Mistras Group, Inc. and Subsidiaries
(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 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 Company services play in ensuring the safe and efficient operation of infrastructure, the Company has historically provided a majority of its services to its customers on a regular, recurring basis. The Company serves a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, fossil and nuclear power, alternative and renewable energy, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industry.
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 presentation have been included. Operating results for the three and six months ended November 30, 2010 are not necessarily indicative of the results that may be expected for the year ending May 31, 2011. The balance sheet at May 31, 2010 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: Quality Service Laboratories, Inc., Cismis Springfield Corp., Mistras Group, S.A. (formerly Euro Physical Acoustics, S.A.) and its majority-owned subsidiary, IPS S.A.R.L. (“IPS”), Nippon Physical Acoustics Ltd., Physical Acoustics South America, Diapac Company, Mistras Canada, Inc. and Physical Acoustics Ltd. and its wholly or majority-owned subsidiaries, Physical Acoustics India Private Ltd., Physical Acoustics B.V. and Envirocoustics A.B.E.E. (“Envac”). Where the Company’s ownership interest is less than 100%, the noncontrolling interests are reported in 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. All foreign subsidiaries’ reporting year ends are April 30, while Mistras Group, Inc. and the domestic subsidiaries year ends are May 31. The effect of this difference in timing of reporting foreign operations on the consolidated results of operations and consolidated financial position is not significant.
Reclassification
Certain amounts previously reported 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.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
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2.
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Summary of Significant Accounting Policies
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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, which is generally upon product delivery. The exceptions to this accounting treatment would be for multiple-element arrangements (described below) or those situations where specialized installation or customer acceptance is required. Payments received in advance of revenue recognition are reflected as deferred revenues.
Percentage of completion
A portion of the Company’s revenues are generated from engineering and manufacturing of custom products under long-term contracts that may last from several months to several years, depending on the contract. Revenues from long-term contracts are recognized on the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting revenues are recognized as work is performed. The percentage of completion at any point in time is based on total costs or total labor dollars incurred to date in relation to the total estimated costs or total labor dollars estimated at completion. The percentage of completion is then applied to the total contract 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 our project performance and the recoverability of any claims. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.
Multiple-element arrangements
The Company occasionally enters into transactions that represent multiple-element arrangements, which may include any combination of services, software, and hardware. Under current FASB guidance, the Company utilizes vendor-specific objective evidence to determine whether the multiple elements can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if: (1) the delivered item has value on a standalone basis; and (2) there is objective and reliable evidence of the fair value of the undelivered items if the delivery or performance of the undelivered items is probable and in the control of the Company.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
If these criteria are not met, then revenues are deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value. Effective June 1, 2011, the Company will adopt updated guidance from the FASB that will require the allocation of revenue in multiple-element arrangements to separate units of accounting based on an element’s estimated selling price if vendor-specific or other first party evidence is not available.
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, allowances for doubtful accounts, inventory valuation, reserves for self-insured workers compensation and health benefits and provision for income taxes.
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 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 the pro forma vesting of restricted stock units.
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 2010 did not identify any instances of impairment and there were no events through November 30, 2010 that warranted a reconsideration of our 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 the risk of nonperformance of the financial institutions.
The Company sells primarily to large companies, extends reasonably short collection terms, performs credit evaluations and does not require collateral. The Company maintains reserves for potential credit losses.
The Company has one major customer with multiple business units that accounted for 15% and 19% of revenues for the three months ended November 30, 2010 and 2009, respectively, and 16% and 20% of total revenues for the six months ended November 30, 2010 and 2009, respectively. Accounts receivable from this customer was approximately 10% of total accounts receivable, net as of November 30, 2010 and May 31, 2010, respectively.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
Stock-based compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based upon the grant-date fair value of the award. The Company uses the “straight-line” attribution method for allocating compensation costs and recognizes the fair value of each 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-based awards and the estimated volatility of the Company’s common stock price. The Black-Scholes model is sensitive to changes in these two variables. Since the Company’s initial public offering (“IPO”), the expected term of the Company’s stock options is generally determined using the mid-point between the vesting period and the end of the contractual term. Expected stock price volatility is typically based on the daily historical trading data for a period equal to the expected term. Because the Company’s historical trading data only dates back to October 8, 2009, the first trading date after its IPO, the Company has estimated expected volatility using an analysis of the stock price volatility of comparable peer companies. Prior to the Company’s IPO, the exercise price equaled the estimated fair market value of the Company’s common stock, as determined by its board of directors. Since the Company’s IPO, the exercise price of stock option grants is determined using the closing market price of the Company’s common stock on the date of grant.
Recent Accounting Pronouncements
In October 2009, the FASB issued guidance on revenue recognition related to multiple-element arrangements. The new guidance requires companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other first party evidence of value is not available. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted retrospectively from the beginning of an entity’s fiscal year. The Company does not expect a significant impact on the financial statements of the Company when the guidance is adopted in fiscal 2012.
Common Stock
In October 2009, the Company completed its initial public offering of 10,000,000 shares of common stock at a price of $12.50 per share. The Company sold 6,700,000 shares. The Company received net proceeds of approximately $74.0 million from the offering. The Company used approximately $68.0 million of the net proceeds to repay the outstanding principal balance of the term loan ($25.0 million), outstanding balance of the revolver ($41.4 million) and accrued interest thereon ($0.1 million), as well as approximately $1.5 million to pay costs and expenses related to the offering. The remaining proceeds (approximately $6.0 million) were used for acquisitions and working capital purposes.
Dividends on common stock will be paid when, and if declared by the board of directors. Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held.
Preferred stock
Prior to its IPO in October 2009, the Company completed several private placements of its Class A and Class B preferred stock. These preferred shares included various redemption and conversion features and were reported outside the equity section and adjusted to fair value, which represented their redemption value at each reporting date. All of the preferred shares outstanding as of the offering converted to common stock and all accretion recorded through the redemption price formula were credited to additional paid-in capital.
Stock options
In September 2009, the Company’s board of directors and shareholders adopted and approved the 2009 Long-Term Incentive Plan (the “2009 Plan”), which became effective upon the closing of the IPO. Awards may be in the form of stock options, restricted stock 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. 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.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
As of November 30, 2010, there were a total of approximately 2,895,000 stock options and approximately 218,000 unvested restricted stock units outstanding under the 2009 Plan, the 1995 Plan, and the 2007 Plan. Under the 2009 Plan there were 1,997,000 shares available for future grants.
The fair value of the Company’s stock option awards was estimated at the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:
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For the six months ended November 30,
|
| |
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2010
|
|
2009
|
| |
|
|
|
|
|
|
|
Dividend yield
|
|
0.0 |
% |
|
0.0 |
% |
|
Expected volatility
|
|
44 |
% |
|
44 |
% |
|
Risk-free interest rate
|
|
2.6 |
% |
|
1.9-3.0 |
% |
|
Expected term (years)
|
|
6.3 |
|
|
4.0-6.3 |
|
The Company recognized stock-based compensation expense related to stock option awards of approximately $0.9 million, and $0.8 million for the three months ended November 30, 2010, and 2009, respectively. For the six months ended November 30, 2010 and 2009, the Company recognized stock-based compensation expense related to stock option awards of $1.6 million and $1.0 million, respectively. As of November 30, 2010, there was approximately $8.4 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 2.7 years. There were no stock option exercises during the three and six month periods ended November 30, 2010 and 2009.
The Company also recognized approximately $0.1 million and $0.2 million in stock-based compensation expense related to restricted stock unit awards during the three and six month periods ended November 30, 2010. There was no such expense incurred during the three and six month periods ended November 30, 2009. As of November 30, 2010, there was approximately $2.0 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 3.7 years.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
The following table sets forth the computations of basic and diluted earnings per share:
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|
Three months ended November 30,
|
|
|
Six months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$ |
5,678 |
|
|
$ |
10,061 |
|
|
$ |
7,270 |
|
|
$ |
10,876 |
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
26,665 |
|
|
|
20,987 |
|
|
|
26,664 |
|
|
|
16,971 |
|
|
Basic earnings per share
|
|
$ |
0.21 |
|
|
$ |
0.48 |
|
|
$ |
0.27 |
|
|
$ |
0.64 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$ |
5,678 |
|
|
$ |
3,562 |
|
|
$ |
7,270 |
|
|
$ |
4,377 |
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
26,665 |
|
|
|
20,987 |
|
|
|
26,664 |
|
|
|
16,971 |
|
|
Dilutive effect of stock options outstanding
|
|
|
129 |
|
|
|
1,302 |
|
|
|
121 |
|
|
|
1,287 |
|
|
Dilutive effect of restricted stock units outstanding
|
|
|
22 |
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
Dilutive effect of conversion of preferred shares
|
|
|
— |
|
|
|
2,704 |
|
|
|
— |
|
|
|
4,722 |
|
|
Total shares
|
|
|
26,816 |
|
|
|
24,993 |
|
|
|
26,795 |
|
|
|
22,980 |
|
|
Diluted earnings per share
|
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
$ |
0.27 |
|
|
$ |
0.19 |
|
Basic earnings per share are computed by dividing net income by the weighted-average number of share outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of (1) the weighted-average number of shares outstanding during the period, and (2) the dilutive effect of assumed equity award conversions using the treasury stock method. For the three and six month periods ended November 30, 2010, there was no difference in the amount of net income (numerator) used in the computation of basic and diluted earnings per share. For the three and six month periods ended November 30, 2009, the amount of net income (numerator) used in the computation of diluted earnings per share did not include preferred stock accretion as such accretion provided an anti-dilutive effect.
Assets and liabilities of the acquired businesses were included in the Consolidated Balance Sheet as of November 30, 2010 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. Results of operations for the period from acquisition date are reported in each respective operating segment’s statement of operations.
The Company made three acquisitions during the six months ended November 30, 2010 for strategic market expansion. Two of the acquisitions were asset purchases that met the definition of a “business” as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-10-20. In the third acquisition, we acquired 80% of the common stock of the acquiree. The remaining 20% of the acquiree’s common stock is recorded as noncontrolling interest in stockholders’ equity. The holders of the remaining 20% interest can require the Company to purchase the noncontrolling interest at any time for a price based upon EBITDA. Such price was approximately $17 thousand as of November 30, 2010.
Revenues included in the Consolidated Statement of Operations for the three and six month periods ended November 30, 2010 from these acquisitions for the period subsequent to the closing of each respective transaction was approximately $4.3 million and $5.4 million, respectively. On a pro forma basis from the beginning of fiscal 2011, revenues from these acquisitions would have been approximately $5.2 million and $9.6 million for the three and six month periods ended November 30, 2010. Operating income or other financial measures for these acquisitions both from the date of closing of each respective transaction and on a pro forma basis is impractical to estimate due to the integration of these entities post-acquisition.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
The table below summarizes the purchase price allocation for all acquisitions during the six months ended November 30, 2010 and 2009, respectively:
| |
|
Six months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Number of entities
|
|
|
3 |
|
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
Cash paid
|
|
$ |
16,801 |
|
|
$ |
14,350 |
|
Subordinated notes issued |
|
|
1,637 |
|
|
|
5,399 |
|
|
Debt
assumed
|
|
|
1,100 |
|
|
|
— |
|
|
Contingent consideration |
|
|
— |
|
|
|
687 |
|
| |
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$ |
19,538 |
|
|
$ |
20,436 |
|
| |
|
|
|
|
|
|
|
|
|
Current assets acquired
|
|
|
59 |
|
|
|
939 |
|
|
Property, plant and equipment
|
|
|
6,196 |
|
|
|
5,124 |
|
|
Deferred tax asset
|
|
|
6 |
|
|
|
1,067 |
|
|
Intangibles, primarily customer lists
|
|
|
6,265 |
|
|
|
8,239 |
|
|
Goodwill
|
|
|
7,129 |
|
|
|
5,067 |
|
|
Less: noncontrolling interest
|
|
|
(117 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$ |
19,538 |
|
|
$ |
20,436 |
|
The amortization period of intangible assets acquired ranges from one to seven years. Goodwill of approximately $7.1 million resulting from these acquisitions arises largely from the synergies expected from combining the operations of the acquisitions with our existing services operations, as well as from the benefits derived from the assembled workforce of the acquired companies. The goodwill recognized is expected to be deductible for tax purposes.
|
6.
|
Property, plant and equipment, net
|
Property, plant and equipment consist of the following:
| |
|
Useful Life
|
|
|
|
|
|
|
|
| |
|
(Years)
|
|
|
November 30, 2010
|
|
|
May 31, 2010
|
|
|
Land
|
|
|
|
|
$ |
2,195 |
|
|
$ |
1,304 |
|
|
Building and improvements
|
|
30-40 |
|
|
|
11,393 |
|
|
|
10,240 |
|
|
Office furniture and equipment
|
|
5-8 |
|
|
|
3,815 |
|
|
|
1,479 |
|
|
Machinery and equipment
|
|
5-7 |
|
|
|
76,748 |
|
|
|
68,238 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
94,151 |
|
|
|
81,261 |
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
(47,755 |
) |
|
|
(41,280 |
) |
| |
|
|
|
|
$ |
46,396 |
|
|
$ |
39,981 |
|
Depreciation expense for the three months ended November 30, 2010 and 2009 was approximately $3.4 million and $2.6 million, respectively. Depreciation expense for the six months ended November 30, 2010 and 2009 was approximately $6.4 million and $5.1 million, respectively.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
|
7.
|
Accounts Receivable and Allowance for Doubtful Accounts
|
An allowance for doubtful accounts is provided against accounts receivable for amounts management believes may be uncollectible. Changes in the allowance for doubtful accounts are represented by the following:
|
Balance, May 31, 2010
|
|
$ |
(1,661 |
) |
|
Provision for doubtful accounts
|
|
|
(368 |
) |
|
Write-offs, net of recoveries
|
|
|
77 |
|
|
Foreign exchange valuation
|
|
|
(12 |
) |
| |
|
|
|
|
|
Balance, November 30, 2010
|
|
$ |
(1,964 |
) |
Inventories consist of the following:
| |
|
As of
|
|
|
As of
|
|
| |
|
November 30, 2010
|
|
|
May 31, 2010
|
|
| |
|
|
|
|
|
|
|
Raw materials
|
|
$ |
2,774 |
|
|
$ |
2,564 |
|
|
Work in process
|
|
|
2,886 |
|
|
|
2,252 |
|
|
Finished goods
|
|
|
2,761 |
|
|
|
2,655 |
|
|
Supplies
|
|
|
1,760 |
|
|
|
1,265 |
|
| |
|
$ |
10,181 |
|
|
$ |
8,736 |
|
Inventories are net of reserves for slow-moving and obsolete inventory of approximately $0.8 million and $0.9 million as of November 30, 2010 and May 31, 2010, respectively.
|
9.
|
Accrued expenses and other current liabilities
|
Accrued expenses and other current liabilities consist of the following:
| |
|
As of
|
|
|
As of
|
|
| |
|
November 30, 2010
|
|
|
May 31, 2010
|
|
| |
|
|
|
|
|
|
|
Accrued salaries, wages and related employee benefits
|
|
$ |
9,753 |
|
|
$ |
8,158 |
|
|
Other accrued expenses
|
|
|
3,652 |
|
|
|
2,740 |
|
|
Accrued worker compensation and health benefits
|
|
|
8,011 |
|
|
|
8,041 |
|
|
Deferred revenues
|
|
|
1,169 |
|
|
|
1,151 |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
22,585 |
|
|
$ |
20,090 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
Long-term debt consists of the following:
| |
|
As of
|
|
|
As of
|
|
| |
|
November 30, 2010
|
|
|
May 31, 2010
|
|
|
Senior credit facility:
|
|
|
|
|
|
|
|
Revolver
|
|
$ |
6,600 |
|
|
$ |
— |
|
|
Notes payable - acquisitions
|
|
|
10,354 |
|
|
|
11,023 |
|
|
Other
|
|
|
878 |
|
|
|
971 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
17,832 |
|
|
|
11,994 |
|
|
Less: Current maturities
|
|
|
5,563 |
|
|
|
6,303 |
|
|
Long-term debt, net of current maturities
|
|
$ |
12,269 |
|
|
$ |
5,691 |
|
Senior Credit Facility
In July 2009, the Company entered into its current credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A., which provided for a $25.0 million term loan and a $55.0 million secured revolving credit facility. As of November 30, 2010, the Company had $6.6 million of outstanding borrowings under the revolving credit facility. In October 2009, the term loan was repaid with the net proceeds from our IPO. Borrowings made under the revolving credit facility are payable in July 2012.
In December 2009, the Company signed an amendment to its current credit agreement that, among other things, adjusted certain affirmative and negative covenants including delivery of financial statements, the minimum consolidated debt service coverage ratio, the procedures for obtaining lender approval for acquisitions and the removal of the minimum EBITDA requirement.
Under the amended agreement, borrowings under the credit agreement bear interest at the LIBOR or base rate, at the Company’s option, plus an applicable LIBOR margin ranging from 1.75% to 3.25%, or base rate margin ranging from -0.50% to 0.50%, and a market disruption increase of between 0% and 1.0%, if the lenders determine its applicable. As of November 30, 2010, the interest rate on our revolving credit facility borrowings 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 credit agreement, is greater than a specified amount on or before October 1 each year.
As of November 30, 2010, we were in compliance with the terms of the credit agreement.
During the six months ended November 30, 2009, the Company capitalized approximately $0.5 million of costs related to the new credit agreement and expensed approximately $0.2 million of deferred financing costs related to its former credit facility. In connection with the repayment and extinguishment of the term loan portion of the new facility in October 2009, the Company expensed approximately $0.2 million of financing costs incurred during the six months ended November 30, 2009. The unamortized balance of these costs is included in net intangible assets in the Consolidated Balance Sheet. The accelerated amounts expensed are classified as loss on extinguishment of debt in the Consolidated Statement of Operations.
Notes Payable and Other
In connection with its acquisitions through November 30, 2010, the Company issued subordinated notes payable to the sellers. These notes generally mature three 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 10.0% imputed interest rate. Unamortized discount on these notes totaled approximately $0.2 million and $0.3 million as of November 30, 2010 and May 31, 2010, respectively. Amortization is recorded as interest expense in the Consolidated Statement of Operations.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
|
11.
|
Fair Value Measurements
|
In 2010, the Company hedged a portion of the variable rate interest payments on debt using an interest rate swap contract to convert variable payments into fixed payments. The Company did not apply hedge accounting to its interest rate swap contracts. Changes in the fair value of this instrument were reported as a component of interest expense. The Company had an interest rate swap that matured in November 2010 that had a notional amount of $8.0 million. The following outlines the significant terms of the contract and the fair value of the contract at November 30, 2010 and May 31, 2010, respectively:
| |
|
|
|
|
|
|
Variable
|
|
Fixed
|
|
As of |
|
|
|
|
|
| |
|
|
|
Notional |
|
interest
|
|
interest
|
|
November 30, |
|
|
As of |
|
|
Contract date
|
|
Term
|
|
Amount |
|
rate
|
|
rate
|
|
2010 |
|
|
May 31, 2010 |
|
|
November 20, 2006
|
|
4 years
|
|
$ |
8,000 |
|
LIBOR
|
|
5.17 |
% |
|
$ |
— |
|
|
$ |
(210 |
) |
| |
|
|
|
$ |
8,000 |
|
|
|
|
|
|
$ |
— |
|
|
$ |
(210 |
) |
The Company classifies its interest rate swaps at fair value in the following categories:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than quoted market prices in active markets that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value of the Company’s interest rate swap liability was determined using quoted prices in an active market and was classified as a Level 1 liability within the fair value hierarchy.
|
12.
|
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, except as disclosed below. The costs of defense and amounts that may be recovered in such matters may be covered by insurance.
The Company is a defendant in two related purported class action lawsuits in California, based upon alleged violations of California labor and employment law. The first case, Quiroz v. Mistras Group, Inc., et al, U.S. District Court, Central District of California (Case No. CV09-7146 PSG), was originally filed in California State court in September 2009, and was removed to Federal Court. This matter was a purported class action case on behalf of existing and former California employees of the Company and its subsidiaries for violation of various labor and employment laws, primarily for failure to pay wages timely and for having defective wage statements, as well as other claims, and is seeking penalties under the California Private Attorneys General Act. In March 2010, the plaintiff’s request to certify the case as a class action suit was denied.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
The second case is Ballard v. Mistras Group, Inc., et al, U.S. District Court, Central District of California (Case No. 2:10-cv-03186 (PSG)), filed in late March 2010 in California State Court and removed to Federal court. This matter is also a purported class action case, based on substantially identical claims as the Quiroz case, and was filed by the same attorney representing the plaintiff in the Quiroz case, approximately two weeks after class action certification was denied in Quiroz.
In September 2010, the Company participated in non-binding mediation for the Quiroz and Ballard cases together, and the Company and the Plaintiffs subsequently reached a tentative settlement, subject to court approval. Based on this tentative settlement, the Company increased its reserve to approximately $0.3 million in connection with the Quiroz and Ballard cases, which represents its estimate of the Company’s total potential liability related to these cases, net of insurance reimbursements.
Commitments
In October 2010, we entered into an agreement for 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. Total construction costs per the agreement are approximately $3.3 million.
In December 2010, the Company acquired the assets of an asset protection business to continue its strategic efforts in market expansion. The Company’s cash outlay with regards to this acquisition was approximately $1.5 million. The Company is in the process of completing the preliminary purchase price allocation. This acquisition was not individually significant and no pro forma information has been included.
The Company’s three segments are:
Services. This segment provides asset protection solutions in North and Central America with the largest concentration in the United States.
Products and Systems. This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
International. This segment offers services, products and systems similar to those of our other segments to global markets, principally in Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by our Products and Systems segment.
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 corporate and eliminations.
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.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
Revenues by operating segment include intercompany transactions, which are eliminated in corporate and eliminations.
Selected consolidated financial information by segment for the periods shown was as follows:
| |
|
Three months ended November 30,
|
|
|
Six months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
76,108 |
|
|
$ |
60,938 |
|
|
$ |
131,390 |
|
|
$ |
106,640 |
|
|
Products and Systems
|
|
|
5,228 |
|
|
|
4,744 |
|
|
|
10,538 |
|
|
|
8,369 |
|
|
International
|
|
|
9,350 |
|
|
|
7,479 |
|
|
|
18,390 |
|
|
|
15,230 |
|
|
Corporate and eliminations
|
|
|
(1,849 |
) |
|
|
(1,262 |
) |
|
|
(3,071 |
) |
|
|
(2,251 |
) |
| |
|
$ |
88,837 |
|
|
$ |
71,899 |
|
|
$ |
157,247 |
|
|
$ |
127,988 |
|
The Services segment had sales to other operating segments of $0.3 million and $0.6 million for the three and six months ended November 30, 2010, respectively. For the three and six months ended November 30, 2009, the Services segment sales to other operating segments were de minimis for each respective period.
The Products and Systems segment had sales to other operating segments of $1.3 million and $1.0 million for the three months ended November 30, 2010 and 2009, respectively. For the six months ended November 30, 2010 and 2009, the Products and Systems segment sales to other operating segments totaled $2.1 million and $1.9 million, respectively.
The International segment had sales to other operating segments of $0.3 million and $0.5 million for the three and six month periods ended November 30, 2010, respectively. For the three and six month periods ended November 30, 2009, the International segment sales to other operating segments were de minimus for each respective period.
| |
|
Three months ended November 30, |
|
|
Six months ended November 30, |
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
21,753 |
|
|
$ |
17,405 |
|
|
$ |
36,754 |
|
|
$ |
29,933 |
|
|
Products and Systems
|
|
|
2,821 |
|
|
|
2,818 |
|
|
|
5,390 |
|
|
|
4,506 |
|
|
International
|
|
|
3,260 |
|
|
|
2,944 |
|
|
|
6,531 |
|
|
|
5,990 |
|
|
Corporate and eliminations
|
|
|
(26 |
) |
|
|
(151 |
) |
|
|
(89 |
) |
|
|
(263 |
) |
| |
|
$ |
27,808 |
|
|
$ |
23,016 |
|
|
$ |
48,586 |
|
|
$ |
40,166 |
|
| |
|
Three months ended November 30,
|
|
|
Six months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
10,249 |
|
|
$ |
7,625 |
|
|
$ |
14,097 |
|
|
$ |
10,857 |
|
|
Products and Systems
|
|
|
976 |
|
|
|
1,111 |
|
|
|
1,767 |
|
|
|
1,041 |
|
|
International
|
|
|
1,082 |
|
|
|
808 |
|
|
|
2,110 |
|
|
|
2,070 |
|
|
Corporate and eliminations
|
|
|
(2,110 |
) |
|
|
(1,877 |
) |
|
|
(4,461 |
) |
|
|
(3,515 |
) |
| |
|
$ |
10,197 |
|
|
$ |
7,667 |
|
|
$ |
13,513 |
|
|
$ |
10,453 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
Operating income by operating segment includes intercompany transactions, which are eliminated in corporate and eliminations.
| |
|
Three months ended November 30,
|
|
|
Six months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
4,024 |
|
|
$ |
3,290 |
|
|
$ |
7,608 |
|
|
$ |
6,164 |
|
|
Products and Systems
|
|
|
212 |
|
|
|
254 |
|
|
|
418 |
|
|
|
500 |
|
|
International
|
|
|
348 |
|
|
|
274 |
|
|
|
669 |
|
|
|
639 |
|
|
Corporate and eliminations
|
|
|
37 |
|
|
|
31 |
|
|
|
68 |
|
|
|
62 |
|
| |
|
$ |
4,621 |
|
|
$ |
3,849 |
|
|
$ |
8,763 |
|
|
$ |
7,365 |
|
| |
|
As of
|
|
|
As of
|
|
| |
|
November 30, 2010
|
|
|
May 31, 2010
|
|
| |
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
Services
|
|
$ |
17,772 |
|
|
$ |
14,042 |
|
|
Products and Systems
|
|
|
1,134 |
|
|
|
1,016 |
|
|
International
|
|
|
904 |
|
|
|
504 |
|
|
Corporate and eliminations
|
|
|
480 |
|
|
|
526 |
|
| |
|
$ |
20,290 |
|
|
$ |
16,088 |
|
| |
|
As of
|
|
|
As of
|
|
| |
|
November 30, 2010
|
|
|
May 31, 2010
|
|
| |
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
Services
|
|
$ |
49,859 |
|
|
$ |
42,804 |
|
|
Products and Systems
|
|
|
— |
|
|
|
— |
|
|
International
|
|
|
1,727 |
|
|
|
1,511 |
|
|
Corporate and eliminations
|
|
|
— |
|
|
|
— |
|
| |
|
$ |
51,586 |
|
|
$ |
44,315 |
|
| |
|
As of
|
|
|
As of
|
|
| |
|
November 30, 2010
|
|
|
May 31, 2010
|
|
| |
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
Services
|
|
$ |
170,665 |
|
|
$ |
148,462 |
|
|
Products and Systems
|
|
|
22,043 |
|
|
|
21,817 |
|
|
International
|
|
|
23,913 |
|
|
|
19,163 |
|
|
Corporate and eliminations
|
|
|
(9,513 |
) |
|
|
(810 |
) |
| |
|
$ |
207,108 |
|
|
$ |
188,632 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
| |
|
Three months ended November 30,
|
|
|
Six months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
72,353 |
|
|
$ |
58,703 |
|
|
$ |
127,120 |
|
|
$ |
103,940 |
|
|
Europe
|
|
|
7,200 |
|
|
|
5,525 |
|
|
|
13,640 |
|
|
|
11,912 |
|
|
Other Americas
|
|
|
7,289 |
|
|
|
5,550 |
|
|
|
12,142 |
|
|
|
8,476 |
|
|
Asia-Pacific
|
|
|
1,995 |
|
|
|
2,121 |
|
|
|
4,345 |
|
|
|
3,660 |
|
| |
|
$ |
88,837 |
|
|
$ |
71,899 |
|
|
$ |
157,247 |
|
|
$ |
127,988 |
|
|
|
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, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“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.
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, 2010 is referred to as “fiscal 2010”), 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 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, alternative and renewable energy, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industries. During fiscal 2010, we provided our asset protection solutions to approximately 4,800 customers. As of November 30, 2010, we had approximately 2,500 employees, including 32 Ph.D.’s and more than 100 other degreed engineers and highly-skilled, certified technicians, in 75 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 60% and 61% of our revenues for the second quarter of fiscal 2011 and 2010, 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 has, in general, 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 personnel, expand our technical capabilities and increase our geographical reach.
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 have enhanced our sustainable competitive advantages over our competition.
The global economy continues to be fragile. Global financial markets continue to experience uncertainty, including diminished liquidity and credit availability, relatively low consumer confidence, slower economic growth, persistently high unemployment rates, volatile currency exchange rates and continued uncertainty about economic stability. There may be further deterioration and volatility in the global economy, the global financial markets, and consumer confidence. However, 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 technology 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 November 30, 2010 compared to the three months ended November 30, 2009
Our consolidated results of operations for the three months ended November 30, 2010 and 2009 were as follows:
| |
|
Three months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
(in thousands)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
88,837 |
|
|
$ |
71,899 |
|
|
Cost of revenues
|
|
|
57,734 |
|
|
|
46,248 |
|
|
Depreciation
|
|
|
3,295 |
|
|
|
2,635 |
|
|
Gross profit
|
|
|
27,808 |
|
|
|
23,016 |
|
|
Selling, general and administrative expenses
|
|
|
15,615 |
|
|
|
13,686 |
|
|
Research and engineering
|
|
|
569 |
|
|
|
449 |
|
|
Depreciation and amortization
|
|
|
1,326 |
|
|
|
1,214 |
|
|
Legal reserve
|
|
|
101 |
|
|
|
— |
|
|
Income from operations
|
|
|
10,197 |
|
|
|
7,667 |
|
|
Interest expense
|
|
|
671 |
|
|
|
1,017 |
|
|
Loss on extinguishment of long-term debt
|
|
|
— |
|
|
|
218 |
|
|
Income before provision for income taxes and noncontrolling interest
|
|
|
9,526 |
|
|
|
6,432 |
|
|
Provision for income taxes
|
|
|
3,818 |
|
|
|
2,875 |
|
|
Net income
|
|
|
5,708 |
|
|
|
3,557 |
|
|
Net (income) loss attributable to noncontrolling interests, net of taxes
|
|
|
(30 |
) |
|
|
5 |
|
|
Net income attributable to Mistras Group, Inc.
|
|
|
5,678 |
|
|
|
3,562 |
|
|
Accretion of preferred stock
|
|
|
— |
|
|
|
6,499 |
|
|
Net income attributable to common shareholders
|
|
$ |
5,678 |
|
|
$ |
10,061 |
|
Our EBITDA and Adjusted EBITDA, non-GAAP measures explained below, for the three months ended November 30, 2010 and 2009, were as follows:
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|
Three months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
EBITDA and Adjusted EBITDA data
|
|
(in thousands)
|
|
|
Net income attributable to Mistras Group, Inc.
|
|
$ |
5,678 |
|
|
$ |
3,562 |
|
|
Interest expense
|
|
|
671 |
|
|
|
1,017 |
|
|
Provision for income taxes
|
|
|
3,818 |
|
|
|
2,875 |
|
|
Depreciation and amortization
|
|
|
4,621 |
|
|
|
3,849 |
|
|
EBITDA
|
|
$ |
14,788 |
|
|
$ |
11,303 |
|
|
Legal reserve
|
|
|
101 |
|
|
|
— |
|
|
Stock compensation expense
|
|
|
1,047 |
|
|
|
783 |
|
|
Loss on extinguishment of debt
|
|
|
— |
|
|
|
218 |
|
|
Adjusted EBITDA
|
|
$ |
15,936 |
|
|
$ |
12,304 |
|
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, certain acquisition related costs and certain one-time and generally non-recurring items (which items are described in the next paragraph and 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 off which to base 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, 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 $88.8 million for three months ended November 30, 2010 compared to $71.9 million for three months ended November 30, 2009. Revenues by segment for the three months ended November 30, 2010 and 2009 were as follows:
| |
|
Three months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
(in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
Services
|
|
$ |
76,108 |
|
|
$ |
60,938 |
|
|
Products and Systems
|
|
|
5,228 |
|
|
|
4,744 |
|
|
International
|
|
|
9,350 |
|
|
|
7,479 |
|
|
Corporate and eliminations
|
|
|
(1,849 |
) |
|
|
(1,262 |
) |
| |
|
$ |
88,837 |
|
|
$ |
71,899 |
|
We estimate our growth rates for the three months ended November 30, 2010 and 2009, respectively, were as follows:
| |
|
Three months ended November 30,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Revenue growth
|
|
$ |
16,938 |
|
|
$ |
12,624 |
|
|
% Growth over prior year
|
|
|
23.6 |
% |
|
|
21.3 |
% |
| |
|
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
|
% of organic growth
|
|
|
17.6 |
% |
|
|
8.7 |
% |
|
% of acquisition growth
|
|
|
6.0 |
% |
|
|
13.1 |
% |
|
% foreign exchange decrease
|
|
|
0.0 |
% |
|
|
(0.5 |
%) |
| |
|
|
23.6 |
% |
|
|
21.3 |
% |
Revenues increased $16.9 million, or approximately 24%, for the three months ended November 30, 2010 compared to the three months ended November 30, 2009 as a result of growth in all our segments. For the second quarter of fiscal 2011 and the second quarter of fiscal 2010, we estimate that our organic growth rate, as compared to growth driven by acquisitions, was approximately 18% and 9%, respectively. This organic growth was driven by increased demand for our asset protection solutions, including our mechanical integrity services, professional engineering services and our software based asset management products and services in both normal maintenance projects as well as capital spending projects. In the second quarter of fiscal 2011, we estimate that our growth from acquisitions was approximately $4.3 million, or approximately 6%, compared to approximately $7.8 million, or approximately 13%, in the second quarter of fiscal 2010. We completed three acquisitions during the six months ended November 30, 2010 and three acquisitions during the six months ended November 30, 2009, further increasing our capabilities and adding to our base of qualified technicians.
We continued to experience growth in many of our target markets in the second quarter of fiscal 2011 as compared to the second quarter of fiscal 2010. Second quarter revenues from customers in the oil and gas market increased 22% over the prior year. This revenue was achieved globally and provided approximately 60% and 61% of our total revenues for the second quarter of fiscal 2011 and 2010, respectively. We also experienced high growth in several of our other target markets, including chemical, fossil power, aerospace and industrial markets. Taken as a group, all target markets other than oil and gas grew by approximately 27% in the second quarter of fiscal 2011 over the prior year period. Our largest customer accounted for approximately 15% and 19% of our revenues in the second quarter of fiscal 2011 and 2010, respectively. No other customer accounted for more than 8% of our revenues in the second quarter of fiscal 2011.