2016
ANNUAL REPORT
MIS TRAS GROU P, INC .
KEY FIN ANCIAL HIGHLIGHTS
Revenues by End Market
(FY Ending May 31)
56% Oil & Gas
25% Downstream
15% Upstream
14% Midstream
02% Petrochemical
12% Aerospace & Defense
9% Industrial
8% Power Generation
& Transmission
7% Other Process Industries
4% Infrastructure, Research
& Engineering
4% All Other
Revenues by Region
(FY Ending May 31)
Historical Annual Revenues
(FY Ending May 31 / $ in millions)
5YR CAGR: 16%
1
1
7
$
9
1
7
$
3
2
6
$
9
2
5
$
7
3
4
$
9
3
3
$
FY11
FY12
FY13
FY14
FY15
FY16
Adjusted EBITDA
(FY Ending May 31 / $ in millions)
5YR CAGR: 11%
8
8
$
1
7
$
2
7
$
8
6
5 $
6
$
2
5
$
FY11
FY12
FY13
FY14
FY15
FY16
72%
United States
Europe17%
9%
Other Americas
2%
Asia-Pacific
S HAR E HOL DE R L E T TER
Dear Fellow Shareholders,
When Mistras Group began its fiscal year 2016 that ended May 31, 2016, there was ample
reason for pessimism. Commodity prices had fallen precipitously and the oil and gas
market, which accounts for more than half of Mistras Group revenues, was very turbulent.
Results in the second half of our prior fiscal year were adversely impacted, as customer
spending and inspection industry revenue growth had become curtailed. Our stock price
was at a multi-year low, reflecting these concerns.
We had hundreds of conversations with our customers that helped us understand the
magnitude of the oil and gas market’s sudden downturn. This led us to take many decisive
actions, including:
While we are very pleased with our strong 2016 performance, we view our company as
a work in progress that requires continuous improvement. To this end, we continue to
bolster our management team and our processes. During fiscal year 2016 we transitioned
new leadership in our UK, Netherlands and Products and Systems businesses.
Additionally, Dennis Bertolotti was promoted to the new role of President and Chief
Operating Officer, Jon Wolk was promoted to Senior Executive Vice President, adding
Information Technology to his responsibilities as CFO, and Mike Lange added the title of
Senior Executive Vice President, in charge of the Company’s business development and
strategic planning.
• We divested our operations in Russia and Japan;
• We reduced headcount in almost all of our International subsidiaries;
• We reorganized our Services leadership team;
• We reduced headcounts in several North American locations; and
• We formed a team of experts to lead our efforts to improve contract margins
In last year’s shareholder letter, I expressed optimism that these actions, combined with
our powerful culture that is driven to provide customers with tremendous value and
exceed their expectations, would improve our performance. I am very pleased to tell
you that my predictions not only came true, but that our company exceeded my most
optimistic expectations for fiscal year 2016:
• We had positive organic revenue growth, despite a very challenging market that saw
most competitors suffer high single digit or double-digit declines;
• We grew Adjusted EBITDA by $16 million, or 23% over prior year, and operating cash
flow by $18 million or 37%, establishing new record levels of performance for these
important metrics;
• We improved our gross margin to 28.2% from the prior year’s 26.0%, and our Adjusted
EBITDA margin to 12.2% from the prior year’s 10.1%;
• We established new company records for operating income (excluding charges) and
Adjusted EBITDA not only for the entire fiscal year, but also in every fiscal quarter of
fiscal year 2016; and
• We reduced our ratio of net debt to Adjusted EBITDA from over 2.0 during the previous
fiscal year, to 0.9 at the end of fiscal year 2016.
These important accomplishments were achieved while adhering to our strict quality,
safety and training protocols and continuing to offer the industry’s widest breadth
of industry expertise and geographic coverage in North America. Our team employed
numerous key performance indicators to monitor our performance and communicate with
our customers. And we continued to save many customers millions of dollars per year
compared with using alternative inspection providers and methods.
In a very challenging market, Mistras Group managed to grow its business and gain
market share on both sides of the Atlantic by winning new customers, while at the same
time outpacing rivals with strong customer retention.
As I look forward to fiscal year 2017 and beyond, I am excited for our future. Mistras has
become one of the largest outsourced asset protection service providers in the world,
earning a reputation that enables many of the world’s largest companies to place their
reliance upon our company. Because of our strong performance and strong customer
relationships, we have been asked by some customers to explore expanding our service
offerings into light mechanical areas that are adjacent to (but not potentially conflicting
with) the inspection duties that we presently perform for them. We are intrigued by these
opportunities and eager to add more value for our customers. Despite the present market
challenges, we believe we have a long runway ahead of us that will enable our company
to grow well beyond one billion in revenues, with profit margins that continue to improve.
Speaking specifically of fiscal year 2017, our planning assumptions call for a continuance
of lower oil prices for the foreseeable future. In this environment we will strive to continue
to provide the best possible value to our customers as efficiently as possible, and with
the same sense of urgency they have come to expect from Mistras. We expect we will
continue to expand our profit margins in fiscal year 2017, and we will continue to gain
market share on both sides of the Atlantic, in a market that likely remains challenged.
In conclusion, we are excited about our market position, our value proposition, our
unparalleled network of certified technicians, and the improvements we have made in our
financial performance. We will continue to strive to help our refinery customers achieve
first quartile performance, to help our power generation customers avoid unplanned
outages, to assist our aerospace customers in delivering the highest quality advanced
composite components, and to improve public safety with innovative monitoring
solutions. We will continue to make investments that enable us to maintain and extend
our market leadership, while continuing to deliver improved profits and cash flows.
On behalf of our Board of Directors and our management team, I extend our thanks to
our customers, our partners, our 5,700 employees, and to our loyal shareholders, for their
continued support and trust.
Sincerely,
Dr. Sotirios J. Vahaviolos
Chairman of the Board of Directors and Chief Executive Officer
THIS PAGE INTENTIONALLY LEFT BLANK
THIS PAGE INTENTIONALLY LEFT BLANK
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2016
Commission File Number 001-34481
Mistras Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
22-3341267
(I.R.S. Employer
Identification Number)
195 Clarksville Road
Princeton Junction, New Jersey 08550
(609) 716-4000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
of 1933. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 (the “Exchange Act”). Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act 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. Yes
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 during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of
November 30, 2015, based upon the closing price of the common stock as reported by New York Stock Exchange on such date
was approximately $364.4 million.
As of August 5, 2016, a total of 28,955,455 shares of the Registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the registrant’s
definitive Proxy Statement for its 2016 Annual Meeting of Shareholders (the “Proxy Statement”), which is expected to be filed
not later than 120 days after the registrant’s fiscal year ended May 31, 2016. Except as expressly incorporated by reference, the
Proxy Statement shall not be deemed to be a part of this report on Form 10-K.
Table of Contents
MISTRAS GROUP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURE
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3
18
26
26
26
26
26
28
29
45
46
74
74
75
75
76
76
76
76
76
2
Table of Contents
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains forward-looking statements regarding us and our business, financial condition, results of
operations and prospects 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). Such forward-looking statements include those that express plans,
anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact.
These forward-looking statements are based on our current expectations and projections about future events and they are
subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially
from those expressed or implied in such statements.
In some cases, you can identify forward-looking statements by terminology, such as “goals,” “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “should,” “would,” “predicts,” “appears,” “projects,” or
the negative of such terms or other similar expressions. Factors that could cause or contribute to differences in results and
outcomes from those in our forward-looking statements include, without limitation, those discussed elsewhere in this Report in
Part I, Item 1A. “Risk Factors,” Part 2, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and in this Item 1, as well as those discussed in our other Securities and Exchange Commission (SEC) filings. We
undertake no obligation to (and expressly disclaim any obligation to) revise or update any forward-looking statements made
herein whether as a result of new information, future events or otherwise. However, you should consult any further disclosures
we may make on these or related topics in our reports on Form 8-K or Form 10-Q filed with the SEC.
The following discussions should be read in conjunction with the sections of this Report entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Risk Factors”.
Our Business
We offer our customers “one source for asset protection solutions”® and are a leading 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), Non-
Destructive Testing (NDT), Destructive Testing (DT) and predictive maintenance (PdM) services, process and fixed asset
engineering and consulting services, proprietary data analysis and our world class enterprise inspection database management
and analysis software, PCMS, to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to
complex, plant-wide asset integrity management and assessments. These mission critical solutions enhance our customers’
ability to comply with governmental safety and environmental regulations, extend the useful life of their assets, increase
productivity, minimize repair costs, manage risk and avoid catastrophic disasters. Given the role our solutions 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 (downstream, midstream, upstream and petrochemical), power generation (natural gas, fossil, nuclear,
alternative, renewable, and transmission and distribution), public infrastructure, chemicals, commercial aerospace and defense,
transportation, primary metals and metalworking and research and engineering institutions. As of May 31, 2016, we had
approximately 5,700 employees, in approximately 120 offices across 14 countries. We have established long-term relationships
as a critical solutions provider to many of the leading companies in our target markets.
Our asset protection solutions combine the disciplines of NDT, DT, PdM, MI, engineering & consulting services and data
analysis and enterprise inspection data management software to provide value to our customers. The foundation of our business
is NDT, which is the examination of assets without impacting current and future usefulness or impairing the integrity of these
assets. The ability to inspect infrastructure assets and not interfere with their operating performance makes NDT a highly
attractive alternative to many traditional intrusive inspection techniques, which may require dismantling equipment or shutting
down a plant, mill or site. Our MI services are a systematic engineering-based approach to developing best practices for
ensuring the on-going integrity and safety of equipment and industrial facilities. MI services involve conducting an inventory
of infrastructure assets, developing and implementing inspection and maintenance procedures, training personnel in executing
these procedures and managing inspections, testing and assessments of customer assets. By assisting customers in
implementing MI programs, we enable them to identify gaps between existing and desired practices, find and track deficiencies
and degradations to be corrected and establish quality assurance standards for fabrication, engineering and installation of
infrastructure assets. We believe our MI services improve plant safety and reliability and regulatory compliance, and in so
doing reduce maintenance costs. Our solutions also incorporate comprehensive Risk Based Inspection (RBI) data analysis from
our proprietary asset protection software to provide customers with detailed, integrated and cost-effective solutions that rate the
3
Table of Contents
risks of alternative maintenance approaches and recommend actions in accordance with consensus industry codes and standards
and help to establish and support key performance indicators (KPI’s) to ensure continued safe and economic operations.
We differentiate ourselves by delivering these solutions under our “One Source” umbrella, utilizing a proven systematic
method that creates a closed loop life cycle for addressing continuous asset protection and improvement. Under this business
model, customers outsource their inspection to us on a “run and maintain” basis. As a global asset protection leader, we provide
a comprehensive range of solutions that includes:
•
•
•
•
•
•
•
•
•
traditional and advanced outsourced NDT services conducted by our technicians, mechanical integrity assessments,
above-ground storage tank inspection, pipeline inspection and American Petroleum Institute (API) visual inspections
and PdM program development;
destructive testing (DT), a definitive discipline in material testing, taking specimens through to mechanical failure
while examining a host of factors. Hardness, stiffness and strength are a few key indicators drawn from destructive
tests per customer specifications. DT is a strength of our subsidiary, Mistras-GMA in Germany, which specializes in
an array of destructive testing applications utilized throughout the materials selection and approval process in the
aerospace, automotive, chemical, oil and gas and power generation industries.
advanced asset protection solutions, in most cases involving proprietary acoustic emission (AE), digital radiography,
infrared, wireless and/or automated ultrasonic inspections and sensors, which are operated by our highly trained
technicians;
a proprietary and customized portfolio of software products for testing and analyzing data captured in real-time by our
technicians and sensors, including advanced features such as pattern recognition and neural networks;
enterprise software and relational databases to store and analyze inspection data, comparing it to prior operations and
testing of similar assets, industrial standards and specific risk conditions, such as use with highly flammable or
corrosive materials, and developing asset integrity management plans based on risk-based inspection that specify an
optimal schedule for the testing, maintenance and retirement of assets;
on-line monitoring systems that provide secure web-based remote or on-site asset inspection, real-time reports and
analysis of plant or enterprise-wide structural integrity data, comparison of integrity data to our library of historical
inspection data and analysis to better assess structural integrity and provide alerts for and prioritize future inspections
and maintenance;
in-house testing services: Mistras’ in-house inspection services provide cost-effective, efficient solutions that improve
the integrity and lifespan of critical assets featuring a dynamic suite of testing and inspection services. With a network
of in-house laboratories, Mistras provides a one-stop shop for traditional (NDT), advanced non-destructive testing
(ANDT), and destructive testing (DT) of materials and fabricated structures by offering a complete inspection package
— from preparation and production all the way to post-processing. These capabilities are available through our state-
of-the-art testing equipment and expertise in our grid of in-house testing laboratories across the U.S.A., Canada and
Europe;
full range of engineering consulting services to the downstream and renewable energy sectors that includes plant
operations support covering both process and equipment technologies; project planning, management and execution;
expert testimony and technical training; and
ultra-high pressure water blasting in place of sand blasting, used for both off shore oil & gas platforms and land based
refinery and chemical fixed equipment. NDT inspection services are offered while in post cleaning mode.
Our labs hold a wide variety of certifications that allow them to perform inspections to meet or exceed stringent regulatory
requirements, such as: NADCAP, AS9100/ISO-9001, FAA Repair Station and ITAR/EAR. With these certifications comes a
comprehensive range of approvals from prime contractors of major projects, the military, and internationally renowned
products and systems manufactures from aerospace to nuclear energy; transportation to petrochemical industries.
We offer our customers a customized package of services, products and systems, or our enterprise software and other niche
high-value products on a stand-alone basis. For example, customers can purchase most of our sensors and accompanying
software to integrate with their own systems, or they can purchase a complete turn-key solution, including installation,
monitoring and assessment services. Importantly, we do not sell certain of our advanced and proprietary software and other
4
Table of Contents
products as stand-alone offerings; instead, we embed them in our comprehensive service offerings to protect our investment in
intellectual property while providing an added value which generates a substantial source of recurring revenues.
We generated revenues of $719.2 million, $711.3 million and $623.5 million, net income of $24.7 million, $16.1 million and
$22.5 million and adjusted EBITDA of $88.1 million, $71.9 million and $70.7 million for fiscal 2016, 2015 and 2014,
respectively. An explanation of adjusted EBITDA and a reconciliation of these amounts to net income are set forth in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”. For fiscal 2016, we generated
approximately 77% of our revenues from our Services segment. Our revenues are diversified, with our top ten customers
accounting for approximately 36%, 33% and 38% of our revenues during fiscal 2016, 2015 and 2014, respectively.
Asset Protection Industry Overview
The asset protection industry consists of NDT inspection, DT inspection, PdM and MI services and inspection data
management and analysis. NDT plays a crucial role in assuring the operational and structural integrity and reliability of critical
infrastructure without compromising the usefulness of the tested materials or equipment. The evolution of NDT services, in
combination with broader industry trends, including increased asset utilization and aging of infrastructure, the desire by
companies to extend the useful life of their existing infrastructure, new construction projects, enhanced government regulation
and the shortage of certified NDT professionals, have made NDT an integral and increasingly outsourced part of many asset-
intensive industries. Well-publicized industrial and public infrastructure failures and accidents such as the Deepwater Horizon
oil spill in the Gulf of Mexico and the I-35W Mississippi River bridge collapse in Minnesota, and a number of recent refinery
accidents continues to raise the level of safety and environmental awareness of regulators, while owners and operators are
recognizing the benefits that asset protection solutions can provide.
Historically, NDT solutions predominantly used qualitative testing methods aimed primarily at detecting defects in the tested
materials. This methodology, which we categorize as “traditional NDT,” is typically labor intensive and, as a result,
considerably dependent upon the availability and skill level of the certified technicians, engineers and scientists performing the
inspection services. The traditional NDT market has been highly fragmented, with a significant number of small vendors
providing inspection services to divisions of companies or local governments situated in close proximity to the vendor’s field
inspection engineers and technicians. The trend over the past several years, however, is for customers to look for a select few
vendors capable of providing a wider spectrum of asset protection solutions for global infrastructure that we call “one source”.
This shift in underlying demand, which began in the early 1990s and has accelerated more recently, has contributed to a
transition from traditional NDT solutions to more advanced solutions that employ automated digital sensor technologies and
accompanying enterprise software, allowing for the effective capture, storage, analysis and reporting of inspection and
engineering results electronically and in digital formats. These advanced techniques, taken together with advances in wired and
wireless communication and information technologies, have further enabled the development of remote monitoring systems,
asset-management and predictive maintenance capabilities and other data analytics and management. We believe that as
advanced asset protection solutions continue to gain acceptance among asset-intensive organizations, those vendors offering
broad, complete and integrated solutions, scalable operations and a global footprint will have a distinct competitive advantage.
Moreover, we believe that vendors that are able to effectively deliver both advanced solutions and data analytics, by virtue of
their access to customers’ data, create a significant barrier to entry for competitors, and lead the opportunity to create
significant recurring revenues.
We believe the following represent key dynamics of the asset protection industry:
• Extending the Useful Life of Aging Infrastructure. The prohibitive cost and challenge of building new infrastructure
has resulted in the significant aging of existing infrastructure and caused companies to seek ways to extend the useful
life of existing assets. For example, due to the significant cost associated with constructing new refineries, stringent
environmental regulations which have increased the costs of managing them and difficulty in finding suitable
locations on which to build them, no major new refineries have been constructed in the United States since 1976.
Another example is in the area of power transmission and distribution. The Smart Grid initiative in the United States is
causing increased loading on aging transformers that are more than 40 years old in many cases. The need to test and
monitor these units to ensure their reliability until replacement is instrumental in support of a reliable Smart Grid
network. Because aging infrastructure requires relatively higher levels of maintenance and repair in comparison to
new infrastructure, as well as more frequent, extensive and ongoing testing, companies and public authorities will
continue spending on asset protection solutions to ensure the operational and structural integrity of existing
infrastructure.
• Outsourcing of Non-Core Activities and Technical Resource Constraints. The increasing sophistication and automation
of NDT programs, together with a decreasing supply of skilled professionals and stricter and increasing governmental
5
Table of Contents
regulations, has caused many companies and public authorities to outsource NDT and other services rather than recruit
and train such capabilities internally. Owners and operators of infrastructure are increasingly contracting with third
party providers that have the necessary technical product portfolio, engineering expertise, technical workforce and
proven track record of results-oriented performance to effectively meet their increasing requirements.
•
•
•
Increasing Asset and Capacity Utilization. Due to the high repair and replacement costs and the limited construction
of new infrastructure, existing infrastructure in some of our target markets will experience high usage, causing
increased stress and fatigue that accelerate deterioration. These dynamic prices and costs also motivate our customers
to complete repairs, maintenance, replacements and upgrades more quickly. For example, increasing demand for
refined petroleum products, combined with high plant utilization rates, is driving refineries to upgrade facilities to
make them more efficient and expand capacity. In order to sustain high capacity utilization rates, customers are
increasingly using asset protection solutions to efficiently ensure the integrity and safety of their assets.
Implementation of asset protection solutions can also lead to increased productivity as a result of reduced
maintenance-related downtime.
Increasing Corrosion from Low-Quality Inputs. The increased availability and low cost of crude oil from areas such as
shale plays and oil sands resources have led to the use of lower grade raw materials and feedstock used in refinery and
power generation processes. These lower grade raw materials and feedstock, especially in the case of the refining
process involving petroleum with higher sulfur content, can rapidly corrode the infrastructure with which they come
into contact, which in turn increases the need for asset protection solutions to identify such corrosion and enable
infrastructure owners to proactively combat the problems caused by such corrosion.
Increasing Use of Advanced Materials. Customers in our target markets are increasingly utilizing advanced materials,
such as composites, and other unique technologies in the manufacturing and construction of new infrastructure and
aerospace applications. As a result, they require advanced testing, assessment and maintenance technologies to inspect
and to protect these assets, since many of these advanced materials cannot be tested using traditional NDT techniques.
We believe that demand for NDT solutions will increase as companies and public authorities continue to use these
advanced materials, not only during the operating phase of the lifecycle of their assets, but also during the design,
manufacturing and quality control phases and are more frequently integrating and embedding sensors directly into the
end product in support of total life cycle asset management.
• Meeting Safety Regulations. Owners and operators of infrastructure assets increasingly face strict government
regulations and safety requirements. Failure to meet these standards can result in significant financial liabilities,
increased scrutiny by Occupational Safety and Health Administration (OSHA) and other regulators, higher insurance
premiums and tarnished corporate brand value. There have been several industrial accidents, including explosions and
fires, in recent years. These accidents created significant damage to the reputation of refineries and coupled with
concern by owners, led OSHA to strengthen process safety enforcement standards with the continued implementation
of the National Emphasis Program (NEP) that also extends to chemical plants for compliance with applicable
regulations. As a result, these owners and operators are seeking highly reliable asset protection suppliers with a proven
track record of providing asset protection services, products and systems to assist them in meeting these increasingly
stringent regulations.
• Expanding Addressable End-Markets. Advances in NDT sensor technology and asset protection software based
systems, and the continued emergence of new technologies, are creating increased demand for asset protection
solutions in applications where existing techniques were previously ineffective. Further, we expect increased demand
in relatively new markets, such as automotive component suppliers.
• Expanding Addressable Geographies. We believe that incremental demand will continue to come from international
markets, including Western and Eastern Canada, Asia, Europe and parts of Latin America. Specifically, as companies
and governments in these markets build and maintain infrastructure and applications that require the use of asset
protection solutions, we believe demand for our solutions will increase.
We believe that the market available to us will continue to grow as a result of these macro-market trends.
Our Target Markets
Overview
6
Table of Contents
Mistras operates in a highly competitive, but fragmented market. Domestically, the market is serviced by several national
competitors, and many regional and/or local companies. Internationally, our primary competitors are divisions of large
companies, with additional competition from small independent local companies which may be limited to a specific product,
service or technology and focused on a niche market or geographic region. We focus our strategic sales, marketing and product
development efforts on a range of infrastructure-intensive based industries and governmental authorities. In general, our largest
markets in broad terms are energy-related infrastructure where we perform inspections, which may lead to a fitness for service
evaluation and engineering based services on fixed and rotating assets.
There are economic indicators that continue to drive our business, especially in the U.S. domestic markets as indicated by the
Energy Information Administration (EIA);
• Growth in U.S. energy production- While crude oil production slowed in the first quarter of 2016 from record highs in
2015 at 9.4 million barrels per day (bbl/d) domestic production is still significantly higher than pre-2015 levels
according to the EIA. Although tailing off slightly, production estimates for the year 2016 is predicted to level off
around 9 million bbl/d.
• High demand for U.S. Natural Gas - According to the EIA, demand for natural gas remains high resulting from the
fact that the U.S. is experiencing record low pricing for natural gas in the last 18 months.
• The United States is continuing its trend from being a net importer of natural gas to a net exporter by 2017. Several
facilities have already begun operations in support of the export process, with more capital expenditures planned for
the coming years.
The outlook for power in the U.S. has shifted substantially in the last several years due to legislation restricting emissions of
greenhouse gas related to fossil fuels. There has been a shift from traditional coal and gas fired base load power plants to
natural gas fueled base load and peaking units around the country. Natural gas units are preferred as natural gas pricing
remains low, and the permitting process to operate these units is easier than coal or nuclear facilities.
Revenue by Target Market
The following chart represents the percentage of consolidated revenues we generated from our various markets for fiscal 2016:
Mistras Revenues by Target Market
(Fiscal 2016)
Oil and Gas
Because oil, gas, and to a much less extent, coal are expected to continue to be the primary energy sources, the energy industry
will have to continue providing these fuels to meet demand. In addition, there were approximately 657 crude oil refineries in
the world, with 142 refineries operating in the United States. With aging infrastructure and growing capacity constraints, asset
7
Table of Contents
protection continues to be an indispensable tool in maintenance planning, quality control and prevention of catastrophic failure
in refineries and petrochemical plants. Recent low oil and lower fossil fuel input prices have placed additional pressure on
industry participants to increase capacity, focus on production efficiency and cost reductions and shorten shut-down time or
“turnarounds.” Asset protection solutions are used for both off-stream inspections, or inspection when the tested infrastructure
is shut-down, and increasingly, on-stream inspections, or inspection when the tested infrastructure is operating at normal levels.
While we expect off-stream inspection of vessels and piping during a plant shut-down or turnaround to remain a routine
practice by companies in these industries, we expect the areas of greatest future growth to occur as a result of on-stream
inspections and monitoring of facilities, such as offshore platforms, transport systems and oil and gas pipeline transmission
lines, because of the substantial lost revenues from shutting them down. On-stream inspection enables companies to avoid the
costs associated with shutdowns during testing while enabling the economic and safety advantages of advanced planning or
predictive maintenance.
Power Generation and Transmission
Asset protection in the power industry has traditionally been associated with the inspection of high-energy, critical steam
piping, boilers, rotating equipment, and various other plant components (balance of plant), utility aerial man-lift devices, large
transformer testing and various other applications for nuclear and fossil-fuel based power plants. We believe that in recent years
the acceptance of asset protection solutions has grown rapidly in this industry due to the aging of critical power generation and
transmission infrastructure. For instance, the average age of a nuclear power plant in the United States is over 30 years. Also
driving this segment is the large conversion of tradition coal plants to cleaner burning and more efficient natural gas fired
power plants. Furthermore, global demand for power generation and transmission has grown rapidly and is expected to
continue, primarily as a result of the energy needs of emerging economies such as China and India. The areas of power
generation and transmission on which we focus our efforts are natural gas, fossil, nuclear, alternative and renewable, such as
wind.
Process Industries
The process industries, or industries in which raw materials are treated or prepared in a series of stages, include chemicals,
pharmaceuticals, food processing, paper and pulp and metals and mining, have a need for our products and services. As with oil
and gas processing facilities, chemical processing facilities require significant spending on maintenance and monitoring. Given
their aging infrastructure and high utilization requirements, growing capacity constraints and increasing capital costs, we
believe asset protection solutions will continue to grow in importance in maintenance planning, quality and cost control and
prevention of catastrophic failure in the chemicals industry.
Public Infrastructure, Research and Engineering
We believe that high profile infrastructure catastrophes, such as the collapse of the I-35W Mississippi River Bridge in
Minneapolis and others since, have caused public authorities to more actively seek ways to prevent similar events from
occurring. Public authorities tasked with new construction and maintenance of existing, public infrastructure increasingly use
asset protection solutions to inspect these assets, including the use of embedded sensors to enable on-line monitoring
throughout the life of the asset. This is a target market for our application technology and experience. Over the last twenty
years, we have provided testing and health monitoring on many bridges and structures worldwide, among which include some
of the largest and well-known bridges in the United States and United Kingdom. In fiscal 2015, for example, we installed
several wire break systems complete with multiple sensors types (known as sensor fusion). These are being monitored 24/7
automatically, alerting the bridge owner when a crack is detected. Other services are offered, including internet and cloud data
transfer, secure web sites and monitoring contracts that provide for “around the clock monitoring” and regular reports, which
provide information on the status of the bridge and early detection of suspect areas that can be identified and repaired before an
alarm is generated. We continue to provide these monitoring services worldwide.
Aerospace and Defense
The operational safety, reliability, structural integrity and maintenance of aircraft and associated products is critical to the
aerospace and defense industries. Industry participants increasingly use asset protection solutions to perform inspections upon
delivery, and also periodically employ asset protection solutions during the operational service of aircraft, using advanced
ultrasonic immersion systems or digital radiography in order to precisely detect structural defects. Industry participants also use
asset protection solutions for the inspection of advanced composites found in new classes of aircraft, x-ray of critical engine
components, ultrasonic fatigue testing of complete aircraft structures, corrosion detection and on-board monitoring of landing
8
Table of Contents
gear and other critical components. We expect increased demand for our solutions including our destructive testing business
from the aerospace industry to result from wider use of these advanced composites and distributed on-line sensor networks and
other embedded analytical applications built into the structure of assets to enable real-time performance monitoring and
condition-based maintenance. We serve this rapidly growing target market by providing our state of the art fully integrated
inspection systems to original equipment manufacturers (OEMs). For the OEM that prefers to outsource this inspection, we
provide a full range of in-house services through our various regional facilities. These facilities have obtained numerous
accreditations and certifications required to meet the stringent inspection criteria that the aerospace industry demands.
Industrial
The quality control requirements driven by the need for zero to low defect component tolerance within automated robotic
intensive industries such as automotive, consumer electronics and medical industries, serve as key drivers for the recent growth
of NDT technologies, such as ultrasonics and radiography. We expect that increasingly stringent quality control requirements
and competitive forces will drive the demand for more costly finishing and polishing which, in turn, may promote greater use
of NDT throughout the production lifecycle.
Our Competitive Strengths
We believe the following competitive strengths contribute to our being a leading provider of asset protection solutions and will
allow us to further capitalize on growth opportunities in our industry:
• One Source Provider for Asset Protection Solutions® Worldwide. We believe we have the most comprehensive
portfolio of proprietary and integrated asset protection solutions, including inspection and engineering services,
products and systems worldwide, which positions us to be the leading single source provider for a customer’s asset
protection requirements. Through our network of approximately 120 offices, supplemented by independent
representatives in 14 countries around the world, we offer an extensive portfolio of solutions that enables our
customers to consolidate all their inspection and maintenance requirements and the associated data storage and
analytics on a single system that spans the customers’ entire enterprise.
•
Long-Standing Trusted Provider to a Diversified and Growing Customer Base. By providing critical and reliable NDT
services, products and systems for more than 30 years and expanding our asset protection solutions, we have become a
trusted partner to a large and growing customer base across numerous infrastructure-intensive industries globally. Our
customers include some of the largest and most well-recognized firms in the oil and gas, chemicals, fossil and nuclear
power, and aerospace and defense industries as well as some of the largest public authorities.
• Repository of Customer-Specific Inspection Data. Our enterprise data management and analysis software, PCMS,
enables us to capture, warehouse, manage and analyze our customers’ testing and inspection data in a centralized
relational database. As a result, we have accumulated large amounts of proprietary process data and information that
allows us to provide our customers with value-added services, such as benchmarking, risk-based inspection and
reliability centered maintenance solutions including predictive maintenance, inspection scheduling, data analytics and
regulatory compliance.
• Proprietary Products, Software and Technology Packages. We have developed systems that have become the
cornerstone of several high value-added unique NDT applications, such as those used for the testing of above-ground
storage tanks (the TANKPAC® technology package). These proprietary products allow us to efficiently and effectively
provide highly valued solutions to our customers’ complex applications, resulting in a significant competitive
advantage. In addition to the proprietary products and systems that we sell to customers on a stand-alone basis, we
also develop a range of proprietary sensors, instruments, systems and software used exclusively by our Services
segment.
• Deep Domain Knowledge and Extensive Industry Experience. We are an industry leader in developing advanced asset
protection solutions, including acoustic emission testing for non-intrusive on-line monitoring of storage tanks and
pressure vessels, bridges and transformers, portable corrosion mapping, ultrasonic testing (UT) systems, on-line plant
asset integrity management with sensor fusion, enterprise software solutions for plant-wide and fleet-wide inspection
data archiving and management, advanced and thick composites inspection and ultrasonic phased array inspection of
thick wall boilers.
• Collaborating with Our Customers. Our asset protection solutions have historically been designed in response to our
customers’ unique performance specifications and are supported by our proprietary technologies. Important
9
Table of Contents
technology packages, such as TANKPAC for tank floor corrosion detection and Acoustic Turbine Monitoring System
(ACTMS), were developed in close cooperation and partnership with key Mistras customers. Our sales and
engineering teams work closely with our customers’ research and design staff during the design phase in order to
incorporate our products into specified infrastructure projects, as well as with facilities maintenance personnel to
ensure that we are able to provide the asset protection solutions necessary to meet these customers’ changing demands.
• Experienced Management Team. Our management team has a track record of leadership in NDT, DT, PdM and
engineering services, averaging over 20 years of experience in the industry. These individuals also have extensive
experience in growing businesses organically and in acquiring and integrating companies, which we believe is
important to facilitate future growth in the fragmented asset protection industry. In addition, our senior managers are
supported by highly experienced managers who are responsible for delivering our solutions to customers.
Our Growth Strategy
Our growth strategy emphasizes the following key elements:
• Continue to Develop Technology-Enabled Asset Protection Services, Products, Software and Systems. We intend to
maintain and enhance our technological leadership by continuing to invest in the internal development of new
services, products, software and systems. Our highly trained team of Ph.D.’s, engineers, application software
developers and certified technicians has been instrumental in developing numerous significant asset protection
standards. We believe their knowledge base will continue to enable us to innovate a wide range of new asset protection
solutions.
•
Increase Revenues from Our Existing Customers. Many of our customers are multinational corporations with asset
protection requirements from multiple divisions at multiple locations across the globe. Currently, we believe we
capture a relatively small portion of their overall expenditures on these solutions. We believe our superior services,
products and systems, combined with the trend of outsourcing asset protection solutions to a small number of trusted
service providers, position us to significantly expand both the number of divisions and locations that we serve as well
as the types of solutions we provide. We strive to be the preferred global partner for our customers and aim to become
the single source provider for their asset protection solution requirements.
• Add New Customers in Existing Target Markets. Our current customer base represents a small fraction of the total
number of companies in most of our target markets with asset protection requirements. Our scale, scope of products
and services and expertise in creating technology-enabled solutions have allowed us to build a reputation for high-
quality and have increased customer awareness about us and our asset protection solutions. We intend to leverage our
reputation and solutions offerings to win new customers within our existing target markets, especially as asset
protection solutions are adopted internationally. We intend to continue to leverage our competitive strengths to win
new business as customers in our existing target markets continue to seek a single source and trusted provider of
advanced asset protection solutions.
• Expand Our Customer Base into New End Markets. We believe we have significant opportunities to expand our
customer base in relatively new end markets, including nuclear, wind turbine and other alternative energy and natural
gas transportation industries and the market for public infrastructure, such as highways and bridges. The expansion of
our addressable markets is being driven by the increased recognition and adoption of asset protection services,
products and systems, and new NDT technologies enabling further applications in industries such as healthcare and
compressed and liquefied natural gas transportation, and the aging of infrastructure, such as construction and loading
cranes and ports, to the point where visual inspection has proven inadequate and new asset protection solutions are
required. We expect to continue to expand our global sales organization, grow our inspection data management and
data mining services and find new high-value applications. As companies in these emerging end markets realize the
benefits of our asset protection solutions, we expect to expand our leadership position by addressing customer needs
and winning new business.
• Continue to Capitalize on Acquisitions. We intend to continue employing a disciplined acquisition strategy to broaden,
complement and enhance our product and service offerings, add new customers and certified personnel, expand our
sales channels, supplement our internal development efforts and accelerate our expected growth. We believe the
market for asset protection solutions is highly fragmented with a large number of potential acquisition opportunities.
We have a proven ability to integrate complementary businesses, as demonstrated by the success of our past
acquisitions, which have often contributed entirely new products and services that have added to our revenues and
10
Table of Contents
profitability. In addition, we often sell our advanced asset protection solutions to customers of companies we acquired
that had previously relied on traditional NDT solutions.
Our Segments
The Company has three operating segments:
•
•
Services. This segment provides asset protection solutions predominantly in North America with the largest
concentration in the United States along with a growing Canadian services business, consisting primarily of non-
destructive testing, and inspection and engineering 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 our Services and Products and
Systems segments to global markets, 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.
• Products and Systems. This segment designs, manufactures, sells, installs and services our asset protection products
and systems, including equipment and instrumentation, predominantly in the United States.
For discussion of segment revenues, operating results and other financial information, including geographic areas in which we
generated revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7,
as well as Note 19 - Segment Disclosure in the notes to consolidated financial statements in Item 8 of this Report.
Our Solutions
We offer our customers “one source for asset protection solutions”® and are a leading 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 MI, NDT, DT and PdM services, process
and fixed asset engineering and consulting services, and our world class enterprise inspection database management and
analysis software PCMS, to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to
complex, plant-wide asset integrity management and assessments. We deliver our solutions through a combination of services
and products and systems.
Our Services
Our Services segment provides a range of testing and inspection services to a diversified customer base across energy-related,
industrial and public infrastructure industries. We either deploy our services directly at the customer’s location or through our
own extensive network of field testing facilities. Our footprint allows us to provide asset protection solutions through local
offices in close proximity to our customers, permitting us to keep response time, and travel, living and per diem costs to a
minimum, while maximizing our ability to develop meaningful, collaborative customer relationships. Examples of our
comprehensive portfolio of services include: testing components of new construction as they are built or assembled; providing
corrosion monitoring data to help customers determine whether to repair or retire infrastructure; providing material analysis to
ensure the integrity of infrastructure components; and supplying non-invasive on-stream techniques that enable our customers
to pinpoint potential problem areas prior to failure. In addition, we also provide services to assist in the planning and
scheduling of resources for repairs and maintenance activities. Our experienced inspection professionals perform these
services, supported by our advanced proprietary software and hardware products. Examples of our services are discussed
below.
11
Table of Contents
Traditional NDT Services
Our certified personnel provide a range of traditional inspection services. For example, our visual inspections provide
comprehensive assessments of the condition of our customers’ plant equipment during capital construction projects and
maintenance shutdowns. Of the broad set of traditional NDT techniques that we provide, several lend themselves to integration
with our other offerings and often serve as the initial entry point to more advanced customer engagements. For example, we
provide a comprehensive program for the inspection of above-ground storage tanks designed to meet stringent industry
standards for the inspection, repair, alteration and reconstruction of oil and petrochemical storage tanks. This program includes
magnetic flux exclusion for the rapid detection of floor plate corrosion, advanced ultrasonic systems and leak detection of floor
defects, remote ultrasonic crawlers for shell and roof inspections and trained, certified inspectors for visual inspection and
documentation.
Advanced NDT Services
In addition to traditional NDT services, we provide a broad range of proprietary advanced NDT services that we offer on a
stand-alone basis or in combination with software solutions such as our proprietary enterprise inspection data management and
plant condition monitoring software and systems (PCMS). We also provide on-line monitoring capabilities and other solutions
that enable the delivery of accurate and real-time information to our customers. Our advanced NDT services require more
complex equipment and more skilled inspection professionals to operate this equipment and interpret test results. Some of the
technologies and techniques we use include automated ultrasonic testing, guided ultrasonic long wave testing, phased array
ultrasonic testing, risk-based inspection (RBI) and computed and digital radiography.
Mechanical Integrity Services
We provide a broad range of MI services that enable our customers to meet stringent regulatory requirements. These services
increase plant safety, minimize unscheduled downtime and allow our customers to plan for, repair and replace critical
components and systems before failure occurs. Our services are designed to complement a comprehensive predictive and
preventative inspection and maintenance program that we can provide for our customers in addition to the MI services.
Customers of our MI services have, in many instances, also licensed our PCMS software, which allows for the storage and
analysis of data captured by our testing and inspection products and services, and implemented this solution to complement our
inspection services.
As a result of the information captured by PCMS and its risk-based inspection software module, we are able to provide a
professional service known as “Mechanical Integrity Gap Analysis” for process facilities. Our Mechanical Integrity Gap
Analysis service offers insight into the level of plant readiness, how best to manage and monitor the integrity of process facility
assets, and how to extend the useful lives of such assets. Our Mechanical Integrity Gap Analysis service also assists customers
in benchmarking and managing their infrastructure through key performance indicators and other metrics.
Destructive Testing Services
We provide a wide range of destructive testing (DT) services. Hardness, stiffness and strength are a few key indicators drawn
from destructive tests per customer specifications. DT is a strength of our subsidiary, Mistras-GMA in Germany, which
specializes in an array of destructive testing applications utilized throughout the materials selection and approval process in the
aerospace, automotive, chemical, oil and gas and power generation industries. Example testing includes:
• Mechanical tests — Materials, specimens and even composites are subjected to increasing levels of tension,
•
compression, shear and peeling until failure. There are a number of variations of mechanical testing in which adding
temperature, strain, unidirectional load or shear can provide useful results
Physical/Chemical — Used to examine specific material and thermal characteristics as well as chemical compositions,
including differential scanning calorimetry (DSC), high performance liquid chromatography, fiber volume content and
fourier transformation infrared spectroscopy (FTIR)
• Materialography — Gives an insight into the geometries of structural composites, which presents an inside track with
regards to determining failure mechanisms and asset lifespan expectations.
Our Products and Systems
We provide a range of acoustic emission (AE) products and are a leader in the design and manufacture of AE sensors,
instruments and turn-key systems used for monitoring and testing materials, pressure components, processes and structures.
Though we principally sell our products as a system, which includes a combination of sensors, an amplifier, signal processing
12
Table of Contents
electronics, knowledge-based software and decision and feedback electronics, we can also sell these as individual components
to certain customers that have the in-house expertise to perform their own services. Our sensors “listen” to structures and
materials to detect real-time AE activity and to determine the presence of active corrosion, crack propagation and other
structural flaws in the inspected materials. Such components include pressure vessels, storage tanks, heat exchangers, piping,
turbine blades and reactors.
In addition, we provide leak monitoring and detection systems used in diverse applications, including the detection and location
of both gaseous and liquid leaks in valves, vessels, pipelines, boilers and tanks. AE leak monitoring and detection, when
applied in a systematic preventive maintenance program, has proven to substantially reduce costs by eliminating the need for
visual valve inspection and unscheduled down-time.
We design, manufacture and market a complete line of ultrasonic equipment. While AE technology detects flaws and pinpoints
their location, our UT technology has the ability to size defects in three-dimensional geometric representations. Our line of UT
systems include various Automated UT scanners, our unique portable UT handheld and tablet systems with motion control to
run our many inspection scanners, and our immersion systems ranging from small bench top units to large UT systems over
55 feet long and large production unit gantry systems.
We provide a wide array of digital radiographic systems to solve specific industrial problems, including Computed
Radiography (CR), Real-Time Radiography (RTR), Direct Radiography (DR), and Computed Tomography (CT). Digital
Radiography is one of the newest forms of radiographic imaging. Thickness profiles of piping systems, both insulated and un-
insulated, are performed using computed radiography, while large production runs of smaller parts are inspected using direct
radiography. Real time radiography is utilized for large “real time” inspections of insulated piping systems to identify areas of
pipe degradation.
Technology Solutions
In order to address some of the more common problems faced by our customers, we have developed a number of robust
technology solutions. These packages generally allow more rapid and effective testing of infrastructure because they minimize
the need for service professionals to customize and integrate asset protection solutions with the infrastructure and interpret test
results. These packaged solutions use proprietary and specialized testing procedures and hardware, advanced pattern
recognition, neural network software and databases to compare test results against our prior testing data or national and
international structural integrity standards. One such package is our ACTMS (Acoustic Combustion Turbine Monitoring
System), an on-line system to detect stator blade cracks in gas turbines. Others include TANKPAC for tank inspections,
POWERPAC for monitoring discharges in critical power grid transformers, and the AMS boiler tube leak detection and
location monitoring system.
Software Solutions
Our software solutions are designed to meet the demands of our customers inspection data management, risk management, data
analysis and asset integrity management requirements. We address these requirements using best in class database management
systems and applying enterprise based inspection and data management applications. We apply our comprehensive portfolio of
customized Acoustic Emission and Ultrasonic application-specific software products to cover a broad range of materials testing
and analysis methods, for neural networks, pattern recognition, wavelet analysis and moment tensor analysis. Some of the key
software solutions we offer include:
•
•
PCMS enterprise software: A leading inspection data management system for supporting asset protection and
reliability
ISOTRAC: A multiphase methodology to illustrate in 3-D each element of a plant to help develop an overall asset
integrity management program that meets or exceeds compliance with current MI standards and regulations
Our PCMS application is an enterprise software system that allows for the collection, storage and analysis of data as captured
by our testing and inspection products and services and convert it to valuable information for our plant personnel and plant
management. PCMS allows our customers to design and develop asset integrity management monitoring plans that include:
•
•
•
optimal systematic testing schedules for their infrastructure based on real-time data captured by our sensors;
alerts that notify customers when to perform special testing services on suspect areas, enabling them to identify and
resolve flaws on a timely basis by using our PCMS risk-based inspection (RBI) software module; and
schedules for the maintenance and retirement of assets.
13
Table of Contents
PCMS also offers advantages by allowing the information it develops and stores to be organized, linked and synchronized with
enterprise software systems such as SAP and IBM’s Maximo. We believe PCMS is one of the more widely used plant condition
management software systems in the world and we estimate it is currently used by more than 40% of U.S. refineries, by
capacity. This provides us not only with recurring maintenance and support fees, but also marketing opportunities for additional
software, asset integrity management and other asset protection solutions. PCMS has also been chosen and installed by leading
midstream pipeline energy companies and major energy companies in Canada and Europe.
We also offer other software solutions, such as our Advanced Data Analysis Pattern Recognition and Neural Networks Software
(NOESIS), which enables our AE experts to develop automated remote monitoring systems for our customers, and our Loose
Parts Monitoring Software (LPMS), which is a software program for monitoring, detecting and evaluating metallic loose parts
in nuclear reactor coolant systems in accordance with strict industry standards.
Engineering and Consulting Services
In addition to software and advanced technologies, Mistras also provides professional engineering and consulting services that
is organized under our Asset Integrity Management Services (AIMS) group. Asset integrity management refers to the
management system that enables plant owners to maintain the integrity of its assets in a fit for service condition for the desired
life of the assets, as well as optimize the assets that are part of a process unit. Our engineering and consulting support
capabilities include plant operations support, turn-around planning, project planning, management and execution, facilities
planning studies, engineering design, safety reviews, plant operations improvement and optimization evaluations, and technical
training.
On-line Monitoring
Our on-line monitoring offerings combine all of our asset protection services, products and systems. We provide temporary,
periodic and continuous monitoring of static infrastructures such as bridges, pipes, and transformers, as well as dynamic or
rotating assets such as pumps, motors, gearboxes, steam and gas turbines. Temporary monitoring is typically used when there is
a known defect or problem and the condition needs to be monitored until repaired or new equipment can be placed in service.
Periodic monitoring, or “walk around” monitoring, is used as a preventative maintenance tool to take machine and device
readings, on a periodic basis, to observe any change in the assets’ condition, such as increased vibration or unusual heat buildup
and dissipation. Continuous monitoring is applied “24/7” on critical assets to observe the earliest onset of a defect and to track
its progression to avoid catastrophic failure.
Centers of Excellence
Another differentiator in our business model is the formation of our Centers of Excellence (COEs), which we consider to be
incubators of inspection technology. The COEs are focused around target applications in our key market segments. They are
supported by subject matter experts that will engage in strategic sales opportunities offering customers value-added solutions
using advanced technologies and methods providing oversight, management and consultation. The COEs have a blueprint for
their areas that can be replicated throughout the world by delivering procedures, equipment, reports, certifications, etc. ensuring
a standardized approach to implementation yielding higher margin business.
Customers
We provide our asset protection solutions to a global customer base of diverse companies primarily in our target markets. One
customer, BP plc., accounted for approximately 10% of our total revenues for fiscal 2016. No customer accounted for more
than 10% of our revenues in fiscal 2015 or 2014.
Geographic Areas
We conduct our business in 14 different countries. Our revenues are primarily derived from our U.S., Canadian and European
operations. See Note 19 — Segment Disclosure to the consolidated financial statements in this report for further disclosure of
our revenues, long-lived assets and other financial information regarding our international operations.
Seasonality
Our business is seasonal. This seasonality relates primarily to our Services segment. Our first and third fiscal quarter revenues
for our Services segment are typically lower than our revenues in the second and fourth fiscal quarters because demand for our
14
Table of Contents
asset protection solutions from the oil and gas as well as the fossil and nuclear power industries increases during their non-peak
production periods. Because we are increasing our work in the second and fourth fiscal quarters, our cash flows are lower in
those quarters than in our first and third quarters, as collections of receivables lag behind revenues. For instance, U.S.
refineries’ non-peak periods are generally in our second fiscal quarter, when they are retooling to produce more heating oil for
winter, and in our fourth fiscal quarter, when they are retooling to produce more gasoline for summer. Our quarterly Services
segment revenues for fiscal 2016, as a percentage of total Services revenues for fiscal 2016, were 25% (first quarter), 27%
(second quarter), 22% (third quarter), and 26% (fourth quarter). We expect that this seasonality will continue.
Competition
We operate in a highly competitive, but fragmented, market. Our primary competitors are divisions of large companies, and
many of our other competitors are small companies, limited to a specific product or technology and focused on a niche market
or geographic region. We believe that none of our competitors currently provides the full range of asset protection and NDT
products, enterprise software (PCMS) and the traditional and advanced services solutions that we offer. Our competition with
respect to NDT services include the Acuren division of Rockwood Service Corporation, SGS Group, the Team Qualspec
division of Team, Inc. and APPLUS RTD. Our competition with respect to our PCMS software includes UltraPIPE, Lloyd’s
Register Capstone, Inc. and Meridium Systems. Our competition with respect to our ultrasonic and radiography products are
GE Inspection Technologies and Olympus NDT. In the traditional NDT market, we believe the principal competitive factors
include project management, availability of qualified personnel, execution, price, reputation and quality. In the advanced NDT
market, reputation, quality and size are more significant competitive factors than price. We believe that the NDT market has
significant barriers to entry which would make it difficult for new competitors to enter the market. These barriers include:
(1) having to acquire or develop advanced NDT services, products and systems technologies, which in our case occurred over
many years of customer engagements and at significant internal research and development expense, (2) complex regulations
and safety codes that require significant industry experience, (3) license requirements and evolved quality and safety programs,
(4) costly and time-consuming certification processes, (5) capital requirements and (6) emphasis by large customers on size and
critical mass, length of relationship and past service record.
Sales and Marketing
We sell our asset protection solutions through our experienced and highly trained direct sales and marketing teams within all of
our offices worldwide. In addition, our project and laboratory managers as well as our management are trained on our solutions
and often are the source of sales leads and customer contacts. Our direct sales and marketing teams work closely with our
customers’ research and design personnel, reliability engineers and facilities maintenance engineers to demonstrate the benefits
and capabilities of our asset protection solutions, refine our asset protection solutions based on changing market and customer
needs and identify potential sales opportunities. We divide our sales and marketing efforts into services sales, products and
systems sales and marketing and utilize a robust CRM system to collect, manage and collaborate customer information with our
teams globally. Our CRM also provides critical data to provide accurate forecasting and reporting.
Manufacturing
Most of our hardware products are manufactured in our Princeton Junction, New Jersey facility. Our Princeton Junction facility
includes the capabilities and personnel to fully produce all of our AE products, NDT Automation Ultrasonic equipment and
Vibra-Metrics vibration sensing products and systems. We recently expanded our manufacturing facilities to handle the
assembly and manufacturing of our larger UT systems due to growth in this segment. Certain other hardware is manufactured
by a third party and then loaded by us with our proprietary software. We also design and manufacture automated ultrasonic
systems and scanners in France.
Intellectual Property
Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business
without infringing on the proprietary rights of others. We utilize a combination of intellectual property safeguards, including
patents, copyrights, trademarks and trade secrets, as well as employee and third-party confidentiality agreements, to protect our
intellectual property.
As of May 31, 2016, we held 6 patents (by direct ownership or exclusive licensing), all in the United States, which will expire
at various times between fiscal 2017 and 2026, and license certain other patents. However, we do not principally rely on these
patents or licenses to provide our proprietary asset protection solutions. Our trademarks and service marks provide us and our
products and services with a certain amount of brand recognition in our markets. We do not consider any single patent,
trademark or service mark material to our financial condition or results of operations.
15
Table of Contents
As of May 31, 2016, the primary trademarks and service marks that we held in the United States included Mistras® and our
stylized globe design. Other trademarks or service marks that we utilize in localized markets or product advertising include
PCMS®, Physical Acoustics Corporation and the PAC logo, Ropeworks®, NOESIS, Pocket AE®, Pocket UT®
AEwinPost, UTwin®, UTIA, LST, Vibra-Metrics®, Field CAL®, MONPAC, PERFPAC, TANKPAC® , Valve-Squeak®,VPAC,
POWERPAC, Sensor Highway, QSL, NDT Automation, and One Source for Asset Projection Solutions®.
, AEwin®,
Many elements of our asset protection solutions involve proprietary know-how, technology or data that are not covered by
patents or patent applications because they are not patentable, or patents covering them would be difficult to enforce, including
technical processes, equipment designs, algorithms and procedures. We believe that this proprietary know-how, technology and
data is the most important component of our intellectual property assets used in our asset protection solutions, and is a primary
differentiator of our asset protection solutions from those of our competitors. We rely on various trade secret protection
techniques and agreements with our customers, service providers and vendors to protect these assets. All of our employees are
subject to confidentiality requirements through our employee handbook. In addition, employees in our Products and Systems
segment and our other employees involved in the development of our intellectual property have entered into confidentiality and
proprietary information agreements with us. Our employee handbook and these agreements require our employees not to use or
disclose our confidential information, to assign to us all of the inventions, designs and technologies they develop during the
course of employment with us, and otherwise address intellectual property protection issues. We also seek confidentiality
agreements from our customers and business partners before we disclose any sensitive aspects of our asset protection solutions
technology or business strategies. We are not currently involved in any material intellectual property claims.
Research and Development
Our research and development is principally conducted by engineers and scientists at our Princeton Junction, New Jersey
headquarters, and supplemented by other employees in the United States and throughout the world, including France, Greece,
and the United Kingdom, who have other primary responsibilities. Our total professional staff includes employees who hold
Ph.D.’s and engineers and employees who hold Level III certification, the highest level of certification from the American
Society of Non-Destructive Testing.
We work with customers to develop new products or applications for our technology. Research and development expenses are
reflected on our consolidated statements of income as research and engineering expenses. Our company-sponsored research
and engineering expenses were approximately $2.5 million, $2.5 million and $3.0 million for fiscal 2016, 2015 and 2014,
respectively. While we have historically funded most of our research and development expenditures, from time to time we also
receive customer-sponsored research and development funding. We also have paid research contracts in Greece, Brazil, France,
the United Kingdom, and the Netherlands, for various industries and applications, including testing of new composites,
detecting crack propagation and wireless and communications technologies, as well as the development of permanently
embedded inspection systems using acoustic emission and acousto-ultrasonics to provide continuous on-line in-service full
coverage monitoring of critical structural components. Most of the projects are in our target markets; however, a few of the
projects could lead to other future market opportunities.
Employees
Providing our asset protection solutions requires a highly-skilled and technically proficient employee base. As of May 31,
2016, we had approximately 5,700 employees worldwide, of which approximately 65% were based in the United States. Less
than 10% of our employees in the United States are unionized. We believe that we have good relations with our employees.
Environmental Matters
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the
United States, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation,
and Liability Act, the Resources Conservation and Recovery Act, the Clean Air Act, the Federal Water Pollution Control Act,
the Toxic Substances Control Act, the Atomic Energy Act, the Energy Reorganization Act of 1974, and applicable regulations.
In addition to the federal laws and regulations, states and other countries where we do business often have numerous
environmental, legal and regulatory requirements by which we must abide. We evaluate and address the environmental impact
of our operations by assessing properties in order to avoid future liabilities and comply with environmental, legal and
regulatory requirements.
We received a notice in May 2015 that the U.S. Environmental Protection Agency (“EPA”) performed a preliminary assessment
of a leased facility we operate in Cudahy, California. Based upon the preliminary assessment, the EPA would like to conduct an
16
Table of Contents
investigation of the site, which would include taking groundwater and soil samples. The purpose of the investigation is to
determine whether any hazardous materials were released from the facility. We have been informed that certain hazardous
materials and pollutants have been found in the ground water in the general vicinity of the site and the EPA is attempting to
ascertain the origination or source of these materials and pollutants. Given the historic industrial use of the site, the EPA
determined that the site of our Cudahy facility should be examined along with numerous other sites in the vicinity. At this time,
we are not able to determine whether we have any liability in connection with this matter and if so, the amount or range of any
such liability.
Our Website and Available Information
Our website address is www.mistrasgroup.com. We file reports with the SEC, including Quarterly Reports on Form 10-Q,
Annual Reports on Form 10-K, Current Reports on Form 8-K and Proxy Statements. All of the materials we file with or furnish
to the SEC are available free of charge on our website at http://investors.mistrasgroup.com/sec.cfm, as soon as reasonably
practicable after having been electronically submitted to the SEC. Information contained on or connected to our website is not
incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report or any other
filing with the SEC. All of our SEC filings are also available at the SEC’s website at www.sec.gov. In addition, materials we file
with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Executive Officers
The following are our executive officers and other key employees as of May 31, 2016 and their background and experience:
Name
Dr. Sotirios J. Vahaviolos
Dennis Bertolotti
Mark F. Carlos
Michael C. Keefe
Michael J. Lange
Jonathan H. Wolk
Age
70
56
64
59
56
55
Position
Chairman, President, Chief Executive Officer and Director
Group Executive Vice President, Services America
Group Executive Vice President, Products and Systems
Executive Vice President, General Counsel and Secretary
Vice Chairman, Group Executive Vice President, Strategic Planning and
Business Development, and Director
Executive Vice President, Chief Financial Officer and Treasurer
Subsequent to May 31, 2016, Dennis Bertolotti became President and Chief Operating Officer, Jonathan H. Wolk became
Senior Executive Vice President, Chief Financial Officer and Treasurer and Michael J. Lange became Vice Chairman, Senior
Group Executive Vice President of Global Business Development, Marketing & Strategic Planning, and Director.
Dr. Sotirios J. Vahaviolos has been our Chairman, President and Chief Executive Officer since he founded Mistras in 1978
under the name Physical Acoustics Corporation. Prior to joining Mistras, Dr. Vahaviolos worked at AT&T Bell Laboratories.
Dr. Vahaviolos received a B.S. in Electrical Engineering and graduated first in his engineering class from Fairleigh Dickinson
University and received Masters Degrees in Electrical Engineering and Philosophy and a Ph.D. (EE) from the Columbia
University School of Engineering. During Dr. Vahaviolos’ career in non-destructive testing, he has been elected Fellow of The
Institute of Electrical and Electronics Engineers, a member of The American Society for Nondestructive Testing (ASNT) where
he served as its President from 1992-1993 and its Chairman from 1993-1994, a member of Acoustic Emission Working Group
(AEWG) and an honorary life member of the International Committee for Nondestructive Testing. Additionally, he was the
recipient of ASNT’s Gold Medal in 2001 and AEWG’s Gold Medal in 2005. He was also one of the six founders of NDT
Academia International in 2008 headquartered in Brescia, Italy.
Dennis Bertolotti joined Mistras when Conam Inspection Services was acquired in 2003, where Mr. Bertolotti was a Vice
President at the time of the acquisition. Mr. Bertolotti has been in the NDT business for over 30 years, and previously held
ASNT Level III certifications and various American Petroleum Institute, or API, certifications, and received his Associate of
Science degree in NDT from Moraine Valley Community College in 1983. Mr. Bertolotti has also received a Bachelor of
Science and MBA from Otterbein College.
Mark F. Carlos joined Mistras at its founding in 1978. Prior to joining Mistras, Mr. Carlos worked at AT&T Bell Laboratories.
Mr. Carlos received a MBA from Rider University and a Masters in Electrical Engineering from Columbia University.
Mr. Carlos is an elected Fellow of ASNT and AEWG, and currently serves as the Chairman of the American Society for Testing
17
Table of Contents
and Materials’ NDT Standards Writing Committee E-07 and was the recipient of its prestigious Charles W. Briggs Award in
2007.
Michael C. Keefe joined Mistras in December 2009. Most recently before Mistras, Mr. Keefe worked at International Fight
League, a publicly-traded sports promotion company, from 2007 until 2009, in various executive positions. From 1990 until
2006, Mr. Keefe served in various legal roles with Lucent Technologies and AT&T, the last four years as Vice President,
Corporate and Securities Law and Assistant Secretary. Mr. Keefe received a BS in Business Administration (Accounting) from
Seton Hall University and a J.D. from Seton Hall University School of Law.
Michael J. Lange joined Mistras when we acquired Quality Services Laboratories in November 2000, and was elected a
Director in 2003. Mr. Lange is a well-recognized authority in Radiography and has held an ASNT Level III Certificate for
almost 20 years. Mr. Lange received an Associate of Science degree in NDT from the Spartan School of Aeronautics in 1979.
Jonathan H. Wolk joined us in November 2013. Prior to joining Mistras, he served as Senior Vice President, Chief Financial
Officer and Secretary of American Woodmark Corporation from 2004 until August 2013. Prior to American Woodmark, he
served as the Chief Financial Officer and Treasurer of Tradecard, Inc., from 2000 to 2004, and was the global controller of GE
Capital Real Estate from 1998 to 2000. Mr. Wolk started his career in public accounting at KPMG, received his B.S. in
accounting from State University of New York-Albany and is a certified public accountant.
Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships
among any of our directors or executive officers.
ITEM 1A. RISK FACTORS
This section describes the major risks to us, our business and our common stock. You should carefully read and consider the
risks described below, together with the other information contained in this Annual Report, including our financial statements
and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”(MD&A)
before making an investment decision. The statements contained in this section constitute cautionary statements under the
Private Securities Litigation Reform Act of 1995. If any of these risks actually occur, our business, financial condition, results
of operations and future growth prospects may be adversely affected. As a result, the trading price of our common stock would
likely decline, and you may lose all or part of your investment. You should understand that it is not possible to predict or
identify all risk factors that could impact us. Accordingly, you should not consider the following to be a complete discussion of
all risks and uncertainties pertaining to us and our common stock.
Risks Related to Our Business
Our growth strategy includes acquisitions. We may not be able to identify suitable acquisition candidates or integrate
acquired businesses successfully, which may adversely impact our results. Furthermore, acquisitions that we do complete
could expose us to a number of unanticipated operational and financial risks.
A significant factor in our growth has been and will continue to be based upon our ability to make acquisitions and successfully
integrate these acquired businesses. We intend to continue to seek additional acquisition opportunities, both to expand into new
markets and to enhance our position in existing markets. This strategy has provided us with many benefits and has helped fuel
our growth, but also carries with it many risks. Some of the risks associated with our acquisition strategy include:
• whether we successfully identify suitable acquisition candidates, negotiate appropriate acquisition terms, and complete
proposed acquisitions
• whether we can successfully integrate acquired businesses into our current operations, including our accounting,
internal control and information technology systems, marketing and other key infrastructure
• whether we can adequately capture opportunities that an acquired business may offer, including the expansion into
new markets in which we have no prior experience
• whether we value an acquired business properly when determining the purchase price, terms and whether we are able
to achieve the returns on the investment we expect
• whether an acquired business can achieve levels of revenues, profitability, productivity or cost savings we expect
18
Table of Contents
• whether an acquired business is compatible with our culture and philosophy of doing business
•
•
•
unexpected loss of key personnel and customers of an acquired business;
the assumption of liabilities and risks (including environmental-related costs) of an acquired business, some of which
may not be anticipated; and
the potential disruption of our ongoing business and distraction of management and other personnel of us and the
acquired business resulting from the efforts to acquire then integrate an acquired business
Our ability to undertake acquisitions is limited by our financial resources, including available cash and borrowing capacity.
Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of substantial additional
indebtedness and other expenses, any of which could adversely impact our financial condition and results of operations.
Although management intends to: (i) evaluate the risks inherent in any particular transaction, (ii) assume only risks
management believes to be acceptable, and (iii) develop plans to mitigate such risks, there are no assurances that we will
properly ascertain or accurately assess the extent of all such risks. Difficulties encountered with acquisitions may adversely
impact our business, financial condition and results of operations.
In addition, we have a significant amount of goodwill and other intangible assets on our balance sheet as a result of our
acquisitions. This will increase as we complete more acquisitions. If our acquisitions do not perform as planned and we do not
realize the benefits and profitability we expect, we could incur significant write-downs and impairment charges to our earnings
due to the impairment of the goodwill and other intangible assets we have acquired.
Our international operations are subject to risks relating to non-U.S. operations.
In fiscal 2016, 2015 and 2014 we generated approximately 28%, 31% and 35% of our revenues outside the United States,
respectively. We may choose to increase our international presence over time. Our primary operations outside the United States
are in Canada, Germany, the United Kingdom, France and Brazil. We also have operations in the Netherlands, India, Belgium
and Switzerland. There are numerous risks inherent in doing business in international markets, including:
•
•
•
•
•
•
•
•
•
•
•
fluctuations in currency exchange rates and interest rates;
varying regional and geopolitical business and economic conditions and demands;
compliance with applicable foreign regulations and licensing requirements, and U.S. laws and regulation with respect
to our business in other countries, including export controls and anti-bribery laws;
the cost and uncertainty of obtaining data and creating solutions that are relevant to particular geographic markets;
the need to provide sufficient levels of technical support in different locations;
the complexity of maintaining effective policies and procedures in locations around the world;
political instability and civil unrest;
restrictions or limitations on outsourcing contracts or services abroad;
the impact of the United Kingdom exiting the European Union;
restrictions or limitations on the repatriation of funds; and
potentially adverse tax consequences.
Due to our dependency on customers in the oil and gas industry, we are susceptible to prolonged negative trends relating to
this industry that could adversely affect our operating results.
Our customers in the oil and gas industry (including the petrochemical market) have accounted for a substantial portion of our
historical revenues. Specifically, they accounted for approximately 56%, 52% and 49% of our revenues for fiscal 2016, 2015
and 2014, respectively. Although we have expanded our customer base into industries other than the oil and gas industry, we
19
Table of Contents
still receive approximately half of our revenues from this industry. While our services are vital to the operators of plants and
refineries, economic slowdowns or reductions in oil prices could result in cutbacks in contracts for our services. If the oil and
gas industry were to suffer a prolonged or significant downturn, our revenues, profits and cash flows may be reduced. While we
continue to expand our market presence in the power generation and transmission, and the chemical processing industries,
among others, these markets are also cyclical in nature and as such, are subject to economic downturns.
We expect to continue expanding and our success depends on how effectively we manage our growth.
We expect to continue experiencing growth in the number of employees and the scope of our operations. To effectively manage
our anticipated future growth, we must continue to implement and improve our managerial, operational, compliance, financial
and reporting systems and capabilities, expand our facilities and continue to recruit and train additional qualified personnel. We
expect that all of these measures will require significant expenditures and will demand the attention of management. Failure to
manage our growth effectively could lead us to over or under-invest in technology and operations, result in weaknesses in our
infrastructure, systems, compliance programs or controls, give rise to operational mistakes, loss of business opportunities, the
loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital
expenditures and may divert financial resources from other projects, such as the development of new solutions. If our
management is unable to effectively manage our expected growth, our expenses may increase more than expected, our profit
margins may suffer, our revenues could decline or may grow more slowly than expected and we may be unable to implement
our business strategy as anticipated.
Our operating results could be adversely affected by a reduction in business with our significant customers.
We derive a significant amount of revenues from a few customers. For instance, various divisions or business units of our
largest customer were responsible for approximately 10% of our revenues for fiscal 2016. Taken as a group, our top ten
customers were responsible for approximately 36%, 33% and 38% of our revenues for fiscal 2016, 2015 and 2014, respectively.
This concentration pertains almost exclusively to our Services segment, which accounted for more than 70% of our revenues
for each of the last three fiscal years and are primarily in the oil and gas sector. Generally, our customers do not have an
obligation to make purchases from us and may stop ordering our products and services or may terminate existing orders or
contracts at any time with little or no financial penalty. The loss of any of our significant customers, any substantial decline in
sales to these customers or any significant change in the timing or volume of purchases by our customers could result in lower
revenues and could harm our business, financial condition or results of operations.
An accident or incident involving our asset protection solutions could expose us to claims, harm our reputation and
adversely affect our ability to compete for business and, as a result, harm our operating performance.
We could be exposed to liabilities arising out of the solutions we provide. For instance, we furnish the results of our testing and
inspections for use by our customers in their assessment of their assets, facilities, plants and other structures. If such results
were to be incorrect or incomplete, as a result of, for instance, poorly designed inspections, malfunctioning testing equipment
or our employees’ failure to adequately test or properly record data, we could be subject to claims. Further, if an accident or
incident involving a structure we tested occurs and causes personal injuries or property damage, such as the collapse of a bridge
or an explosion in a facility, and particularly if these injuries or damages could have been prevented by our customers had we
provided them with correct or complete results, we may face significant claims relating to personal injury, property damage or
other losses. Even if our results are correct and complete, we may face claims for such injuries or damage simply because we
tested the structure or facility in question. While we do have insurance, our insurance coverage may not be adequate to cover
the damages from any such claims, forcing us to bear these uninsured damages directly, which could harm our operating results
and may result in additional expenses and possible loss of revenues. An accident or incident for which we are found partially or
fully responsible, even if fully insured, or even an incident at a customer for which we provide services although we were
found not to be responsible, may also result in negative publicity, which would harm our reputation among our customers and
the public, cause us to lose existing and future contracts or make it more difficult for us to compete effectively, thereby
significantly harming our operating performance. In addition, the occurrence of an accident or incident might also make it more
expensive or extremely difficult for us to insure against similar events in the future.
Many of the sites at which we work are inherently dangerous workplaces. If we fail to maintain a safe work environment,
we may incur losses and lose business.
Many of our customers, particularly in the oil and gas and chemical industries, require their inspectors and other contractors
working at their facilities to have good safety records because of the inherent danger at these sites. If our employees are injured
at the work place, we will incur costs for the injuries and lost productivity. In addition, safety records are impacted by the
number and amount of workplace incidents involving a contractor’s employees. If our safety record is not within the levels
20
Table of Contents
required by our customers, or compares unfavorably to our competitors, we could lose business, be prevented from working at
certain facilities or suffer other adverse consequences, all of which could negatively impact our business, revenues, reputation
and profitability.
Most of our computer and communications hardware is located at a single facility, the failure of which would harm our
business and results of operations.
Most of our computer and communications hardware is located at a single facility. We have a back-up data-center and storage
in a different geographic area. Should a natural disaster or some other event occur that damages our primary data center or
significantly disrupts its operation, such as human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist
attacks, acts of war and similar events, we could suffer temporary interruption of key functions and capabilities before the
back-up facility is fully operational.
If we are unable to attract and retain a sufficient number of trained certified technicians, engineers and scientists at
competitive wages, our operational performance may be harmed and our costs may increase.
We believe that our success depends, in part, upon our ability to attract, develop and retain a sufficient number of trained
certified technicians, engineers and scientists at competitive wages. The demand for such employees fluctuates as the demand
for NDT and inspection services fluctuate. There is a reduced demand for technicians because of a slowdown of spending in
the oil and gas industry. However, if the demand for qualified technicians increases, we will likely experience increased labor
costs. The markets for our products and services require us to use personnel trained and certified in accordance with standards
set by domestic or international standard-setting bodies, such as the American Society of Non-Destructive Testing or the
American Petroleum Institute. Because of the limited supply of these certified technicians, we expend substantial resources
maintaining in-house training and certification programs. If we fail to attract sufficient new personnel or fail to motivate and
retain our current personnel, our ability to perform under existing contracts and orders or to pursue new business may be
harmed, preventing us from growing our business or causing us to lose customers and revenues, and the costs of performing
such contracts and orders may increase, which would likely reduce our margins.
We operate in competitive markets and if we are unable to compete successfully, we could lose market share and revenues
and our margins could decline.
We face strong competition from NDT and a variety of niche asset protection providers, both larger and smaller than we are.
Some of our competitors have greater financial resources than we do and could focus their substantial financial resources to
develop a competing business model or develop products or services that are more attractive to potential customers than what
we offer. Some of our competitors are business units of companies substantially larger than us and could attempt to combine
asset protection solutions into an integrated offering to customers who already purchase other types of products or services
from them. Our competitors may offer asset protection solutions at lower prices than ours in order to attempt to gain market
share. Smaller niche competitors with small customer bases could be aggressive in their pricing in order to retain customers.
These competitive factors could reduce our market share, revenues and profits.
Events such as natural disasters, industrial accidents, epidemics, war and acts of terrorism, and adverse weather conditions
could disrupt our business or the business of our customers, which could significantly harm our operations, financial
results and cash flow.
Our operations and those of our customers are susceptible to the occurrence of catastrophic events outside our control, ranging
from severe weather conditions to acts of war and terrorism. Any such events could cause a serious business disruption that
reduces our customers’ need or interest in purchasing our asset protection solutions. For example, significant wild fires in the
Fort McMurray vicinity in Canada resulted in a reduction in revenue and earnings for our Canadian operations in the fourth
quarter of fiscal 2016. In the past, such events have resulted in order cancellations and delays because customer equipment,
facilities or operations have been damaged, or are not then operational or available. A large portion of our customer base has
operations in the Gulf of Mexico, which is subject to hurricanes in the first and second quarters of our fiscal year. Hurricane-
related disruptions to our customers’ operations have adversely affected our revenues in the past. Such events in the future may
result in substantial delays in the provision of solutions to our customers and the loss of valuable equipment. In addition, our
third quarter fiscal results can be adversely impacted by severe winter weather conditions, which can result in lost work days
and temporary closures of customer facilities or outdoor projects. Any cancellations, delays or losses due to such events may
significantly reduce our revenues and harm our operating performance.
If we lose key members of our senior management team upon whom we are dependent, we may be less effective in
managing our operations and may have more difficulty achieving our strategic objectives.
21
Table of Contents
Our future success depends to a considerable degree upon the availability, contributions, vision, skills, experience and effort of
our senior management team. We have in place various compensation programs, such as an annual cash incentive program,
equity incentive program and a severance policy, each designed to incentivize and retain our key senior managers. We have also
made changes to our senior management structure so that executive officers other than our founder, Dr. Sotirios Vahaviolos,
provide executive leadership for operational, business development and strategy matters. At this time, we do not have any
reason to believe that we may lose the services of any of these key persons in the foreseeable future and we believe our
compensation programs will help us retain these individuals. We believe we have sufficient depth in our executive management
to continue our success if we were to lose the services of an executive. However, an unplanned loss or interruption of the
service of two or more key members of our senior management team could harm our business, financial condition and results
of operations and could significantly reduce our ability to manage our operations and implement our strategy.
Deteriorations in economic conditions in certain markets or other factors may cause us to recognize impairment charges for
our goodwill.
As of May 31, 2016, the carrying amount of our goodwill was approximately $169 million, of which approximately $36
million relates to our International segment. A significant portion of our international operations are concentrated in Europe and
Brazil. Significant deterioration in industry or economic conditions in which we operate, disruptions to our business, not
effectively integrating acquired businesses, or other factors, may cause impairment charges to goodwill in future periods.
The success of our businesses depends, in part, on our ability to develop new asset protection solutions, increase the
functionality of our current offerings and meet the needs and demands of our customers.
The market for asset protection solutions is impacted by technological change, uncertain product lifecycles, shifts in customer
demands and evolving industry standards and regulations. We may not be able to successfully develop and market new asset
protection solutions that comply with present or emerging industry regulations and technology standards. Also, new regulations
or technology standards could increase our cost of doing business.
From time to time, our customers have requested greater value and functionality in our solutions. As part of our strategy to
enhance our asset protection solutions and grow our business, we continue to make investments in the research and
development of new technologies, inspection tools and methodologies. We believe our future success will depend, in part, on
our ability to continue to design new, competitive and broader asset protection solutions, enhance our current solutions and
provide new, value-added services. Many traditional NDT and inspection services are subject to price competition by our
customers. Accordingly, the need to demonstrate our value-added services is becoming more important. Developing new
solutions will require continued investment, and we may experience unforeseen technological or operational challenges. In
addition, our asset protection software is complex and can be expensive to develop, and new software and software
enhancements can require long development and testing periods. If we are unable to develop new asset protection solutions or
enhancements that meet market demands on a timely basis, we may experience a loss of customers or otherwise be likely to
lose opportunities to earn revenues and to gain customers or access to markets, and our business and results of operations will
be adversely affected.
Even if we develop new solutions, if our customers, or potential customers, do not see the value our solutions have over
competing products and services, our operating results could be adversely impacted. In addition, because the asset protection
solutions industry is rapidly evolving, we could lose insight into trends that may be emerging, which would further harm our
competitive position by making it difficult to predict and respond to customer needs. If the market for our asset protection
solutions does not continue to develop, our ability to grow our business would be limited and we might not be able to maintain
profitability. If we cannot convince our customers of the advantages and value of our advanced NDT services we could lose
large contracts or suffer lower profit margin.
If our software or system produces inaccurate information or are incompatible with the systems used by our customers and
make us unable to successfully provide our solutions, it could lead to a loss of revenues and customers.
Our software and systems are complex and, accordingly, may contain undetected errors or failures. Software or system defects
or inaccurate data may cause incorrect recording, reporting or display of information related to our asset protection solutions.
Any such failures, defects and inaccurate data may prevent us from successfully providing our asset protection solutions, which
could result in lost revenues. Software or system defects or inaccurate data may lead to customer dissatisfaction and could
cause our customers to seek to hold us liable for any damages incurred. As a result, we could lose customers, our reputation
may be harmed and our financial condition and results of operations could be materially adversely affected.
22
Table of Contents
We currently serve a commercial, industrial and governmental customer base that uses a wide variety of constantly changing
hardware, software solutions and operating systems. Our asset protection solutions need to interface with these non-standard
systems in order to gather and assess data. Our business depends on the following factors, among others:
•
•
•
our ability to integrate our technology with new and existing hardware and software systems;
our ability to anticipate and support new standards, especially Internet-based standards; and
our ability to integrate additional software modules under development with our existing technology and operational
processes.
If we are unable to adequately address any of these factors, our results of operations and prospects for growth and profitability
would be adversely impacted.
The seasonal nature of our business reduces our revenues and profitability in our first and third fiscal quarters.
Our business, primarily in our Services segment, is seasonal. Our first and third fiscal quarter revenues for our Services
segment are typically lower than our revenues in the second and fourth fiscal quarters because demand for our asset protection
solutions from the oil and gas as well as the fossil and nuclear power industries increases during their non-peak production
periods. For instance, U.S. refineries’ non-peak periods are generally in our second fiscal quarter, when they are retooling to
produce more heating oil for winter, and in our fourth fiscal quarter, when they are retooling to produce more gasoline for
summer. As a result of these trends, we generally have reduced cash flows in our second and fourth fiscal quarters, as
collections of receivables lag behind revenues, possibly requiring us to borrow under our credit agreement. In addition, most of
our operating expenses, such as employee compensation and property rental expense, are relatively fixed over the short term.
Moreover, our spending levels are based in part on our expectations regarding future revenues. As a result, if revenues for a
particular quarter are below expectations, we may not be able to proportionately reduce operating expenses for that quarter. We
expect that the impact of seasonality will continue.
Our business, and the industries we currently serve, are currently subject to governmental regulation, and may become
subject to modified or new government regulation that may negatively impact our ability to market our asset protection
solutions.
We incur substantial costs in complying with various government regulations and licensing requirements. For example, the
transportation and overnight storage of radioactive materials used in providing certain of our asset protection solutions such as
radiography are subject to regulation under federal and state laws and licensing requirements. Our Services segment is
currently licensed to handle radioactive materials by the U.S. Nuclear Regulatory Commission (NRC) and over 20 state
regulatory agencies. If we allegedly fail to comply with these regulations, we may be investigated and incur significant legal
expenses associated with such investigations, and if we are found to have violated these regulations, we may be fined or lose
one or more of our licenses or permits, which would prevent or restrict our ability to provide radiography services. In addition,
while we are investigated, we may be required to suspend work on the projects associated with our alleged noncompliance,
resulting in loss of profits or customers, and damage to our reputation. Many of our customers have strict requirements
concerning safety or loss time occurrences and if we are unable to meet these requirements it could result in lost revenues. In
the future, federal, state, provincial or local governmental agencies may seek to change current regulations or impose additional
regulations on our business. Any modified or new government regulation applicable to our current or future asset protection
solutions may negatively impact the marketing and provision of those solutions and increase our costs and the price of our
solutions.
Additionally, greenhouse gases that result from human activities, including burning of fossil fuels, have been the focus of
increased scientific and political scrutiny and are being subjected to various legal requirements. International agreements,
national laws, state laws and various regulatory schemes limit or otherwise regulate emissions of greenhouse gases, and
additional restrictions are under consideration by different governmental entities. We derive a significant amount of revenues
and profits from such industries, including oil and gas, power generation and transmission, and chemicals processing. Such
regulations could negatively impact our customers, which could negatively impact the market for the services and products we
provide. This could materially adversely affect our business, financial condition, results of operations and cash flows.
We rely on certification of our NDT solutions by industry standards-setting bodies. We and/or our subsidiaries currently have
International Organization for Standardization (ISO) 9001:2008 certification, ISO 14001:2004 certification and OHSAS
18001:2007 certification. In addition, we currently have Nadcap (formerly National Aerospace and Defense Contractors
Accreditation Program) and similar certifications for certain of our locations. We continually review our NDT solutions for
23
Table of Contents
compliance with the requirements of industry specification standards and the Nadcap special processes quality requirements.
However, if we fail to maintain our ISO, Nadcap or other certifications, our business may be harmed because our customers
generally require that we have these certification before they purchase our NDT solutions.
Intellectual property may impact our business and results of operations.
Our ability to compete effectively depends in part upon the maintenance and protection of the intellectual property related to
our asset protection solutions. Patent protection is unavailable for certain aspects of the technology and operational processes
important to our business and any patent or patent applications, trademarks or copyrights held by us or to be issued to us, may
not adequately protect us. Some of our trademarks that are not in use may become available to others. To date, we have relied
principally on copyright, trademark and trade secrecy laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our intellectual property. However, we have not obtained confidentiality agreements from all of our
customers and vendors. Although we obligate all of our employees to confidentiality, we cannot be certain that these
obligations will be honored or enforceable.
We may require additional capital to support business growth, which might not be available.
We intend to continue making investments to support our business growth and may require additional funds to respond to
business challenges or opportunities, including the need to develop new, or enhance our current, asset protection solutions,
enhance our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to engage in equity or
debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt
securities, our current stockholders could suffer significant dilution, and any new equity securities we issue could have rights,
preferences and privileges superior to those of holders of our common stock. While our current bank financing is meeting our
current need, any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising
activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to
pursue business opportunities, including potential acquisitions. In addition, no assurance can be given that adequate or
acceptable financing will be available to us, in which case we may not be able to grow our business or respond to business
challenges.
Our credit agreement contains financial and operating restrictions that may limit our access to credit. If we fail to comply
with financial or other covenants in our credit agreement, we may be required to repay indebtedness to our existing lenders,
which may harm our liquidity.
Our credit agreement contains financial covenants that require us to maintain compliance with specified financial ratios. If we
fail to comply with these covenants, the lenders could prevent us from borrowing under our credit agreement, require us to pay
all amounts outstanding, require that we cash collateralize letters of credit issued under the credit agreement and restrict us
from making acquisitions. If the maturity of our indebtedness is accelerated, we then may not have sufficient funds available
for repayment or the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to
us, or at all.
Our current credit agreement also imposes restrictions on our ability to engage in certain activities, such as creating liens,
making certain investments, incurring more debt, disposing of certain property, paying dividends and making distributions and
entering into a new line of business. While these restrictions have not impeded our business operations to date, if our plans
change, these restrictions could be burdensome or require that we pay fees to have the restrictions waived.
Any real or perceived internal or external electronic security breaches in connection with the use of our asset protection
solutions could harm our reputation, inhibit market acceptance of our solutions and cause us to lose customers.
We and our customers use our asset protection solutions to compile and analyze sensitive or confidential customer-related
information. In addition, some of our asset protection solutions allow us to remotely control and store data from equipment at
commercial, institutional and industrial locations. Our asset protection solutions rely on the secure electronic transmission of
proprietary data over the Internet or other networks. The occurrence or perception of security breaches in connection with our
asset protection solutions or our customers’ concerns about internet security or the security of our solutions, whether warranted
or not, would likely harm our reputation or business, inhibit market acceptance of our asset protection solutions and cause us to
lose customers, any of which would harm our financial condition and results of operations.
We may come into contact with sensitive information or data when we perform installation, maintenance or testing functions
for our customers. Even the perception that we have improperly handled sensitive, confidential information would have a
negative effect on our business. If, in handling this information, we fail to comply with privacy or security laws, we could incur
24
Table of Contents
civil liability to government agencies, customers and individuals whose privacy is compromised. In addition, third parties may
attempt to breach our security or inappropriately harm our asset protection solutions through computer viruses, electronic
break-ins and other disruptions. If a breach is successful, confidential information may be improperly obtained, for which we
may be subject to lawsuits and other liabilities.
Risks Related to Our Common Stock
Our stock price could fluctuate for numerous reasons, including variations in our results.
Our quarterly operating results have fluctuated in the past and may do so in the future. Accordingly, we believe that period-to-
period comparisons of our results of operations may be the best indicators of our business. You should not rely upon the results
of one quarter as an indication of future performance. Our revenues and operating results may fall below the expectations of
securities analysts or investors in any future period. Our failure to meet these expectations may cause the market price of our
common stock to decline, perhaps substantially. Our quarterly revenues and operating results may vary depending on a number
of factors, including those listed previously under “Risks Related to Our Business.” In addition, the price of our common stock
is subject to general economic, market, industry, and competitive conditions, the risk factors discussed below and numerous
other conditions outside of our control.
A significant stockholder controls the direction of our business. The concentrated ownership of our common stock may
prevent other stockholders from influencing significant corporate decisions.
Dr. Sotirios J. Vahaviolos, our Chairman, Chief Executive Officer and President, owns approximately 43% of our outstanding
common stock. As a result, Dr. Vahaviolos effectively controls our Company and has the ability to exert substantial influence
over all matters requiring approval by our shareholders, including the election and removal of directors, amendments to our
certificate of incorporation, and any proposed merger, consolidation or sale of all or substantially all of our assets and other
corporate transactions. This concentration of ownership could be disadvantageous to other shareholders with differing interests
from Dr. Vahaviolos.
We currently have no plans to pay dividends on our common stock.
We have not declared or paid any cash dividends on our common stock to date, and we do not anticipate declaring or paying
any dividends on our common stock in the foreseeable future. To the extent we do not pay dividends on our common stock,
investors must look solely to stock appreciation for a return on their investment.
Shares eligible for future sale may cause the market price for our common stock to decline even if our business is doing
well.
Future sales by us or by our existing shareholders of substantial amounts of our common stock in the public market, or the
perception that these sales may occur, could cause the market price of our common stock to decline. This could also impair our
ability to raise additional capital in the future through the sale of our equity securities. Under our second amended and restated
certificate of incorporation, we are authorized to issue up to 200,000,000 shares of common stock, of which approximately
28,955,000 shares of common stock were outstanding as of August 5, 2016. In addition, we have approximately 3,118,000
shares of common stock reserved for issuance related to stock options and restricted stock units that were outstanding as of
August 5, 2016. We cannot predict the size of future issuances of our common stock or the effect, if any, that future sales and
issuances of shares of our common stock, or the perception of such sales or issuances, would have on the market price of our
common stock.
Provisions of our charter, bylaws and of Delaware law could discourage, delay or prevent a change of control of our
company, which may adversely affect the market price of our common stock.
Certain provisions of our second amended and restated certificate of incorporation and amended and restated bylaws could
discourage, delay or prevent a merger, acquisition, or other change of control that stockholders may consider favorable,
including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions also
could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the
market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to
do so. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove our
management. These provisions:
•
allow the authorized number of directors to be changed only by resolution of our board of directors;
25
Table of Contents
•
•
•
•
•
require that vacancies on the board of directors, including newly created directorships, be filled only by a majority
vote of directors then in office;
authorize our board of directors to issue, without stockholder approval, preferred stock that, if issued, could operate as
a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not
approved by our board of directors;
require that stockholder actions must be effected at a duly called stockholder meeting by prohibiting stockholder
action by written consent;
prohibit cumulative voting in the election of directors, which may otherwise allow holders of less than a majority of
stock to elect some directors; and
establish advance notice requirements for stockholder nominations to our board of directors or for stockholder
proposals that can be acted on at stockholder meetings and limit the right to call special meetings of stockholders to
the Chairman of the Board, the Chief Executive Officer, the board of directors acting pursuant to a resolution adopted
by a majority of directors or the Secretary upon the written request of stockholders entitled to cast not less than 35% of
all the votes entitled to be cast at such meeting.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning
15% or more of our outstanding voting stock, from merging or combining with us for a prescribed period of time.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of May 31, 2016, we operated approximately 120 offices in 14 countries, with our corporate headquarters located in
Princeton Junction, New Jersey. Our headquarters in Princeton Junction is our primary location, where most of our
manufacturing and research and development is conducted. While we lease most of our facilities, as of May 31, 2016, we
owned properties located in Monroe, North Carolina; Trainer, Pennsylvania; LaPorte, Texas; Burlington, Washington; Gillette,
Wyoming; and Jonquiere, Quebec. Our Services segment, utilizes approximately 80 offices throughout North America
(including Canada). Our Products and Systems segment’s primary location is in our Princeton Junction, NJ facility. Our
International segment has approximately 40 offices including locations in Belgium, Brazil, France, Germany, Greece, India, the
Netherlands, and the United Kingdom. We believe that all of our facilities are well maintained and are suitable and adequate for
our current needs.
ITEM 3. LEGAL PROCEEDINGS
We are subject to periodic legal proceedings, investigations and claims that arise in the ordinary course of business. See
“Litigation” in Note 18 — Commitments and Contingencies to our audited consolidated financial statements contained in Item
8 of this report for a description of legal proceedings involving us and our business, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASE OF EQUITY SECURITIES
Market for Common Stock
Our common stock currently trades on the New York Stock Exchange (NYSE) under the ticker symbol “MG”. The following
table sets forth for the periods indicated the range of high and low sales prices of our common stock.
26
Table of Contents
Quarter ended August 31,
Quarter ended November 30,
Quarter ended February 28,
Quarter ended May 31,
Holders of Record
Year ended May 31, 2016
High
Low
Year ended May 31, 2015
High
Low
$
$
$
$
20.14
21.53
22.59
26.00
$
$
$
$
13.88
12.79
18.42
22.02
$
$
$
$
25.04
21.55
21.50
19.34
$
$
$
$
20.70
15.98
15.87
17.50
As of August 5, 2016, there were 9 holders of record of our Common Stock. The number of record holders was determined
from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the
names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is
American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
Dividends
No cash dividends have been paid on our Common Stock to date. We currently intend to retain our future earnings, if any, to
finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future.
Purchases of Equity Securities
The following sets forth the shares of our common stock we acquired during the fourth quarter of fiscal 2016 pursuant to the
surrender of shares by employees to satisfy minimum tax withholding obligations in connection with the vesting of restricted
stock units.
Month Ending
April 30, 2016
Total Number of
Shares (or Units)
Purchased
856
Average Price Paid
per Share (or Unit)
25.37
$
27
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the last five fiscal years. This selected financial data should be
read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7
and the audited consolidated financial statements and the notes thereto in Item 8 in this Annual Report.
Statement of Income Data
Revenues
Gross profit
Income from operations
For the year ended May 31,
2016 (1)
2015 (1)
2014 (1)
2013 (2)
2012 (3)
($ in thousands, except share and per share data)
$ 719,181
$ 711,252
$ 623,447
$ 529,282
$ 436,875
203,008
43,177
184,733
30,353
172,943
38,295
148,371
27,554
129,690
36,098
21,353
Net income attributable to Mistras Group, Inc.
$
24,654
$
16,081
$
22,518
$
11,646
$
Per Share Information:
Weighted average common shares outstanding:
Basic
Diluted
Earnings per common share:
Basic
Diluted
Balance Sheet Data
Cash and cash equivalents
Total assets
Total long-term debt and obligations under capital
leases, including current portion
28,856
29,891
28,613
29,590
28,365
29,324
28,141
29,106
27,839
28,685
$
$
0.85
0.82
$
$
0.56
0.54
$
$
0.79
0.77
$
$
0.41
0.40
$
$
0.77
0.74
$
21,188
$
10,555
$
10,020
$
7,802
$
8,410
482,675
471,727
443,972
377,997
329,816
104,776
132,822
97,563
77,956
59,274
Total Mistras Group, Inc. stockholders’ equity
$ 276,163
$ 244,819
$ 242,104
$ 210,053
$ 193,012
Cash Flow Data:
Net cash provided by operating activities
$
68,124
$
49,840
$
36,873
$
43,503
$
31,402
Net cash used in investing activities
(16,752)
(49,651)
(38,005)
(45,479)
(37,512)
Net cash (used in) provided by financing activities
(40,378)
2,066
3,262
1,144
2,009
1 - Includes pre-tax charges (benefits) of $6.0 million in fiscal 2016, $0.1 million in fiscal 2015 and $(2.4) million in fiscal
2014 relating to special items. Net income was (decreased) increased by these items, net of taxes, by ($3.2) million in fiscal
2016, $1.0 million in fiscal 2015 and $2.4 million in fiscal 2014, respectively. The (decrease) increase of these items on
diluted earnings per share were ($0.11) in fiscal 2016, $0.03 in fiscal 2015 and $0.08 in fiscal 2014, respectively.
2 - Includes pre-tax charges of $7.8 million relating to: goodwill impairment charge of $9.9 million and acquisition related
benefit of ($2.1 million). The impact of these items, net of taxes, on net income and diluted earnings per share was ($8.3)
million and ($0.29), respectively.
3 - Includes pre-tax charges of $1.3 million relating to: acquisition related expense of $2.0 million and gain on extinguishment
of long-term debt of ($0.7 million). The impact of these items, net of taxes, on net income and diluted earnings per share was
($0.8) million and ($0.03), respectively.
28
Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following Management’s Discussion and Analysis (“MD&A”) provides a narrative of our results of operations for the
years ended May 31, 2016, 2015 and 2014, respectively, and our financial position as of May 31, 2016 and 2015, respectively.
The MD&A should be read together with our consolidated financial statements and related notes included in Item 8 in this
Annual Report on Form 10-K. In this annual 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, 2016 is referred to as “fiscal 2016”), 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. The MD&A includes the following sections:
Forward-Looking Statements
•
• Overview
• Consolidated Results of Operations
•
Segment Results of Operations
• Liquidity and Capital Resources
• Critical Accounting Estimates
• Recent Accounting Pronouncements
Forward-Looking Statements
This report on Form 10-K 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). Such forward-looking statements
include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not
statements of historical fact. See “Forward-Looking Statements” at the beginning of Item 1 of this Report.
Overview
We offer our customers “one source for asset protection solutions”® and are a leading 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), Non-
Destructive Testing (NDT), Destructive Testing (DT) and predictive maintenance (PdM) services, process and fixed asset
engineering and consulting services, proprietary data analysis and our world class enterprise inspection database management
and analysis software, PCMS, to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to
complex, plant-wide asset integrity management and assessments. These mission critical solutions enhance our customers’
ability to comply with governmental safety and environmental regulations, extend the useful life of their assets, increase
productivity, minimize repair costs, manage risk and avoid catastrophic disasters. Our operations consist of three reportable
segments: Services, International and Products and Systems.
•
•
Services provides asset protection solutions predominantly in North America with the largest concentration in the
United States along with a growing Canadian services business, consisting primarily of NDT, inspection and
engineering services that are used to evaluate the structural integrity and reliability of critical energy, industrial and
public infrastructure.
International offers services, products and systems similar to those of the other segments to global markets, 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 designs, manufactures, sells, installs and services the Company’s asset protection products and
systems, including equipment and instrumentation, predominantly in the United States.
Given the role our solutions 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 (downstream, midstream, upstream and petrochemical),
power generation (natural gas, fossil, nuclear, alternative, renewable, and transmission and distribution), public infrastructure,
chemicals, commercial aerospace and defense, transportation, primary metals and metalworking, pharmaceutical/biotechnology
and food processing industries and research and engineering institutions. As of May 31, 2016, we had approximately 5,700
29
Table of Contents
employees in approximately 120 offices across 14 countries. We have established long-term relationships as a critical solutions
provider to many of the leading companies in our target markets.
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 are working on building our infrastructure to profitably absorb additional growth and have
made a number of 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 have provided us with
additional products, technologies, resources and customers that we believe will enhance our advantages over our competition.
Global financial markets continue to experience uncertainty, including tight liquidity and credit availability, relatively low
consumer confidence, slow economic growth, fluctuating oil prices and volatile currency exchange rates. However, we believe
these conditions have allowed us to selectively hire new talented individuals that otherwise might not have been available to us,
and to make acquisitions of complementary businesses at reasonable valuations.
Consolidated Results of Operations
The following table summarizes our consolidated statements of operations for fiscal 2016, 2015 and 2014:
Revenues
Gross profit
Gross profit as a % of Revenue
Total operating expenses
Operating expenses as a % of Revenue
Income from operations
Income from operations as a % of Revenue
Interest expense
Income before provision for income taxes
Provision for income taxes
Net income
For the year ended May 31,
2016
2015
2014
($ in thousands)
$
719,181
$
711,252
$
623,447
203,008
184,733
172,943
28%
26%
28%
159,831
154,380
134,648
22%
22%
22%
43,177
30,353
38,295
6%
4%
6%
4,762
38,415
13,765
24,650
(4)
24,654
$
4,622
25,731
9,740
15,991
(90)
16,081
3,192
35,103
12,528
22,575
57
$
22,518
Less: net (loss) income attributable to noncontrolling interests, net of taxes
Net income attributable to Mistras Group, Inc.
$
The Company uses Adjusted EBITDA, a non-GAAP metric, to measure its consolidated operating performance and assist in
comparing performance from period to period on a consistent basis. A reconciliation of Adjusted EBITDA to net income is
provided below for the fiscal years ended May 31, 2016, 2015 and 2014:
30
Table of Contents
Net income attributable to Mistras Group, Inc.
Interest expense
Provision for income taxes
Depreciation and amortization
Share-based compensation expense
Acquisition-related expense, net
Charges related to sale of foreign operations
Severance costs
Foreign exchange (gains) losses
Asset write-offs and lease terminations
Legal settlement
Adjusted EBITDA
Note about Non-GAAP Measures
For the year ended May 31,
2016
2015
2014
24,654
4,762
13,765
32,474
6,514
(1,453)
—
1,107
(59)
—
6,320
88,084
($ in thousands)
16,081
$
4,622
9,740
33,286
6,579
(5,167)
2,516
1,723
1,474
1,029
—
71,883
$
$
$
$
$
22,518
3,192
12,528
28,429
6,261
(2,657)
—
306
101
—
—
70,678
Adjusted EBITDA is a performance measure used by management that is not calculated in accordance with U.S. generally
accepted accounting principles (GAAP). Adjusted EBITDA is defined in this Report as net income attributable to Mistras
Group, Inc. plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation
expense, and certain acquisition-related costs (including transaction due diligence costs and adjustments to the fair value of
contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted.
Our management uses Adjusted EBITDA 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 certain of our
executive and employee incentive compensation programs.
Later in this MD&A under the heading "Income for Operations", the non-GAAP financial performance measure "Income
before special items" is used for each of our three segments and the "Total Company", with tables reconciling the measure to a
financial measure under GAAP. This non-GAAP measure excludes from the GAAP measure "Income from
Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs (b) the net
changes in the fair value of acquisition-related contingent consideration liabilities and (c) nonrecurring items. These items have
been excluded from the GAAP measure because these expenses and credits are not related to the Company’s or Segment’s core
business operations. The acquisition related costs and special items can be a net expense or credit in any given period.
In the MD&A section "Liquidity and Capital Resources", we use the term "free cash flow", a non-GAAP measurement. We
define free cash flow as cash provided by operating activities less capital expenditures (which are purchases of property, plant
and equipment and of intangible assets and classified as an investing activity). Free cash flow, which does not represent
residual cash flow available for discretionary expenditures since items such as debt repayments are not deducted in determining
such measures, for fiscal 2016 was $51.9 million, consisting of $68.1 million of operating cash flow less $16.2 million of
capital expenditures. For fiscal 2015, free cash flow was $33.9 million consisting of $49.8 million of operating cash flow less
$16.0 million of capital expenditures.
We believe investors and other users of our financial statements benefit from the presentation Adjusted EBITDA and "Income
before special items” for each of our three segments and the "Total Company", and free cash flow in evaluating our operating
performance because they provide additional tools 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 share-based compensation, which is a non-cash expense and is excluded by management when
evaluating the underlying performance of our business operations. Similarly, we believe that "Income before special items” for
each of our three segments and the "Total Company", provides investors with useful information and more meaningful period
over period comparisons by identifying and excluding acquisition-related costs and special items so that the performance of the
core business operations can be identified and compared.
31
Table of Contents
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. In addition, acquisitions are a part of our growth strategy, and therefore
acquisition-related items are a necessary cost of the Company’s business. "Income before special items” for each of our three
segments and for the consolidated company and “free cash flow” are not metrics used to determine incentive compensation for
executives or employees.
Revenues
Revenues by segment for fiscal 2016, 2015 and 2014 were as follows:
Revenues
Services
International
Products and Systems
Corporate and eliminations
Fiscal 2016
For the year ended May 31,
2016
2015
2014
($ in thousands)
$
$
553,279
143,025
30,293
(7,416)
719,181
$
$
540,224
146,953
31,255
(7,180)
711,252
$
$
443,229
161,395
33,544
(14,721)
623,447
Revenue was $719.2 million in fiscal 2016, an increase of $7.9 million or 1% compared with fiscal 2015, driven by Services
segment growth of $13.1 million or 2%, offset by declines in International revenues of $3.9 million or 3%, and the Products &
Systems segment of $1.0 million or 3%. The Services segment increase was driven by low single digit organic growth, plus a
lesser amount of acquisition-driven growth, offset in part by low single digit unfavorable impact of foreign exchange rates. The
decline in International Segment revenues was driven by a combination of high single digit organic growth that was more than
offset by the low double digit unfavorable impact of foreign exchange rates. Products and Systems segment revenues declined
due to lower sales volume.
Management believes that inspection industry revenues declined during fiscal 2016, as evidenced by several of the Company's
competitors who reported revenue declines that have been driven by customers spending less on inspection due to pressures
stemming from low commodities prices. Despite these difficult market conditions, the Company had modest growth in fiscal
2016, as noted above, driven by market share gains in both the Services and International segments. Revenues from oil and
gas customers comprised 56% and 52% of revenues in fiscal 2016 and 2015, respectively. Revenues from oil and gas customers
grew by 9% in fiscal 2016. Our top ten customers represented approximately 36% of our fiscal 2016 revenues compared with
33% in fiscal 2015. One customer accounted for 10% of fiscal 2016 revenues.
Fiscal 2015
Revenue was $711.3 million in fiscal 2015, an increase of $88 million or 14% compared with fiscal 2014, driven by Services
segment growth of $97 million or 22%, that was offset in part by International revenues that declined by $14 million or 9%,
and Products and Systems segment revenues that declined by $2 million or 7%. The Services segment increase was driven by a
combination of mid-teens acquisition growth and mid-single digit organic revenue growth. The decline in International segment
revenues was driven by a combination of unfavorable foreign exchange rates of approximately 7%, modest acquisition growth
and a mid-single digit organic decline. Products and Systems segment revenues declined approximately 7% due to lower sales
volume.
Robust North American market conditions combined with the Company’s market share gains and acquisitions led Services
revenue to grow by 38% over prior year during the first half of fiscal 2015. However, a combination of the 50% drop in the
32
Table of Contents
price of oil and labor union strikes at various customer sites caused market conditions to slow dramatically in the second half of
fiscal year 2015, reducing the Services second half year-over-year revenue growth rate to 8%. Revenues from oil and gas
customers comprised 52% and 49% of revenues in fiscal 2015 and 2014, respectively. Revenues from oil and gas customers
grew by 22% in fiscal 2015, led by organic gains and from an acquisition. Fiscal 2015 revenue growth from customers in other
industries, including industrial, process industries which include chemical and pharmaceutical, power generation and
infrastructure grew by 6% over prior year. Our top ten customers represented approximately 33% of fiscal 2015 revenues
compared with 38% in fiscal 2014. No single customer accounted for 10% or more of fiscal 2015 revenues.
Gross Profit. Gross profit by segment for fiscal 2016, 2015 and 2014 was as follows:
Gross profit
Services
% of segment revenue
International
% of segment revenue
Products and Systems
% of segment revenue
Corporate and eliminations
% of total revenue
Fiscal 2016
For the year ended May 31,
2016
2015
2014
($ in thousands)
$
145,262
$
135,201
$
114,182
26.3%
43,613
30.5%
14,022
46.3%
111
203,008
28.2%
$
25.0%
34,572
23.5%
14,314
45.8%
646
184,733
26.0%
$
25.8%
44,893
27.8%
14,495
43.2%
(627)
172,943
27.7%
$
Gross profit increased $18.3 million, or 10% in fiscal 2016 compared to fiscal 2015. As a percentage of revenues, gross profit
margin improved by 220 basis points compared with the prior year to 28.2% in fiscal 2016, reversing a four year trend of
declining gross profit margins.
The 2016 increase of 220 basis points in gross profit margin was primarily attributable to the International and Services
segments. International segment gross margins increased to 30.5% in fiscal 2016 compared with 23.5% in the prior year, driven
by improvement in each of our four largest countries, organic revenue growth, prior year management changes and staffing
actions that improved technical labor utilization, as well as improvements in sales mix and overhead costs. Services segment
gross profit margin improved by approximately 130 basis points compared with fiscal 2015, due primarily to improvements in
contract profitability and technician labor utilization. Products and Systems segment gross profit margin improved to 46.3%
compared to 45.8% in the prior year driven by cost reductions.
Fiscal 2015
Gross profit increased $11.8 million, or 7% in fiscal 2015 compared to fiscal 2014. As a percentage of revenues, gross profit
margin declined to 26.0% in fiscal 2015 from 27.7% in fiscal 2014.
The 2015 decrease of 170 basis points in gross profit margin was primarily attributable to the International and Services
segments. International segment gross margins decreased to 23.5% in fiscal 2015 compared with 27.8% in the prior year, due
primarily to lower levels of project sales and product sales and lower levels of technical labor utilization. Services segment
gross profit margin declined by approximately 80 basis points in fiscal 2015, due primarily to wage increases that exceeded
price increases earlier in the Company’s fiscal year and the adverse impact from labor union strikes at various customer sites.
Products and Systems segment gross margin improved to 45.8% compared to 43.2% in the prior year driven by a more
favorable sales mix which included fewer heavily customized solutions.
33
Table of Contents
Income from Operations. The following table shows a reconciliation of the segment income before special items to income
from operations for fiscal 2016, 2015 and 2014:
Services:
Income from operations (GAAP)
$
52,552
$
49,142
$
43,221
For the year ended May 31,
2016
2015
2014
($ in thousands)
Legal settlement
Severance costs
Acquisition-related expense (benefit), net
Income before special items (non-GAAP)
International:
6,320
188
(1,061)
57,999
—
—
(639)
48,503
Income (loss) from operations (GAAP)
$
9,293
$
Severance costs
Asset write-offs and lease terminations
Acquisition-related expense (benefit), net
Income (loss) before special items (non-GAAP)
885
—
(520)
9,658
(575) $
1,082
872
(2,926)
(1,547)
—
—
1,625
44,846
10,238
306
—
(3,452)
7,092
2,552
—
—
(1,035)
1,517
$
2,688
$
2,461
$
34
—
—
2,722
99
157
—
2,717
$
$
$
$
(21,356) $
—
(20,675) $
542
—
128
(21,228)
2,516
(1,602)
(19,219)
(17,716)
—
—
205
(17,511)
43,177
5,974
49,151
$
$
$
30,353
101
30,454
$
$
$
38,295
(2,351)
35,944
Products and Systems:
Income from operations (GAAP)
Severance costs
Asset write-offs and lease terminations
Acquisition-related expense (benefit), net
Income before special items (non-GAAP)
Corporate and Eliminations:
Loss from operations (GAAP)
Severance costs
Charges related to sale of foreign operations
Acquisition-related expense (benefit), net
Loss before special items (non-GAAP)
Total Company
Income from operations (GAAP)
Special items
Income before special items (non-GAAP)
Fiscal 2016
Income from operations (GAAP) was $43.2 million for fiscal 2016, an increase of $12.8 million, or 42% compared to fiscal
2015 and income before special items (non-GAAP), exclusive of acquisition-related items and nonrecurring items, was $49.2
million for fiscal 2016, an increase of $18.7 million or 61% compared with fiscal 2015. As a percentage of revenues, income
before special items improved by 250 basis points to 6.8% in fiscal 2016 from 4.3% in fiscal 2015.
Total operating expenses increased by $5 million, or 4% in fiscal 2016 compared to fiscal 2015, driven by a $6.3 million legal
settlement accrual, offset by a $1.3 million, or 1% decline in recurring expenses. The recurring expense decrease was driven by
the International segment, which decreased $2.9 million, primarily due to the impact of foreign exchange rates. Offsetting the
34
Table of Contents
International decreases were increases of $1.5 million from the Corporate segment, primarily due to legal and bonus expense.
The Services and Products and Systems segments were flat from fiscal 2015 to fiscal 2016.
Fiscal 2015
Income from operations (GAAP) was $30.4 million for fiscal 2015, a $7.9 million decrease compared to fiscal 2014 and
income before special items (non-GAAP) was $30.5 million for fiscal 2015, a $5.5 million decrease compared to fiscal 2014.
As a percentage of revenues, income before special items dropped to 4.3% in fiscal 2015 from 5.8% in fiscal 2014.
Total operating expenses increased $19.7 million, or 15% in fiscal 2015 vs. fiscal 2014, driven by $18.3 million or 13%
increase in recurring expense and a $1.4 million increase in special items, primarily from acquisition related expenses. The
recurring expense increase was driven by the Services segment, which incurred a year-on-year operating expense increase of
$17.4 million or 25%. Operating expenses incurred by acquired companies accounted for $11.6 million of this increase, and
increased compensation and benefits to support growth comprised most of the remaining increase. Corporate operating
expenses increased by $3.0 million or 18%, due primarily to increased headcount, insurance cost and foreign exchange losses.
Products and Systems segment year-on-year operating expenses decreased $1.2 million, primarily due to headcount reductions,
while International segment operating expenses decreased by $0.8 million, as incremental operating expenses of acquired
companies was more than offset by the impact of foreign exchange rates.
Interest Expense
Interest expense was $4.8 million in fiscal 2016, $4.6 million in fiscal 2015 and $3.2 million in fiscal 2014. The increase in
fiscal 2015 was primarily related to an increase in average borrowings compared to fiscal 2014.
Income Taxes
Our effective income tax rate was 36% for fiscal 2016 compared to 38% for fiscal 2015. The lower effective tax rate was
driven by discrete items, including favorability from reserves pertaining to uncertain tax positions and the absence of increases
in the valuation allowance for deferred tax assets in 2016.
Our effective income tax rate was 38% for fiscal 2015 compared to 36% for fiscal 2014. The increase was primarily due to a
lower amount of foreign income in fiscal 2015 which is taxed at lower rates and an increase in the valuation allowance for
deferred tax assets, offset by the impact of acquisition contingent consideration.
Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of
meals and entertainment expense, valuation allowances, and other permanent differences. It is also affected by discrete items
that may occur in any given year, but are not consistent from year to year. Our effective income tax rate may fluctuate over the
next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes
resulting from our acquisition strategy, and increases or decreases in our permanent differences.
Segment Results of Operations
Services Segment
Selected financial information for the Services segment was as follows for fiscal 2016, 2015 and 2014:
35
Table of Contents
Services segment
Revenues
Gross profit
% of segment revenue
Operating Expenses
Income from operations
% of segment revenue
Income before special charges (non-GAAP)
% of segment revenue
Depreciation and amortization
Revenues
For the years ended May 31,
2016
2015
2014
($ in thousands)
$
$
$
$
$
$
553,279
145,262
26%
92,710
52,552
9%
$
$
$
$
540,224
135,201
25%
86,059
49,142
9%
$
$
$
$
443,229
114,182
26%
70,961
43,221
10%
57,999
$
48,503
$
44,846
10%
9%
10%
22,725
$
22,268
$
17,794
In fiscal 2016, Services revenues increased $13.1 million, or 2% compared with fiscal 2015. This increase was driven by low
single digit organic revenue growth, and to a lesser extent, acquisition-driven growth, offset in part by a low single digit
unfavorable impact of foreign exchange rates. Management believes that inspection industry revenues declined during fiscal
2016, driven by customers spending less due to pressures stemming from low commodities prices. Despite these difficult
market conditions, the Services segment experienced positive organic growth in fiscal 2016, driven by market share gains.
Oil and gas customers accounted for approximately 67% and 64% of Services segment revenues in fiscal 2016 and fiscal 2015,
respectively. Services' top ten customers accounted for approximately 44% and 42% of Services segment revenues during fiscal
2016 and 2015, respectively. Revenues from Services' largest customer represented approximately 13% of segment revenues in
fiscal 2016 and 12% in fiscal 2015.
In fiscal 2015, Services revenues increased $97.0 million, or 22% compared with fiscal 2014. The increase was driven by mid-
teens acquisition growth and mid-single digit organic growth. Strong market conditions combined with Services' market share
gains and acquisitions drove 38% growth in first half revenues. However, the sudden 50% drop in oil prices combined with
labor union refinery strikes caused market conditions to slow dramatically in the second half of the fiscal year, reducing
Services' second half revenue growth rate to 8% over prior year.
Gross Profit
Services segment gross profit margin was 26.3% and 25.0% in fiscal 2016 and fiscal 2015, respectively. The 130 basis point
increase in Services segment gross profit margin was primarily due to improvements in contract profitability and technician
labor utilization.
Our Services segment gross profit margin was 25.0% and 25.8% in fiscal 2015 and fiscal 2014, respectively. The 80 basis point
decrease in Services segment gross profit margin was due primarily to wage increases that exceeded price increases earlier in
the Company’s fiscal year, as well as market conditions that deteriorated in the second half of fiscal 2015.
Income from Operations
Services segment income from operations (GAAP) improved by $3.4 million, or 7% to $52.6 million and income before special
items (non-GAAP) improved by $9.5 million, or 20% to $58.0 million in fiscal 2016. Services operating profit margin before
special items improved by 150 basis points to 10.5% in fiscal 2016, driven primarily by the 130 basis point improvement in
gross profit margin for the segment.
36
Table of Contents
In fiscal 2016, Services segment operating expenses rose by $6.7 million, or 8%, due primarily to a $6.3 million settlement of a
class action lawsuit involving labor claims. (See Note 18 of our audited consolidated financial statements contained in Item 8
of this report for details of this case). Services' operating expenses exclusive of the legal settlement costs were nearly flat with
prior year.
Services segment income from operations (GAAP) improved by $5.9 million, or 14% to $49.1 million and income before
special items (non-GAAP) improved by $3.7 million or 8%, to $48.5 million in fiscal 2015. Services' operating profit margin
before special items declined by 110 basis points to 9.0% in fiscal 2015, driven primarily by the 80 basis point reduction in
gross profit margin for the segment.
In fiscal 2015, Services segment operating expenses rose by $15 million, or 21%, Operating expenses incurred by acquired
companies accounted for $10.8 million of this increase and increased compensation and benefits to support growth comprised
most of the remaining increase, offset by acquisition-related benefit.
International Segment
Selected financial information for our International segment was as follows for fiscal 2016, 2015 and 2014:
International segment
Revenues
Gross profit
as % of segment revenue
Operating Expenses
Income (loss) from operations
as % of segment revenue
Income (loss) before special charges (non-GAAP)
as % of segment revenue
Depreciation and amortization
Revenues
For the years ended May 31,
2016
2015
($ in thousands)
2014
143,025
146,953
161,395
43,613
34,572
30%
24 %
44,893
28%
34,320
9,293
6%
$
$
35,147
$
34,655
(575)
— %
10,238
6%
9,658
$
(1,547)
$
7,092
7%
(1)%
4%
7,774
$
8,451
$
8,065
$
$
$
$
$
$
International segment revenues declined by $3.9 million, or 3% during fiscal 2016, driven by a combination of high single digit
organic growth that was more than offset by the low double digit unfavorable impact of foreign exchange rates. Each of the
Company’s four largest international subsidiaries experienced positive organic growth during fiscal 2016. Industries with the
largest revenue concentrations in fiscal 2016 were aerospace and defense (39%), oil and gas (21%) and industrials (15%).
International segment revenues declined by $14.4 million, or 9% during fiscal 2015 driven by a combination of unfavorable
foreign exchange rates of approximately 7%, modest acquisition growth and a mid-single digit organic decline. Industries with
the largest revenue concentrations in fiscal 2015 were aerospace and defense (41%), oil and gas (17%) and industrials (15%).
Gross Profit
International segment gross profit for fiscal 2016 increased by $9.0 million or 26% and comprised 30.5% of revenues. The
International gross profit margin improved by 700 basis points in fiscal 2016, as improvement in each of the Company's four
largest country locations were driven by organic revenue growth, prior year management changes and staffing actions that
improved technical labor utilization, improvements in sales mix and reduced overhead costs.
37
Table of Contents
International segment gross profit for fiscal 2015 decreased by $10.3 million or 23% and comprised 23.5% of revenues.
International gross profit margin fell by 430 basis points in 2015, due primarily to lower levels of project and product sales and
lower levels of technician labor utilization.
Income (loss) from Operations
International segment income from operations (GAAP) was $9.3 million in fiscal 2016, compared to a loss from operations of
$0.6 million in fiscal 2015. International segment income before special items (non-GAAP) was $9.7 million, compared to loss
before special items of $1.5 million in fiscal 2015. As a percentage of revenues, the income before special charges was
approximately 7% in fiscal 2016, compared with (1)% in fiscal 2015.
Segment operating expenses, exclusive of acquisition-related items and special items, declined by $2.9 million, or 8% during
fiscal 2016, driven by the impact of lower foreign exchange rates, costs reductions and reduced foreign exchange losses.
Recurring operating expenses were 24% and 25%, of segment revenues in fiscal 2016 and 2015, respectively.
International segment loss from operations (GAAP) was $0.6 million in fiscal 2015, compared to income from operations of
$10.2 million in fiscal 2014. International segment loss before special items (non-GAAP) was $1.5 million in fiscal 2015
compared to income before special items of $7.1 million in fiscal 2014. As a percentage of revenues, the loss before special
charges was approximately (1)% in fiscal 2015 compared with 4% in fiscal 2014.
Segment operating expenses, exclusive of acquisition-related items and special items, decreased by $0.8 million from fiscal
2014 to fiscal 2015, as incremental operating expenses of acquired companies was more than offset by the impact of foreign
exchange rates.
Products and Systems Segment
Selected financial information for the Products and Systems segment was as follows for fiscal 2016, 2015 and 2014:
Products and Systems segment
Revenues
Gross profit
% of segment revenue
Operating Expenses
Income from operations
% of segment revenue
Income before special charges (non-GAAP)
% of segment revenue
Depreciation and amortization
Revenues
For the years ended May 31,
2016
2015
2014
($ in thousands)
$
$
$
$
$
$
30,293
14,022
46%
11,334
2,688
9%
$
$
$
$
31,255
14,314
46%
11,853
2,461
8%
$
$
$
$
33,544
14,495
43%
11,943
2,552
8%
2,722
$
2,717
$
1,517
9%
9%
5%
2,323
$
2,426
$
2,373
Products and Systems segment revenues for fiscal 2016 decreased $1.0 million or 3% compared to fiscal 2015 and by $2.3
million or 7% compared to fiscal 2014. The revenue declines were due to lower sales volume.
Gross Profit
38
Table of Contents
Products and Systems segment gross profit margin was 46.3% in fiscal 2016, which represented a 50 basis point improvement
over fiscal 2015, and a 310 basis point improvement over fiscal 2014. Because of these gross profit margin improvements,
gross profits generated by this segment were consistent from fiscal 2014 to fiscal 2016 despite the sales declines. The gross
profit margin improvements were driven in both years by a more favorable sales mix which included fewer heavily customized
solutions.
Income from Operations
Products and Systems segment income from operations (GAAP) improved by $0.2 million in fiscal 2016 and decreased by $0.1
million in fiscal 2015. Income before special charges (non-GAAP) improved by over $1.2 million in fiscal 2015 and was flat
in fiscal 2016 despite the sales declines experienced. Fiscal 2016 operating profit margins before special charges of 9.0%
represented improvements of 30 basis points over fiscal 2015 and of 450 basis points over fiscal 2014. Drivers to these
improvements included the improvements in gross profit margin, coupled with operating expense reductions of $1.2 million in
fiscal 2015 compared with fiscal 2014, and a further $0.4 million in fiscal 2016 as compared with fiscal 2015. The reductions in
operating expenses were driven by lower headcounts in both years.
Corporate and Eliminations
The elimination of revenues and cost of revenues products sales by the Products and Systems segment to the International and
Services segments is captured in this segment, as well as operating expenses that have not been allocated to other segments.
These costs primarily include the costs of corporate support functions, such as finance, legal, human resources and certain other
costs. As a percentage of our total revenues, these costs have generally remained consistent over the last three fiscal years,
consisting of approximately 3% of total revenues for each of the fiscal years ended 2016, 2015 and 2014, respectively.
Liquidity and Capital Resources
Overview
The Company has funded its operations from cash provided from operations, bank borrowings and capital lease financings.
Management believes that the Company's existing cash and cash equivalents, anticipated cash flows from operating activities,
and available borrowings under our credit agreement will be more than sufficient to meet anticipated cash needs over the next
12 months. The Company generated free cash flow, (a non-GAAP measurement defined as operating cash flow reduced by
capital expenditures) of $51.9 million in fiscal 2016, compared with $33.9 million in fiscal 2015 and $19.3 million in fiscal
2014. Capital expenditures include both the purchase of property, plant and equipment and of intangible assets.
Cash Flows Table
The following table summarizes our cash flows for fiscal 2016, 2015 and 2014:
Fiscal year
($ in thousands)
Net cash provided by (used in):
Operating Activities
Investing Activities
Financing Activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Cash Flows from Operating Activities
2016
2015
2014
$
$
68,124
(16,752)
(40,378)
(361)
10,633
$
$
49,840
(49,651)
2,066
(1,720)
535
$
$
36,873
(38,005)
3,262
88
2,218
Cash provided by operating activities in fiscal 2016 improved by $18 million or 37% over the prior fiscal year. This
improvement was primarily driven by the Company's $16 million improvement in net income, as adjusted for working capital
items and certain non-cash items, most notably the $6 million legal settlement, as well as from reducing Days Sales
Outstanding by 2 days.
39
Table of Contents
Cash provided by operating activities in fiscal 2015 improved by $13 million or 35% over the prior fiscal year. The
improvement was primarily attributable to the timing of working capital inflows and outflows, namely a $28 million
improvement in the timing of collections of accounts receivable, offset in part by incremental net outflows of $15 million
related to the timing of payments relating to accounts payable, and accrued expenses and other liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities was $16.8 million in fiscal 2016, principally due to $16.2 million purchases of property,
plant and equipment and intangible assets.
Net cash used in investing activities was $49.7 million in fiscal 2015, principally due to acquisitions totaling $34.7 million, net
of cash acquired and purchases of property, plant and equipment of $16.0 million.
Cash Flows from Financing Activities
Net cash used in financing activities in fiscal 2016 was $40 million, as compared with cash provided by financing activities of
$2 million in fiscal 2015. Net cash used in financing activities during fiscal 2016 consisted primarily of net repayments of debt
totaling $36 million.
Net cash provided by financing activities in fiscal 2015 was $2 million, compared to $3 million in fiscal 2014.
Effect of Exchange Rate on Changes in Cash
For fiscal 2016, 2015 and 2014, exchange rate changes (decreased) increased cash by $(0.4) million, $(1.7) million and $0.1
million, respectively.
Cash Balance and Credit Facility Borrowings
As of May 31, 2016, the Company had cash and cash equivalents totaling $21.2 million and available borrowing capacity of up
to $101.2 million under its credit agreement (as defined below). Borrowings of $69.0 million and letters of credit of $4.8
million were outstanding under the credit agreement at May 31, 2016. We finance our operations primarily through our existing
cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are
sufficient to fund our operations for the foreseeable future.
On October 31, 2014, the Company entered into a Third Amendment and Modification Agreement (the “Amendment”), to our
revolving line of credit, the Third Amended and Restated Credit Agreement (“Credit Agreement”), dated December 21, 2011,
with its lending group. The Amendment increased the Company's revolving line of credit from $125.0 million to $175.0 million
and provides that under certain circumstances the line of credit can be increased to $225.0 million. The Company may continue
to 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. The Amendment also extended the original maturity date of the Credit Agreement from December 20, 2016 to
October 30, 2019.
Loans under the Credit Agreement bear interest at LIBOR plus an applicable LIBOR margin ranging from 1% to 1.75%, or a
base rate less a margin of 1.25% to 0.375%, at our option, based upon our 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. We have the benefit of the lowest margin if our 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 2.0 to 1. We 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 on any amounts not paid when due. Amounts borrowed under the
Credit Agreement are secured by liens on substantially all of our assets.
40
Table of Contents
The Credit Agreement contains financial covenants requiring that we maintain a Funded Debt Leverage Ratio of no greater
than 3.25 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 us and our 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 our 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
our ability to acquire other businesses or companies except that the acquired business or company must be in our line of
business, we 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 May 31, 2016, the Company was in compliance with the terms of the Credit Agreement, and has undertaken to
continuously monitor compliance with these covenants.
Liquidity and Capital Resources Outlook
Future Sources of Cash
We expect our future sources of cash to include cash flow generated from our operating activities and borrowings under our
Credit Agreement. Our revolving credit facility is available for cash advances required for working capital and for letters of
credit to support our operations. Acquisitions are funded through available cash, borrowings under the revolving credit facility
and seller notes.
Future Uses of Cash
We expect our future uses of cash will primarily be for acquisitions, international expansion, purchases or manufacture of field
testing equipment to support growth, additional investments in technology and software products and the replacement of
existing assets and equipment used in our operations. We often make purchases to support new sources of revenues, particularly
in our Services segment. In addition, we will need to fund a certain amount of replacement equipment, including our fleet
vehicles. We historically spend approximately 2% to 4% of our total revenues on capital expenditures, excluding acquisitions,
and expect to fund these expenditures through a combination of cash and lease financing. Our cash capital expenditures,
excluding acquisitions, for fiscal 2016, 2015 and 2014 were approximately 2%, 2%, and 3% of revenues, respectively. In
addition, we expect to selectively repurchase our common stock, pursuant to the stock repurchase program of up to $50 million,
that was approved by the Company's Board of Directors during fiscal 2016.
Our future acquisitions may also require capital. We acquired two companies in fiscal 2016 and four companies in fiscal 2015,
with an aggregate cash outlay of $37.5 million. In some cases, additional equipment will be needed to upgrade the capabilities
of these acquired companies. In addition, our future acquisition and capital spending may increase as we pursue growth
opportunities. Other investments in infrastructure, training and software may also be required to match our growth, but we plan
to continue using a disciplined approach to building our business. In addition, we will use cash to fund our operating leases,
capital leases, long-term debt repayments and various other obligations as they arise.
We also expect to use cash to support our working capital requirements for our operations, particularly in the event of further
growth and due to the impacts of seasonality on our business. Our future working capital requirements will depend on many
factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions and
our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents and
future cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds
through bank credit arrangements, public or private equity financings, or debt financings. We also may need to raise additional
funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products that will
complement our existing operations. In the event additional funding is required, we may not be able to obtain bank credit
arrangements or effect an equity or debt financing on acceptable terms.
Contractual Obligations
41
Table of Contents
We generally do not enter into long-term minimum purchase commitments. Our principal commitments, in addition to those
related to our long-term debt discussed below, consist of obligations under facility leases for office space and equipment leases
and contingent consideration obligations in connection with our acquisitions.
The following table summarizes our outstanding contractual obligations as of May 31, 2016:
($ in thousands)
Long-term debt (1)
Capital lease obligations (2)
Operating lease obligations
Contingent consideration
obligations (3)
Total
$
Total
85,009
21,189
46,809
Fiscal 2017
12,553
$
9,112
9,956
Fiscal 2018
881
$
6,491
7,903
Fiscal 2019
751
$
3,810
6,580
Fiscal 2020
69,446
$
1,520
5,219
Fiscal 2021
294
$
134
4,112
2,075
$ 155,082
1,029
32,650
933
16,208
$
$
104
11,245
9
76,194
$
$
$
—
4,540
2022 &
Beyond
1,084
122
13,039
—
14,245
$
$
________________________________
(1) Consists primarily of borrowings from our senior credit facility and seller notes payable in connection with our
acquisitions and includes the current portion outstanding.
(2) Includes estimated cash interest to be paid over the remaining terms of the leases.
(3) Consists of payments deemed reasonably likely to occur in connection with our acquisitions
Off-Balance Sheet Arrangements
During fiscal 2016, 2015 and 2014, we did not have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires that we make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.
The accounting policies that we believe require more significant estimates and assumptions include: revenue recognition,
valuations of accounts receivable, long-lived assets, goodwill, and deferred tax assets and uncertain tax positions. We base our
estimates and assumptions on historical experience, known or expected trends and various other assumptions that we believe to
be reasonable. As future events and their effects cannot be determined with precision, actual results could differ significantly
from these estimates, which may cause our future results to be significantly affected.
We believe that the following critical accounting policies comprise the more significant estimates and assumptions used in the
preparation of our consolidated financial statements.
Revenue Recognition
Revenue is generally recognized when persuasive evidence of an arrangement exists, services have been rendered or products
have been delivered, the fee is fixed or determinable, and collectability is reasonably assured, as summarized below.
Services
Revenue is primarily derived from providing services on a time and material basis. Service arrangements generally consist of
inspection professionals working under contract for a fixed period of time or on a specific customer project. Revenue is
generally recognized when the service is performed in accordance with terms of each customer arrangement, upon completion
of the earnings process and when collection is reasonably assured. At the end of any reporting period, revenue is accrued for
services that have been earned which have not yet been billed. Reimbursable costs, including those related to travel and out-of-
pocket expenses, are included in revenue, and equivalent amounts of reimbursable costs are included in cost of services.
42
Table of Contents
Products and Systems
Sales of products and systems are recorded when the sales price is fixed and determinable and the risks and rewards of
ownership are transferred (generally upon shipment) and when collectability is reasonably assured.
These arrangements occasionally contain multiple elements or deliverables, such as hardware, software (that is essential to the
functionality of the hardware) and related services. We recognize revenue for delivered elements as separate units of
accounting, when the delivered elements have standalone value, uncertainties regarding customer acceptance are resolved and
there are no refund or return rights for the delivered elements. We establish the selling prices for each deliverable based on our
vendor-specific objective evidence (“VSOE”), if available, third-party evidence, if VSOE is not available, or estimated selling
price (“ESP”) if neither VSOE nor third-party evidence is available. We establish VSOE of selling price using the price charged
for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant
authority. Third-party evidence of selling price is established by evaluating largely similar and interchangeable competitor
products or services in standalone sales to similarly situated customers. We determine ESP by considering internal factors such
as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle.
Consideration is also given to market conditions such as competitor pricing strategies and industry technology life cycles.
When determining ESP, we apply management judgment to establish margin objectives and pricing strategies and to evaluate
market conditions and product life cycles. Changes in the aforementioned factors may result in a different allocation of revenue
to the deliverables in multiple element arrangements and therefore may change the pattern and timing of revenue recognition
for these elements, but will not change the total revenue recognized for the arrangement.
A portion of our revenue is 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 generally 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 our 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.
Long-Lived Assets
We perform a review of long-lived assets for impairment when events or changes in circumstances indicate the carrying value
of such assets may not be recoverable. If an indication of impairment is present, we compare the estimated undiscounted future
cash flows to be generated by the asset to its carrying amount. If the undiscounted future cash flows are less than the carrying
amount of the asset, we record an impairment loss equal to the excess of the asset’s carrying amount over its fair value. We
estimate fair value based on valuation techniques such as a discounted cash flow analysis or a comparison to fair values of
similar assets. As of May 31, 2016 and 2015, we had $78.7 million and $79.3 million in net property, plant and equipment,
respectively, and $43.5 million and $51.3 million in intangible assets, net, respectively. There were no long-lived asset
impairment charges recorded during the years ended May 31, 2016, 2015 or 2014.
Long-lived assets, net, outside of the U.S. totaled $104.8 million and $105.9 million as of May 31, 2016 and 2015, respectively.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible
assets and identifiable intangible assets. We test the carrying value of goodwill for impairment at a “reporting unit” level
(which for the Company is represented by (i) our Services segment, (ii) our Products and Systems segment, and (iii) the
European component and (iv) Brazilian component of our International segment), using a qualitative assessment for its
Services reporting unit and a two-step approach for its remaining reporting units, annually as of March 1, or whenever an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that
43
Table of Contents
reporting unit may be impaired. In this case, a second step is performed to allocate the fair value of the reporting unit to the
assets and liabilities of the reporting unit as if it had just been acquired in a business combination, and as if the purchase price
was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts
assigned to its assets and liabilities is referred to as the implied fair value of goodwill. The implied fair value of the reporting
unit’s goodwill is then compared to the actual carrying value of goodwill. If the implied fair value is less than the carrying
value, an impairment loss would be recorded to reduce the carrying value of goodwill to its implied fair value. We consider the
income and market approaches to estimating the fair value of our reporting units, which requires significant judgment in
evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors. The Company
believes that the fair values of each of its reporting units are substantially in excess of their respective carrying amounts.
Significant deterioration in industry or economic trends, disruptions to our business, inability to effectively integrate acquired
businesses, or other factors, may cause these fair value to decline, possibly resulting in impairment charges to goodwill in
future periods.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with
Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of
promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP
when it becomes effective. The new standard is effective for fiscal years and interim periods within those fiscal years beginning
December 15, 2017, as a result of a one year deferral in the standard issued by the FASB in August 2015 with ASU 2015-14,
Revenue from Contracts with Customers - Deferral of the Effective Date. Early application is not permitted. The standard
permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that
ASU 2014-09 will have on its consolidated financial statements and related disclosures.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments. This amendment will simplify the accounting for adjustments made to provisional amounts
recognized in a business combination and eliminates the requirement to retrospectively account for those adjustments in
previous reporting periods. This update will require on the face of the income statement or in the notes to the financial
statements the amount recorded in current-period earnings that would have previously been recorded if the adjustment to the
provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years, and interim
periods within those fiscal years beginning after December 15, 2015. This update should be applied prospectively and earlier
adoption is permitted for financial statements that have not been issued. The Company is evaluating the effect that ASU
2015-16 will have on its consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes. This amendment will simplify the presentation of deferred tax assets and liabilities on the balance sheet and require all
deferred tax assets and liabilities to be treated as non-current. ASU 2015-17 is effective for fiscal years, and interim periods
within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the
effect that ASU 2015-17 will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This amendment supersedes previous accounting
guidance (Topic 840) and requires all leases, with exception of leases with a term of 12 months or less, to be recorded on the
balance sheet as lease assets and lease liabilities. ASU 2016-02 is effective for fiscal years, and interim periods within those
fiscal years beginning after December 15, 2018, with early adoption permitted. The standard requires lessees and lessors to
recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The
Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issues ASU No. 2016-09, Stock Compensation (Topic 718). This amendment will simplify certain
aspects of accounting for share-based payment transactions, which include accounting for income taxes and the related impact
on the statement of cash flows, an option to account for forfeitures when they occur in addition to the existing guidance to
estimate the forfeitures of awards, classification of awards as either equity or liabilities and classification on the statement of
cash flows for employee taxes paid to tax authorities on shares withheld for vesting. ASU 2016-09 is effective for fiscal years,
and interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company
is evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures.
44
Table of Contents
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The company’s investment portfolio primarily includes cash equivalents for which the market values are not significantly
affected by changes in interest rates. Our interest rate risk results primarily from our variable rate indebtedness under our credit
facility, which is influenced by movements in short-term rates. Borrowings under our $175.0 million revolving credit facility
are based on an LIBOR, plus an additional margin based on our Funded Debt Leverage Ratio. Based on the amount of variable
rate debt, $69.0 million at May 31, 2016, an increase in interest rates by one hundred basis points from our current rate would
increase annual interest expense by approximately $0.7 million.
Foreign Currency Risk
We have foreign currency exposure related to our operations in foreign locations. This foreign currency exposure, particularly
the Euro, British Pound Sterling, Brazilian Real, Canadian Dollar and the Indian Rupee, arises primarily from the translation of
our foreign subsidiaries’ financial statements into U.S. Dollars. For example, a portion of our annual sales and operating costs
are denominated in British Pound Sterling and we have exposure related to sales and operating costs increasing or decreasing
based on changes in currency exchange rates. If the U.S. Dollar increases in value against these foreign currencies, the value in
U.S. Dollars of the assets and liabilities originally recorded in these foreign currencies will decrease. Conversely, if the U.S.
Dollar decreases in value against these foreign currencies, the value in U.S. Dollars of the assets and liabilities originally
recorded in these foreign currencies will increase. Thus, increases and decreases in the value of the U.S. Dollar relative to these
foreign currencies have a direct impact on the value in U.S. Dollars of our foreign currency denominated assets and liabilities,
even if the value of these items has not changed in their original currency. We do not currently enter into forward exchange
contracts to hedge exposures denominated in foreign currencies. An unfavorable 10% change in the average U.S. Dollar
exchange rates for fiscal 2016 would cause a decrease in consolidated operating income of approximately $1.1 million and a
favorable 10% change would cause an increase of approximately $1.3 million. We may consider entering into hedging or
forward exchange contracts in the future, as sales in international currencies increase due to growth in our International
segment.
Fair Value of Financial Instruments
We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly
liquid investments purchased with a remaining maturity of three months or less. We do not use derivative financial instruments
for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future.
Effects of Inflation and Changing Prices
Our results of operations and financial condition have not been significantly affected by inflation and changing prices.
45
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Mistras Group, Inc.:
We have audited the accompanying consolidated balance sheets of Mistras Group, Inc. and subsidiaries (the Company) as of
May 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income (loss), equity, and cash
flows for each of the years in the three-year period ended May 31, 2016. We also have audited the Company’s internal control
over financial reporting as of May 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Mistras Group, Inc. and subsidiaries as of May 31, 2016 and 2015, and the results of their operations and their cash
flows for each of the years in the three-year period ended May 31, 2016, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of May 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
New York, New York
August 15, 2016
46
Table of Contents
Mistras Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Deferred income taxes
Other assets
Total Assets
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable
Accrued expenses and other current liabilities
Current portion of long-term debt
Current portion of capital lease obligations
Income taxes payable
Total current liabilities
Long-term debt, net of current portion
Obligations under capital leases, net of current portion
Deferred income taxes
Other long-term liabilities
Total Liabilities
Commitments and contingencies
Equity
Preferred stock, 10,000,000 shares authorized
Common stock, $0.01 par value, 200,000,000 shares authorized, 28,939,993 and
28,703,320 shares issued and outstanding as of May 31, 2016 and May 31, 2015,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Mistras Group, Inc. stockholders’ equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
May 31,
2016
2015
$
$
$
21,188
137,913
9,918
6,216
12,711
187,946
78,676
43,492
169,220
1,000
2,341
482,675
10,796
62,983
12,553
7,835
2,710
96,877
72,456
11,932
18,328
6,794
206,387
10,555
133,228
10,841
5,144
11,698
171,466
79,256
51,276
166,414
1,208
2,107
471,727
10,529
55,914
17,902
8,646
532
93,523
95,557
10,717
16,984
9,934
226,715
—
—
290
213,737
82,235
(20,099)
276,163
125
276,288
482,675
$
287
208,064
57,581
(21,113)
244,819
193
245,012
471,727
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
47
Table of Contents
Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
Revenue
Cost of revenue
Depreciation
Gross profit
Selling, general and administrative expenses
Research and engineering
Depreciation and amortization
Acquisition-related (benefit) expense, net
Legal settlement
Income from operations
Interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Less: net (loss) income attributable to noncontrolling interests, net of
taxes
Net income attributable to Mistras Group, Inc.
Earnings per common share
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
$
For the year ended May 31,
2016
2015
2014
$
719,181
494,911
21,262
203,008
141,229
$
711,252
506,281
20,238
184,733
143,978
623,447
432,695
17,809
172,943
123,690
2,523
11,212
(1,453)
6,320
43,177
4,762
38,415
13,765
24,650
(4)
24,654
0.85
0.82
28,856
29,891
$
$
$
2,521
13,048
(5,167)
—
30,353
4,622
25,731
9,740
15,991
(90)
16,081
0.56
0.54
28,613
29,590
$
$
$
2,995
10,620
(2,657)
—
38,295
3,192
35,103
12,528
22,575
57
22,518
0.79
0.77
28,365
29,324
The accompanying notes are an integral part of these consolidated financial statements.
48
Table of Contents
Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Net income
Other comprehensive income (loss):
Foreign currency translation adjustments
Comprehensive income (loss)
Less: net (loss) income attributable to noncontrolling interests
Foreign currency translation adjustments attributable to noncontrolling
interests
Comprehensive income (loss) attributable to Mistras Group, Inc.
$
25,669
$
For the year ended May 31,
2016
2015
2014
$
24,650
$
15,991
$
22,575
1,014
25,664
(4)
1
(19,602)
(3,611)
(90)
5
(3,516) $
2,941
25,516
57
(4)
25,455
The accompanying notes are an integral part of these consolidated financial statements.
49
Table of Contents
Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Equity
(in thousands)
Common Stock
Shares
Amount
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
Mistras Group,
Inc.
Stockholders’
Equity
Noncontrolling
Interest
Total Equity
Balance at May 31, 2013
28,211
$
282
$
195,241
$
18,982
$
(4,452)
$
210,053
$
227
$
210,280
Net income
Other comprehensive income, net of
tax
Share-based payments
Net settlement on vesting of
restricted stock units
Excess tax benefit from share-based
payment compensation
Exercise of stock options
Balance at May 31, 2014
Net income
Other comprehensive loss, net of tax
Share-based payments
Net settlement on vesting of
restricted stock units
Excess tax benefit from share-based
payment compensation
Exercise of stock options
Balance at May 31, 2015
Net income
Other comprehensive income, net of
tax
Share-based payments
Net settlement on vesting of
restricted stock units
Excess tax benefit from share-based
payment compensation
Exercise of stock options
Balance at May 31, 2016
—
—
19
123
—
103
—
—
—
1
—
1
—
—
6,261
(1,007)
340
996
22,518
—
—
—
—
—
—
2,941
—
—
—
22,518
2,941
6,261
(1,006)
340
997
57
4
—
—
—
—
22,575
2,945
6,261
(1,006)
340
997
28,456
$
284
$
201,831
$
41,500
$
(1,511)
$
242,104
$
288
$
242,392
—
—
21
161
—
65
—
—
—
2
—
1
—
—
6,579
(1,483)
388
749
16,081
—
16,081
—
—
—
—
—
(19,602)
—
—
—
—
(19,602)
6,579
(1,481)
388
750
(90)
(5)
—
—
—
—
15,991
(19,607)
6,579
(1,481)
388
750
28,703
$
287
$
208,064
$
57,581
$
(21,113)
$
244,819
$
193
$
245,012
—
—
—
182
—
55
—
—
—
2
—
1
—
—
6,394
(1,093)
(170)
542
24,654
—
—
—
—
—
—
1,014
—
—
—
—
24,654
1,014
6,394
(1,091)
(170)
543
(4)
(64)
—
—
—
—
24,650
950
6,394
(1,091)
(170)
543
28,940
$
290
$
213,737
$
82,235
$
(20,099)
$
276,163
$
125
$
276,288
The accompanying notes are an integral part of these consolidated financial statements.
50
Table of Contents
Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization
Deferred income taxes
Share-based compensation expense
Charges associated with the exit of foreign operations
Fair value adjustments to contingent consideration
Other
Changes in operating assets and liabilities, net of effect of acquisitions
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other liabilities
Income taxes payable
Net cash provided by operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Acquisition of businesses, net of cash acquired
Proceeds from sale of equipment
Net cash used in investing activities
Cash flows from financing activities
Repayment of capital lease obligations
Proceeds from borrowings of long-term debt
Repayment of long-term debt
Proceeds from revolver
Repayments of revolver
Payment of contingent consideration for business acquisitions
Taxes paid related to net share settlement of equity awards
Excess tax benefit from share-based payment compensation
Proceeds from the exercise of stock options
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents:
Beginning of period
End of period
Supplemental disclosure of cash paid
Interest
Income taxes
Noncash investing and financing
Equipment acquired through capital lease obligations
Issuance of notes payable and other debt obligations primarily related to
acquisitions
$
$
$
$
$
For the year ended May 31,
2016
2015
Note 1
2014
$
24,650
$
15,991
$
22,575
32,474
240
6,514
—
(2,066)
(1,052)
(4,999)
1,595
(1,128)
(684)
254
10,187
2,139
68,124
(14,864)
(1,315)
(1,743)
1,170
(16,752)
(7,870)
2,737
(17,580)
55,800
(69,600)
(3,147)
(1,091)
(170)
543
(40,378)
(361)
10,633
10,555
21,188
4,151
10,686
8,248
$
$
$
$
33,286
(1,745)
6,579
2,516
(5,382)
1,647
3,982
388
(288)
(821)
(6,571)
2,006
(1,748)
49,840
(15,104)
(866)
(34,677)
996
(49,651)
(8,653)
2,232
(11,457)
110,300
(86,800)
(3,213)
(1,481)
388
750
2,066
(1,720)
535
10,020
10,555
4,504
13,243
8,031
— $
20,480
28,429
(621)
6,261
—
(3,937)
617
(23,857)
1,203
(4,059)
36
6,125
4,532
(431)
36,873
(16,871)
(708)
(21,924)
1,498
(38,005)
(8,139)
—
(8,830)
102,880
(81,300)
(1,678)
(1,007)
340
996
3,262
88
2,218
$
$
$
$
$
7,802
10,020
3,271
12,920
11,031
336
The accompanying notes are an integral part of these consolidated financial statements.
51
Table of Contents
Mistras Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(tabular dollars in thousands, except share and per share data)
1. Description of Business and 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. 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, commercial aerospace and defense,
transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research
and engineering institutions.
Principles of Consolidation
The accompanying audited consolidated financial statements include the accounts of Mistras Group, Inc. and its wholly and
majority-owned subsidiaries. For subsidiaries in which 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 interests in
net income, net of tax, is classified separately in the accompanying consolidated statements of income.
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 subsidiaries in the International segment, which end on April 30.
Accordingly, the Company’s International segment subsidiaries are consolidated on a one-month lag. Therefore, in the quarter
and year of acquisition, results of acquired subsidiaries in the International segment are generally included in consolidated
results for one less month than the actual number of months from the acquisition date to the end of the reporting period.
Management does not believe that any events occurred during the one-month lag period that would have a material effect on
the Company’s consolidated financial statements for fiscal 2016. As discussed in Note 7 - Acquisitions and Dispositions, during
the lag period in fiscal 2015, the Company sold an international subsidiary, and decided to sell two additional international
subsidiaries. Management does not believe that any additional events occurred during the fiscal 2015 one-month lag period that
would have a material effect on the Company’s consolidated financial statements. Reference to a fiscal year means the fiscal
year ended May 31.
Reclassifications
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.
Immaterial Correction
Subsequent to the issuance of its consolidated financial statements as of and for the year ended May 31, 2015, the Company
identified errors related to the classification of amounts reported in the Consolidated Statement of Cash Flows for that period.
In accordance with the SEC Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the
materiality of the errors from qualitative and quantitative perspectives, and concluded that the errors were immaterial.
Accordingly, management has corrected the presentation of the affected line items of the accompanying Consolidated
Statement of Cash Flows for the year ended May 31, 2015, as summarized below. These changes did not impact the Company’s
net income, balance sheet, or stockholders’ equity for any periods previously reported.
52
Table of Contents
Cash flows from operating activities
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Acquisition of businesses, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds from borrowings of long-term debt
Repayments of long-term debt
Net borrowings against revolver
Net cash provided by financing activities
Previously
Reported
Revised
(6,281)
2,500
50,624
(34,967)
(49,941)
—
(9,224)
21,914
481
(6,571)
2,006
49,840
(34,677)
(49,651)
2,232
(11,457)
23,500
2,066
Effect of exchange rate changes on cash and cash equivalents
(629)
(1,720)
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is generally recognized when persuasive evidence of an arrangement exists, services have been rendered or products
have been delivered, the fee is fixed or determinable, and collectability is reasonably assured. Shipping and handling costs are
included in cost of revenues. Taxes collected from customers and remitted to governmental authorities are presented in the
consolidated statements of income on a net basis. One customer accounted for 10% of our revenues in fiscal 2016, which
primarily were generated from the Services segment. No customer accounted for 10% or more of our revenues in fiscal 2015
and 2014. The following revenue recognition policies define the manner in which we account for specific transaction types:
Services
Revenue is primarily derived from providing services on a time and material basis. Service arrangements generally consist of
inspection professionals working under contract for a fixed period of time or on a specific customer project. Revenue is
generally recognized when the service is performed in accordance with terms of each customer arrangement, upon completion
of the earnings process and when collection is reasonably assured. At the end of any reporting period, revenue is accrued for
services that have been earned which have not yet been billed. Reimbursable costs, including those related to travel and out-of-
pocket expenses, are included in revenue, and equivalent amounts of reimbursable costs are included in cost of services.
Products and Systems
Sales of products and systems are recorded when the sales price is fixed and determinable and the risks and rewards of
ownership are transferred (generally upon shipment) and when collectability is reasonably assured.
These arrangements occasionally contain multiple elements or deliverables, such as hardware, software (that is essential to the
functionality of the hardware) and related services. The Company recognizes revenue for delivered elements as separate units
of accounting, when the delivered elements have standalone value, uncertainties regarding customer acceptance are resolved
and there are no refund or return rights for the delivered elements. The Company establishes the selling prices for each
deliverable based on its, vendor-specific objective evidence (“VSOE”), if available, third-party evidence, if VSOE is not
available, or estimated selling price (“ESP”) if neither VSOE nor third-party evidence is available. The Company establishes
VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price
established by management having the relevant authority. Third-party evidence of selling price is established by evaluating
largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. The
Company determines ESP, by considering Internal factors such as margin objectives, pricing practices and controls, customer
segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor
pricing strategies and Industry technology life cycles. When determining ESP, the Company applies management judgment to
53
Table of Contents
establish margin objectives and pricing strategies and to evaluate market conditions and product life cycles. Changes in the
aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements and
therefore may change the pattern and timing of revenue recognition for these elements, but will not change the total revenue
recognized for the arrangement.
A portion of the Company’s revenue is 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 generally 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 our 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.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires that the Company
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of
contingent assets and liabilities at the date of financial statements. The accounting policies that the Company believes require
more significant estimates and assumptions include: revenue recognition, valuations of accounts receivable, long lived assets,
goodwill, and deferred tax assets and uncertain tax positions. The Company bases its estimates and assumptions on historical
experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their
effects cannot be determined with precision, actual results could differ significantly from these estimates, which may cause the
Company’s future results to be significantly affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents.
Accounts Receivable
Accounts receivable are stated net of an allowance for doubtful accounts and sales allowances. Outstanding accounts receivable
balances are reviewed periodically, and allowances are provided at such time that management believes it is probable that such
balances will not be collected within a reasonable period of time. The Company extends credit to its customers based upon
credit evaluations in the normal course of business, primarily with 30-day terms. Bad debts are provided for based on historical
experience and management’s evaluation of outstanding accounts receivable. Accounts are generally written off when they are
deemed uncollectible. One customer accounted for 11% of our accounts receivable in fiscal 2016. No customer accounted for
10% or more of our accounts receivable in fiscal 2015.
Inventories
Inventories are stated at the lower of cost, as determined by using the first-in, first-out method, or market. Work in process and
finished goods inventory include material, direct labor, variable costs and overhead.
Purchased and Internal-Use Software
The Company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software, which
includes software coding, installation and testing. Capitalized costs are amortized on a straight-line basis over three years, the
estimated useful life of the software.
Property, Plant and Equipment
54
Table of Contents
Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed utilizing the
straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed utilizing
the straight-line method over the shorter of the remaining lease term or estimated useful life. Repairs and maintenance costs are
expensed as incurred.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible
assets and identifiable intangible assets. The Company tests the carrying value of goodwill for impairment at a “reporting unit”
level (which for the Company is represented by (i) our Services segment, (ii) our Products and Systems segment, and (iii) the
European component and (iv) Brazilian component of our International segment), using a qualitative assessment for its
Services reporting unit and a two-step approach for its remaining reporting units, annually as of March 1, or whenever an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that
reporting unit may be impaired. In this case, a second step is performed to allocate the fair value of the reporting unit to the
assets and liabilities of the reporting unit as if it had just been acquired in a business combination, and as if the purchase price
was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts
assigned to its assets and liabilities is referred to as the implied fair value of goodwill. The implied fair value of the reporting
unit’s goodwill is then compared to the actual carrying value of goodwill. If the implied fair value is less than the carrying
value, an impairment loss would be recorded to reduce the carrying value of goodwill to its implied fair value. The Company
considers the income and market approaches to estimating the fair value of our reporting units, which requires significant
judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors. The
Company believes that the fair values of each of its reporting units are substantially in excess of their respective carrying
amounts.
Significant deterioration in industry or economic trends, disruptions to our business, inability to effectively integrate acquired
businesses, or other factors, may cause these fair value to decline, possibly resulting in impairment charges to goodwill in
future periods.
Impairment of Long-lived Assets
The Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify indicators of a possible
impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value
of its long-lived assets from expected future undiscounted cash flows. If the total expected future undiscounted cash flows are
less than the carrying amount of the assets, a loss is recognized for the difference between fair value (computed based upon the
expected future discounted cash flows) and the carrying value of the assets.
Research and Engineering
Research and product development costs are expensed as incurred.
Advertising, Promotions and Marketing
The costs for advertising, promotion and marketing programs are expensed as incurred and are included in selling, general and
administrative expenses. Advertising expense was approximately $1.8 million, $2.2 million and $1.8 million for fiscal 2016,
2015 and 2014, respectively.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other financial current assets
and liabilities approximate fair value based on the short-term nature of the items. The carrying value of long-term debt
approximates fair value due to the variable-rate structure of the debt. The fair value of the Company’s notes payable and capital
lease obligations approximate their carrying amounts as those obligations bear interest at rates which management believes
would currently be available to the Company for similar obligations.
Foreign Currency Translation
55
Table of Contents
The financial position and results of operations of the Company’s foreign subsidiaries are measured using their functional
currencies, which, is their local currency. Assets and liabilities of foreign subsidiaries are translated into the U.S. Dollar at the
exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the
period. Translation gains and losses are reported as a component of other comprehensive income (loss) for the period and
included in accumulated other comprehensive income (loss) within stockholders’ equity.
Foreign currency (gains) and losses arising from transactions denominated in currencies other than the functional currency are
included in net income, reported in SG&A expenses, and were approximately $(0.1) million, $1.5 million and $0.1 million in
fiscal 2016, 2015 and 2014, respectively.
Concentrations 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.
Self-Insurance
The Company is self-insured for certain losses relating to workers’ compensation and health benefits claims. The Company
maintains third-party excess insurance coverage for all workers compensation and health benefit claims in excess of
approximately $0.3 million to reduce its exposure from such claims. Self-insured losses are accrued when it is probable that an
uninsured claim has been incurred but not reported and the amount of the loss can be reasonably estimated at the balance sheet
date.
Share-based Compensation
The value of services received from employees and directors in exchange for an award of an equity instrument is measured
based on the grant-date fair value of the award. The computed value is recognized as a non-cash cost on a straight-line basis
over the period the individual provides services, which is typically the vesting period of the award with the exception of awards
containing an internal performance measure which is recognized on a straight-line basis over the vesting period subject to the
probability of meeting the performance requirements and adjusted for the number of shares expected to be earned. As share-
based compensation expense is based on awards ultimately expected to vest, the amount of expense has been reduced for
estimated forfeitures. The cost of these awards is recorded in selling, general and administrative expense in the company’s
consolidated statements of income.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carry-forwards. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation allowance is provided if it is more likely than
not that some or all of a deferred income tax asset will not be realized. Financial accounting standards prescribe a minimum
recognition threshold a tax position is required to meet before being recognized in the financial statements. These standards
also provide guidance on de-recognition, measurement, and classification of amounts relating to uncertain tax positions,
accounting for and disclosure of interest and penalties, accounting in interim periods and disclosures required. Interest and
penalties related to unrecognized tax positions are recognized as incurred within “provision for income taxes” in the
consolidated statements of income.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with
Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of
promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP
when it becomes effective. The new standard is effective for fiscal years and interim periods within those fiscal years beginning
December 15, 2017, as a result of a one year deferral in the standard issued by the FASB in August 2015 with ASU 2015-14,
Revenue from Contracts with Customers - Deferral of the Effective Date. Early application is not permitted. The standard
56
Table of Contents
permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that
ASU 2014-09 will have on its consolidated financial statements and related disclosures.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments. This amendment will simplify the accounting for adjustments made to provisional amounts
recognized in a business combination and eliminates the requirement to retrospectively account for those adjustments in
previous reporting periods. This update will require on the face of the income statement or in the notes to the financial
statements the amount recorded in current-period earnings that would have previously been recorded if the adjustment to the
provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years, and interim
periods within those fiscal years beginning after December 15, 2015. This update should be applied prospectively and earlier
adoption is permitted for financial statements that have not been issued. The Company is evaluating the effect that ASU
2015-16 will have on its consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes. This amendment will simplify the presentation of deferred tax assets and liabilities on the balance sheet and require all
deferred tax assets and liabilities to be treated as non-current. ASU 2015-17 is effective for fiscal years, and interim periods
within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the
effect that ASU 2015-17 will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This amendment supersedes previous accounting
guidance (Topic 840) and requires all leases, with exception of leases with a term of 12 months or less, to be recorded on the
balance sheet as lease assets and lease liabilities. ASU 2016-02 is effective for fiscal years, and interim periods within those
fiscal years beginning after December 15, 2018, with early adoption permitted. The standard requires lessees and lessors to
recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The
Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issues ASU No. 2016-09, Stock Compensation (Topic 718). This amendment will simplify certain
aspects of accounting for share-based payment transactions, which include accounting for income taxes and the related impact
on the statement of cash flows, an option to account for forfeitures when they occur in addition to the existing guidance to
estimate the forfeitures of awards, classification of awards as either equity or liabilities and classification on the statement of
cash flows for employee taxes paid to tax authorities on shares withheld for vesting. ASU 2016-09 is effective for fiscal years,
and interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company
is evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures.
3. Earnings per Share
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average
number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to
common shareholders 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:
57
Table of Contents
Basic earnings per share
Numerator:
Net income attributable to Mistras Group, Inc.
Denominator
Weighted average common shares outstanding
Basic earnings per share
Diluted earnings per share:
Numerator:
Net income attributable to Mistras Group, Inc.
Denominator
Weighted average common shares outstanding
Dilutive effect of stock options outstanding
Dilutive effect of restricted stock units outstanding
Diluted earnings per share
For the year ended May 31,
2016
2015
2014
24,654
$
16,081
$
22,518
28,856
0.85
$
28,613
0.56
$
28,365
0.79
24,654
$
16,081
$
22,518
28,856
712
323
29,891
0.82
$
28,613
719
258
29,590
0.54
$
28,365
775
184
29,324
0.77
$
$
$
$
The following potential common shares were excluded from the computation of diluted earnings per share, as the effect would
have been anti-dilutive:
Potential common stock attributable to stock options outstanding
Potential common stock attributable to performance awards outstanding
Total
4. Accounts Receivable, net
Accounts receivable consist of the following:
Trade accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
For the year ended May 31,
2016
2015
2014
5
24
29
6
1
7
5
121
126
May 31,
2016
2015
$
$
140,820
(2,907)
137,913
$
$
136,208
(2,980)
133,228
The Company had $18.8 million and $15.0 million of unbilled revenues accrued as of May 31, 2016 and 2015, respectively.
Unbilled revenues as of May 31, 2016 are expected to be billed in the first quarter of fiscal 2017.
5. Inventories
Inventories consist of the following:
58
Table of Contents
Raw materials
Work in progress
Finished goods
Services-related consumable supplies
Inventory
6. Property, Plant and Equipment, net
Property, plant and equipment consist of the following:
Land
Building and improvements
Office furniture and equipment
Machinery and equipment
Accumulated depreciation and amortization
Property, plant and equipment, net
May 31,
2016
2015
3,827
1,743
2,839
1,509
9,918
$
$
4,194
1,604
3,178
1,865
10,841
$
$
Useful Life
(Years)
30-40
5-8
5-7
May 31,
2016
$
1,735
$
19,364
8,692
173,053
202,844
(124,168)
78,676
$
$
2015
1,856
17,712
7,934
162,762
190,264
(111,008)
79,256
Depreciation expense was approximately $22.9 million, $22.2 million and $19.2 million for the years ended May 31, 2016,
2015 and 2014, respectively.
7. Acquisitions and Dispositions
Acquisitions
During fiscal 2016, the Company completed two acquisitions. The Company purchased a U.S.-based company that provides
unmanned aerial systems and NDT services and a Canadian-based company that provides engineering and NDT services. In
these acquisitions, the Company acquired 100% of the common stock of each acquiree in exchange for aggregate consideration
of $1.8 million in cash and contingent consideration estimated to be $1.0 million to be earned based upon the acquired business
achieving specific performance metrics over various periods during the initial four years of operations from the acquisition
date. The Company accounted for these transactions in accordance with the acquisition method of accounting for business
combinations. The estimated total potential contingent consideration for these acquisitions ranges from zero to $0.3 million as
of May 31, 2016.
During fiscal 2015, the Company completed the acquisition of four companies. One of the acquired companies is located in the
U.S. and provides maintenance and inspection services primarily on offshore platforms. This acquisition expanded the service
offerings within the Services segment, allowing the Company to provide services to the upstream operations of its customers.
The Company also purchased a group of asset protection businesses located in Quebec, Canada and an asset inspection
business in Florida to complement service offerings within the Company’s Services segment and continue its market expansion
strategy. The Company’s International Segment completed an acquisition of an asset inspection business located in the United
Kingdom. In these acquisitions, the Company acquired 100% of the common stock or certain assets of each acquiree in
exchange for aggregate consideration of approximately $35.8 million in cash and $20.5 million in notes payable over two
years. The Company accounted for such transactions in accordance with the acquisition method of accounting for business
combinations. In addition to the cash consideration related to these acquisitions, the Company accrued a liability of
approximately $2.3 million, which represents the estimated fair value of contingent consideration expected to be payable in the
event that the acquired companies achieve specific performance metrics during various periods over the next three years of
operations. The estimated total potential contingent consideration for these acquisitions ranges from zero to $3.2 million as of
May 31, 2015.
59
Table of Contents
Assets and liabilities of the acquired businesses were included in the consolidated balance sheets as of May 31, 2016 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 results of operations of each of the acquisitions completed
in fiscal 2016 and 2015 are included in each respective operating segment’s results of operations from the date of acquisition.
The Company’s allocation of purchase price for these acquisitions is included in the table below. The following table
summarizes the estimated fair value of the assets acquired and liabilities assumed and any subsequent adjustments made during
the fiscal year ended May 31, 2016:
Number of entities
Cash paid
Subordinated notes issued
Contingent consideration
Consideration paid
Current net assets
Debt and other long-term liabilities
Property, plant and equipment
Deferred tax liability
Intangibles
Goodwill
Net assets acquired
2016
2015
2
4
$
$
$
1,784
$
$
$
—
991
2,775
180
(546)
485
(72)
—
2,728
$
2,775
$
35,755
20,505
2,255
58,515
2,770
(5,889)
7,395
(2,467)
10,394
46,312
58,515
The amortization period for intangible assets acquired ranges from two to twelve years. The Company recorded $2.7 million
and $46.3 million of goodwill in connection with its fiscal 2016 and 2015 acquisitions, respectively, reflecting the strategic fit
and revenue and earnings growth potential of these businesses. The goodwill recorded in fiscal 2016 and 2015 relates primarily
to the acquisition of the common stock of the acquirees, which is generally not deductible for tax purposes.
We are continuing our review of our fair value estimate of assets acquired and liabilities assumed for two entities acquired in
fiscal 2016 disclosed above. This process will conclude as soon as we finalize information regarding facts and circumstances
that existed as of the acquisition date. Goodwill for these two entities totaled $2.7 million. These measurement periods will not
exceed one year from the respective acquisition dates.
Revenue included in the consolidated statement of operations for fiscal 2016 from these acquisitions for the period subsequent
to the closing of the fiscal 2016 transactions were approximately $0.2 million. Aggregate loss from operations included in the
consolidated statement of operations for fiscal 2016 from the acquisitions for the period subsequent to the closing of each
transaction was approximately $0.3 million. As these acquisitions are not significant to the Company’s fiscal 2016 results, no
unaudited pro forma financial information has been included in this report.
Dispositions
On May 22, 2015, the Company completed the sale of one of its Russian subsidiaries and recognized a loss of $0.4 million. On
July 31, 2015, the Company completed the sale of its other subsidiary in Russia, as well as its subsidiary in Japan. For the year
ended May 31, 2015, the Company recognized impairment charges of $2.1 million related to these sales. Aggregate charges
associated with the exit of these three foreign operations was approximately $2.5 million and is included within selling, general
and administrative expenses on the consolidated income statement for the year ended May 31, 2015. In the aggregate, the assets
and liabilities of these subsidiaries represent 0.6% and 0.3% of consolidated assets and liabilities, respectively, and are included
in their natural classifications on the consolidated balance sheet as of May 31, 2015.
Acquisition-Related expense
In the course of its acquisition activities, the Company incurs costs in connection with due diligence, professional fees, and
other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a
60
Table of Contents
quarterly basis. These amounts are recorded as acquisition-related (benefit) expense, net, on the consolidated statements of
income and were as follows for fiscal 2016, 2015 and 2014:
Due diligence, professional fees and other transaction costs
Adjustments to fair value of contingent consideration liabilities
Acquisition-related (benefit) expense, net
For the year ended May 31,
2016
2015
2014
$
$
$
$
629
(2,082) $
(1,453) $
215
$
(5,382) $
(5,167) $
1,280
(3,937)
(2,657)
The Company’s contingent consideration liabilities are recorded on the balance sheet in accrued expenses and other liabilities.
8. Goodwill
The changes in the carrying amount of goodwill by segment is shown below:
Balance at May 31, 2014
Goodwill acquired during the year
Adjustments to preliminary purchase price allocations
Foreign currency translation
Balance at May 31, 2015
Goodwill acquired (disposed) during the year
Adjustments to preliminary purchase price allocations
Foreign currency translation
Balance at May 31, 2016
Services
International
Products
Total
73,767
$
43,552
$
13,197
$
130,516
41,986
3,529
(2,003)
117,279
2,728
270
(594)
119,683
$
$
1,480
(367)
(8,727)
35,938
(374)
—
776
—
—
—
$
13,197
$
—
—
—
43,466
3,162
(10,730)
166,414
2,354
270
182
36,340
$
13,197
$
169,220
$
$
$
The Company reviews goodwill for impairment on a reporting unit basis on March 1 of each year and whenever events or
changes in circumstances indicate the carrying value of goodwill may not be recoverable. As of May 31, 2016, the Company
did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable.
The Company's cumulative goodwill impairment as of May 31, 2016, May 31, 2015 and May 31, 2014 was $9.9 million, which
is within its International segment.
9. Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets were as follows:
2016
2015
May 31,
Customer relationships
Software/Technology
Covenants not to compete
Other
Total
Useful Life
(Years)
5-12
3-15
2-5
2-5
Gross
Amount
$
81,262
17,539
10,791
7,827
$ 117,419
Accumulated
Amortization
$
(47,747) $
(11,855)
(9,290)
(5,035)
(73,927) $
$
Net
Carrying
Amount
33,515
5,684
1,501
2,792
43,492
Gross
Amount
$
81,101
15,738
11,678
6,910
$ 115,427
Accumulated
Amortization
$
(41,009) $
(10,290)
(8,605)
(4,247)
(64,151) $
$
Net
Carrying
Amount
40,092
5,448
3,073
2,663
51,276
Amortization expense for the years ended May 31, 2016, 2015 and 2014 was approximately $9.6 million, $11.1 million and
$9.2 million, respectively, including amortization of software/technology for the years ended May 31, 2016, 2015 and 2014 of
$1.0 million, $0.9 million and $0.9 million, respectively.
Amortization expense in each of the five years and thereafter subsequent to May 31, 2016 related to the Company’s intangible
assets is expected to be as follows:
61
Table of Contents
2017
2018
2019
2020
2021
Thereafter
Total
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
Accrued salaries, wages and related employee benefits
Contingent consideration
Accrued worker compensation and health benefits
Deferred revenues
Legal settlement accrual
Other accrued expenses
Total accrued expenses and other current liabilities
11. Long-Term Debt
Long-term debt consists of the following:
Senior credit facility
Notes payable
Other
Total debt
Less: Current portion
Long-term debt, net of current portion
Senior Credit Facility
Expected
Amortization
Expense
$
$
8,618
7,302
6,119
4,495
4,238
12,720
43,492
May 31,
2016
2015
31,566
1,029
4,834
3,332
6,320
15,902
62,983
$
$
26,053
3,543
3,630
3,841
—
18,847
55,914
$
$
May 31,
2016
2015
68,999
10,111
5,899
85,009
(12,553)
72,456
$
$
83,062
24,632
5,765
113,459
(17,902)
95,557
$
$
On October 31, 2014, the Company entered into a Third Amendment and Modification Agreement (the “Amendment”), of its
revolving line of credit, the Third Amended and Restated Credit Agreement (“Credit Agreement”), dated December 21, 2011,
with its lending group. The Amendment increased the Company’s revolving line of credit from $125.0 million to $175.0
million and provides that under certain circumstances the line of credit can be increased to $225.0 million. The Company may
continue to 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. The Amendment also extended the original maturity date of the Credit Agreement from December
20, 2016 to October 30, 2019. At May 31, 2016, the Company had borrowings of $69.0 million and letters of credit of $4.8
million were outstanding under the Credit Agreement. The Company capitalized $0.7 million of costs associated with this debt
modification.
Loans under the Credit Agreement bear interest at LIBOR plus an applicable LIBOR margin ranging from 1% to 1.75%, or a
base rate less a margin of 1.25% to 0.375%, at the option of the Company, based upon the Company’s Funded Debt Leverage
Ratio. Funded Debt Leverage Ratio is generally the ratio of (1) all outstanding indebtedness for borrowed money and other
62
Table of Contents
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 2.0 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 on any
amounts not paid when due. 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 no
greater than 3.25 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 the Company's 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 May 31, 2016, the Company was in compliance with the terms of the Credit Agreement, and has undertaken to
continuously monitor compliance with these covenants.
Notes Payable and Other Debt
In connection with certain of its acquisitions, the Company issued subordinated notes payable to the sellers. The maturity of the
notes that remain outstanding range from two to five years from the date of acquisition with stated interest rates ranging from
0% to 4%. The Company has discounted these obligations to reflect a 2% to 4% market interest. Unamortized discount on the
notes was de minimis as of May 31, 2016 and 2015. Amortization is recorded as interest expense in the consolidated statements
of income.
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.
Scheduled principal payments due under all borrowing agreements in each of the five years and thereafter subsequent to
May 31, 2016 are as follows:
2017
2018
2019
2020
2021
Thereafter
Total
$
$
12,553
881
751
69,446
294
1,084
85,009
12. 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
63
Table of Contents
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:
Liabilities:
Contingent consideration
Total Liabilities
Liabilities:
Contingent consideration
Total Liabilities
Level 1
Level 2
Level 3
Total
May 31, 2016
— $
— $
— $
— $
2,075
2,075
$
$
2,075
2,075
Level 1
Level 2
Level 3
Total
May 31, 2015
— $
— $
— $
— $
6,411
6,411
$
$
6,411
6,411
$
$
$
$
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.
13. Share-Based Compensation
The Company has share-based incentive awards outstanding to its eligible employees and Directors under two employee stock
ownership plans: (i) the 2007 Stock Option Plan (the 2007 Plan), and (ii) the 2009 Long-Term Incentive Plan (the 2009 Plan).
No further awards may be granted under the 2007 Plan, although awards granted under the 2007 Plan remain outstanding in
accordance with their terms. Awards granted under the 2009 Plan may be in the form of stock options, restricted stock units and
other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock
rights. The 2009 Plan allows for the grant of awards of up to approximately 2,286,000 shares of common stock, of which
approximately 658,000 shares were available for future grants as of May 31, 2016. As of May 31, 2016, there was an aggregate
of approximately 2,232,000 stock options outstanding and approximately 902,000 unvested restricted stock units outstanding
under the 2009 Plan and the 2007 Plan.
Stock Options
For the fiscal years ended May 31, 2016 and 2015, the Company recognized share-based compensation expense related to stock
option awards of less than $0.1 million, respectively, and $0.7 million for the fiscal year ended May 31, 2014. No stock
options were granted during the years ended May 31, 2016, 2015 and 2014. As of May 31, 2016, no unrecognized
compensation costs remained related to stock option awards. Cash proceeds from, and the intrinsic value of stock options
exercised during the years ended May 31, 2016, 2015 and 2014 were as follows:
64
Table of Contents
Cash proceeds from options exercised
Aggregate intrinsic value of options exercised
For the year ended May 31,
2016
2015
2014
$
$
543
658
$
750
563
996
1,247
A summary of the stock option activity, weighted average exercise prices, options outstanding and exercisable as of May 31,
2016 is as follows (in thousands, except per share amounts):
For the year ended May 31,
2016
2015
2014
Common
Stock
Options
Weighted
Average
Exercise
Price
Common
Stock
Options
Weighted
Average
Exercise
Price
Common
Stock
Options
Weighted
Average
Exercise
Price
Outstanding at beginning of year:
2,287
$
13.13
2,352
$
13.09
Granted
Exercised
Expired or forfeited
— $
(55) $
— $
—
9.87
—
— $
(65) $
— $
—
11.54
—
Outstanding at end of year:
2,232
$
13.21
2,287
$
13.13
2,464
$
— $
(103) $
(9) $
$
2,352
12.93
—
9.67
10.03
13.09
Range of Exercise Prices
$6.15-$11.54
$13.46-$22.35
For the year ended May 31, 2016
Options Outstanding
Options Exercisable
Total
Options
Outstanding
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
137
2,095
2,232
2.3
3.2
$
$
9.09
13.48
Weighted
Average
Exercise
Price
9.09
13.48
Number
Exercisable
$
$
137
2,095
2,232
Aggregate Intrinsic Value
$
25,887
$
25,887
Restricted Stock Unit Awards
The Company recognized approximately $4.4 million of share-based compensation in fiscal 2016, $4.7 million of share-based
compensation in fiscal 2015 and $4.0 million of share-based compensation expense in fiscal 2014 related to restricted stock
unit awards. As of May 31, 2016, there were approximately $7.0 million of unrecognized compensation costs, net of estimated
forfeitures, related to restricted stock unit awards, which are expected to be recognized over a remaining weighted average
period of 2.1 years.
Approximately 264,000 restricted stock units were granted in fiscal 2016, 192,000 restricted stock units were granted in fiscal
2015 and 295,000 restricted stock units were granted in fiscal 2014. Approximately 223,000 restricted stock units vested in
fiscal 2016, 232,000 restricted stock units vested in fiscal 2015 and 178,000 restricted stock units vested in fiscal 2014. The fair
value of these units was $3.5 million, $5.2 million and $3.3 million, respectively. Upon vesting, restricted stock units are
generally net share-settled to cover the required minimum withholding tax and the remaining amount is converted into an
equivalent number of shares of common stock. Approximately 30,000 shares were forfeited in fiscal 2016, 24,000 shares were
forfeited in fiscal 2015 and 44,000 shares were forfeited in fiscal 2014.
During the years ended May 31, 2016, 2015 and 2014, the Company granted approximately 28,000, 21,000 and 19,000 shares,
respectively, 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 $0.5 million, $0.4 million and $0.4 million,
respectively, which is included in the share-based compensation expense recorded during the years ended May 31, 2016, 2015
and 2014.
Performance Restricted Stock Units
65
Table of Contents
In fiscal 2014, the company granted one-year, two-year and three-year performance restricted stock units to its executive and
certain other senior officers. These units have requisite service periods of three years and have no dividend rights. The actual
payout of these units, before the fiscal 2016 modification as described below, was based on the Company’s performance over
one, two and three-year periods (based on pre-established targets) and a market condition modifier based on total shareholder
return (TSR) compared to an industry peer group. The one-year and two-year performance conditions of the fiscal 2014 awards
were evaluated before modification of the awards and not achieved. The one-year and two-year market conditions of the fiscal
2014 awards were evaluated before modification of the awards and achieved. The one-year and two-year awards related to
market conditions will payout at 170% and 105%, respectively, of target once the requisite service period is complete. The
three-year performance and market condition awards were surrendered as part of the fiscal 2016 modification described below.
In fiscal 2015, the company granted performance restricted stock units to its executive and certain other senior officers. These
units have requisite service periods of three years and have no dividend rights. The actual payout of these units, before the
fiscal 2016 modification as described below, was based on the Company’s performance over the three-year period (based on
pre-established targets) and a market condition modifier based on (TSR) compared to an industry peer group. The 2015
awards were surrendered as part of the fiscal 2016 modification described below.
In the first quarter of fiscal 2016, the Company modified its equity compensation program and granted 154,000 performance
restricted stock units to its executive and certain other senior officers. As a condition for receiving any awards under the
revised fiscal 2016 plan, the executive and senior officers surrendered and released all rights to receive any shares under the
three-year 2014 awards and three-year 2015 awards with a performance or market condition. The Company has accounted for
the fiscal 2016 awards as modifications in accordance with ASC 718, Compensation - Stock Compensation. These units have
requisite service periods of five years and have no dividend rights. The actual payout of these units will vary based on the
Company’s performance over a one-year period based on three metrics related to the Company’s fiscal 2016 performance: (1)
Operating Income, (2) Adjusted EBITDAS, which is consistent with Adjusted EBITDA as disclosed in the financial statements,
which is net income before interest, taxes, depreciation, amortization, non-cash stock-based compensation expense, acquisition
related items, and other non-routine items as approved by the Company's Compensation Committee and (3) Revenue. There is
also a discretionary portion based on individual performance. During the year ended May 31, 2016, the Company evaluated
the performance metrics, and due to achievement above target, increased the estimated performance shares expected to be
granted by approximately 85,000 units to a total of 239,000 units.
Compensation costs are initially measured assuming that the target performance conditions will be achieved. However,
compensation costs related to the performance conditions are adjusted for subsequent changes in the expected outcome of the
performance conditions. The discretionary portion of the fiscal 2016 awards are liability-classified and adjusted to fair value
each reporting period. Compensation costs for the discretionary portion of the awards are recognized over the same five year
requisite service period as the awards based on the Company’s fiscal 2016 performance.
Compensation costs related to the TSR conditions for the one-year and two-year 2014 awards described above were fixed at the
measurement date, and not subsequently adjusted.
Compensation expense related to all performance restricted stock units described above was $1.6 million, $1.5 million and $1.2
million for the years ended May 31, 2016, 2015 and 2014. At May 31, 2016, there was $3.2 million of total unrecognized
compensation costs related to approximately 328,000 nonvested performance restricted stock units. These costs are expected to
be recognized over a weighted-average period of approximately 3.7 years.
For the fiscal years ended May 31, 2016, 2015 and 2014, the income tax benefit recognized on all share based compensation
arrangements above was approximately $2.2 million, $2.3 million and $2.3 million, respectively.
14. Income Taxes
Income before provision for income taxes is as follows:
Income (loss) before provision for income taxes from:
U.S. operations
Foreign operations
Earnings before income taxes
66
For the year ended May 31,
2015
2014
2016
$
$
27,772
10,643
38,415
$
$
26,893
(1,162)
25,731
$
$
25,433
9,670
35,103
Table of Contents
The provision for income taxes consists of the following:
Current
Federal
States and local
Foreign
Reserve for uncertain tax positions
Total current
Deferred
Federal
States and local
Foreign
Total deferred
Net change in valuation allowance
Net deferred
Provision for income taxes
For the year ended May 31,
2016
2015
2014
$
$
9,156
1,537
3,672
(529)
13,836
82
(51)
(557)
(526)
455
(71)
13,765
$
$
8,489
1,177
1,493
(48)
11,111
(145)
(126)
(2,416)
(2,687)
1,316
(1,371)
9,740
$
$
8,836
1,689
2,484
59
13,068
(53)
395
(967)
(625)
85
(540)
12,528
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to income tax as
follows:
2016
2015
2014
For the year ended May 31,
Federal tax at statutory rate
State taxes, net of federal benefit
Foreign tax
Contingent consideration
Permanent differences
Other
Change in valuation allowance
Total provision for income taxes
$
$
13,445
966
(610)
(425)
245
(311)
455
13,765
35.0 % $
2.5 %
(1.6)%
(1.1)%
0.6 %
(0.8)%
1.2 %
35.8 % $
9,006
683
(517)
(914)
196
(30)
1,316
9,740
35.0 % $
2.7 %
(2.0)%
(3.6)%
0.8 %
(0.1)%
5.1 %
37.9 % $
12,286
1,355
(1,868)
24
531
115
85
12,528
35.0 %
3.9 %
(5.3)%
0.1 %
1.5 %
0.3 %
0.2 %
35.7 %
67
Table of Contents
Deferred income tax attributes resulting from differences between financial accounting amounts and income tax basis of assets
and liabilities are as follows:
Deferred income tax assets
Allowance for doubtful accounts
Inventory
Intangible assets
Accrued expenses
Net operating loss carryforward
Capital lease obligations
Capital losses
Deferred share-based compensation
Other
Deferred income tax assets
Valuation allowance
Net deferred income tax assets
Deferred income tax liabilities
Property and equipment
Goodwill
Intangible assets
Other
Deferred income tax liabilities
Net deferred income taxes
May 31,
2016
2015
$
940
518
1,641
4,668
4,036
1,167
719
6,477
440
20,606
(3,397)
17,209
(9,785)
(12,535)
(5,989)
(12)
(28,321)
(11,112) $
1,036
796
1,254
3,455
4,738
379
—
6,241
370
18,269
(3,238)
15,031
(8,214)
(10,728)
(6,677)
(44)
(25,663)
(10,632)
$
$
As of May 31, 2016, the Company had federal net operating loss carry forwards (NOL’s) in the amount of approximately $0.3
million which may be utilized subject to limitation under Internal Revenue code section 382. The federal NOL's expire at
various times from 2029 to 2033. In addition, as of May 31, 2016 the Company had state and foreign NOLs of $3.6 million and
$12.1 million, respectively. The state NOLs expire at various times from 2025 to 2036. Approximately $1.7 million of the
foreign NOLs expire at various times from 2021 to 2036, while the remainder of the Company's foreign NOLs do not expire.
In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will be realized. Valuation allowances are provided when management believes the Company's
deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing,
prudent and feasible tax planning strategies. At May 31, 2016, the Company has a valuation allowance of approximately $3.4
million primarily against certain state and foreign NOLs and the capital losses generated by the disposals of certain foreign
subsidiaries. For the year ended May 31, 2016, the valuation allowance increased $0.2 million attributable to tax losses
generated by foreign subsidiaries. Except for those deferred tax assets subject to the valuation allowance, management believes
that it will realize all deferred tax assets as a result of sufficient future taxable income in each tax jurisdiction in which we have
deferred tax assets.
68
Table of Contents
The following table summarizes the changes in the Company’s gross unrecognized tax benefits, excluding interest and
penalties:
For the year ended May 31,
2016
2015
$
763
$
1,016
29
52
(23)
(91)
(29)
(398)
303
$
30
—
(1)
(112)
(50)
(120)
763
Balance at June 1
Additions for tax positions related to the current fiscal year
Additions for tax positions related to prior years
Decreases for tax positions related to prior years
Impact of foreign exchange fluctuation
Settlements
Reductions related to the expiration of statutes of limitations
Balance at May 31
$
The Company has recorded the unrecognized tax benefits in other long-term liabilities in the consolidated balance sheets. As of
May 31, 2016 and 2015, there were approximately $0.4 million and $1.1 million of unrecognized tax benefits, respectively,
including penalties and interest that if recognized would favorably affect the effective tax rate. Interest and penalties related to
unrecognized tax benefits are recorded in income tax expense and are not significant for the years ending May 31, 2016 and
2015. The Company anticipates a decrease to its unrecognized tax benefits of approximately $0.2 million excluding interest and
penalties within the next 12 months.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company is no longer
subject to U.S. federal income tax examinations for years ending before May 31, 2013 and generally is no longer subject to
state, local or foreign income tax examinations by tax authorities for years ending before May 31, 2012.
The Company has not recognized U.S. tax expense on its undistributed international earnings or losses of its foreign
subsidiaries since it intends to indefinitely reinvest the earnings outside the United States. Net income (loss) of foreign
subsidiaries was $7.5 million and $(0.8) million for fiscal 2016 and 2015, respectively. We have recognized no deferred tax
liability for the remittance of such earnings to the U.S. since it is our intention to utilize those earnings in the foreign
operations. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not
practicable because of the complexities of the hypothetical calculation.
15. Employee Benefit Plans
The Company provides a 401(k) savings plan for eligible U.S. based employees. Employee contributions are discretionary up
to the IRS limits each year and catch up contributions are allowed for employees 50 years of age or older. Under the 401
(k) plan, employees become eligible to participate on the first day of the month after six months of continuous service. Under
this plan, the Company matches 50% of the employee’s contributions up to 6% of the employee’s annual compensation, as
defined by the plan. There is a five-year vesting schedule for the Company match. The Company’s contribution to the plan was
$3.3 million, $2.8 million and $2.5 million for the years ended May 31, 2016, 2015 and 2014, respectively.
The Company participates with other employers in contributing to a union plan, which covers certain U.S. based union
employees. The plan is not administered by the Company and contributions are determined in accordance with provisions of a
collective bargaining agreement. The Company’s contributions to the plan were $0.2 million, $0.2 million and $0.1 million for
the years ended May 31, 2016, 2015 and 2014. The Company has benefit plans covering certain employees in selected foreign
countries. Amounts charged to expense under these plans were not significant in any year.
16. Related Party Transactions
The Company leases its headquarters under an operating lease from a shareholder and officer of the Company. On August 1,
2014, the Company extended its lease at its headquarters requiring monthly payments through October 2024. Total rent
payments made during fiscal 2016 were approximately $0.9 million. See Note 18 — Commitments and Contingencies for
further detail related to operating leases.
The Company has a lease for office space located in France, which is partly owned by a shareholder and officer. Total rent
payments made during fiscal 2016 were approximately $0.2 million.
69
Table of Contents
The Company has a lease for office space located in Brazil, which is partly owned by a shareholder and officer. Total rent
payments made during fiscal 2016 were approximately $0.1 million.
17. Obligations under Capital Leases
The Company leases certain office space, and service equipment under capital leases, requiring monthly payments ranging
from less than $1 thousand to $81 thousand, including effective interest rates that range from approximately 1% to 7% expiring
through May 2022. The net book value of assets under capital lease obligations was $19.8 million and $19.9 million at May 31,
2016 and 2015, respectively.
Scheduled future minimum lease payments subsequent to May 31, 2016 are as follows:
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of minimum lease payments
Less: current portion of obligations under capital leases
Obligations under capital leases, net of current portion
18. Commitments and Contingencies
Operating Leases
$
$
9,112
6,491
3,810
1,520
134
122
21,189
(1,422)
19,767
(7,835)
11,932
The Company is party to various noncancelable lease agreements, primarily for its international and domestic office and lab
space. Future minimum lease payments under noncancelable operating leases in each of the five years and thereafter
subsequent to May 31, 2016 are as follows:
2017
2018
2019
2020
2021
Thereafter
Total
$
$
9,956
7,903
6,580
5,219
4,112
13,039
46,809
Total rent expense was $11.2 million, $10.6 million and $9.5 million for the years ended May 31, 2016, 2015 and 2014,
respectively.
Legal Proceedings and Government Investigations
The Company is subject to periodic legal proceedings, investigations and claims that arise in the ordinary course of business.
The Company cannot predict with certainty the ultimate resolution of legal proceedings, investigations and claims asserted
against it. Except for the matters described below, 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 against the Company may be covered by
insurance for certain matters.
Litigation and Commercial Claims
70
Table of Contents
The Company is currently a defendant in a consolidated purported class and collective action, Edgar Viceral and David Kruger
v Mistras Group, et al, pending in the U.S. District Court for the Northern District of California. This matter results from the
consolidation of two cases originally filed in California state court in April 2015. The consolidated case alleges violations of
California statutes, primarily the California Labor Code, and seeks to proceed as a collective action under the U.S. Fair Labor
Standards Act. The case is predicated on claims for allegedly missed rest and meal periods, inaccurate wage statements, and
failure to pay all wages due, as well as related unfair business practices, and is requesting payment of all damages, including
unpaid wages, and various fines and penalties available under California and Federal law.
The parties have reached a settlement of the case, whereby the Company agreed to pay $6 million to resolve the allegations and
avoid further distraction that would result if the litigation continued. The settlement is subject to court approval, and a hearing
for preliminary approval is currently scheduled for August 18, 2016. The Company recorded a pre-tax charge of $6.3 million in
the fourth quarter of fiscal 2016 for the settlement and payment of payroll taxes and other costs related to the settlement. The
settlement will cover claims dating back to April 2011 in some cases and involves approximately 4,900 current and former
employees.
During fiscal 2013, the Company performed radiography work on the construction of a pipeline project in the U.S. The owner
of the pipeline project contends that certain of the radiography images the Company’s technicians prepared regarding the
project did not meet the code quality interpretation standards required by the American Petroleum Institute. The project owner
is claiming damages as a result of the alleged quality defects of the Company’s radiography images. No lawsuit has been filed
at this time, but the Company received a demand for damages of approximately $6 million. The Company is currently unable
to determine the likely outcome or reasonably estimate the amount or range of potential liability related to this matter, and
accordingly, has not established any reserves for this matter.
The Company’s subsidiary in France has been involved in a dispute with a former owner of a business in France purchased by
the Company’s French subsidiary. The former owner received a judgment in his favor in the amount of approximately $0.4
million for payment of the contingent consideration portion of the purchase price for the business. The judgment is being
appealed, but the Company recorded a reserve for the full amount of the judgment in the fourth quarter of fiscal 2016.
Government Investigations
In May 2015, the Company received a notice from the U.S. Environmental Protection Agency (“EPA”) that it performed a
preliminary assessment at a leased facility the Company operates in Cudahy, California. Based upon the preliminary
assessment, the EPA is conducting an investigation of the site, which includes taking groundwater and soil samples. The
purpose of the investigation is to determine whether any hazardous materials were released from the facility. The Company has
been informed that certain hazardous materials and pollutants have been found in the ground water in the general vicinity of the
site and the EPA is attempting to ascertain the origination or source of these materials and pollutants. Given the historic
industrial use of the site, the EPA determined that the site of the Cudahy facility should be examined, along with numerous
other sites in the vicinity. At this time, the Company is unable to determine whether it has any liability in connection with this
matter and if so, the amount or range of any such liability, and accordingly, has not established any reserves for this matter.
In January 2012, the Company received notice of a governmental investigation concerning an environmental incident which
occurred in February 2011 outside on the premises of the Cudahy facility. No human injury or property damage was reported
or appears to have been caused as a result of this incident. While management cannot predict the ultimate outcome of this
matter, based on its internal investigation to date, the Company does not believe the outcome will have a material effect on its
financial condition or results of operations. To the Company’s knowledge, this matter has been dormant since fiscal 2012.
Acquisition-related contingencies
The Company is liable for contingent consideration in connection with certain of its acquisitions. As of May 31, 2016, total
potential acquisition-related contingent consideration ranged from zero to $16.6 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 7 - Acquisitions for further discussion of the Company’s acquisitions.
19. Segment Disclosure
The Company’s three operating segments are:
71
Table of Contents
•
•
Services. This segment provides asset protection solutions predominantly in North America with the largest
concentration in the United States along with a growing Canadian services business, consisting primarily of non-
destructive testing, and inspection and engineering 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 Company’s other segments to
global markets, 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 finance, legal, and certain other costs 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.
The accounting policies of the reportable segments are the same as those described in Note 2 — Summary of Significant
Accounting Policies. Segment income from operations is one of the primary performance measures used by the Chief
Executive Officer, who is the chief operating decision maker, to assess the performance of each segment and make decisions as
to resource allocations. Certain general and administrative costs such as human resources, information technology and training
are allocated to the segments. Segment income from operations 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 administrative charges related to corporate
personnel and other charges that cannot be readily identified for allocation to a particular segment.
Selected financial information by segment for the periods shown was as follows (intercompany transactions are eliminated in
Corporate and eliminations):
Revenues
Services
International
Products and Systems
Corporate and eliminations
Gross profit
Services
International
Products and Systems
Corporate and eliminations
For the year ended May 31,
2016
2015
2014
553,279
143,025
30,293
(7,416)
719,181
$
$
540,224
146,953
31,255
(7,180)
711,252
$
$
443,229
161,395
33,544
(14,721)
623,447
For the year ended May 31,
2016
2015
2014
145,262
43,613
14,022
111
203,008
$
$
135,201
34,572
14,314
646
184,733
$
$
114,182
44,893
14,495
(627)
172,943
$
$
$
$
72
Table of Contents
Income from operations
Services
International
Products and Systems
Corporate and eliminations
Depreciation and amortization
Services
International
Products and Systems
Corporate and eliminations
Intangible assets, net
Services
International
Products and Systems
Corporate and eliminations
Total assets
Services
International
Products and Systems
Corporate and eliminations
Revenue and long-lived assets by geographic area was as follows:
Revenue
United States
Other Americas
Europe
Asia-Pacific
73
$
$
$
$
For the year ended May 31,
2016
2015
2014
52,552
9,293
2,688
(21,356)
43,177
$
$
49,142
(575)
2,461
(20,675)
30,353
$
$
43,221
10,238
2,552
(17,716)
38,295
For the year ended May 31,
2016
2015
2014
22,725
7,774
2,323
(348)
32,474
$
$
$
$
$
$
22,268
8,451
2,426
141
33,286
$
$
17,794
8,065
2,373
197
28,429
May 31,
2016
2015
19,022
17,703
6,054
713
43,492
$
$
24,598
19,482
7,004
192
51,276
May 31,
2016
2015
308,008
132,643
31,596
10,428
482,675
$
$
301,031
126,643
35,464
8,589
471,727
For the year ended May 31,
2015
2014
2016
$
$
519,361
67,809
118,566
13,445
719,181
$
$
491,818
68,628
137,071
13,735
711,252
$
$
403,001
55,120
143,931
21,395
623,447
Table of Contents
Long-lived assets
United States
Other Americas
Europe
Asia-Pacific
May 31,
2016
2015
$
$
186,543
29,743
75,102
—
291,388
$
$
190,997
31,558
73,744
647
296,946
20. Selected Quarterly Financial Information (unaudited)
The following is a summary of the quarterly results of operations for the years ended May 31, 2016 and 2015:
Fiscal quarter ended
Revenues
Gross Profit
Income from operations
Net income attributable to
Mistras Group, Inc.
Earnings per common share:
Basic
Diluted
May 31,
2016
February 29,
2016
November 30,
2015
August 31,
2015
May 31,
2015
February 28,
2015
November 30,
2014
August 31,
2014
$
184,187
$
160,355
$
194,786
$
179,853
$
174,686
$
163,100
$
206,893
$
166,573
52,000
4,918
2,764
0.10
0.09
$
$
$
42,809
5,758
3,593
0.12
0.12
$
$
$
$
$
$
56,925
19,569
11,425
0.40
0.39
$
$
$
51,274
12,932
6,872
0.24
0.23
$
$
$
44,966
4,627
2,171
0.08
0.07
$
$
$
38,734
3,870
1,817
0.06
0.06
$
$
$
59,039
18,192
10,427
0.36
0.35
$
$
$
41,994
3,664
1,666
0.06
0.06
21. Subsequent Events
Subsequent to May 31, 2016, the Company completed two acquisitions of asset protection businesses for $1.2 million in cash
upon closing and $0.3 million of deferred purchase price. In addition to the cash consideration, the acquisitions provide for
possible contingent consideration up to $0.6 million to be earned based upon the achievement of specific performance metrics
over the next three years of operation. The Company is in the process of completing the preliminary purchase price allocations.
These acquisitions were not significant and no pro forma information has been included.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation, under the supervision
and with the participation of our Chairman, Chief Executive Officer and President and our Executive Vice President, Chief
Financial Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls (as defined in
Rule 13a-15(e) of the Exchange Act) and procedures. Based upon that evaluation, our Chairman, Chief Executive Officer and
President and our Executive Vice President, Chief Financial Officer and Treasurer concluded that, as of May 31, 2016, our
disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Our
internal control over financial reporting is a process designed by, or under the supervision of, our Chairman, Chief Executive
Officer and President and our Executive Vice President, Chief Financial Officer and Treasurer, and effected by the Company’s
74
Table of Contents
board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of May 31, 2016. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in the updated Internal Control — Integrated Framework issued in 2013. Based on that assessment, our
management concluded that, as of May 31, 2016, our internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of May 31, 2016, has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
During the quarter ended May 31, 2016, we identified deficiencies in general information technology controls (GITCs) that affected
the use of a report-writer IT application operated in connection with the Company’s enterprise resource planning systems.
Specifically, we did not have effective controls over the configuration of the reports and completeness and accuracy of information
presented in the reports. Reports produced by the report-writer IT application are used in preparation of the consolidated financial
statements, the measurement of certain significant accounts and the operation of related internal controls. We have determined
that these deficiencies in our internal control over financial reporting constituted a material weakness that originated in periods
prior to the fourth quarter of 2016. The deficiencies resulted in no misstatements to the current or previously issued financial
statements.
In connection with the preparation of the annual consolidated financial statements as of and for the year ended May 31, 2016,
management designed and implemented effective controls over the generation of information and reports using the report-writer
IT application going forward and retrospectively operated those controls for each instance that the reports were used by management
as part of its internal control over financial reporting during fiscal year 2016, thereby remediating the material weakness as of
May 31, 2016. Further, we have enhanced the design of our existing general information technology controls over the report-
writer application. We will monitor these new controls going forward and implement additional enhancements to our internal
control over financial reporting in the next fiscal year.
We have determined that the actions taken to date have sufficiently improved the Company’s internal control over financial
reporting such that as of May 31, 2016, there is not a reasonable possibility that a material misstatement of the Company’s
annual or interim financial statements will not be prevented or detected on a timely basis. Based on the remediation of the
deficiencies we concluded that our internal control over financial reporting was effective as of May 31, 2016.
Other than the changes noted above, there has been no change in our internal control over financial reporting during the quarter
ended May 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Directors
The information required by Item 10 is incorporated herein by reference to the information to be included in our
definitive proxy statement related to the 2016 annual shareholders meeting. The information concerning our executive officers
required by this Item 10 is provided under the caption “Executive Officers of the Registrant” in Part I hereof.
75
Table of Contents
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the information to be included in our definitive
proxy statement related to the 2016 annual shareholders meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 regarding Security Ownership of Certain Beneficial Owners and Management
and Related Stockholders is incorporated by reference to the information to be included in our definitive proxy statement
related to the 2016 annual meeting of shareholders.
Equity Compensation Plan Information
The following table provides certain information as of May 31, 2016 concerning the shares of our common stock that may
be issued under existing equity compensation plans.
Plan Category
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options
Weighted Average
Exercise Price of
Outstanding Options
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(in thousands, except exercise price data)
Equity Compensation Plans Approved by Security
Holders (1)
2,232
$
13.21
Equity Compensation Plans Not Approved by
Security Holders
Total
—
2,232
$
—
13.21
658
—
658
________________________________________
(1) Includes all the Company’s plans: 1995 Incentive Stock Option and Restricted Stock Plan, 2007 Stock Option Plan and
2009 Long-Term Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference to the information to be included in our definitive
proxy statement related to the 2016 annual shareholders meeting.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the information to be included in our definitive
proxy statement related to the 2016 annual shareholders meeting.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) The following financial statements are filed herewith in Item 8 of Part II above:
76
Table of Contents
Report of independent registered public accounting firm
Consolidated Balance sheets as of May 31, 2016 and May 31, 2015
Consolidated Statements of income for the years ended May 31, 2016, 2015 and 2014
Consolidated Statements of comprehensive income (loss) for the years ended May 31, 2016, 2015 and 2014
Consolidated Statements of equity for the years ended May 31, 2016, 2015 and 2014
Consolidated Statements of cash flows for the years ended May 31, 2016, 2015 and 2014
Notes to consolidated financial statements
Page
50
51
52
53
54
55
56
(2) Financial Statement Schedules
All other schedules are omitted because of the absence of conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
(3) Exhibits
Exhibit No.
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Description
Second Amended and Restated Certificate of Incorporation (filed as exhibit 3.1 to Registration Statement
on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and
incorporated herein by reference)
Amended and Restated Bylaws (filed as exhibit 3.2 to Registration Statement on Form S-1 (Amendment
No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein by reference)
Specimen certificate evidencing shares of common stock (filed as exhibit 4.1 to Registration Statement
on Form S-1 (Amendment No. 5) filed on September 23, 2009 (Registration No. 333-151559) and
incorporated herein by reference.
Third Amended and Restated Credit Agreement dated December 21, 2011 (filed as exhibit 10.1 to
Quarterly Report on Form 10-Q filed April 9, 2012 and incorporated herein by reference)
Third Amendment and Modification Agreement, dated October 31, 2014 to the Third Amended and
Restated Credit Agreement, dated December 21, 2011 (filed as exhibit 10.1 to Quarterly Report on
Form 10-Q filed January 9, 2015 and incorporated herein by reference)
Form of Indemnification Agreement for directors and officers (filed as exhibit 10.1 to Registration
Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559)
and incorporated herein by reference)
Employment Agreement between the Company and Sotirios J. Vahaviolos (filed as exhibit 10.4 to
Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration
No. 333-151559) and incorporated herein by reference)
Amendment, dated July 14, 2010 to Employment Agreement, between the Company and Sotirios J.
Vahaviolos (filed as exhibit 10.1 to Quarterly Report on Form 10-Q filed on October 14, 2010 and
incorporated herein by reference)
Amendment No. 2, dated January 24, 2014, to Employment Agreement between the Company and
Sotirios J. Vahaviolos (filed as exhibit 10.1 to Quarterly Report on Form 10-Q filed on April 9, 2014 and
incorporated herein by reference)
2007 Stock Option Plan and form of Stock Option Agreement (filed as exhibit 10.5 to Registration
Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559)
and incorporated herein by reference)
2009 Long-Term Incentive Plan (filed as exhibit 10.6 to Registration Statement on Form S-1
(Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559) and incorporated herein
by reference).
Form of 2009 Long-Term Incentive Plan Stock Option Agreement (filed as exhibit 10.7 to Registration
Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration No. 333-151559)
and incorporated herein by reference)
10.10
Form of 2009 Long-Term Incentive Plan Restricted Stock Agreement (filed as exhibit 10.8 to
Registration Statement on Form S-1 (Amendment No. 4) filed on September 21, 2009 (Registration
No. 333-151559) and incorporated herein by reference)
77
Table of Contents
10.11
10.12
10.13
10.14
21.1*
23.1*
24.1*
31.1*
31.2*
32.1**
32.2**
Form of Restricted Stock Unit Certificate for awards under 2009 Long-Term Incentive Plan (filed as
exhibit 10.1 to Quarterly Report on Form 10-Q filed on January 13, 2011 and incorporated herein by
reference)
Form of performance share unit awards letter under 2009 Long-Term Incentive Plan (filed as exhibit
10.11 to Annual Report on Form 10-K filed on August 8, 2014 and incorporated herein by reference)
Mistras Group Severance Plan as amended (April 2014) (filed as Exhibit 10.12 to Annual Report on
Form 10-K filed on August 8, 2014 and incorporated herein by reference)
Description of Compensation for Non-Employee Directors (Fiscal 2015) (filed as exhibit 10.13 to
Annual Report on Form 10-K filed on August 8, 2014 and incorporated herein by reference)
Subsidiaries of the Registrant
Consent of KPMG LLP
Power of Attorney (included as part of the signature page to this report)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS***
XBRL Instance Document
101.SCH***
XBRL Schema Document
101.CAL***
XBRL Calculation Linkbase Document
101.LAB
XBRL Labels Linkbase Document
101.PRE***
XBRL Presentation Linkbase Document
101.DEF***
XBRL Definition Linkbase Document
_______________________
Exhibits 10.3 to 10.14 are management contracts or compensatory plans, contracts, or arrangements.
* Filed herewith.
** Furnished herewith.
*** Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not
filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.
78
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ DR. SOTIRIOS J. VAHAVIOLOS
MISTRAS GROUP, INC.
By:
Dr. Sotirios J. Vahaviolos
Chairman and Chief Executive Officer
Date: August 15, 2016
We, the undersigned directors and officers of Mistras Group, Inc., hereby severally constitute Dr. Sotirios J. Vahaviolos,
Jonathan H. Wolk and Michael C. Keefe, and each of them singly, as our true and lawful attorneys with full power to each of
them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-
K filed with the Securities and Exchange Commission.
This power of attorney may only be revoked by a written document executed by the undersigned that expressly revokes this
power by referring to the date and subject hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/Dr. Sotirios J. Vahaviolos
Dr. Sotirios J. Vahaviolos
Chairman and Chief Executive
Officer (Principal Executive Officer)
and Director
August 15, 2016
/s/ Jonathan H. Wolk
Jonathan H. Wolk
/s/ James J. Forese
James J. Forese
/s/ Richard H. Glanton
Richard H. Glanton
/s/ Nicholas DeBenedictis
Nicholas DeBenedictis
/s/ Michael J. Lange
Michael J. Lange
/s/ Manuel N. Stamatakis
Manuel N. Stamatakis
/s/ W. Curtis Weldon
W. Curtis Weldon
Senior Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial and
Accounting Officer)
August 15, 2016
Director
Director
Director
Director
Director
Director
79
August 15, 2016
August 15, 2016
August 15, 2016
August 15, 2016
August 15, 2016
August 15, 2016
THIS PAGE INTENTIONALLY LEFT BLANK
THIS PAGE INTENTIONALLY LEFT BLANK
STOCK PRICE PERFORMANCE GRAPH
The following performance graph compares the performance of our common stock to the Russell 3000 Index and a self-constructed peer group. The comparison
assumes $100 was invested on June 1, 2011 in each of our common stock, the Russell 3000 Index and the peer group. The values of each investment are based
on share price appreciation, with reinvestment of all dividends, assuming any were paid. For each graph, the investments are assumed to have occurred at the
beginning of each period presented. The Company reconstituted some of its peer group due to business combinations and changing industry conditions to enable
a more relevant comparison. The following companies are included in the Company’s updated peer group we used in the graph: Aegion Corp, Exponent, Inc.,
Badger Meter, Inc., CIRCOR International, Inc., Matrix Service Company and Team, Inc. The stock price performance included in this graph is not necessarily
indicative of future stock price performance.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
May 2016
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
Mistras Group, Inc.
Russell 3000 Index
New Peer Group
Old Peer Group
Mistras Group, Inc.
Russell 3000 Index
New Peer Group
Old Peer Group
Return %
Cum $
Return %
Cum $
Return %
Cum $
Return %
Cum $
2011
100.00
100.00
100.00
100.00
2012
29.47
129.47
-1.87
98.13
-14.83
85.17
-29.11
70.89
2013
-5.15
122.80
27.89
125.51
38.44
117.91
36.78
96.96
2014
6.45
130.73
20.57
151.32
30.37
153.72
44.06
139.67
2015
-18.67
106.32
11.85
169.26
-11.83
135.54
-30.60
96.94
2016
34.04
142.50
0.22
169.62
8.35
146.86
-10.45
86.81
Peer group index uses beginning-of-period market capitalization weighting.
COMPANY AND SHAR EH OL DE R IN FORM AT IO N
LEADERSHIP TEAM
BOARD OF DIRECTORS
ANNUAL MEETING
Dr. Sotirios J. Vahaviolos
Chairman of the Board of Directors
and Chief Executive Officer
Dennis M. Bertolotti
President, Chief Operating Officer
Michael J. Lange
Vice Chairman; Senior Executive Vice
President of Business Development, Marketing
& Strategic Planning
Jonathan H. Wolk
Senior Executive Vice President,
Chief Financial Officer and Treasurer
Michael C. Keefe
Executive Vice President,
General Counsel and Secretary
Mark F. Carlos
Executive Vice President,
Products & Systems
David Thigpen
Group Senior Vice President, Oil & Gas
Julie Marini
Group Vice President of Human Resources
Chris Smith
Group Vice President Corporate Compliance
Udo Klibingat
Vice President of German & Benelux Operations
Mehdi Batel
Vice President EMEA & Australasia
STOCK LISTING
The Company’s common stock is listed and
traded on the New York Stock Exchange under the
symbol “MG”.
INVESTOR RELATIONS
Dr. Sotirios J. Vahaviolos
Chairman of the Board of Directors
and Chief Executive Officer
Nicholas DeBenedictis
Chairman and Retired CEO of Aqua America, Inc.
James J. Forese
Operating Partner and Chief Operating Officer
of HCI Equity Partners
Richard H. Glanton
Chairman and Chief Executive Officer
of Philadelphia Television Network
Michael J. Lange
Vice Chairman; Senior Executive Vice
President of Business Development, Marketing
& Strategic Planning
Manuel J. Stamatakis
Chairman and Chief Executive Officer
of Capital Management Enterprises
W. Curtis Weldon
Former US Congressman 7th District and
Founder of Jenkins Hill International
The 2016 Annual Meeting of Shareholders will be
held at 5:00 p.m. local time on October 18, 2016,
at Corporate Headquarters, 195 Clarksville Rd.,
Princeton Junction, NJ.
CORPORATE HEADQUARTERS
195 Clarksville Road
Princeton Junction, NJ 08550
www.mistrasgroup.com
Tel: 1(609) 716-4000
Fax: 1(609) 716-0706
MEDIA RELATIONS
Members of the news media requesting
information about MISTRAS Group should visit our
online Press Room at mistrasgroup.com/news.
For additional information about MISTRAS Group,
contact: Nestor S. Makarigakis, Group Director,
Marketing Communications, at Corporate
Headquarters.
SHAREHOLDER COMMUNICATION
WEB SITE
Any interested party wishing to communicate
directly with our Board of Directors should write to
Michael C. Keefe, Executive Vice President,
General Counsel and Secretary, at Corporate HQ.
FORM 10-K
The Form 10-K report included in this 2016 annual
report has been filed with the Securities and
Exchange Commission (SEC). Additional copies
of the Form 10-K as filed with the SEC may be
obtained by request from the Company or through
the Company’s web site.
www.mistrasgroup.com
MISTRAS Group’s web site offers financial
information and facts about the Company and
its products, systems and services. Web site
content is available for informational purposes
only. It should not be relied upon for investment
purposes, nor is it incorporated by reference into
this annual report.
CUSTOMERS
For assistance with MISTRAS Group products,
systems and services, call 1(609) 716-4000, or
visit the MISTRAS Group website at
www.mistrasgroup.com. Additional contact
information is listed on our web site at
mistrasgroup.com/locations.
Security analysts, investors, stockbrokers,
portfolio managers and other investors seeking
additional information about MISTRAS Group
should contact Jonathan H. Wolk, Senior Executive
Vice President, Chief Financial Officer and
Treasurer at Corporate Headquarters.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company, LLC.
Operations Center
6201 15th Avenue, Brooklyn, NY 11219
Tel: 1(800) 937-5449, 1(718) 921-8124
One Source for
Asset Protection
Solutions
MISTRAS GROUP, INC.
A leading “one source” global provider
of technology-enabled asset protection
solutions used to evaluate the structural
integrity of critical energy, industrial and
public infrastructure.
mistrasgroup.com
MG
LISTED
Scan code with
mobile phone
for MG Investor
Information.