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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 November 30, 2011

 

 

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 January 2, 2012, the registrant had 27,916,036 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 November 30, 2011 and May 31, 2011

2

 

 

 

 

 

 

Unaudited Consolidated Statements of Operations for the three and six months ended November 30, 2011 and 2010

3

 

 

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the six months ended November 30, 2011 and 2010

4

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the six months ended November 30, 2011 and 2010

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

35

 

 

 

 

 

ITEM 5.

Other Information

35

 

 

 

 

 

ITEM 6.

Exhibits

35

 

 

 

 

SIGNATURES

36

 

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)

 

 

 

November 30, 2011

 

May 31, 2011

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

5,319

 

$

10,879

 

Restricted cash

 

3,700

 

 

Accounts receivable, net

 

102,782

 

78,031

 

Inventories, net

 

10,997

 

9,830

 

Deferred income taxes

 

1,280

 

1,278

 

Prepaid expenses and other current assets

 

8,305

 

6,761

 

Total current assets

 

132,383

 

106,779

 

Property, plant and equipment, net

 

54,216

 

49,168

 

Intangible assets, net

 

27,826

 

27,304

 

Goodwill

 

71,814

 

64,146

 

Other assets

 

1,323

 

1,240

 

Total assets

 

$

287,562

 

$

248,637

 

 

 

 

 

 

 

LIABILITIES, PREFERRED STOCK AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

5,733

 

$

7,226

 

Current portion of capital lease obligations

 

6,339

 

5,853

 

Accounts payable

 

6,171

 

6,656

 

Accrued expenses and other current liabilities

 

33,118

 

28,028

 

Income taxes payable

 

1,925

 

2,825

 

Total current liabilities

 

53,286

 

50,588

 

Long-term debt, net of current portion

 

34,191

 

14,625

 

Obligations under capital leases, net of current portion

 

12,283

 

9,623

 

Deferred income taxes

 

2,916

 

2,863

 

Other long-term liabilities

 

3,702

 

3,452

 

Total liabilities

 

106,378

 

81,151

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Preferred stock, 10,000,000 shares authorized

 

 

 

Equity

 

 

 

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 27,916,036 and 27,667,122 shares issued and outstanding as of November 30, 2011 and May 31, 2011, respectively

 

279

 

277

 

Additional paid-in capital

 

184,553

 

180,594

 

Accumulated deficit

 

(2,833

)

(14,017

)

Accumulated other comprehensive (loss) income

 

(1,065

)

303

 

Total Mistras Group, Inc. stockholders’ equity

 

180,934

 

167,157

 

Noncontrolling interest

 

250

 

329

 

Total equity

 

181,184

 

167,486

 

Total liabilities, preferred stock and equity

 

$

287,562

 

$

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 November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues:

 

 

 

 

 

 

 

 

 

Services

 

$

103,942

 

$

82,953

 

$

186,844

 

$

144,205

 

Products

 

10,278

 

5,884

 

18,823

 

13,042

 

Total revenues

 

114,220

 

88,837

 

205,667

 

157,247

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Cost of services

 

71,047

 

55,667

 

127,934

 

97,058

 

Cost of products sold

 

4,216

 

2,067

 

7,856

 

5,344

 

Depreciation related to services

 

3,556

 

3,136

 

6,879

 

5,945

 

Depreciation related to products

 

186

 

159

 

363

 

314

 

Total cost of revenues

 

79,005

 

61,029

 

143,032

 

108,661

 

Gross profit

 

35,215

 

27,808

 

62,635

 

48,586

 

Selling, general and administrative expenses

 

19,378

 

15,615

 

38,759

 

31,094

 

Research and engineering

 

602

 

569

 

1,191

 

1,124

 

Depreciation and amortization

 

1,503

 

1,326

 

2,982

 

2,504

 

Acquisition-related costs

 

(339

)

 

(339

)

 

Legal reserve

 

 

101

 

 

351

 

Income from operations

 

14,071

 

10,197

 

20,042

 

13,513

 

Other expenses

 

 

 

 

 

 

 

 

 

Interest expense

 

1,145

 

671

 

1,806

 

1,361

 

Income before provision for income taxes

 

12,926

 

9,526

 

18,236

 

12,152

 

Provision for income taxes

 

5,008

 

3,818

 

7,124

 

4,872

 

Net income

 

7,918

 

5,708

 

11,112

 

7,280

 

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

 

38

 

(30

)

72

 

(10

)

Net income attributable to Mistras Group, Inc.

 

$

7,956

 

$

5,678

 

$

11,184

 

$

7,270

 

Earnings per common share (see Note 4):

 

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

$

0.21

 

$

0.40

 

$

0.27

 

Diluted

 

$

0.28

 

$

0.21

 

$

0.39

 

$

0.27

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

27,786

 

26,665

 

27,731

 

26,664

 

Diluted

 

28,600

 

26,816

 

28,417

 

26,795

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

Mistras Group,

 

 

 

 

 

 

 

 

 

 

 

Additional

 

earnings

 

other

 

Inc.

 

 

 

 

 

 

 

Common Stock

 

paid-in

 

(accumulated

 

comprehensive

 

Stockholders’

 

Noncontrolling

 

 

 

 

 

Shares

 

Amount

 

capital

 

deficit)

 

income (loss)

 

Equity

 

Interest

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended November 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 31, 2010

 

26,664

 

$

267

 

$

162,054

 

$

(30,448

)

$

(1,587

)

$

130,286

 

$

268

 

$

130,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

7,270

 

 

7,270

 

10

 

7,280

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

566

 

566

 

8

 

574

 

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

7,836

 

18

 

7,854

 

Stock compensation

 

1

 

 

1,776

 

 

 

1,776

 

 

1,776

 

Noncontrolling interest in subsidiary

 

 

 

 

 

 

 

117

 

117

 

Balance at November 30, 2010

 

26,665

 

$

267

 

$

163,830

 

$

(23,178

)

$

(1,021

)

$

139,898

 

$

403

 

$

140,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended November 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 31, 2011

 

27,667

 

$

277

 

$

180,594

 

$

(14,017

)

$

303

 

$

167,157

 

$

329

 

$

167,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

11,184

 

 

11,184

 

(72

)

11,112

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

(1,368

)

(1,368

)

(7

)

(1,375

)

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

9,816

 

(79

)

9,737

 

Stock compensation

 

14

 

 

2,547

 

 

 

2,547

 

 

2,547

 

Net settlement on vesting of restricted stock units

 

36

 

 

(281

)

 

 

 

(281

)

 

(281

)

Excess tax benefit from stock compensation

 

 

 

370

 

 

 

370

 

 

370

 

Exercise of stock options

 

199

 

2

 

1,323

 

 

 

1,325

 

 

1,325

 

Balance at November 30, 2011

 

27,916

 

$

279

 

$

184,553

 

$

(2,833

)

$

(1,065

)

$

180,934

 

$

250

 

$

181,184

 

 

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)

 

 

 

Six months ended November 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

11,184

 

$

7,270

 

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

 

 

 

 

 

Depreciation and amortization

 

10,224

 

8,763

 

Deferred income taxes

 

141

 

(29

)

Provision for doubtful accounts

 

256

 

341

 

(Gain) loss on sale of assets

 

(82

)

13

 

Amortization of deferred financing costs

 

85

 

84

 

Stock compensation expense

 

2,547

 

1,776

 

Interest rate swap

 

 

(210

)

Noncontrolling interest

 

(72

)

10

 

Foreign currency loss (gain)

 

235

 

(368

)

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

 

 

 

 

 

Accounts receivable

 

(20,392

)

(8,207

)

Inventories

 

(922

)

(1,345

)

Prepaid expenses and other current assets

 

(1,224

)

(2,484

)

Other assets

 

(44

)

980

 

Accounts payable

 

(1,292

)

(174

)

Income taxes payable

 

(864

)

31

 

Accrued expenses and other current liabilities

 

641

 

2,589

 

Net cash provided by operating activities

 

421

 

9,040

 

Cash flows from investing activities

 

 

 

 

 

Purchase of property, plant and equipment

 

(3,840

)

(3,721

)

Purchase of intangible assets

 

(265

)

(231

)

Acquisition of businesses, net of cash acquired

 

(10,695

)

(16,856

)

Change in restricted cash

 

(3,700

)

 

Proceeds from sale of equipment

 

301

 

42

 

Net cash used in investing activities

 

(18,199

)

(20,766

)

Cash flows from financing activities

 

 

 

 

 

Repayment of capital lease obligations

 

(3,391

)

(2,984

)

Repayment of long-term debt

 

(2,819

)

(3,418

)

Net borrowings from revolver

 

18,950

 

6,600

 

Net (repayments) proceeds from other short-term borrowings

 

(1,868

)

2,055

 

Taxes paid related to net share settlement of equity awards

 

(281

)

 

Excess tax benefit from stock compensation

 

370

 

 

Proceeds from the exercise of stock options

 

1,325

 

 

Net cash provided financing activities

 

12,286

 

2,253

 

Effect of exchange rate changes on cash and cash equivalents

 

(68

)

205

 

Net change in cash and cash equivalents

 

(5,560

)

(9,268

)

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

10,879

 

16,037

 

End of period

 

$

5,319

 

$

6,769

 

Supplemental disclosure of cash paid

 

 

 

 

 

Interest

 

$

1,335

 

$

1,496

 

Income taxes

 

$

7,571

 

$

4,617

 

Noncash investing and financing

 

 

 

 

 

Equipment acquired through capital lease obligations

 

$

6,464

 

$

2,731

 

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

 

$

 

$

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 our 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 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 six months ended November 30, 2011 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. All foreign subsidiaries’ fiscal years end on April 30, while Mistras Group, Inc. and the domestic subsidiaries’ fiscal years end on 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 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

 

We have revised our consolidated statement of cash flows for the six months ended November 30, 2010 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 six months ended November 30, 2010 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)

 

 

 

Six months months ended

 

 

 

November 30, 2010

 

 

 

As previously
reported

 

Revision

 

As revised

 

 

 

 

 

 

 

 

 

Net cash flows provided by operating activities

 

$

11,095

 

$

(2,055

)

$

9,040

 

Net cash flows used in investing activities

 

(20,766

)

 

(20,766

)

Net cash flows provided by financing activities

 

198

 

2,055

 

2,253

 

Effects of exchange rate changes on cash and cash equivalents

 

205

 

 

205

 

Net increase in cash and cash equivalents during the period

 

(9,268

)

 

(9,268

)

 

A similar revision will be reflected in the statement of cash flows for the nine-month period ended February 28, 2011 in our third quarterly filing of fiscal 2012.  The impact of these revisions in the nine-month period ending February 28, 2011 was a decrease of approximately $2.7 million to net cash flows provided by operating activities with a corresponding increase to net cash flows provided by financing activities. These revisions had no impact on our annual statement of cash flows as presented in our 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

 

7



Table of Contents

 

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

 

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. 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. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue, as amended.

 

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 November 30, 2011 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 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.

 

8



Table of Contents

 

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

 

We have one customer, BP plc. (BP), which accounted for 17% and 15% of revenues for the three months ended November 30, 2011 and 2010, respectively, and 16% of revenues for each of the six month periods ended November 30, 2011 and 2010.  Accounts receivable from this customer were approximately 13% and 15% of total accounts receivable, net as of November 30, 2011 and May 31, 2011, respectively. Our relationship with BP is comprised of separate contracts for non-destructive testing and inspection services with multiple affiliated entities within the broad BP organization.  We conduct 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 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 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

 

9



Table of Contents

 

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

 

other comprehensive income, when an item of other comprehensive income must be reclassified to net income, 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 Accounting Standards Update (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 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 1,700,000 shares were available for future grants as of November 30, 2011. 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 November 30, 2011, there were approximately 2,665,000 stock options outstanding and approximately 449,000 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 six months ended November 30, 2010 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 six months ended November 30, 2011.

 

 

 

Six months ended
November 30, 2010

 

 

 

 

 

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 $0.9 million for each of the three month periods ended November 30, 2011 and 2010. For the six months ended November 30, 2011 and

 

10



Table of Contents

 

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

 

2010, the Company recognized stock-based compensation expense related to stock option awards of $1.7 million and $1.6 million, respectively.  As of November 30, 2011, there was approximately $5.3 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 1.7 years.  Cash proceeds from and the aggregate intrinsic value of stock options exercised during the three and six months ended November 30, 2011 and 2010 were as follows:

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Cash proceeds from options exercised

 

$

1,268

 

$

 

$

1,325

 

$

 

Aggregate intrinsic value of options exercised

 

$

3,026

 

$

 

$

3,062

 

$

 

 

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 November 30, 2011 and 2010, respectively.  For the six months ended November 30, 2011 and 2010, the Company recognized stock-based compensation expense related to restricted stock unit awards of $0.7 million and $0.2 million, respectively.  As of November, 2011, there was approximately $6.6 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 3.5 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 three and six months ended November 30, 2011.

 

During the six months ended November 30, 2011, 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 six 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 would have otherwise 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:

 

11


 


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 November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

7,956

 

$

5,678

 

$

11,184

 

$

7,270

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

27,786

 

26,665

 

27,731

 

26,664

 

Basic earnings per share

 

$

0.29

 

$

0.21

 

$

0.40

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

7,956

 

$

5,678

 

$

11,184

 

$

7,270

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

27,786

 

26,665

 

27,731

 

26,664

 

Dilutive effect of stock options outstanding

 

741

 

129

 

622

 

121

 

Dilutive effect of restricted stock units outstanding

 

73

 

22

 

64

 

10

 

 

 

28,600

 

26,816

 

28,417

 

26,795

 

Diluted earnings per share

 

$

0.28

 

$

0.21

 

$

0.39

 

$

0.27

 

 

5.                                      Acquisitions

 

The Company made four acquisitions during the six months ended November 30, 2011. These acquisitions were asset protection companies specializing in advanced ultrasonic inspection, NDT services and inspection, ultrasonic testing (UT) products and systems, and in-house component inspection. These companies were acquired to complement our service and product offerings within our Services, Products and Systems, and International segments. One acquisition was an asset purchases that met the definition of “acquisitions of businesses” under the provision of FASB Accounting Standards Codification (ASC) 805-10-20, and has been integrated into our Services segment. In the three remaining acquisitions, we acquired 100% of the common stock of the acquirees, all of which have been integrated into our International segment. In addition to the cash and debt consideration related to acquisitions closed during the six months ended November 30, 2011, the Company also accrued a liability of approximately $0.8 million as of November 30, 2011, 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 $0.9 million for these acquisitions.

 

Assets and liabilities of the acquired businesses were included in the consolidated balance sheets as of November 30, 2011 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 of the acquisitions in our International segment. We believe we will have finalized these valuations and purchase price allocations prior to the end of our third fiscal quarter ending February 29, 2012. The Company’s preliminary allocation of purchase price for these acquisitions is included in the table below. Results of operations for the period from acquisition date are reported in each respective operating segment’s statement of operations. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

 

12



Table of Contents

 

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

 

 

 

Six months ended November 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Number of entities

 

4

 

3

 

 

 

 

 

 

 

Cash paid

 

$

10,695

 

$

16,856

 

Subordinated notes issued

 

 

1,637

 

Debt and other liabilities assumed

 

4,052

 

1,045

 

Contingent consideration

 

785

 

 

 

 

 

 

 

 

Purchase price

 

$

15,532

 

$

19,538

 

 

 

 

 

 

 

Current net assets acquired

 

1,306

 

59

 

Property, plant and equipment

 

3,192

 

6,196

 

Deferred tax asset

 

88

 

6

 

Intangibles

 

3,058

 

6,265

 

Goodwill

 

7,888

 

7,129

 

Less: noncontrolling interest

 

 

(117

)

Net assets acquired

 

$

15,532

 

$

19,538

 

 

The amortization period of intangible assets acquired ranges from one to fifteen years. The Company recorded approximately $7.9 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 six months ended November 30, 2011 from these acquisitions for the period subsequent to the closing of each transaction was approximately $1.9 million and $2.3 million, respectively. Loss from operations included in the consolidated statement of operations for the three and six months ended November 30, 2011 from these acquisitions for the period subsequent to the closing of each transaction was approximately ($11) thousand and ($67) thousand, respectively.

 

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 November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

119,503

 

$

94,270

 

$

216,297

 

$

168,139

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

$

14,244

 

$

10,073

 

$

19,947

 

$

12,925

 

 

During the three and six month periods ended November 30, 2011, the Company adjusted the fair value of certain acquisition-related contingent consideration liabilities. The adjustments resulted in a net decrease of $0.7 million to the Company’s acquisition-related contingent consideration liabilities, which were approximately $4.8 million as of November 30, 2011 and recorded on the balance sheet in accrued expenses and other liabilities. These adjustments also resulted in a corresponding net increase to income from operations of $0.7 million. Additionally, the Company incurred certain acquisition-related costs of $0.4 million in connection with due diligence, professional fees, and other expenses for its fiscal 2012 acquisition activity. 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 six months ended November 30, 2011. Acquisition-related costs for the Company’s fiscal 2011 acquisition activity were insignificant for the three and six months ended November 30, 2010.

 

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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)

 

Prior to November 30, 2011, the Company funded an escrow account in the amount of $3.7 million related to an acquisition that closed December 6, 2011. These disbursed funds have been classified as restricted cash on the consolidated balance sheet and included in cash used in investing activities on the statement of cash flows for the six months ended November 30, 2011.

 

6.                                      Accounts Receivable

 

Accounts receivable consist of the following:

 

 

 

As of
November 30, 2011

 

As of
May 31, 2011

 

 

 

 

 

 

 

Trade accounts receivable

 

$

104,819

 

$

79,800

 

Allowance for doubtful accounts

 

(2,037

)

(1,769

)

Total

 

$

102,782

 

$

78,031

 

 

7.                                      Inventories

 

Inventories consist of the following:

 

 

 

As of
November 30, 2011

 

As of
May 31, 2011

 

 

 

 

 

 

 

Raw materials

 

$

2,621

 

$

2,832

 

Work in process

 

2,010

 

1,531

 

Finished goods

 

4,423

 

3,623

 

Supplies

 

1,943

 

1,844

 

Total

 

$

10,997

 

$

9,830

 

 

Inventories are net of reserves for slow-moving and obsolete inventory of approximately $1.2 million and $1.0 million as of November 30, 2011 and May 31, 2011, respectively.

 

8.                                      Property, Plant and Equipment, net

 

Property, plant and equipment consist of the following:

 

 

 

Useful Life

 

As of
November 30, 2011

 

As of
May 31, 2011

 

 

 

(Years)

 

 

 

 

 

Land

 

 

 

$

2,197

 

$

2,210

 

Building and improvements

 

30-40

 

14,469

 

14,779

 

Office furniture and equipment

 

5-8

 

5,875

 

5,006

 

Machinery and equipment

 

5-7

 

91,085

 

80,587

 

 

 

 

 

113,626

 

102,582

 

Accumulated depreciation and amortization

 

 

 

(59,410

)

(53,414

)

Property, plant and equipment, net

 

 

 

$

54,216

 

$

49,168

 

 

Depreciation expense for the three months ended November 30, 2011 and 2010 was approximately $3.9 million and $3.4 million, respectively. Depreciation expense for the six months ended November 30, 2011 and 2010 was approximately $7.5 million and $6.4 million, respectively.

 

14



Table of Contents

 

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
November 30, 2011

 

As of
May 31, 2011

 

 

 

 

 

 

 

Accrued salaries, wages and related employee benefits

 

$

13,036

 

$

12,066

 

Other accrued expenses

 

10,350

 

7,452

 

Accrued worker compensation and health benefits

 

7,213

 

6,471

 

Deferred revenues

 

2,519

 

2,039

 

Total

 

$

33,118

 

$

28,028

 

 

10.                               Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

As of
November 30, 2011

 

As of
May 31, 2011

 

Senior credit facility:

 

 

 

 

 

Revolver

 

$

22,800

 

$

3,850

 

Notes payable

 

12,162

 

15,808

 

Other

 

4,962

 

2,193

 

 

 

39,924

 

21,851

 

Less: Current maturities

 

(5,733

)

(7,226

)

Long-term debt, net of current maturities

 

$

34,191

 

$

14,625

 

 

Senior Credit Facility

 

In July 2009, the Company entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A., which provided for a $25.0 million term loan and a $55.0 million secured revolving credit facility. The outstanding principal balance of the term loan was subsequently repaid in October 2009 in connection with the Company’s IPO and may not be re-borrowed under the current credit agreement. The Company also repaid the outstanding balance of the revolving credit facility but may re-borrow under the revolving credit facility at any time during the term of the agreement. As of November 30, 2011, there were outstanding borrowings of $22.8 million and a total of $3.9 million of outstanding letters of credit under the existing revolving 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 and permits the Company to borrow up to $30.0 million in non-U.S. dollar currencies and to use up to $10.0 million of the credit limit for the issuance of letters of credit.   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

 

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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)

 

Leverage Ratio exceeds 3.0 to 1.  The Credit Agreement is secured by liens on substantially all of the assets of the Company.

 

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.

 

In December 2011, outstanding borrowings under the former credit agreement were repaid in full using proceeds from the Credit Agreement.

 

Notes Payable and Other

 

In connection with 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 November 30, 2011 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 agreement s 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 charge during the three month and six month periods ending November 30, 2010 of $0.4 million and $0.1 million, respectively, for these cases.

 

Acquisition-related contingencies

 

The Company is liable for contingent consideration in connection with certain of its acquisitions. As of November 30, 2011, total potential acquisition-related contingent consideration ranged from $0 to $10.1 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 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 and permits the Company to borrow up to $30.0 million in non-U.S. dollar currencies and to use up to $10.0 million of the credit limit for the issuance of letters of credit.    See Note 10 to these consolidated financial statements for further discussion of the Company’s Credit Agreement.

 

In December 2011, the Company completed the acquisition of three asset protection businesses to continue its strategic efforts in market expansion. Prior to November 30, 2011, the Company funded an escrow account in the amount of $3.7 million for one of the acquisitions. These disbursed funds were classified as restricted cash on the consolidated balance sheet as of November 30, 2011. The Company’s cash outlay for the remaining two acquisitions was approximately $9.6 million and was made subsequent to November 30, 2011. 

 

In addition to the cash consideration, the agreement allows for contingent consideration to be earned based upon certain of the acquired companies reaching specific performance metrics over the next three years of operation. 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 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 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:

 

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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 November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Services

 

$

96,909

 

$

76,108

 

$

172,598

 

$

131,390

 

Products and Systems

 

9,092

 

5,228

 

16,605

 

10,538

 

International

 

11,857

 

9,350

 

21,630

 

18,390

 

Corporate and eliminations

 

(3,638

)

(1,849

)

(5,166

)

(3,071

)

 

 

$

114,220

 

$

88,837

 

$

205,667

 

$

157,247

 

 

Revenues by operating segment include intercompany transactions, which are eliminated in corporate and eliminations.  The Services segment had sales to other operating segments of $1.6 million and $0.3 million for the three months ended November 30, 2011 and 2010, respectively. For the six months ended November 30, 2011 and 2010, the Services segment sales to other operating segments totaled $1.8 million and $0.6 million, respectively.

 

The Products and Systems segment had sales to other operating segments of $2.1 million and $1.3 million for the three months ended November 30, 2011 and 2010, respectively. For the six months ended November 30, 2011 and 2010, the Products and Systems segment sales to other operating segments totaled $3.4 million and $2.1 million, respectively.

 

The International segment had sales to other operating segments of $0.2 million and $0.3 million for the three months ended November 30, 2011 and 2010, respectively.  For the six months ended November 30, 2011 and 2010, the International segment sales to other operating segments totaled $0.2 million and $0.5 million, respectively.

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

 

 

Services

 

$

27,053

 

$

21,753

 

$

47,361

 

$

36,754

 

Products and Systems

 

4,263

 

2,821

 

8,014

 

5,390

 

International

 

4,246

 

3,260

 

7,677

 

6,531

 

Corporate and eliminations

 

(347

)

(26

)

(417

)

(89

)

 

 

$

35,215

 

$

27,808

 

$

62,635

 

$

48,586

 

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

 

 

 

 

 

 

 

Services

 

$

13,616

 

$

10,249

 

$

20,776

 

$

14,097

 

Products and Systems

 

2,551

 

976

 

3,562

 

1,767

 

International

 

1,354

 

1,082

 

2,090

 

2,110

 

Corporate and eliminations

 

(3,450

)

(2,110

)

(6,386

)

(4,461

)

 

 

$

14,071

 

$

10,197

 

$

20,042

 

$

13,513

 

 

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

 

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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 November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

Services

 

$

4,298

 

$

4,024

 

$

8,401

 

$

7,608

 

Products and Systems

 

480

 

212

 

951

 

418

 

International

 

444

 

348

 

804

 

669

 

Corporate and eliminations

 

23

 

37

 

68

 

68

 

 

 

$

5,245

 

$

4,621

 

$

10,224

 

$

8,763

 

 

 

 

As of
November 30, 2011

 

As of
May 31, 2011

 

 

 

 

 

 

 

Intangible assets, net

 

 

 

 

 

Services

 

$

14,205

 

$

15,900

 

Products and Systems

 

9,857

 

10,250

 

International

 

3,436

 

771

 

Corporate and eliminations

 

328

 

383

 

 

 

$

27,826

 

$

27,304

 

 

 

 

As of
November 30, 2011

 

As of
May 31, 2011

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

Services

 

$

53,274

 

$

51,745

 

Products and Systems

 

10,557

 

10,557

 

International

 

7,983

 

1,844

 

Corporate and eliminations

 

 

 

 

 

$

71,814

 

$

64,146

 

 

 

 

As of
November 30, 2011

 

As of
May 31, 2011

 

 

 

 

 

 

 

Long-lived assets

 

 

 

 

 

Services

 

$

112,780

 

$

109,978

 

Products and Systems

 

20,967

 

23,235

 

International

 

18,157

 

6,504

 

Corporate and eliminations

 

1,952

 

901

 

 

 

$

153,856

 

$

140,618

 

 

 

 

As of
November 30, 2011

 

As of
May 31, 2011

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

Services

 

$

204,699

 

$

188,693

 

Products and Systems

 

35,985

 

36,450

 

International

 

47,775

 

26,431

 

Corporate and eliminations

 

(897

)

(2,937

)

 

 

$

287,562

 

$

248,637

 

 

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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)

 

Revenues by geographic area for the three and six months ended November 30, 2011 and 2010, respectively, were as follows:

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

United States

 

$

91,323

 

$

72,353

 

$

162,799

 

$

127,120

 

Other Americas

 

11,059

 

7,200

 

20,857

 

13,640

 

Europe

 

8,476

 

7,289

 

14,076

 

12,142

 

Asia-Pacific

 

3,362

 

1,995

 

7,935

 

4,345

 

 

 

$

114,220

 

$

88,837

 

$

205,667

 

$

157,247

 

 

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 November 30, 2011, we had approximately 3,100 employees, including approximately 30 Ph.D.’s and 100 other degreed engineers and certified technicians, in approximately 81 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 57% and 60% of our second quarter revenues for 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 competitive advantages over our competition.

 

The global economy continues to be fragile. Global financial markets continue to experience uncertainty, including tightened 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. 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 November 30, 2011 compared to the three months ended November 30, 2010

 

Our consolidated results of operations for the three months ended November 30, 2011 and 2010 were as follows:

 

 

 

 

Three months ended November 30,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Statement of Operations Data

 

 

 

 

 

Revenues

 

$

114,220

 

$

88,837

 

Cost of revenues

 

75,263

 

57,734

 

Depreciation

 

3,742

 

3,295

 

Gross profit

 

35,215

 

27,808

 

Selling, general and administrative expenses

 

19,378

 

15,615

 

Research and engineering

 

602

 

569

 

Depreciation and amortization

 

1,503

 

1,326

 

Acquisition-related costs

 

(339

)

 

Legal reserve

 

 

101

 

Income from operations

 

14,071

 

10,197

 

Interest expense

 

1,145

 

671

 

Income before provision for income taxes

 

12,926

 

9,526

 

Provision for income taxes

 

5,008

 

3,818

 

Net income

 

7,918

 

5,708

 

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

 

38

 

(30

)

Net income attributable to Mistras Group, Inc.

 

$

7,956

 

$

5,678

 

 

Our EBITDA and Adjusted EBITDA, non-GAAP measures explained below, for the three months ended November 30, 2011 and 2010, were as follows:

 

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Table of Contents

 

 

 

Three months ended November 30,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

EBITDA and Adjusted EBITDA data

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

7,956

 

$

5,678

 

Interest expense

 

1,145

 

671

 

Provision for income taxes

 

5,008

 

3,818

 

Depreciation and amortization

 

5,245

 

4,621

 

EBITDA

 

$

19,354

 

$

14,788

 

Stock compensation expense

 

1,545

 

1,047

 

Acquisition-related costs

 

(339

)

 

Legal reserve

 

 

101

 

Adjusted EBITDA

 

$

20,560

 

$

15,936

 

 


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 one-time and generally 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 on 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 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 $114.2 million for the three months ended November 30, 2011 compared to $88.8 million for the three months ended November 30, 2010.   Revenues by segment for the three months ended November 30, 2011 and 2010 were as follows:

 

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Table of Contents

 

 

 

Three months ended November 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

Services

 

$

96,909

 

$

76,108

 

Products and Systems

 

9,092

 

5,228

 

International

 

11,857

 

9,350

 

Corporate and eliminations

 

(3,638

)

(1,849

)

 

 

$

114,220

 

$

88,837

 

 

We estimate our growth rates for the three months ended November 30, 2011 and 2010, respectively, were as follows:

 

 

 

Three months ended November 30,

 

 

 

2011

 

2010

 

 

 

($ in thousands)

 

Revenue growth

 

$

25,383

 

$

16,938

 

% Growth over prior year

 

28.6

%

23.6

%

 

 

 

 

 

 

Comprised of:

 

 

 

 

 

% of organic growth

 

19.4

%

17.6

%

% of acquisition growth

 

8.8

%

6.0

%

% foreign exchange increase (decrease)

 

0.4

%

0.0

%

 

 

28.6

%

23.6

%

 

Revenues increased $25.4 million, or approximately 29%, for the three months ended November 30, 2011 compared to the three months ended November 30, 2010 as a result of growth in all our segments, but principally attributable to growth in our Services segment. For the second quarter of fiscal 2012 and 2011, we estimate that our organic growth rate, as compared to growth driven by acquisitions, was approximately 19% and 18%, respectively. This organic growth was driven by an increase in demand for our inspection services coupled with an increase in our “run and maintain” or “evergreen” contracts.  In the second quarter of fiscal 2012, we estimate that our acquisition growth was approximately 9% compared to approximately 6% in the second quarter of fiscal 2011. We completed four acquisitions during the six months ended November 30, 2011 and three acquisitions during the six months ended November 30, 2010.

 

We continued to experience growth in many of our target markets during the second quarter of fiscal 2012.   Oil and gas is our largest target market and represented approximately 57% of total revenues in the second quarter of fiscal 2012, compared to approximately 60% in the second quarter of fiscal 2011. Oil and gas revenue in the second quarter of fiscal 2012 increased approximately 21% over the prior year with the largest increases coming from the downstream and upstream sections of the oil and gas industry. We also experienced growth in several of our other target markets outside of oil and gas, including chemical, industrial markets, and transportation. Taken as a group, revenues for all target markets other than oil and gas grew approximately 39% in the second quarter of fiscal 2012 over the prior year period. Our largest customer in both periods was BP plc., (BP), accounting for approximately 17% of our revenues in the second quarter of fiscal 2012 and approximately 15% in the second quarter of fiscal 2011.   Our top ten customers represented approximately 44% of our revenues in the second quarter of fiscal 2012 compared to 42% in the same quarter last year.

 

Gross Profit. Our gross profit was $35.2 million and increased $7.4 million, or 27% in the second quarter of fiscal 2012 compared to $27.8 million in the second quarter of fiscal 2011. Gross profit by segment for the three months ended November 30, 2011 and 2010 were as follows:

 

24



Table of Contents

 

 

 

Three months ended November 30,

 

 

 

2011

 

2010