes on cash and cash equivalents

 

(545

)

105

 

Net change in cash and cash equivalents

 

(2,948

)

(9,477

)

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

10,879

 

16,037

 

End of period

 

$

7,931

 

$

6,560

 

Supplemental disclosure of cash paid

 

 

 

 

 

Interest

 

$

1,720

 

$

2,058

 

Income taxes

 

$

11,995

 

$

6,581

 

Noncash investing and financing

 

 

 

 

 

Equipment acquired through capital lease obligations

 

$

8,613

 

$

3,678

 

Issuance of notes payable and other debt obligations primarily related to acquisitions

 

$

2,444

 

$

1,637

 

 

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

 

5



Table of Contents

 

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(tabular dollars in thousands, except per share data)

 

1.                                      Description of Business & Basis of Presentation

 

Description of Business

 

Mistras Group, Inc. and subsidiaries (the Company) is a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability 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 disasters. Given the role the services of the Company 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, alternative and renewable energy, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industries.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine months ended February 29, 2012 are not necessarily indicative of the results that may be expected for the year ending May 31, 2012. The balance sheet at May 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. You should read these unaudited consolidated financial statements together with the historical consolidated financial statements of the Company as filed with the Securities and Exchange Commission.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Mistras Group, Inc. and its wholly or majority-owned subsidiaries. Where the Company’s ownership interest is less than 100%, the noncontrolling interests are reported in stockholders’ equity in the accompanying consolidated balance sheets. The noncontrolling 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. Mistras Group, Inc.’s and its subsidiaries’ fiscal years end on May 31 except for the companies in the International segment, which end on April 30. 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 in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company’s financial condition or results of operations as previously reported.

 

Revision of Prior Period Financial Statements

 

The Company has revised the consolidated statement of cash flows for the nine months ended February 28, 2011 to reflect the cash flows associated with the financing of an insurance premium as cash flows from financing activities.  Such cash flows were previously reported in operating activities.  A summary of the revisions to the consolidated statements of cash flows for the nine months ended February 28, 2011 is as follows:

 

6



Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

 

 

Nine months months ended

 

 

 

February 28, 2011

 

 

 

As previously
reported

 

Revision

 

As revised

 

 

 

 

 

 

 

 

 

Net cash flows provided by operating activities

 

$

21,365

 

$

(2,722

)

$

18,643

 

Net cash flows used in investing activities

 

(24,580

)

 

(24,580

)

Net cash flows provided by financing activities

 

(6,367

)

2,722

 

(3,645

)

Effects of exchange rate changes on cash and cash equivalents

 

105

 

 

105

 

Net increase in cash and cash equivalents during the period

 

(9,477

)

 

(9,477

)

 

These revisions had no impact on the annual statement of cash flows as presented in the 2011 Form 10-K.

 

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.

 

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. 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 revenue 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 cost 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 project

 

7



Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

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, and hardware. When a sales arrangement contains multiple elements, such as hardware and services and/or software products, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available.  The Company has historically utilized the VSOE due to the nature of its products. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.

 

Use of Estimates

 

These unaudited consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The more significant estimates include valuation of goodwill and intangible assets, useful lives of long-lived assets, acquisition-related contingent consideration, allowance for doubtful accounts, inventory valuation, reserves for self-insured workers compensation and health benefits and provision for income taxes.

 

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. The Company tests 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. The most recent annual test for impairment performed for fiscal 2011 did not identify any instances of impairment and there were no events through February 29, 2012 that warranted a reconsideration of the impairment test results.

 

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

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At times, cash deposits may exceed the limits insured by the Federal Deposit Insurance Corporation. The Company believes it is not exposed to any significant credit risk or risk of 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 customer, BP plc. (BP), which accounted for 16% and 21% of revenues for the three months ended February 29, 2012 and February 28, 2011, respectively, and 16% and 17% of revenues for the nine months ended February 29, 2012 and February 28, 2011, respectively.  Accounts receivable from this customer were approximately 14% and 15% of total accounts receivable, net as of February 29, 2012 and May 31, 2011, respectively. The relationship with BP is comprised of separate contracts for non-destructive testing and inspection services with multiple affiliated entities within the broad BP organization.  The Company conducts business with various divisions or affiliates of the BP organization through numerous contracts covering many segments of BP’s business including downstream (refinery), midstream (pipelines) and upstream (exploration).  These contracts are typically negotiated locally with the specific BP division or

 

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Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

affiliate, are of varying lengths, have different start and end dates and differ in terms of the scope of work and nature of services provided.  Most contracts are based on time and materials.

 

Equity-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 equity award 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 option 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 option 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.

 

Recent Accounting Pronouncements

 

In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which requires companies to allocate the overall consideration in multiple-element arrangements to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. Effective June 1, 2011, the Company adopted, on a prospective basis, the provisions of this updated accounting standard related to revenue recognition associated with contractual arrangements involving multiple elements. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

 

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition (a consensus of the FASB Emerging Issues Task Force).  ASU 2010-17 provides guidance on applying the milestone method to milestone payments for achieving specified performance measure when those payments are related to uncertain future events limited to transactions involving research and development. Entities can make an accounting policy election to recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met. Effective June 1, 2011, the Company adopted, on a prospective basis, the provisions of this updated accounting standard related to milestones. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 allows an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, or the Company’s option to present components of other comprehensive income either net of related tax effects or before related tax effects, nor does it affect how earnings per share is calculated or presented. ASU 2011-05 requires retrospective application, and it is effective for fiscal years and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted. The Company does not expect that the adoption of this pronouncement will have a material impact on the Company’s consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment.  ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely

 

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Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is then necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for the Company in fiscal 2013 and earlier adoption is permitted. The Company does not expect that the adoption of this pronouncement will have a material impact on the Company’s consolidated financial statements.

 

3.                                      Capitalization

 

Common Stock

 

In May 2011, the Company completed a secondary offering of 3,754,061 shares of common stock at a price of $16.00 per share.  The Company sold 989,660 shares and 2,764,401 shares were sold by a selling stockholder.  The Company received net proceeds of approximately $14.7 million from the offering. The Company used the net proceeds for general corporate purposes including the reduction of outstanding indebtedness, acquisitions, capital expenditures and working capital.

 

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.

 

Equity Awards

 

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 units 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. The 2009 Plan allows for the grant of awards of up to approximately 2,286,000 shares of common stock, of which 1,705,000 shares were available for future grants as of February 29, 2012. 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. As of February 29, 2012, there was an aggregate of approximately 2,630,000 stock options outstanding and approximately 443,000 unvested restricted stock units outstanding under the 2009 Plan, the 2007 Plan, and the 1995 Plan.

 

The fair value of the Company’s stock option awards for the nine months ended February 28, 2011 was estimated at the date of grant using the Black-Scholes option-pricing model with the range of assumptions below.  No stock options were granted during the nine months ended February 29, 2012.

 

 

 

Nine months ended
February 28, 2011

 

 

 

 

 

Dividend yield

 

0.0

%

Expected volatility

 

44

%

Risk-free interest rate

 

2.6

%

Expected term (years)

 

6.3

 

 

The Company recognized stock-based compensation expense related to stock option awards of approximately $0.8 million for the each of the three month periods ended February 29, 2012 and February 28, 2011. For each of the nine month periods ended February 29, 2012 and February 28, 2011, the Company recognized stock-based compensation expense related to stock option awards of $2.4 million.  As of February 29, 2012, there was approximately $4.6 million of unrecognized compensation costs, net of estimated forfeitures, related to stock option awards, which are expected to be recognized over a remaining weighted average period of 1.5 years.  Cash proceeds from and the aggregate intrinsic value of stock options exercised during the three and nine months ended February 29, 2012 and February 28, 2011 were as follows:

 

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Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

 

 

 

 

Cash proceeds from options exercised

 

$

152

 

$

30

 

$

1,477

 

$

30

 

Aggregate intrinsic value of options exercised

 

$

337

 

$

43

 

$

3,399

 

$

43

 

 

The Company also recognized approximately $0.5 million and $0.1 million in stock-based compensation expense related to restricted stock unit awards during the three months ended February 29, 2012 and February 28, 2011, respectively.  For the nine months ended February 29, 2012 and February 28, 2011, the Company recognized stock-based compensation expense related to restricted stock unit awards of $1.1 million and $0.3 million, respectively.  As of February 29, 2012, there was approximately $6.1 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which are expected to be recognized over a remaining weighted average period of 3.3 years.

 

In October 2011, the Company granted approximately 9,000 shares of fully-vested common stock to its five non-employee directors, in connection with its non-employee director compensation plan.  These shares had a grant date fair value of approximately $0.2 million, which was recorded as stock-based compensation expense during the nine months ended February 29, 2012.

 

During the nine months ended February 29, 2012, approximately 52,000 restricted stock units vested, the fair value of which was $0.5 million. Upon vesting, restricted stock units are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. The restricted stock units that vested in the first nine months of fiscal 2012 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The Company withheld approximately 16,000 shares based on the value of the restricted stock units on their vesting date as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to the taxing authorities were $0.3 million and are reflected as a financing activity within the consolidated statements of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that otherwise would have been issued as a result of the vesting and did not represent an expense to the Company.

 

4.                                      Earnings per Share

 

Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is 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 assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects: (i) 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 and (ii) the pro forma vesting of restricted stock units.

 

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

 

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Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

3,037

 

$

2,443

 

$

14,221

 

$

9,713

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

27,921

 

26,667

 

27,794

 

26,665

 

Basic earnings per share

 

$

0.11

 

$

0.09

 

$

0.51

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

3,037

 

$

2,443

 

$

14,221

 

$

9,713

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

27,921

 

26,667

 

27,794

 

26,665

 

Dilutive effect of stock options outstanding

 

795

 

202

 

688

 

137

 

Dilutive effect of restricted stock units outstanding

 

113

 

50

 

81

 

22

 

 

 

28,829

 

26,919

 

28,563

 

26,824

 

Diluted earnings per share

 

$

0.11

 

$

0.09

 

$

0.50

 

$

0.36

 

 

5.                                      Acquisitions

 

The Company completed the acquisition of eight companies during the nine months ended February 29, 2012. These acquisitions were asset protection companies specializing in advanced ultrasonic inspection, NDT services and inspection, ultrasonic testing (UT) and acoustic emission (AE) products and systems, and in-house component inspection.  These companies were acquired to complement the service and product offerings within the Services, Products and Systems, and International segments. Three of the acquired companies were asset purchases that met the definition of “acquisitions of businesses” under the provision of FASB Accounting Standards Codification (ASC) 805-10-20. In the remaining acquisitions, the Company acquired 100% of the common stock of the acquirees.  Five of the acquired companies have been integrated into the International segment; two of the acquired companies have been integrated into the Services segment; and one of the acquired companies has been integrated into the Products segment. In addition to the cash and debt consideration related to the acquisitions completed in fiscal 2012, the Company accrued a liability of approximately $3.3 million, which represents the estimated fair value of contingent consideration expected to be payable in the event that certain of the acquired companies achieve specific performance metrics over the next four years of operations. The total potential contingent consideration ranges from zero to $4.5 million for acquisitions completed in fiscal 2012.

 

Assets and liabilities of the acquired businesses were included in the consolidated balance sheets as of February 29, 2012 based on their estimated fair value on the date of acquisition as determined in a purchase price allocation, using available information and making assumptions management believes are reasonable. The Company is still in the process of completing its valuations of the intangible assets for these acquisitions. These valuations and purchase price allocations are expected to be finalized prior to the end of the Company’s fiscal year ending May 31, 2012. The results of operations of each of the acquisitions completed in fiscal 2012 are reported in each respective operating segment’s statement of operations from the date of acquisition. The Company’s preliminary allocation of purchase price for these acquisitions is included in the table below. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

 

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Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

 

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

Number of entities

 

8

 

4

 

 

 

 

 

 

 

Cash paid

 

$

27,514

 

$

18,301

 

Subordinated notes issued

 

2,444

 

1,637

 

Debt and other liabilities assumed

 

3,095

 

1,100

 

Contingent consideration

 

3,445

 

697

 

 

 

 

 

 

 

Purchase price

 

$

36,498

 

$

21,735

 

 

 

 

 

 

 

Current net assets acquired

 

3,801

 

127

 

Property, plant and equipment

 

6,350

 

6,341

 

Deferred tax asset

 

130

 

41

 

Intangibles

 

9,710

 

6,465

 

Goodwill

 

16,507

 

8,878

 

Less: noncontrolling interest

 

 

(117

)

Net assets acquired

 

$

36,498

 

$

21,735

 

 

The amortization period of intangible assets acquired ranges from one to fifteen years. The Company recorded approximately $16.5 million of goodwill in connection with its fiscal 2012 acquisitions, reflecting the strategic fit and revenue and earnings growth potential of these businesses. Substantially all of the goodwill recognized is expected to be deductible for tax purposes.

 

Revenues included in the consolidated statement of operations for the three and nine months ended February 29, 2012 from these acquisitions for the period subsequent to the closing of each transaction was approximately $10.6 million and $12.9 million, respectively. Loss from operations included in the consolidated statement of operations for each of the three and nine month periods ended February 29, 2012 from these acquisitions for the period subsequent to the closing of each transaction was approximately ($0.5) million.

 

The unaudited pro forma information for the periods set forth below gives effect to the fiscal 2012 acquisitions as if they had occurred at the beginning of each period presented. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time (unaudited, in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

117,241

 

$

90,287

 

$

347,412

 

$

268,065

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

$

5,119

 

$

4,899

 

$

27,041

 

$

19,268

 

 

During the three and nine month periods ended February 29, 2012, the Company incurred acquisition-related costs of $1.0 million and $1.4 million, respectively, in connection with due diligence, professional fees, and other expenses for its fiscal 2012 acquisition activity.  Additionally, the Company adjusted the fair value of certain acquisition-related contingent consideration liabilities. For the three month and nine month periods ended February 29, 2012 the adjustments resulted in a net decrease of approximately $0.1 million and $0.9 million, respectively, to the Company’s acquisition-related contingent consideration liabilities, which were approximately $7.5 million as of February 29, 2012 and recorded on the balance sheet

 

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Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

in accrued expenses and other liabilities. These adjustments also resulted in a corresponding net increase to income from operations of approximately $0.1 million and $0.9 million for the three and nine month periods ended February 29, 2012, respectively. Both the fair value adjustments to acquisition-related contingent consideration liabilities and the acquisition-related expenses have been classified as acquisition-related costs in the statement of operations for the three and nine months ended February 29, 2012. Acquisition-related costs for the Company’s fiscal 2011 acquisition activity were insignificant for the three and nine months ended February 28, 2011.

 

6.                                      Accounts Receivable, net

 

Accounts receivable consist of the following:

 

 

 

As of
February 29, 2012

 

As of
May 31, 2011

 

 

 

 

 

 

 

Trade accounts receivable

 

$

97,363

 

$

79,800

 

Allowance for doubtful accounts

 

(2,106

)

(1,769

)

Total

 

$

95,257

 

$

78,031

 

 

7.                                      Inventories, net

 

Inventories consist of the following:

 

 

 

As of
February 29, 2012

 

As of
May 31, 2011

 

 

 

 

 

 

 

Raw materials

 

$

2,912

 

$

2,832

 

Work in process

 

1,991

 

1,531

 

Finished goods

 

6,170

 

3,623

 

Supplies

 

2,100

 

1,844

 

Total

 

$

13,173

 

$

9,830

 

 

Inventories are net of reserves for slow-moving and obsolete inventory of approximately $1.2 million and $1.0 million as of February 29, 2012 and May 31, 2011, respectively.

 

8.                                      Property, Plant and Equipment, net

 

Property, plant and equipment consist of the following:

 

 

 

Useful Life

 

As of
February 29, 2012

 

As of
May 31, 2011

 

 

 

(Years)

 

 

 

 

 

Land

 

 

 

$

2,213

 

$

2,210

 

Building and improvements

 

30-40

 

17,632

 

14,779

 

Office furniture and equipment

 

5-8

 

6,372

 

5,006

 

Machinery and equipment

 

5-7

 

93,214

 

80,587

 

 

 

 

 

119,431

 

102,582

 

Accumulated depreciation and amortization

 

 

 

(60,861

)

(53,414

)

Property, plant and equipment, net

 

 

 

$

58,570

 

$

49,168

 

 

Depreciation expense for the three months ended February 29, 2012 and February 28, 2011 was approximately $4.2 million and $3.5 million, respectively. Depreciation expense for the nine months ended February 29, 2012 and February 28, 2011 was approximately $11.8 million and $9.5 million, respectively.

 

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Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

9.                                      Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consist of the following:

 

 

 

As of
February 29, 2012

 

As of
May 31, 2011

 

 

 

 

 

 

 

Accrued salaries, wages and related employee benefits

 

$

15,185

 

$

12,066

 

Other accrued expenses

 

13,033

 

7,452

 

Accrued worker compensation and health benefits

 

7,344

 

6,471

 

Deferred revenues

 

4,770

 

2,039

 

Total

 

$

40,332

 

$

28,028

 

 

10.                               Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

As of
February 29, 2012

 

As of
May 31, 2011

 

Senior credit facility:

 

 

 

 

 

Revolver

 

$

22,900

 

$

3,850

 

Notes payable

 

13,588

 

15,808

 

Other

 

4,120

 

2,193

 

 

 

40,608

 

21,851

 

Less: Current maturities

 

(5,963

)

(7,226

)

Long-term debt, net of current maturities

 

$

34,645

 

$

14,625

 

 

Senior Credit Facility

 

In December 2011, the Company entered into a Third Amended and Restated Credit Agreement (Credit Agreement) with Bank of America, N.A., as agent for the lenders and a lender, and JPMorgan Chase Bank, N.A., Keybank National Association and TD Bank, N.A., as lenders.  The Credit Agreement provides the Company with a $125.0 million revolving line of credit, which, under certain circumstances, can be increased to $150.0 million.  The Credit Agreement has a maturity date of December 20, 2016.  The Company may borrow up to $30.0 million in non-U.S. dollar currencies and use up to $10.0 million of the credit limit for the issuance of letters of credit.   In December 2011, outstanding borrowings under the former credit agreement were repaid in full using proceeds from the Credit Agreement. As of February 29, 2012, there were outstanding borrowings of $22.9 million and a total of $3.8 million of outstanding letters of credit under the current revolving credit facility.

 

Loans under the Credit Agreement bear interest at LIBOR or base rate, at the option of the Company, plus an applicable LIBOR margin ranging from 1% to 2%, or base rate margin ranging from -1.25% to -.25%, based upon its Funded Debt Leverage Ratio.  Funded Debt Leverage Ratio is generally the ratio of (1) all outstanding indebtedness for borrowed money and other interest-bearing indebtedness as of the date of determination to (2) EBITDA (which is (a) net income, less (b) income (or plus loss) from discontinued operations and extraordinary items, plus (c) income tax expenses, plus (d) interest expense, plus (e) depreciation, depletion, and amortization (including non-cash loss on retirement of assets), plus (f) stock compensation expense, less (g) cash expense related to stock compensation, plus or minus certain other adjustments) for the period of four consecutive fiscal quarters immediately preceding the date of determination.  The Company has the benefit of the lowest margin if its Funded Debt Leverage Ratio is equal to or less than 0.5 to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 2.5 to 1.  The Company will also bear additional costs for market disruption, regulatory changes effecting the lenders’ funding costs, and default pricing of an additional 2% interest rate margin if the Funded Debt Leverage Ratio exceeds 3.0 to 1.  Amounts borrowed under the Credit Agreement are secured by liens on substantially all of the assets of the Company.

 

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Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

The Credit Agreement contains financial covenants requiring that the Company maintain a Funded Debt Leverage Ratio of less than 3.0 to 1 and an Interest Coverage Ratio of at least 3.0 to 1.  Interest Coverage Ratio means the ratio, as of any date of determination, of (a) EBITDA for the 12 month period immediately preceding the date of determination, to (b) all interest, premium payments, debt discount, fees, charges and related expenses of the Company and its subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, paid during the 12 month period immediately preceding the date of determination.  The Credit Agreement also limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, 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 Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in its line of business, the Company must be in compliance with the financial covenants on a pro forma basis after taking into account the acquisition, and, if the acquired business is a separate subsidiary, in certain circumstances the lenders will receive the benefit of a guaranty of the subsidiary and liens on its assets and a pledge of its stock.

 

During the nine months ended February 29, 2012, the Company capitalized approximately $0.6 million of costs related to the new credit agreement and expensed approximately $0.1 million of deferred financing costs related to its former credit facility. The accelerated amounts expensed are classified as loss on extinguishment of long-term debt in the consolidated statement of operations.

 

Notes Payable and Other

 

In connection with certain of the acquisitions the Company has completed, it has, at various times, issued subordinated notes payable to the sellers. The maturity of these notes range from three to five years from the date of acquisition with interest rates ranging from 0% to 7%. The Company has discounted these obligations to reflect a 3.5% to 10% imputed interest rate. Unamortized discount on these notes totaled approximately $0.1 million as of February 29, 2012 and May 31, 2011. Amortization is recorded as interest expense in the consolidated statement of operations. The Company also has payment obligations to the sellers or the shareholders of the sellers pursuant to non-compete agreements which require the sellers and shareholders of the sellers not to compete with the Company.  The payment obligations under these agreements range from 3 to 5 years.

 

11.                               Commitments and Contingencies

 

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. The costs of defense and amounts that may be recovered in such matters may be covered by insurance.

 

The Company was a defendant in two related purported class action lawsuits in California, based upon alleged violations of California labor and employment law: Quiroz v. Mistras Group, Inc., et al, U.S. District Court, Central District of California (Case No. CV09-7146 PSG), filed in September 2009, and Ballard v. Mistras Group, Inc., et al, U.S. District Court, Central District of California (Case No. 2:10-cv-03186 (PSG)), filed in March 2010.  The settlement for these cases received final court approval in August 2011.  The Company took a $0.4 million charge during the nine months ending February 28, 2011 for these cases.

 

Acquisition-related contingencies

 

The Company is liable for contingent consideration in connection with certain of its acquisitions. As of February 29, 2012, total potential acquisition-related contingent consideration ranged from zero to $13.7 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next four years of operations. See Note 5 to these consolidated financial statements for further discussion of the Company’s acquisitions.

 

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Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

12.                               Subsequent Event

 

In March 2012, the Company completed the acquisition of two companies to continue its strategic efforts in market expansion.  The Company’s cash outlay with regards to these acquisitions was approximately $1.8 million.  The Company is in the process of completing the preliminary purchase price allocation.  These acquisitions were not individually significant and no pro forma information has been included.

 

13.                               Segment Disclosure

 

The Company’s three segments are:

 

Services. This segment provides asset protection solutions primarily in North America with the largest concentration in the United States, consisting primarily of non-destructive testing and inspection services that are used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure.

 

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 the 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 the Products and Systems segment.

 

Allocations for general corporate services, including accounting, audit, and contract management, that are provided to the segments are reported 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 the Company’s consolidated financial reporting.

 

Segment income from operations is determined based on internal performance measures used by the Chief Executive Officer, who is 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 matters 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 to 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:

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Services

 

$

80,895

 

$

66,708

 

$

253,493

 

$

198,098

 

Products and Systems

 

9,824

 

5,436

 

26,429

 

15,974

 

International

 

17,164

 

8,671

 

38,794

 

27,062

 

Corporate and eliminations

 

(3,765

)

(1,602

)

(8,931

)

(4,674

)

 

 

$

104,118

 

$

79,213

 

$

309,785

 

$

236,460

 

 

Revenues by operating segment include intercompany transactions, which are eliminated in Corporate and eliminations.  The Services segment had sales to other operating segments of $0.5 million and $0.4 million for the three months ended

 

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Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

February 29, 2012 and February 28, 2011, respectively. For the nine months ended February 29, 2012 and February 28, 2011, Services segment sales to other operating segments totaled $2.3 million and $0.8 million, respectively.

 

The Products and Systems segment had sales to other operating segments of $3.1 million and $1.0 million for the three months ended February 29, 2012 and February 28, 2011, respectively. For the nine months ended February 29, 2012 and February 28, 2011, Products and Systems segment sales to other operating segments totaled $6.4 million and $3.1 million, respectively.

 

The International segment had sales to other operating segments of $0.3 million and $0.1 million for the three months ended February 29, 2012 and February 28, 2011, respectively.  For the nine months ended February 29, 2012 and February 28, 2011, International segment sales to other operating segments totaled $0.5 million and $0.2 million, respectively.

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

 

 

Services

 

$

20,640

 

$

16,650

 

$

68,001

 

$

53,404

 

Products and Systems

 

4,938

 

3,049

 

12,952

 

8,440

 

International

 

4,586

 

2,935

 

12,263

 

9,466

 

Corporate and eliminations

 

(580

)

(37

)

(997

)

(127

)

 

 

$

29,584

 

$

22,597

 

$

92,219

 

$

71,183

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

 

 

 

 

 

 

 

Services

 

$

7,207

 

$

5,494

 

$

27,983

 

$

19,591

 

Products and Systems

 

2,476

 

1,213

 

6,038

 

2,980

 

International

 

340

 

404

 

2,430

 

2,514

 

Corporate and eliminations

 

(4,477

)

(2,418

)

(10,863

)

(6,879

)

 

 

$

5,546

 

$

4,693

 

$

25,588

 

$

18,206

 

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

Services

 

$

4,587

 

$

4,247

 

$

12,988

 

$

11,855

 

Products and Systems

 

500

 

206

 

1,451

 

624

 

International

 

670

 

350

 

1,474

 

1,016

 

Corporate and eliminations

 

8

 

42

 

76

 

113

 

 

 

$

5,765

 

$

4,845

 

$

15,989

 

$

13,608

 

 

18



Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

 

 

As of
February 29, 2012

 

As of
May 31, 2011

 

 

 

 

 

 

 

Intangible assets, net

 

 

 

 

 

Services

 

$

16,868

 

$

15,900

 

Products and Systems

 

10,390

 

10,250

 

International

 

5,480

 

771

 

Corporate and eliminations

 

821

 

383

 

 

 

$

33,559

 

$

27,304

 

 

 

 

As of
February 29, 2012

 

As of
May 31, 2011

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

Services

 

$

57,252

 

$

51,745

 

Products and Systems

 

13,594

 

10,557

 

International

 

9,207

 

1,844

 

Corporate and eliminations

 

 

 

 

 

$

80,053

 

$

64,146

 

 

 

 

As of
February 29, 2012

 

As of
May 31, 2011

 

 

 

 

 

 

 

Long-lived assets

 

 

 

 

 

Services

 

$

120,604

 

$

109,978

 

Products and Systems

 

24,531

 

23,235

 

International

 

25,041

 

6,504

 

Corporate and eliminations

 

2,006

 

901

 

 

 

$

172,182

 

$

140,618

 

 

 

 

As of
February 29, 2012

 

As of
May 31, 2011

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

Services

 

$

205,934

 

$

188,693

 

Products and Systems

 

39,976

 

36,450

 

International

 

52,740

 

26,431

 

Corporate and eliminations

 

2,082

 

(2,937

)

 

 

$

300,732

 

$

248,637

 

 

Revenues by geographic area for the three and nine months ended February 29, 2012 and February 28, 2011, respectively, were as follows:

 

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Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

 

 

Three months ended

 

Nine months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

February 29, 2012

 

February 28, 2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

United States

 

$

74,416

 

$

64,189

 

$

237,215

 

$

191,309

 

Other Americas

 

11,500

 

6,448

 

32,357

 

20,088

 

Europe

 

13,721

 

6,818

 

27,797

 

18,960

 

Asia-Pacific

 

4,481

 

1,758

 

12,416

 

6,103

 

 

 

$

104,118

 

$

79,213

 

$

309,785

 

$

236,460

 

 

20



Table of Contents

 

ITEM 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (Securities Act), and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, our competitive position and the effects of competition, the projected growth of the industries in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that could cause such differences include, but are not limited to the factors discussed under the “Risk Factors” section below.

 

The following is a discussion and analysis of our financial condition and results of operations and should be read together with our condensed consolidated financial statements and related notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes to the audited consolidated financial statements included in our Annual Report on Form 10-K. In this quarterly report, our fiscal years, which end on May 31, are identified according to the calendar year in which they end (e.g., the fiscal year ended May 31, 2011 is referred to as “fiscal 2011”), and unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,” “we,” “us” and “our” refer to Mistras Group, Inc. and its consolidated subsidiaries.

 

Overview

 

We are a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure. We combine 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 our 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 disasters. Given the role our services play in ensuring the safe and efficient operation of infrastructure, we have historically provided a majority of our services to our customers on a regular, recurring basis. We serve 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 industries. During fiscal 2011, we provided our asset protection solutions to approximately 5,600 customers. As of February 29, 2012, we had approximately 3,100 employees, including approximately 30 Ph.D.’s and 100 other degreed engineers and certified technicians, in approximately 80 offices across 15 countries. We have established long-term relationships as a critical solutions provider to many leading companies in our target markets. Our current principal market is the oil and gas industry, which accounted for approximately 56% and 61% of our revenues for the first nine months of fiscal 2012 and 2011, respectively.

 

For the last several years, we have focused on introducing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. During this period, the demand for outsourced asset protection solutions, in general, has increased, creating demand from which our entire industry has benefited. We have experienced compounded annual growth rate (CAGR) for revenue of 31% over the last three fiscal years, including the impact of acquisitions and currency fluctuations. We believe further growth can be realized in all of our target markets. Concurrent with this growth, we have worked to build our infrastructure to profitably absorb additional growth and have made a number of small acquisitions in an effort to leverage our fixed costs, grow our base of experienced, certified personnel, expand our product and technical capabilities and increase our geographical reach.

 

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Table of Contents

 

We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies. These acquisitions have provided us with additional products, technologies, resources and customers that we believe will enhance our advantages over our competition.

 

The global economy continues to be fragile. Global financial markets continue to experience uncertainty, including tight liquidity and credit availability, relatively low consumer confidence, slow economic growth, persistently high unemployment rates, volatile currency exchange rates and continued uncertainty about economic stability. However, we believe these conditions have allowed us to capitalize on an opportunity to selectively hire new talented individuals that otherwise might not have been available to us, to acquire and develop new technologies in order to aggressively expand our proprietary portfolio of customized solutions, and to make acquisitions of complementary businesses at reasonable valuations.

 

Consolidated Results of Operations

 

Three months ended February 29, 2012 compared to the three months ended February 28, 2011

 

Our consolidated results of operations for the three months ended February 29, 2012 and February 28, 2011 were as follows:

 

 

 

Three months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

 

 

($ in thousands)

 

Statement of Operations Data

 

 

 

 

 

Revenues

 

$

104,118

 

$

79,213

 

Cost of revenues

 

70,574

 

53,156

 

Depreciation

 

3,960

 

3,460

 

Gross profit

 

29,584

 

22,597

 

Selling, general and administrative expenses

 

20,806

 

16,005

 

Research and engineering

 

578

 

514

 

Depreciation and amortization

 

1,805

 

1,385

 

Acquisition-related costs

 

849

 

 

Income from operations

 

5,546

 

4,693

 

Interest expense

 

814

 

596

 

Loss on extinguishment of long-term debt

 

113

 

 

Income before provision for income taxes

 

4,619

 

4,097

 

Provision for income taxes

 

1,548

 

1,690

 

Net income

 

3,071

 

2,407

 

Net loss (income) attributable to noncontrolling interests, net of taxes

 

(34

)

36

 

Net income attributable to Mistras Group, Inc.

 

$

3,037

 

$

2,443

 

 

Our EBITDA and Adjusted EBITDA, non-GAAP measures explained below, for the three months ended February 29, 2012 and February 28, 2011 were as follows:

 

22



Table of Contents

 

 

 

Three months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

 

 

($ in thousands)

 

EBITDA and Adjusted EBITDA data

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

3,037

 

$

2,443

 

Interest expense

 

814

 

596

 

Provision for income taxes

 

1,548

 

1,690

 

Depreciation and amortization

 

5,765

 

4,845

 

EBITDA

 

$

11,164

 

$

9,574

 

Stock compensation expense

 

1,244

 

903

 

Acquisition-related costs

 

849

 

 

Loss on extinguishment of long-term debt

 

113

 

 

Adjusted EBITDA

 

$

13,370

 

$

10,477

 

 

Note About Non-GAAP Measures

 

EBITDA and Adjusted EBITDA are performance measures used by management that are not calculated in accordance with U.S. generally accepted accounting principles (GAAP).  EBITDA is defined in this Quarterly Report as net income attributable to Mistras Group, Inc. plus: interest expense, provision for income taxes and depreciation and amortization.  Adjusted EBITDA is defined in this Quarterly Report as net income attributable to Mistras Group, Inc. plus: interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, and, if applicable, certain acquisition related costs (including adjustments to the fair value of contingent consideration) and certain non-recurring items (which items are described below or in the reconciliation table above).

 

Our management uses Adjusted EBITDA as a measure of operating performance to assist in comparing performance from period to period on a consistent basis, as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations.  Adjusted EBITDA is also used as a performance evaluation metric for our executive and employee incentive compensation programs.

 

We believe investors and other users of our financial statements benefit from the presentation of Adjusted EBITDA in evaluating our operating performance because it provides an additional tool to compare our operating performance on a consistent basis and measure underlying trends and results in our business. Adjusted EBITDA removes the impact of certain items that management believes do not directly reflect our core operations. For instance, Adjusted EBITDA generally excludes interest expense, taxes and depreciation and amortization, each of which can vary substantially from company to company depending upon accounting methods and the book value and age of assets, capital structure, capital investment cycles and the method by which assets were acquired. It also eliminates stock-based compensation, which is a non-cash expense and is excluded by management when evaluating the underlying performance of our business operations.

 

While Adjusted EBITDA is a term and financial measurement commonly used by investors and securities analysts, it has limitations. As a non-GAAP measurement, Adjusted EBITDA has no standard meaning and, therefore, may not be comparable with similar measurements for other companies. Adjusted EBITDA is generally limited as an analytical tool because it excludes charges and expenses we do incur as part of our operations. For example, Adjusted EBITDA excludes income taxes, but we generally incur significant U.S. federal, state and foreign income taxes each year and the provision for income taxes is a necessary cost. Adjusted EBITDA should not be considered in isolation or as a substitute for analyzing our results as reported under U.S. generally accepted accounting principles.

 

Revenues. Revenues were $104.1 million for the three months ended February 29, 2012 compared to $79.2 million for the three months ended February 28, 2011.   Revenues by segment for the third quarter of fiscal 2012 and 2011 were as follows:

 

23



Table of Contents

 

 

 

Three months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

 

 

($ in thousands)

 

Revenues

 

 

 

 

 

Services

 

$

80,895

 

$

66,708

 

Products and Systems

 

9,824

 

5,436

 

International

 

17,164

 

8,671

 

Corporate and eliminations

 

(3,765

)

(1,602

)

 

 

$

104,118

 

$

79,213

 

 

We estimate our growth rates for the third quarter of fiscal 2012 and 2011 were as follows:

 

 

 

Three months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

 

 

($ in thousands)

 

Revenue growth

 

$

24,905

 

$

14,857

 

% Growth over prior year

 

31.4

%

23.1

%

 

 

 

 

 

 

Comprised of:

 

 

 

 

 

% of organic growth

 

16.5

%

16.7

%

% of acquisition growth

 

15.2

%

6.2

%

% foreign exchange increase (decrease)

 

(0.3

)%

0.2

%

 

 

31.4

%

23.1

%

 

Revenues increased $24.9 million, or approximately 31%, for the three months ended February 29, 2012 compared to the three months ended February 28, 2011 as a result of growth in all our segments, but principally attributable to growth in our Services segment. For the third quarter of fiscal 2012 and 2011, we estimate that our organic growth rate, as compared to growth driven by acquisitions, was approximately 17%.  In the third quarter of fiscal 2012, we estimate that our acquisition growth was approximately 15% compared to approximately 6% in the third quarter of fiscal 2011. We completed the acquisition of eight companies during the nine months ended February 29, 2012 and four companies during the nine months ended February 28, 2011, which accounts for the increase in acquisition growth.

 

We continued to experience growth in many of our target markets during the third quarter of fiscal 2012.   Oil and gas is our largest target market and represented approximately 55% of total revenues in the third quarter of fiscal 2012, compared to approximately 64% in the third quarter of fiscal 2011. Oil and gas revenue in the third quarter of fiscal 2012 increased approximately 14% over the prior year with the largest increases coming from the downstream and midstream sections of the oil and gas industry. We also experienced growth in several of our other target markets outside of oil and gas, including industrial markets, aerospace and defense and engineering. Taken as a group, revenues for all target markets other than oil and gas grew approximately 63% in the third quarter of fiscal 2012 over the prior year period. Our largest customer in both periods was BP plc. (BP), accounting for approximately 16% of our revenues in the third quarter of fiscal 2012 and approximately 21% in the third quarter of fiscal 2011.   Our top ten customers represented approximately 38% of our revenues in the third quarter of fiscal 2012 compared to 50% in the same quarter last year.

 

Gross Profit. Our gross profit was $29.6 million and increased $7.0 million, or 31% in the third quarter of fiscal 2012 compared to $22.6 million in the third quarter of fiscal 2011. Gross profit by segment for the three months ended February 29, 2012 and February 28, 2011 was as follows:

 

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Table of Contents

 

 

 

Three months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

 

 

($ in thousands)

 

Gross profit

 

 

 

 

 

Services

 

$

20,640

 

$

16,650

 

Products and Systems

 

4,938

 

3,049

 

International

 

4,586

 

2,935

 

Corporate and eliminations

 

(580

)

(37

)

 

 

$

29,584

 

$

22,597

 

 

As a percentage of revenues, our gross profit and its components for the three months ended February 29, 2012 and February 28, 2011 were as follows:

 

 

 

Three months ended

 

 

 

February 29, 2012

 

February 28, 2011

 

 

 

($ in thousands)

 

Gross profit

 

$

29,584

 

$

22,597

 

 

 

 

 

 

 

Gross profit % comprised of:

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

Cost of revenues

 

(67.8

)%

(67.1

)%

Depreciation

 

(3.8

)%

(4.4

)%

Total

 

28.4

%

28.5

%

Gross profit % increase (decrease) from prior year

 

(0.1

)%

1.1

%

 

As a percentage of revenues, our gross profit remained fairly consistent at approximately 28% for each of the third quarters of fiscal 2012 and fiscal 2011. Cost of revenues, excluding depreciation, as a percentage of revenues was approximately 68% and 67% in the third quarter of fiscal 2012 and fiscal 2011, respectively. Depreciation expense included in the determination of gross profit for the third quarter of fiscal 2012 and fiscal 2011 was $4.0 million and $3.5 million, respectively.

 

Our gross profit as a percentage of revenues was somewhat impacted by a change in the mix of revenues generated during the quarter coupled with a decrease in gross profit in our International segment, which relates to the integration of three acquisitions during the quarter. This was offset by improvements in our Services segment gross profit, which was achieved through reductions in our unbilled direct labor as a percentage of revenues.  Revenue from the oil and gas industry increased approximately 14% during the third quarter of fiscal 2012 and represented approximately 55% of total revenues. Revenue from this industry tends to have lower gross margins than other industries due to the existence of longer term contracts which typically have a high concentration of lower margin, traditional NDT services. Offsetting the impact of higher oil and gas revenues in the third quarter of fiscal 2012 was revenue growth of approximately 63% in all other industries, where gross margins tend to be higher.