10-Q 1 a12-27708_110q.htm 10-Q

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, 2012

 

Or

 

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

 

For the transition period to

 

Commission file number 001- 34481

 


 

Mistras Group, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

22-3341267

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

195 Clarksville Road
Princeton Junction, New Jersey

 

08550

(Address of principal executive offices)

 

(Zip Code)

 

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

 


 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of January 1, 2013, the registrant had 28,161,857 shares of common stock outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

PAGE

PART I—FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

1

 

 

 

 

Unaudited Consolidated Balance Sheets as of November 30, 2012 and May 31, 2012

1

 

 

 

 

Unaudited Consolidated Statements of Operations for the three and six months ended November 30, 2012 and 2011

2

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended November 30, 2012 and 2011

3

 

 

 

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended November 30, 2012 and 2011

4

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the six months ended November 30, 2012 and 2011

5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

ITEM 2.

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

20

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

ITEM 4.

Controls and Procedures

32

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

33

 

 

 

ITEM 1.A.

Risk Factors

33

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

ITEM 3.

Defaults Upon Senior Securities

33

 

 

 

ITEM 4.

Mine Safety Disclosures

34

 

 

 

ITEM 5.

Other Information

34

 

 

 

ITEM 6.

Exhibits

34

 

 

 

SIGNATURES

 

35

 

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 and per share data)

 

 

 

November 30, 2012

 

May 31, 2012

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

7,985

 

$

8,410

 

Accounts receivable, net

 

105,901

 

104,515

 

Inventories, net

 

11,542

 

12,492

 

Deferred income taxes

 

1,876

 

1,885

 

Prepaid expenses and other current assets

 

7,650

 

6,321

 

Total current assets

 

134,954

 

133,623

 

Property, plant and equipment, net

 

69,796

 

63,527

 

Intangible assets, net

 

58,201

 

34,469

 

Goodwill

 

117,326

 

96,819

 

Other assets

 

750

 

1,378

 

Total assets

 

$

381,027

 

$

329,816

 

 

 

 

 

 

 

LIABILITIES, PREFERRED STOCK AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

7,948

 

$

5,971

 

Current portion of capital lease obligations

 

6,893

 

5,951

 

Accounts payable

 

8,937

 

11,944

 

Accrued expenses and other current liabilities

 

41,591

 

39,334

 

Income taxes payable

 

4,570

 

1,119

 

Total current liabilities

 

69,939

 

64,319

 

Long-term debt, net of current portion

 

51,717

 

34,258

 

Obligations under capital leases, net of current portion

 

12,763

 

13,094

 

Deferred income taxes

 

13,902

 

4,901

 

Other long-term liabilities

 

23,350

 

19,996

 

Total liabilities

 

171,671

 

136,568

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Preferred stock, 10,000,000 shares authorized

 

 

 

Equity

 

 

 

 

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 28,161,857 and 28,025,507 shares issued and outstanding as of November 30, 2012 and May 31, 2012, respectively

 

282

 

280

 

Additional paid-in capital

 

191,586

 

188,443

 

Retained earnings

 

20,780

 

7,336

 

Accumulated other comprehensive loss

 

(3,561

)

(3,047

)

Total Mistras Group, Inc. stockholders’ equity

 

209,087

 

193,012

 

Noncontrolling interest

 

269

 

236

 

Total equity

 

209,356

 

193,248

 

Total liabilities, preferred stock and equity

 

$

381,027

 

$

329,816

 

 

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

 

1



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,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Services

 

$

127,731

 

$

103,942

 

$

226,956

 

$

186,844

 

Products

 

9,998

 

10,278

 

24,160

 

18,823

 

Total revenues

 

137,729

 

114,220

 

251,116

 

205,667

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Cost of services

 

87,044

 

71,047

 

157,560

 

127,934

 

Cost of products sold

 

4,485

 

4,216

 

9,495

 

7,856

 

Depreciation related to services

 

4,124

 

3,556

 

8,100

 

6,879

 

Depreciation related to products

 

171

 

186

 

339

 

363

 

Total cost of revenues

 

95,824

 

79,005

 

175,494

 

143,032

 

Gross profit

 

41,905

 

35,215

 

75,622

 

62,635

 

Selling, general and administrative expenses

 

23,362

 

19,378

 

46,854

 

38,759

 

Research and engineering

 

530

 

602

 

1,047

 

1,191

 

Depreciation and amortization

 

2,167

 

1,503

 

4,062

 

2,982

 

Acquisition-related expense (See Note 5)

 

(160

)

(339

)

(339

)

(339

)

Income from operations

 

16,006

 

14,071

 

23,998

 

20,042

 

Other expenses

 

 

 

 

 

 

 

 

 

Interest expense

 

1,075

 

1,145

 

2,121

 

1,806

 

Income before provision for income taxes

 

14,931

 

12,926

 

21,877

 

18,236

 

Provision for income taxes

 

5,745

 

5,008

 

8,400

 

7,124

 

Net income

 

9,186

 

7,918

 

13,477

 

11,112

 

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

 

(23

)

38

 

(33

)

72

 

Net income attributable to Mistras Group, Inc.

 

$

9,163

 

$

7,956

 

$

13,444

 

$

11,184

 

Earnings per common share (see Note 4):

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.29

 

$

0.48

 

$

0.40

 

Diluted

 

$

0.32

 

$

0.28

 

$

0.46

 

$

0.39

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

28,144

 

27,786

 

28,094

 

27,731

 

Diluted

 

29,008

 

28,600

 

29,036

 

28,417

 

 

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

 

2



Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income

 

$

9,186

 

$

7,918

 

$

13,477

 

$

11,112

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

1,517

 

(1,062

)

(514

)

(1,375

)

Other comprehensive income (loss)

 

1,517

 

(1,062

)

(514

)

(1,375

)

Comprehensive income

 

10,703

 

6,856

 

12,963

 

9,737

 

Comprehensive (income) loss attributable to noncontrolling interests

 

(23

)

38

 

(33

)

72

 

Foreign currency translation adjustments

 

 

4

 

 

7

 

Comprehensive income attributable to Mistras Group, Inc.

 

$

10,680

 

$

6,898

 

$

12,930

 

$

9,816

 

 

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

 

3



Table of Contents

 

Mistras Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Additional
paid-in
capital

 

Retained
earnings
(accumulated
deficit)

 

Accumulated
other
comprehensive
income (loss)

 

Total
Mistras Group,
Inc.
Stockholders’
Equity

 

Noncontrolling
Interest

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

(1,368

)

(1,368

)

(7

)

(1,375

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended November 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 31, 2012

 

28,026

 

$

280

 

$

188,443

 

$

7,336

 

$

(3,047

)

$

193,012

 

$

236

 

$

193,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

13,444

 

 

13,444

 

33

 

13,477

 

Other comprehensive income, net of tax

 

 

 

 

 

(514

)

(514

)

 

(514

)

Stock compensation

 

13

 

 

3,206

 

 

 

3,206

 

 

3,206

 

Net settlement on vesting of restricted stock units

 

85

 

1

 

(807

)

 

 

(806

)

 

(806

)

Excess tax benefit from stock compensation

 

 

 

393

 

 

 

393

 

 

393

 

Exercise of stock options

 

38

 

1

 

351

 

 

 

352

 

 

352

 

Balance at November 30, 2012

 

28,162

 

$

282

 

$

191,586

 

$

20,780

 

$

(3,561

)

$

209,087

 

$

269

 

$

209,356

 

 

The accompanying notes are an integral part of these condensed 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,

 

 

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

13,444

 

$

11,184

 

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

 

 

 

 

 

Depreciation and amortization

 

12,501

 

10,224

 

Deferred income taxes

 

713

 

141

 

Provision for doubtful accounts

 

133

 

256

 

Loss (gain) on sale of assets

 

28

 

(82

)

Amortization of deferred financing costs

 

62

 

85

 

Stock compensation expense

 

3,206

 

2,547

 

Noncontrolling interest

 

33

 

(72

)

Foreign currency loss (gain)

 

(61

)

235

 

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

 

 

 

 

 

Accounts receivable

 

6,207

 

(20,392

)

Inventories

 

1,460

 

(922

)

Prepaid expenses and other current assets

 

(651

)

(1,224

)

Other assets

 

655

 

(44

)

Accounts payable

 

(4,535

)

(1,292

)

Income taxes payable

 

1,829

 

(864

)

Accrued expenses and other current liabilities

 

(7,628

)

641

 

Net cash provided by operating activities

 

27,396

 

421

 

Cash flows from investing activities

 

 

 

 

 

Purchase of property, plant and equipment

 

(5,223

)

(3,840

)

Purchase of intangible assets

 

(482

)

(265

)

Acquisition of businesses, net of cash acquired

 

(27,033

)

(10,695

)

Change in restricted cash

 

 

(3,700

)

Proceeds from sale of equipment

 

435

 

301

 

Net cash used in investing activities

 

(32,303

)

(18,199

)

Cash flows from financing activities

 

 

 

 

 

Repayment of capital lease obligations

 

(3,381

)

(3,391

)

Repayment of notes payable and other long-term debt

 

(3,093

)

(2,819

)

Net borrowings from current revolver

 

12,349

 

 

Net borrowings from former revolver

 

 

18,950

 

Net repayments of other short-term borrowings

 

 

(1,868

)

Proceeds from borrowings of long-term debt

 

127

 

 

Payment of contingent consideration for business acquisitions

 

(1,295

)

 

Taxes paid related to net share settlement of equity awards

 

(807

)

(281

)

Excess tax benefit from stock compensation

 

393

 

370

 

Proceeds from the exercise of stock options

 

351

 

1,325

 

Net cash provided by financing activities

 

4,644

 

12,286

 

Effect of exchange rate changes on cash and cash equivalents

 

(162

)

(68

)

Net change in cash and cash equivalents

 

(425

)

(5,560

)

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

8,410

 

10,879

 

End of period

 

$

7,985

 

$

5,319

 

Supplemental disclosure of cash paid

 

 

 

 

 

Interest

 

$

1,361

 

$

1,335

 

Income taxes

 

$

4,673

 

$

7,571

 

Noncash investing and financing

 

 

 

 

 

Equipment acquired through capital lease obligations

 

$

2,460

 

$

6,464

 

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

 

$

7,715

 

$

 

 

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

 

5



Table of Contents

 

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars in thousands, except per share data)

 

1.                                      Description of Business & Basis of Presentation

 

Description of Business

 

Mistras Group, Inc., together with its subsidiaries (the Company), is a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure. The Company combines industry-leading products and technologies, expertise in mechanical integrity (MI) and non-destructive testing (NDT) services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity assessments and management. These mission critical solutions enhance customers’ ability to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. Given the role the services of the Company play in ensuring the safe and efficient operation of infrastructure, the Company has historically provided a majority of its services to its customers on a regular, recurring basis. The Company serves a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, fossil and nuclear power, alternative and renewable energy, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industries.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and six months ended November 30, 2012 are not necessarily indicative of the results that may be expected for the year ending May 31, 2013. The balance sheet at May 31, 2012 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. You should read these unaudited consolidated financial statements together with the historical consolidated financial statements of the Company as filed with the Securities and Exchange Commission.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Mistras Group, Inc. and its wholly or majority-owned subsidiaries. Where the Company’s ownership interest is less than 100%, the noncontrolling interests are reported in stockholders’ equity in the accompanying consolidated balance sheets. The noncontrolling interest in net income, net of tax, is classified separately in the accompanying consolidated statements of operations.

 

All significant intercompany accounts and transactions have been eliminated in consolidation. Mistras Group, Inc.’s and its subsidiaries’ fiscal years end on May 31 except for the companies in the International segment, which end on April 30. The effect of this difference in timing of reporting foreign operations on the consolidated results of operations and consolidated financial position is not significant.

 

Reclassification

 

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

 

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.

 

6



Table of Contents

 

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

 

Software

 

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

 

Products

 

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

 

Percentage of Completion

 

A portion of the Company’s revenues are generated from engineering and manufacturing of custom products under long-term contracts that may last from several months to several years, depending on the contract. Revenues from long-term contracts are recognized on the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting revenues are recognized as work is performed. The percentage of completion at any point in time is based on total costs or total labor dollars incurred to date in relation to the total estimated costs or total labor dollars estimated at completion. The percentage of completion is then applied to the total contract revenue to determine the amount of revenue to be recognized in the period. Application of the percentage-of-completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. Contract costs include all direct materials, direct labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and all costs associated with operation of equipment. The cost estimation process is based upon the professional knowledge and experience of the Company’s engineers, project managers and financial professionals. Factors that are considered in estimating the work to be completed include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in project 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 software multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.

 

Use of Estimates

 

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

 

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Table of Contents

 

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

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of the acquired business at the date of acquisition. The Company tests for impairment annually, in its fiscal fourth quarter.  The most recent annual test for impairment performed for fiscal 2012 did not identify any instances of impairment and there were no events through November 30, 2012 that warranted a reconsideration of the impairment test results.

 

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

 

Concentration of Credit Risk

 

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

 

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

 

The Company has one customer, BP plc. (BP), which accounted for 10% and 17% of revenues for the three months ended November 30, 2012 and 2011, respectively, and 11% and 16% of revenues for the six months ended November 30, 2012 and 2011, respectively.  Accounts receivable from this customer were approximately 9% of total accounts receivable, net as of November 30, 2012 and May 31, 2012. The relationship with BP is comprised of separate contracts for non-destructive testing and inspection services with multiple affiliated entities within the broad BP organization.  The Company conducts business with various divisions or affiliates of the BP organization through numerous contracts covering many segments of BP’s business including downstream (refinery), midstream (pipelines) and upstream (exploration).  These contracts are typically negotiated locally with the specific BP division or 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 July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, that is intended to reduce the cost and complexity of the impairment test for indefinite-lived intangible assets by providing an entity with the option to first assess qualitatively whether it is necessary to perform the quantitative impairment test that is currently in place. An entity would not be required to quantitatively calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests beginning after September 

 

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Table of Contents

 

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

 

15, 2012. 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 June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 allows an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, or the Company’s option to present components of other comprehensive income either net of related tax effects or before related tax effects, nor does it affect how earnings per share is calculated or presented.  Effective June 1, 2012, the Company adopted the provisions of this updated accounting standard related to comprehensive income. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

 

3.                                      Capitalization

 

Common Stock

 

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 1,440,000 shares were available for future grants as of November 30, 2012. Prior to the Company’s IPO in October 2009, the Company had two stock option plans: (i) the 1995 Incentive Stock Option and Restricted Stock Purchase Plan (the 1995 Plan), and (ii) the 2007 Stock Option Plan (the 2007 Plan). No additional awards may be granted from these two plans. As of November 30, 2012, there was an aggregate of approximately 2,504,000 stock options outstanding and approximately 566,000 unvested restricted stock units outstanding under the 2009 Plan, the 2007 Plan, and the 1995 Plan.

 

No stock options were granted during the three or six month periods ended November 30, 2012 or 2011.

 

The Company recognized stock-based compensation expense related to stock option awards of approximately $0.8 million and $0.9 million for the three months ended November 30, 2012 and 2011. For the six months ended November 30, 2012 and 2011, the Company recognized stock-based compensation expense related to stock options of $1.6 million and $1.7 million, respectively.  As of November 30, 2012, there was approximately $2.2 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 approximately 0.7 years.  Cash proceeds from and the aggregate intrinsic value of stock options exercised during the three and six months ended November 30, 2012 and 2011 were as follows:

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Cash proceeds from options exercised

 

$

252

 

$

1,268

 

$

351

 

$

1,325

 

Aggregate intrinsic value of options exercised

 

$

359

 

$

3,026

 

$

485

 

$

3,062

 

 

The Company also recognized approximately $0.8 million and $0.5 million during the three months ended November 30, 2012 and 2011, respectively, in stock-based compensation expense related to restricted stock unit awards.  For the six months ended November 30, 2012 and 2011, the Company recognized stock-based compensation expense related to restricted stock unit awards of $1.4 million and $0.7 million, respectively.  As of November 30, 2012, there was

 

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Table of Contents

 

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

 

approximately $9.5 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 3.0 years.

 

In June 2012, the Company granted approximately 13,000 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 $0.3 million, which was recorded as stock-based compensation expense during the six months ended November 30, 2012. 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, 2012 and 2011, approximately 123,000 and 52,000 restricted stock units vested, respectively.  The fair value of these units was $1.9 million and $0.5 million, respectively.   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 2013 and 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 37,000 and 16,000 shares in the first six months of fiscal 2013 and 2012, respectively.  The shares withheld were 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 $0.8 million and $0.3 million and are reflected as a financing activity within the consolidated statements of cash flows for the six months ended November 30, 2012 and 2011, respectively. 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:

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

9,163

 

$

7,956

 

$

13,444

 

$

11,184

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

28,144

 

27,786

 

28,094

 

27,731

 

Basic earnings per share

 

$

0.33

 

$

0.29

 

$

0.48

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

9,163

 

$

7,956

 

$

13,444

 

$

11,184

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

28,144

 

27,786

 

28,094

 

27,731

 

Dilutive effect of stock options outstanding

 

789

 

741

 

798

 

622

 

Dilutive effect of restricted stock units outstanding

 

75

 

73

 

144

 

64

 

 

 

29,008

 

28,600

 

29,036

 

28,417

 

Diluted earnings per share

 

$

0.32

 

$

0.28

 

$

0.46

 

$

0.39

 

 

10



Table of Contents

 

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

 

5.             Acquisitions

 

In September 2012, the Company completed an acquisition of an asset protection company in Germany specializing in destructive and non-destructive services and inspection. The company was acquired to complement the service offerings within the International segment and to expand Mistras’ footprint in Europe. The Company acquired 100% of the common stock of the acquiree in exchange for approximately $28.3 million in cash (excluding cash acquired) and $7.7 million in notes payable over three years.  In addition to the cash and debt consideration related to this acquisition, the Company accrued a liability of approximately $7.5 million as of November 30, 2012, which represents the estimated fair value of contingent consideration expected to be payable in the event that the acquired company achieves specific performance metrics over the next five years of operations. The total potential contingent consideration for this acquisition ranges from zero to $12.9 million as of November 30, 2012.

 

The assets and liabilities of the acquired business were included in the consolidated balance sheet as of November 30, 2012 based on their estimated fair value on the date of acquisition as determined in a purchase price allocation, using available information and making assumptions management believes are reasonable. The Company is still in the process of completing its valuation of the assets acquired, both tangible and intangible, and liabilities assumed, as well as the contingent consideration and deferred tax assets/liabilities. This valuation and the related purchase price allocation is expected to be finalized prior to the end of the Company’s third quarter of fiscal 2013. The results of operations for this acquisition are included in the International segment’s results of operations from the date of acquisition. The Company’s preliminary allocation of purchase price for this acquisition is included in the table below. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition for the Company’s fiscal 2013 acquisitions:

 

Number of entities

 

1

 

 

 

 

 

Cash paid

 

$

28,289

 

Subordinated notes issued

 

7,715

 

Contingent consideration

 

7,501

 

 

 

 

 

Purchase price

 

$

43,505

 

 

 

 

 

Current liabilities assumed, net

 

$

(104

)

Debt and other long-term liabilities

 

(4,004

)

Property, plant and equipment

 

8,161

 

Deferred tax liability

 

(8,375

)

Intangibles, primarily customer relationships

 

27,000

 

Goodwill

 

20,827

 

Net assets acquired

 

$

43,505

 

 

The amortization period of intangible assets acquired ranges from two to twelve years. The Company has preliminarily recorded approximately $20.8 million of goodwill in connection with its fiscal 2013 acquisition, 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.

 

The Company also has four acquisitions that were completed in fiscal 2012 for which it is still in the process of completing the allocation of the consideration transferred, including the valuation of the intangible assets acquired. These valuations and related purchase price allocations are expected to be finalized prior to the end of the Company’s third quarter of fiscal 2013. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition for the Company’s fiscal 2012 acquisitions that have not yet been finalized:

 

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

 

Number of entities

 

4

 

 

 

 

 

Cash paid

 

$

9,171

 

Subordinated notes issued

 

904

 

Contingent consideration

 

1,197

 

 

 

 

 

Purchase price

 

$

11,272

 

 

 

 

 

Current assets acquired, net

 

$

1,025

 

Debt and other long-term liabilities

 

(35

)

Property, plant and equipment

 

1,204

 

Deferred tax liability

 

(529

)

Intangibles, primarily customer relationships

 

3,446

 

Goodwill

 

6,161

 

Net assets acquired

 

$

11,272

 

 

There have been no significant changes during fiscal 2013 to the initial purchase price allocations for which the final purchase price allocation is not yet complete.

 

Revenues for the acquisition completed in fiscal 2013 for the period subsequent to the closing of the transaction were approximately $6.4 million for both of the three and six months ended November 30, 2012. Income from operations for this acquisition for the period subsequent to the closing of the transaction was approximately $0.6 million for both of the three and six months ended November 30, 2012.

 

The unaudited pro forma information for the periods set forth below gives effect to the fiscal 2013 and fiscal 2012 acquisitions as if they had occurred at the beginning of the earliest 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 acquisition been consummated as of that time (unaudited, in thousands):

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

156,289

 

$

143,429

 

$

281,241

 

$

264,715

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

$

16,939

 

$

12,784

 

$

24,631

 

$

16,941

 

 

During the three and six month periods ended November 30, 2012, the Company incurred costs of $0.2 million and $0.9 million, respectively, in connection with due diligence, professional fees, and other expenses for its acquisition activity. Additionally, the Company adjusted the fair value of certain acquisition-related contingent consideration liabilities. For the three month and six month periods ended November 30, 2012, the adjustments resulted in a net decrease of approximately $0.4 million and $1.2 million, respectively, to the Company’s acquisition-related contingent consideration liabilities, which were approximately $18.4 million as of November 30, 2012 and recorded on the balance sheet in accrued expenses and other long-term liabilities. These adjustments also resulted in a corresponding net increase to income from operations of approximately $0.4 million and $1.2 million for the three and six month periods ended November 30, 2012, respectively. Both the fair value adjustments to acquisition-related contingent consideration liabilities and the acquisition-related costs have been classified as acquisition-related expense in the statement of operations for the three and six months ended November 30, 2012.

 

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

 

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Table of Contents

 

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

 

30, 2011 and recorded on the balance sheet in accrued expenses and other long-term liabilities. These adjustments also resulted in a corresponding net increase to income from operations of $0.7 million. Additionally, the Company incurred 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 costs have been classified as acquisition-related expense in the statement of operations for the three and six months ended November 30, 2011.

 

6.                                      Accounts Receivable, net

 

Accounts receivable consist of the following:

 

 

 

November 30, 2012

 

May 31, 2012

 

 

 

 

 

 

 

Trade accounts receivable

 

$

108,332

 

$

106,821

 

Allowance for doubtful accounts

 

(2,431

)

(2,306

)

Total

 

$

105,901

 

$

104,515

 

 

7.                                      Inventories, net

 

Inventories consist of the following:

 

 

 

November 30, 2012

 

May 31, 2012

 

 

 

 

 

 

 

Raw materials

 

$

3,237

 

$

3,054

 

Work in process

 

2,342

 

2,232

 

Finished goods

 

3,615

 

4,287

 

Supplies

 

2,348

 

2,919

 

Total

 

$

11,542

 

$

12,492

 

 

Inventories are net of reserves for slow-moving and obsolete inventory of approximately $1.4 million and $1.2 million as of November 30, 2012 and May 31, 2012, respectively.

 

8.                                      Property, Plant and Equipment, net

 

Property, plant and equipment consist of the following: 

 

 

 

Useful Life
(Years)

 

November 30, 2012

 

May 31, 2012

 

 

 

 

 

 

 

 

 

Land

 

 

 

$

2,097

 

$

1,892

 

Building and improvements

 

30-40

 

21,633

 

16,950

 

Office furniture and equipment

 

5-8

 

7,460

 

6,760

 

Machinery and equipment

 

5-7

 

114,146

 

105,096

 

 

 

 

 

145,336

 

130,698

 

Accumulated depreciation and amortization

 

 

 

(75,540

)

(67,171

)

Property, plant and equipment, net

 

 

 

$

69,796

 

$

63,527

 

 

Depreciation expense for the three months ended November 30, 2012 and 2011 was approximately $4.6 million and $3.9 million, respectively. Depreciation expense for the six months ended November 30, 2012 and 2011 was approximately $9.0 million and $7.5 million, respectively.

 

9.                                      Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consist of the following:

 

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

 

 

 

November 30, 2012

 

May 31, 2012

 

 

 

 

 

 

 

Accrued salaries, wages and related employee benefits

 

$

21,206

 

$

17,195

 

Contingent consideration, current portion

 

3,615

 

2,371

 

Accrued worker compensation and health benefits

 

3,165

 

3,678

 

Deferred revenues

 

2,864

 

5,390

 

Other accrued expenses

 

10,741

 

10,700

 

Total

 

$

41,591

 

$

39,334

 

 

10.                               Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

November 30, 2012

 

May 31, 2012

 

Senior credit facility:

 

 

 

 

 

Revolver

 

$

37,349

 

$

25,000

 

Notes payable

 

18,184

 

12,532

 

Other

 

4,132

 

2,697

 

 

 

59,665

 

40,229

 

Less: Current maturities

 

(7,948

)

(5,971

)

Long-term debt, net of current maturities

 

$

51,717

 

$

34,258

 

 

Senior Credit Facility

 

In December 2011, the Company entered into a Third Amended and Restated Credit Agreement (Credit Agreement) with Bank of America, N.A., as agent for the lenders and a lender, and JPMorgan Chase Bank, N.A., Keybank National Association and TD Bank, N.A., as lenders.  The Credit Agreement provides the Company with a $125.0 million revolving line of credit, which, under certain circumstances, can be increased to $150.0 million.  The Credit Agreement has a maturity date of December 20, 2016.  The Company may borrow up to $30.0 million in non-U.S. dollar currencies and use up to $10.0 million of the credit limit for the issuance of letters of credit.  As of November 30, 2012, there were outstanding borrowings of $37.3 million and a total of $3.0 million of outstanding letters of credit under the current revolving credit facility.

 

Loans under the Credit Agreement bear interest, at the option of the Company, at LIBOR, plus an applicable margin ranging from 1% to 2%, or base rate less a margin ranging from 0.25% to 1.25%, 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, as defined in the Credit Agreement, (which is (a) net income, less (b) income (or plus loss) from discontinued operations and extraordinary items, plus (c) income tax expenses, plus (d) interest expense, plus (e) depreciation, depletion, and amortization (including non-cash loss on retirement of assets), plus (f) stock compensation expense, less (g) cash expense related to stock compensation, plus or minus certain other adjustments) for the period of four consecutive fiscal quarters immediately preceding the date of determination.  The Company has the benefit of the lowest margin if its Funded Debt Leverage Ratio is equal to or less than 0.5 to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 2.5 to 1.  The Company will also bear additional costs for market disruption, regulatory changes effecting the lenders’ funding costs, and default pricing of an additional 2% interest rate margin if the Funded Debt Leverage Ratio exceeds 3.0 to 1.  Amounts borrowed under the Credit Agreement are secured by liens on substantially all of the assets of the Company.

 

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, as defined in the Credit Agreement, 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

 

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

 

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.

 

As of November 30, 2012, the Company was in compliance with the terms of the credit agreement, and it will continuously monitor its compliance with the covenants contained in the new credit agreement.

 

Notes Payable and Other

 

In connection with certain of the acquisitions the Company has completed, it has, at various times, issued subordinated notes payable to the sellers. The maturity of these notes range from three to five years from the date of acquisition with interest rates ranging from 0% to 7%. The Company has discounted these obligations to reflect a 3.5% to 10% imputed interest rate. Unamortized discount on these notes was de minimis as of November 30, 2012 and totaled approximately $0.1 million as of May 31, 2012. Amortization is recorded as interest expense in the consolidated statement of operations. The Company also has payment obligations to the sellers or the shareholders of the sellers pursuant to non-compete agreements which require the sellers and shareholders of the sellers not to compete with the Company.  The payment obligations under these agreements range from 3 to 5 years.

 

In December 2011, the Company amended its credit agreement bringing the Company’s interest rate to current market rates. The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and capital lease obligations approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issues of debt.

 

11.                               Fair Value Measurements

 

The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:

 

Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 — Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.

 

Level 3 — Unobservable inputs reflecting the Company’s own assumptions about inputs that market participants would use in pricing the asset or liability based on the best information available.

 

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial liabilities that are required to be remeasured at fair value on a recurring basis:

 

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Table of Contents

 

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

 

 

 

As of November 30, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent considération

 

$

 

$

 

$

18,382

 

$

18,382

 

Total Liabilities

 

$

 

$

 

$

18,382

 

$

18,382

 

 

 

 

As of May 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent considération

 

$

 

$

 

$

13,513

 

$

13,513

 

Total Liabilities

 

$

 

$

 

$

13,513

 

$

13,513

 

 

The fair value of contingent consideration liabilities that was classified as Level 3 in the table above was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the acquisition agreements.

 

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

 

Acquisition-related contingencies

 

The Company is liable for contingent consideration in connection with certain of its acquisitions. As of November 30, 2012, total potential acquisition-related contingent consideration ranged from zero to approximately $30.2 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next five years of operations. See Note 5 to these consolidated financial statements for further discussion of the Company’s acquisitions.

 

13.                               Subsequent Event

 

Subsequent to November 30, 2012, the Company completed acquisitions of two asset protection businesses, one located in France and one in Canada, to continue its market expansion strategy.  The Company’s cash outlay for these two acquisitions was approximately $6.6 million.  In addition to the cash consideration, the agreement for one of the acquisitions allows for contingent consideration to be earned based upon the acquired company achieving 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 or in the aggregate significant and no pro forma information has been included.

 

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Table of Contents

 

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

 

14.                               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.International. This segment offers services, products and systems similar to those of the other segments to global markets, principally in Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.

 

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.

 

Costs incurred 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, marketing and training are allocated to the segments. Segment income from operations also excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of depreciation on the corporate office facilities and equipment, administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment.

 

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

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Services

 

$

105,213

 

$

96,909

 

$

187,610

 

$

172,598

 

International

 

26,777

 

11,857

 

51,206

 

21,630

 

Products and Systems

 

8,439

 

9,092

 

17,973

 

16,605

 

Corporate and eliminations

 

(2,700

)

(3,638

)

(5,673

)

(5,166

)

 

 

$

137,729

 

$

114,220

 

$

251,116

 

$

205,667

 

 

Revenues by segment include intercompany transactions, which are eliminated in Corporate and eliminations.  The Services segment had sales to other operating segments of $1.1 million and $1.6 million for the three months ended November 30, 2012 and 2011, respectively. For the six months ended November 30, 2012 and 2011, the Services segment sales to other operating segments totaled $2.2 million and $1.8 million, respectively.

 

The International segment had sales to other operating segments of $0.1 million and $0.2 million for the three months ended November 30, 2012 and 2011. For the six months ended November 30, 2012 and 2011, the International segment sales to other operating segments totaled $0.3 million and $0.3 million, respectively.

 

The Products and Systems segment had sales to other operating segments of $1.4 million and $2.1 million for the three months ended November 30, 2012 and 2011, respectively. For the six months ended November 30, 2012 and 2011, the Products and Systems segment sales to other operating segments totaled $3.1 million and $3.4 million, respectively.

 

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Table of Contents

 

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

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Gross profit

 

 

 

 

 

 

 

 

 

Services

 

$

30,692

 

$

27,053

 

$

51,632

 

$

47,361

 

International

 

7,299

 

4,246

 

14,380

 

7,677

 

Products and Systems

 

3,975

 

4,263

 

9,220

 

8,014

 

Corporate and eliminations

 

(61

)

(347

)

390

 

(417

)

 

 

$

41,905

 

$

35,215

 

$

75,622

 

$

62,635

 

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Income from operations

 

 

 

 

 

 

 

 

 

Services

 

$

15,861

 

$

13,616

 

$

22,684

 

$

20,776

 

International

 

1,287

 

1,354

 

2,882

 

2,090

 

Products and Systems

 

1,771

 

2,551

 

4,936

 

3,562

 

Corporate and eliminations

 

(2,913

)

(3,450

)

(6,504

)

(6,386

)

 

 

$

16,006

 

$

14,071

 

$

23,998

 

$

20,042

 

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

Services

 

$

4,579

 

$

4,298

 

$

9,103

 

$

8,401

 

International

 

1,412

 

444

 

2,459

 

804

 

Products and Systems

 

488

 

480

 

979

 

951

 

Corporate and eliminations

 

(17

)

23

 

(40

)

68

 

 

 

$

6,462

 

$

5,245

 

$

12,501

 

$

10,224

 

 

 

 

November 30, 2012

 

May 31, 2012

 

Intangible assets, net

 

 

 

 

 

Services

 

$

15,294

 

$

17,180

 

International

 

32,288

 

6,390

 

Products and Systems

 

9,831

 

10,095

 

Corporate and eliminations

 

788

 

804

 

 

 

$

58,201

 

$

34,469

 

 

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Table of Contents

 

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

 

 

 

November 30, 2012

 

May 31, 2012

 

Goodwill

 

 

 

 

 

Services

 

$

59,001

 

$

58,746

 

International

 

44,733

 

24,481

 

Products and Systems

 

13,592

 

13,592

 

 

 

$

117,326

 

$

96,819

 

 

 

 

November 30, 2012

 

May 31, 2012

 

Long-lived assets

 

 

 

 

 

Services

 

$

118,301

 

$

120,846

 

International

 

101,763

 

47,825

 

Products and Systems

 

23,929

 

24,242

 

Corporate and eliminations

 

1,330

 

1,902

 

 

 

$

245,323

 

$

194,815

 

 

 

 

November 30, 2012

 

May 31, 2012

 

Total assets

 

 

 

 

 

Services

 

$

201,121

 

$

204,209

 

International

 

143,609

 

82,579

 

Products and Systems

 

35,568

 

43,914

 

Corporate and eliminations

 

729

 

(886

)

 

 

$

381,027

 

$

329,816

 

 

Revenues by geographic area for the three and six months ended November 30, 2012 and 2011, respectively, were as follows:

 

 

 

Three months ended November 30,

 

Six months ended November 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues

 

 

 

 

 

 

 

 

 

United States

 

$

91,506

 

$

91,323

 

$

166,644

 

$

162,799

 

Other Americas

 

20,195

 

11,059

 

33,120

 

20,857

 

Europe

 

22,231

 

8,476

 

38,908

 

14,076

 

Asia-Pacific

 

3,797

 

3,362

 

12,444

 

7,935

 

 

 

$

137,729

 

$

114,220

 

$

251,116

 

$

205,667

 

 

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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, 2012 is referred to as “fiscal 2012”), 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. As of November 30, 2012, we had approximately 4,200 employees in approximately 90 offices across 16 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 52% and 57% of our second quarter revenues of fiscal 2013 and 2012, 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 believe continued 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.

 

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, in the aggregate, have provided us with additional products, technologies, resources and customers that we believe will enhance our advantages over our competition.

 

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Table of Contents

 

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

 

Consolidated Results of Operations

 

Three months ended November 30, 2012 compared to the three months ended November 30, 2011

 

Our consolidated results of operations for the three months ended November 30, 2012 and 2011 were as follows:

 

 

 

Three months ended November 30,

 

 

 

2012

 

2011

 

 

 

($ in thousands)

 

Statement of Operations Data

 

 

 

 

 

Revenues

 

$

137,729

 

$

114,220

 

Cost of revenues

 

91,529

 

75,263

 

Depreciation

 

4,295

 

3,742

 

Gross profit

 

41,905

 

35,215

 

Selling, general and administrative expenses

 

23,362

 

19,378

 

Research and engineering

 

530

 

602

 

Depreciation and amortization

 

2,167

 

1,503

 

Acquisition-related expense

 

(160

)

(339

)

Income from operations

 

16,006

 

14,071

 

Interest expense

 

1,075

 

1,145

 

Income before provision for income taxes

 

14,931

 

12,926

 

Provision for income taxes

 

5,745

 

5,008

 

Net income

 

9,186

 

7,918

 

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

 

(23

)

38

 

Net income attributable to Mistras Group, Inc.

 

$

9,163

 

$

7,956

 

 

Our EBITDA and Adjusted EBITDA, non-GAAP measures explained below, for the three months ended November 30, 2012 and 2011 were as follows:

 

 

 

Three months ended November 30,

 

 

 

2012

 

2011

 

 

 

($ in thousands)

 

EBITDA and Adjusted EBITDA data

 

 

 

 

 

Net income attributable to Mistras Group, Inc.

 

$

9,163

 

$

7,956

 

Interest expense

 

1,075

 

1,145

 

Provision for income taxes

 

5,745

 

5,008

 

Depreciation and amortization

 

6,462

 

5,245

 

EBITDA

 

22,445

 

19,354

 

Stock compensation expense

 

1,572

 

1,545

 

Acquisition-related expense

 

(160

)

(339

)

Adjusted EBITDA

 

$

23,857

 

$

20,560

 

 

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Table of Contents

 

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 expenses (including adjustments to the estimated fair value of contingent consideration) and certain non-recurring items (which items are listed below or in the reconciliation table above).

 

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

 

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

 

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

 

Revenues. Revenues were $137.7 million for the three months ended November 30, 2012 compared to $114.2 million for the three months ended November 30, 2011.   Revenues by segment for the second quarter of fiscal 2013 and 2012 were as follows:

 

 

 

Three months ended November 30,

 

 

 

2012

 

2011

 

Revenues

 

 

 

 

 

Services

 

$

105,213

 

$

96,909

 

International

 

26,777

 

11,857

 

Products and Systems

 

8,439

 

9,092

 

Corporate and eliminations

 

(2,700

)

(3,638

)

 

 

$

137,729

 

$

114,220

 

 

We estimate our growth rates for the second quarter of fiscal 2013 and 2012 were as follows:

 

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Table of Contents

 

 

 

Three months ended November 30,

 

 

 

2012

 

2011

 

 

 

($ in thousands)

 

Revenue growth

 

$

23,509

 

$

25,383

 

% Growth over prior year

 

20.6

%

28.6

%

 

 

 

 

 

 

Comprised of:

 

 

 

 

 

% of organic growth

 

1.6

%

19.4

%

% of acquisition growth

 

19.4

%

8.8

%

% foreign exchange increase (decrease)

 

(0.4

)%

0.4

%

 

 

20.6

%

28.6

%

 

Revenues increased $23.5 million, or approximately 21%, for the three months ended November 30, 2012 compared to the three months ended November 30, 2011 as a result of growth in our International and Services segments. The growth in our International segment was principally attributable to growth from our fiscal 2012 and fiscal 2013 acquisitions, while growth in our Services segment was due to a combination of organic and acquisition growth.  In the second quarter of fiscal 2013, we estimate that our acquisition growth was approximately 19% compared to approximately 9% in the second quarter of fiscal 2012. For the second quarter of fiscal 2013 and 2012, we estimate that our organic growth rate was approximately 2% and 19%, respectively.

 

We continued to experience growth in many of our target markets during the second quarter of fiscal 2013.   Oil and gas is our largest target market and represented approximately 52% of total revenues in the second quarter of fiscal 2013, compared to approximately 57% in the second quarter of fiscal 2012. Oil and gas revenue in the second quarter of fiscal 2013 increased approximately 11% over the prior year with the largest increase coming from the midstream section of the oil and gas industry. We continued to experience significant growth in most of our other target markets outside of oil and gas, including power generation, aerospace, industrial and infrastructure.  Taken as a group, revenues for all target markets other than oil and gas grew approximately 33% in the second quarter of fiscal 2013 over the prior year period. Our largest customer in both periods was BP plc. (BP) and its affiliated companies, accounting for approximately 10% of our revenues in the second quarter of fiscal 2013 and approximately 17% in the second quarter of fiscal 2012.   Our top ten customers represented approximately 32% of our revenues in the second quarter of fiscal 2013 and fiscal 2012.

 

Gross Profit. Our gross profit was $41.9 million and increased $6.7 million, or 19% in the second quarter of fiscal 2013 compared to $35.2 million in the second quarter of fiscal 2012. Gross profit by segment for the three months ended November 30, 2012 and 2011 was as follows:

 

 

 

Three months ended November 30,

 

 

 

2012

 

2011

 

Gross profit

 

 

 

 

 

Services

 

$

30,692

 

$

27,053

 

International

 

7,299

 

4,246

 

Products and Systems

 

3,975

 

4,263

 

Corporate and eliminations

 

(61

)

(347

)

 

 

$

41,905

 

$

35,215

 

 

As a percentage of revenues, our gross profit and its components for the three months ended November 30, 2012 and 2011 were as follows:

 

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Three months ended November 30,

 

 

 

2012

 

2011

 

 

 

($ in thousands)

 

Gross profit

 

$

41,905

 

$

35,215

 

 

 

 

 

 

 

Gross profit % comprised of:

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

Cost of revenues

 

(66.5

)%

(65.9

)%

Depreciation

 

(3.1

)%

(3.3

)%

Total

 

30.4

%

30.8

%

Gross profit % decrease from prior year

 

(0.4

)%

(0.5

)%

 

As a percentage of revenues, our gross profit remained fairly consistent at approximately 30% for each of the second quarters of fiscal 2013 and fiscal 2012. Cost of revenues, excluding depreciation, as a percentage of revenues was 66.5% and 65.9% in the second quarter of fiscal 2013 and fiscal 2012, respectively. Depreciation expense included in the determination of gross profit for the second quarter of fiscal 2013 and fiscal 2012 was $4.3 million and $3.7 million, respectively.

 

The 40 basis point decrease in our gross profit as a percentage of revenues was primarily attributable to the decrease in gross profit in our International segment, which relates to our fiscal 2012 acquisitions, as these companies primarily provide lower margin, traditional NDT services. Additionally, the service offerings in our International segment are increasing faster than our product sales, which also lower our gross profit margin. Also contributing to the decrease in gross profit as a percentage of revenues is a change in the mix of Products and Systems segment revenues, which in the quarter included lower margins on revenues from large inspection systems.  These decreases were offset by improvements in our Services Segment utilization rates, reducing both our unbillable labor by 0.2% and our direct overtime labor by 1.3%.

 

Income from Operations. Our income from operations by segment for the three months ended November 30, 2012 and 2011 were as follows:

 

 

 

Three months ended November 30,

 

 

 

2012

 

2011

 

Income from operations

 

 

 

 

 

Services

 

$

15,861

 

$

13,616

 

International

 

1,287

 

1,354

 

Products and Systems

 

1,771

 

2,551

 

Corporate and eliminations

 

(2,913

)

(3,450

)

 

 

$

16,006

 

$

14,071

 

 

Our income from operations of $16.0 million for the second quarter of fiscal 2013 increased $1.9 million, or 14%, compared to the second quarter of fiscal 2012. As a percentage of revenues, our income from operations was approximately 12% in each of the the second quarters of fiscal 2013 and fiscal 2012, respectively.

 

Our SG&A expenses, as a percentage of revenues, was approximately 17% for each of the second quarters of fiscal 2013 and 2012, increasing approximately $4.0 million in fiscal 2013. Of this amount, SG&A for companies acquired within the last twelve months accounted for approximately $3.5 million of the total increase.  The increase in expense was primarily due to the cost of additional salary and other infrastructure costs to support our growth in revenues, including the addition of new locations and personnel in connection with our recent acquisitions. Excluding acquisitions, our SG&A expenses included higher compensation and benefit expenses of $0.2 million over the same period in the prior year attributed to normal salary increases, as well as our investment in additional management and corporate staff to support our growth. Other increases in SG&A expenses, excluding acquisitions, included an increase to the provision for doubtful accounts of approximately $0.3 million and increased marketing costs of $0.2 million.  Depreciation and amortization included in the determination of income from operations for the second quarter of fiscal 2013 and fiscal 2012 was $2.2 million and $1.5 million, respectively.

 

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Our acquisition-related expense for the second quarter of fiscal 2013 was attributed to adjustments to the estimated fair value of c